Apple Will Be the Same Apple Even Without Steve Jobs

In my previous post, I expressed my concerns over Apple's innovation power in case that Steve Jobs won't return from his medical leave (read it here). From reading the comments on the article, I had the impression that some of the readers thought of me as a short of the Apple stock. Actually I am not. In the disclaimer, I stated that 'I am considering selling my AAPL shares', maybe the more accurate words would be 'reevaluating my positions'.

But is it even worth to reevaluate? Under normal market conditions, sure we should look into the uncertainties introduced by Steve's leave. But we are in this unprecedented bear market and there are a lot of solid companies out there with a stock price at a bargain level. In other words, we have investment options that may bring in similar returns, but with lower risks, then why bother with AAPL? For me, I seriously considered switching my holdings of AAPL to Nike (read the analysis of NKE here).

I admit it is the emotions that drove me to look deeper into Apple's situation - I don't feel ready to give up Apple and I like their products. I owned several versions of iPod, and I am managing my music library with iTunes. I am waiting for my Sprint contract to expire in April to get rid of their crappy service, then I am going to buy an iPhone. Good chance my year-end gift would be a Mac Book. So my starting point is like this, if Steve's leave is a big negative factor, are there any positive ones that would keep Apple on its old and glorious track? My answer is Yes, there are quite a few. Honestly, I was a little surprised by my conclusion.

1) This is a logical inference. Steve Jobs was at the helm of Apple for more than 10 years, had been continuously and aggressively driving Apple from one innovation to another. There has to be something got embedded into Apple's corporate culture and management system, which, somewhat should be self-sustainable even without the big man on the top. For example, Apple still retains the top-talented designer team that envisioned and sketched generations of their beloved gadgets; there should be some process that guarantees the original ideas and innovative efforts to receive proper attention and, some form of established routines to facilitate the interactions between the design team, the technical team and the management. I briefly touched this point in my old post, and as an outsider of Apple company, I can't provide any proof. But again, I believe these are valid inferences.

2) Under Steve Jobs, Apple is a company with clear focuses. It has a very limited and straightforward product line, basically iPod, iPhone and Mac. IPod and iPhone share the same design concepts, and both leverage the capabilities of the Mac OS. This allows AAPL to pool its resources to develop winner products, while at the same time retain a relatively simple and agile organization structure, thus creating an innovation-friendly environment at the macro level. I'd like to say this is a strategy deliberately maintained by Apple. An example, it started accumulating cash since Steve Jobs took the office, and for the time being, has around 30 billion cash in the pocket. It could have used it to expand into other territories, but it didn't. In other words, as long as Apple continues this strategy, maintains its focus and avoids impudent business moves, they should be able to keep their innovation power from endangered by unnecessary or unprepared market pressures.

3) This may be my most important finding. Through years of brilliant design and innovation, AAPL developed a certain form of 'Personal Attachment' between the customers and its products. This is rarely seen in the technology world. This solid and expanding 'Fan Base', to an extent, provides a buffer between the company and the external competition, thus offering Apple a very open and forgiving atmosphere and a very healthy mindset for innovation.

I always hear people say, 'Apple never competes in price', which I agree and behind this simple statement, actually lies its unmatchable brilliance. You may not agree with me that all gadgets Apple manufactures in nature are commodities, but the fact is there are load of companies selling them at only a fraction of Apple's price tag. Simply put, Apple managed to differentiate itself from others by unique design in look and feel (hardware), providing different (better) user experience (software), clever marketing (those easily memorable commercials) and in the personal computer field, it actually benefits from Microsoft's monopoly position, which creates the appetite to look for alternatives. (one extra comment here, actually something interesting and bewildering to me. I know to be creative in software is at a more sophisticated level, but in hardware design, just the look and feel, for me it is virtually all about paying good money to find the talented personnel, I don't understand why there is no match with Apple even here. Or is it because I brain-washed by Apple's commercials?) Apple's success created two far-reaching results, the popular cravings to its products, and the second, it obtains the tight hold of its target customer - actually a group of people with relatively higher income. In return, the pressures that normally link to the commodity player are pretty much taken off Apple's shoulder, such as maintaining the market share, the thin margin, the excessive marketing efforts, and the timing (be the first few to rush the products into the market). As a result, you see today's Apple, taking its time to be creative and elegant, which is a form of 'temperament' that I don't see with any other companies.

I'd like to say only the greatest strategist is capable of leading Apple into this position, and no doubt, Steve Jobs is the one. Personal opinion, this is the greatest contribution as well as most precious legacy from him. On the other hand, Steve's leave won't take Apple off this position, and more importantly it doesn't necessarily require a CEO as great as him to maintain this position. In summary, Apple is already there, a certain pattern between the innovation, the products and the market has been in place; even just relying on the momentum should be enough to keep it safe on the right track for several years.

One more comment to make, I don't sense anything revolutionary in Mr. Cook, instead, he was regarded as a 'business operation maestro'. I view this as a big positive. After all, what we need for Apple is not an unproven innovator, but rather an executor that is well qualified to continue Steve's path.

4) Apple already reached the end of its innovation. I know it is a bold statement, but think about it, the way Apple makes a digital music player is the way it makes a iPod Touch, the way it makes a wireless phone is the way it makes an iPhone, and the way it makes a personal computer is the way it makes a Mac Book. Do you think anybody, or any company (including Apple itself) is capable of topping that? Another perspective, once you hold your own iPod touch or iPhone in your hand, do you think it is even necessary for any companies to come up with anything that is 'Better'?

Let's take the controversy away and make some realistic points. Innovation comes at two different levels, the concept level and the implementation level. Using Microsoft as the example - it completed the innovation at the concept level in 1980s and 1990s with the introduction of the initial generations of Windows Operation System, and since then, the innovation is mostly at the implementation level, including architecture redesign, adding more functions, features, etc. Obviously, it requires a prophet type of person on the top during the concept stage. For MSFT, Bill Gates is the one. But once the company stepped into the second stage of innovation, he is not that critical anymore. For Apple, it already completed the innovation at the concept level for all three fields it plays in. What Steve Jobs accomplished is not just a few versions of MP3 player/wireless phone/computer, but a concept/package/platform of how these gadgets should be built. Without Steve Jobs, Apple is not today's Apple, but in this implementation stage, Tim Cook should do OK.

With all these said, I'd like to say the impact of Steve's leave is somewhat exaggerated. The great CEO already lifted Apple to one level where the company is self-sustainable. We all know that eventually he will leave, then is it really bad if it is now? For me, his mission is completed, excellently completed, and I'd like to see how his successors will continue. Steve left the legacy which may turn Apple into an all-time greatest company, and if the new management team holds it well, AAPL might simply become a stock of a life-time.

Apple (AAPL): Still the Unique Innovator without Jobs?

As a long-term investor in Apple (AAPL), I was accumulating more shares during 2008 as the market was spiraling downward, and stopped, guess I had to, when my cash ran out, sometime long before the market bottomed out (longer if the new lows it reached the first week of March were not the bottom). I had strong beliefs in Apple's growth potential, based on its international appearance, and another one was based on the future of the Mac computers. The sole cornerstone of this all was my belief in its unmatchable powers of innovation.

I'd like to admit that my research on AAPL was not thorough enough, because I had this unanswered question both before and after I jumped in, and I am still having the same question today: why no other companies are capable of coming up with anything to match the iPod? Bottom-line, it is just a MP3 player. Resource wise, there are many others that can match or beat Apple, the most obvious being Microsoft (MSFT).

So why it is Apple, Apple Only, and Again and Again Apple Only? Though I couldn't find any answers that I myself felt 100% satisfied with, all my reading seems to suggest that AAPL has established certain forms of corporate culture, a systematic way to encourage creative thinking and channel such creativity through the product development life-cycle. Once such a system is in place, its innovation became sustainable and in return, gave the company a significant competitive edge that is usually pretty difficult for competitors to surmount. This is the underlying theory of all my analysis of AAPL, including my Buy decision. However, I found my belief system cracked a little bit when several weeks ago, CEO Steve Jobs declared a medical leave with very slim chance to return to the helm again - at least according to some analysts.

Apple ranked high every year in various versions of the Most Innovative Companies list, side by side with companies such as Intel (INTC), GE, Microsoft, Amazon (AMZN), eBay (EBAY), P&G (PG), etc. However, if you look deeper, you can find the type of innovation that AAPL delivers is different from almost all the others.

1) The difference between Apple and companies such as eBay and Amazon is like the product vs. the business model. The main focus for eBay or Amazon is not to introduce new products to the world, and eBay is actually more interested in used stuff. But I always have the opinion that eBay may be one of the best business models ever invented in human history. To summarize, it is smart and lazy; smart, because it brings in fat margins; and lazy, because once it is in place, you just sit back and count the money that keeps flowing in.

Basically, Apple's innovation is never about its business model. Instead it sticks to a very traditional one - build something and then sell it above cost to make a profit. You can argue it is a revolution for Apple to combine iPod with iTunes, but this has more meaning for the digital music world than for the MP3 player, and I think ultimately the popularity of the music store was driven by the popularity of the MP3 player, not the opposite. Furthermore, I don't see anything new the way AAPL sell the iPhone. And in the Mac computer sector, again, nothing is truly fresh in the past 10 years - they still stick to and protect their bundling strategy, i.e. Mac OS is allowed to run on Apple computers only. I do believe this bundling strategy gives Apple some edge in software development, allowing it to stay elegant and creative by avoiding a face-off competition with Microsoft (read analysis here). Still, I don't believe this business model is anything innovative.

2) Similar to Intel and GE, Apple's innovation focuses on the product. However, for companies such as Intel and GE, they delve into brand new areas with only a handful of competitors having the expertise and resources to tap in. For example, Intel continuously made breakthroughs in the CPU technology, or GE introduced various means to generate green energy. Apple didn't actually invent MP3 players or smart phones. Rather, they just built on the existing concepts and innovate to revolutionize the user experience. Nothing explains this better than the iPhone, or another more recent example, the new iPod shuffle, the first MP3 player that 'speaks for itself', as they tout. In other words, these are innovations that interact with each individual customer.

From another perspective, we can say innovation for companies like Intel is more about implementation, the idea is already there - making the CPU run faster or running several of them together seamlessly. But for Apple, the innovation is more about bringing up the right ideas, and the implementation seems to be relatively easy.

I'd like to say the Apple's innovation is a lot more demanding, which requires more than placing the right talent in the right position. How difficult is it? Let's say this, there is only one company in the world that is capable of doing it. Microsoft tried with Zune, Dell (DELL) tried with Jukebox and Creative tried with Zen. They simply couldn't match up. For this very reason, Apple's innovation became the cornerstone of its competitive edge and the driver of its future growth. If a new version of iPod fails to impress or a new iPhone is something mediocre, then we may see their market share drop overnight. This is the pattern of competition in the technology world.

As this is so critical an element of Apple's success, we must question its sustainability. Steve Jobs must have played a critical role in this process of constant innovation. Apple sounds like a huge company on paper, but at the end of the day their product line is very simple and limited - several versions of MP3 players, one wireless phone, iTunes and several varieties of computers. I wouldn't be surprised to find out in retrospect that Steve Jobs actually controlled the entire product development process when he was at the helm. With Jobs leaving, can Apple really be the same constant innovator of unique products? I don't know. I admit I am a little nervous, and I am watching.

Disclosure: I am holding a long position in AAPL, but am considering selling it.

The Battle Against Psystar: What if Apple Lost?

People following Apple should be familiar with the legal battle it is engaged in with a small start-up company from Miami, Florida called Psystar, which, after Steve Jobs killed the Mac Clone program more than 10 years ago, became the first one openly selling a computer pre-installed with Mac OS but not branded as an Apple product - it is called 'OpenComputer' instead. Lawsuits from Apple soon followed after Psystar made the move. As of Feb 2009, both parties are locked deep in the battle where Apple claimed Psystar infringed the Mac OS copyright - the End User License Agreement (EULA) doesn't allow the system to be installed on any computer other than an Apple-branded machine, while Psystar countered with allegations that Apple's EULA is invalid, the same manner if Microsoft tries to force Windows to be installed on a Dell computer only.

This looks like a one-sided battle and the vast majority of the followers of the story also predict AAPL will win. Nonetheless, very few is bold enough to rule out the chance, though very very slim, that Psystar may emerge as the last one with a smile on the face. It seems to fit into people's logic if Psystar loses. After all, hundreds of companies of this type come and go on a daily basis. At least this one grabbed the headlines for quite a while before diminishing into oblivion. But what if, a giant if, Apple loses? what is the stake here? Actually I was pondering on the competitive advantage of Apple (I will post a new blog on this topic soon), which leads me into the analysis of its business model, then I found I was deep in this topic. I try not to exaggerate things but my conclusion for now is like this: this is a battle for AAPL to protect its business model as well as its competitive advantage; losing this one might turn out to be devastating.

Let's speculate what may happen assuming the verdict rules Psystar as the winner.

1)Now the Mac Clone is legal (actually I have a big question mark here. Maybe even Apple lost the case, it still has the leverage to put a hold to the situation before it spins out of control, similar to what Steve Jobs did in 1997 - killing the clone program by changing the software version number), and OEMs such as DELL and HP will start produce Mac computers with similar or better performance compared to those from Apple, but only a fraction of the price. AAPL sees the revenue from selling Apple branded computers nose dive.
2) Computer operating system development may be the business with the highest entry threshold in human history - the profit only starts flowing in after burning billions of dollars. Now Apple, with an OS that already cost it billions, sees the high margin from bundling it with the hardware vanish, the only option left is to sell more OS licenses, i.e., increase the market share, i.e., a face-off with Microsoft.
3) Nothing depicts the picture of the competition between MSFT and AAPL better than the TV commercials from Apple. Two friendly guys jump on the scene, greeting you with warm and breezy words, 'Hello I am a Mac', and 'Hello I am a PC'. You saw the PC guy got trashed every time but shrug it off and come back with a smile, a little dumb but sure with a big heart. It is wrong if you come to the conclusion that MSFT doesn't take AAPL seriously, the fact is that they play in two different market zones, with MSFT in a broad one and AAPL in a niche one. Now with AAPL forced out of its traditional zone and positioned to fight MSFT in its backyard, there is no reason to expect MSFT to be that big-hearted dude anymore. Remember how it crashed Netscape years ago? That is the exact MSFT that Apple has to fight.
4) AAPL is going to be squeezed from another side. In the sweet old times, their software engineers only need to make sure their code is compatible with a specified range of hardware, which, Apple has absolute control. Now the pressure to increase the market share will force Apple to consider compatibility issues with a range of hardware 10 times wider. Then adding the derivative support and maintenance issues, don't be surprised if you see the cost rocket.
5) You got used to see an Apple that is creative and elegant, but remember nothing comes without a cost. When AAPL has full control over its products and its market, it can afford the luxury to be creative and elegant. However, if it is constantly under the amounting pressure of the competition and the market, can it still sustain this elegance and innovation? I doubt it. More likely, the constant pressure will exhaust their energy and patience to be innovative, drive the change of the company culture, and eventually, lead to the disappearance of their competitive advantage.

It is scary, but no need to panic. What I am painting here is simply the worst of the worst scenario. First of all, you need Apple to lose the case to Psystar. Second of all, even Apple lost, it doesn't necessarily imply that Mac Clone will become legal. Third of all, even Mac Clone becomes legal, it doesn't necessarily mean that Apple has no way to kill it again. Fourth of all, even Apple can't kill it and has to face MSFT, it doesn't necessarily indicate it is going to lose that war. But if it really reaches this far, I will be worried. Honestly, I don't think Apple is ready, yet. So it is better not lose this case at all.