Tuesday, October 04, 2011

Why I believe AAPL will crumble ...

Earlier this year, at the height of Apple fever, I made a bet that Apple will be in Chapter 11 by the end of 2017. I thought I'd explain my reasoning because it's not what most people would suspect.

First, the problem with Apple in my view was Jobs. Whilst Steve Jobs was outstanding at creative leadership, that is only part of the battle for creating a sustainable company. An exclusive focus on creative leadership always leads to failure as the genesis of new activities (i.e. innovation) might be high worth but it's unstable and uncertain.

The problem for Apple started in my view from a major strategic blunder - it didn't open source iOS, it didn't feel it needed to, it was building the entire stack. By not doing so it enabled Android to thrive. Apple gave oxygen to the formation of a competitive ecosystem of hardware providers to develop around Google's new weapon (and Google had every reason to do this because of the threat that IOS exposed to Google's value chain of data).

As that ecosystem develops, Apple will find itself in a stand alone innovation game against it. The pressure will build for ever more outstanding and exciting breakthroughs in technology which Apple has delivered with the iPad. Unfortunately, this pressure will continue and such breakthroughs by their very nature (chaotic) are uncertain and every company in this position before has failed.

Take Commodore and the Commodore64 which was vastly more influential than the iPad. The C64 transformed a world where computers were rooms owned by huge corporations into personal computers. In terms of consumerization, the C64 was dramatic.

Commodore and Apple both tried to lead this new world through constant innovation but were hammered by the more commodity based ecosystem approach of "IBM PC compatible". Commodore died and Apple barely survived but unfortunately it seems to have failed to learn that lesson.

So once again, we find ourselves in a world where Apple is pushed into the high risk stand alone innovation game against a growing, more commodity focused, ecosystem. That ecosystem will enable rapid innovation of higher order systems, it will outstrip Apple once again and I suspect that Cook (the new Apple CEO) knows this.

The only viable defence against such an ecosystem play is to build a bigger ecosystem (which is tough as a stand-alone) or to buy up the supply chain and use patents to slow your competitors. The latter Apple has done but such moves only slow the change, they don't stop it.

It can give you breathing space though to find that next breakthrough or to work out how to build a bigger ecosystem. However, the problem is often expectation i.e. your customer expect that breakthrough continuously.

I've not listened to Apple's latest press release but if its lacks any breakthroughs and dazzling tech (which I strongly suspect) then markets and fans will slowly turn against Cook and cry "bring Jobs back". Markets always do this, they always want more of the past.

Into this current fray, Amazon will certainly push with its normal approach of commoditising an industry and building an ecosystem around itself. If Google and the greater ecosystem around Android have been waiting for this moment, then they'll shortly strike at Apple - a flood of patent attacks.

Apple will start to turn inwards and the market pressure on Cook will intensify. They'll go from looking for that next breakthrough to needing it. Culture will start to change, it may start to buckle.

Apple's core business will be undermined by the commodity players whose technology will rapidly catch up and overtake, assuming Google can get them to work in a common interest. Soon Android devices will be everywhere. If Apple's patent and supply chain protection measures fail, if a concerted patent attack against Apple is successful then this will happen sooner.

At this point, with margins under pressure, markets under attack, the gloss peeling off the Apple logo and the culture starting to decline then the markets will go after Cook - "it was his fault" they'll say. Of course it wasn't Cook's fault, Jobs made the blunder with an excessive focus on creative leadership creating a high margin but unsustainable business.

Cook might pull out a miracle and maybe they've got some tech they've been keeping back in preparation to dazzle. Maybe he'll help Apple create that sustainable company which balances both innovation and commodity by dealing with the constant flow between them.

I doubt it, markets never think that hard nor give that much time. Cook is more likely to end up as the next Leo Apotheker ... and as for Apple well it didn't learn the lesson first time around, I don't suspect Google and Amazon will let it have a third go.

That's my view, that's my reasoning and that's why I made my prediction. Of course, the prediction assumed Jobs would still be the CEO and maybe Cook can change things by correcting those errors. Should be interesting to find out.

-- Update 13th February 2014

One of the key parts of the above scenario depended upon an aggressive share buyback in order to sustain market value / perception. I was expecting this to be around $100 billion. It turns out that buyback is much less than I anticipated (around $54 billion in the last two years) though Icahn was pushing for closer to $90 billion. This cutting back on the buyback is a fabulous move and gives AAPL a lot more breathing room. Cook is doing an excellent job.
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