AMITIAE - Sunday 27 January 2013

Why would Wall Street want Apple as a Broken Company (Full Text)

apple and chopsticks


By Graham K. Rogers

Tim Cook

Apple is not a broken company: far from it; although reading reports in some sources, one could be forgiven for thinking that Cupertino was about to put up the shutters. There are some who think that it is Wall Street that is broken and their short term gains are more important than long-term company health. There may be another answer: that Wall Street, aided and abetted by its pimps in the press, know exactly what they are doing and the target is to force the share price down to such a level that corporate raiders can take over and split Apple up.

Apple has been in the news a lot in the last few days with the aftermath of its quarterly financial report when once again, the shares took a beating, dropping some 12% (although by Sunday news appeared that there was also a deliberate dump of 800,000 shares in the last second of trading). To some this was not a surprise, although to Apple follower like me this is a disappointment. Apple was constructed to last as a company by its former CEO, Steve Jobs, but the chickens in the barrel are doing their best to destroy it.

Let me explain that "chicken in the barrel" metaphor. When I studied in the USA in the mid-1980s, one of my friends was an intelligent (and feisty) black from Chicago. Marcus was a little older than me and I had much respect for some of his views. He was critical of some white attitudes, but also of attitudes of some blacks, who (he suggested) reacted like chickens in a barrel to other blacks who sought to improve their lot: as soon as they get near the top, the other chickens pull them down. I have been able to apply the idea to many other situations since that time.

In the 1990s, Apple was a broken company. Its former CEO, Steve Jobs was in the wilderness with a couple of companies in his back pocket that were great on technical skills, but needed a big break. Pixar had that with Toy Story, NeXt was taken over by Apple, whose CEO Gil Amelio was thought to be ready to sell off the company and give the money back to the shareholders (Apple watchers will understand that reference).

However, like Churchill returning to the Admiralty ("Winnie's back"), Jobs rejuvenated Apple: instead of CEOs looking to maximise profit, Jobs focussed on the product. With the team he created, a new series of Macintosh computers appeared that were both stylistically and technically innovative. Behind the scenes work was being done on turning the NeXt operating system into OS X, one of the main reasons for the takeover of Jobs' company. Apple had run out of steam.

The next few years saw continuing product innovation with the iPod, the materials that the Macs were made of, and the development of OS X plus related software. Then in January 2007 the iPhone was announced. I am proud to say I was there and still have the notebook in which I took down all the information.

Not all who were there were able to grasp the significance of the iPhone: the touchscreen iPod was well received; the reaction to the mobile phone was ecstatic; but the breakthrough Internet communication device received muted response, although this was the key to the success of the iPhone and subsequently the iPad as the apps were developed.

Some in the computer industry were dismissive, most notably Steve Ballmer of Microsoft, and the CEO of Nokia. Others also tried to ignore the iPhone and in the lead up to the release to customers, some in the press - few of whom had actually seen or handled the device - were mealy mouthed about what the iPhone was and what it would do: bad news spreads faster than good.

Nonetheless, sales of the device took off and (for the moment at least) most critics were silenced although there are always one or two who can always find something negative to say about Apple. The share prices rose, new products arrived and as these did, so some of the processes for manufacturing were improved. It is these innovations that are often missed by the mainstream commentators and the sycophantic bloggers who hang on every word (and often copy them too).

My Apple handler the week of the iPhone announcement was delighted that the Apple shares he bought went past the $200 barrier. With the new products and the track Apple was on share prices reached their highest range in 2011 and 2012. Some analysts were predicting highs of $1,000 or more. But by this time, the chickens had had enough.

A series of negative reports began to appear, beginning with the New York Times supposed exposé of worker problems in China, that had been revealed some months before in Wired and were given a new life by the untrue stories from Mike Daisey who claimed that the same standards do not apply to performance and Art: I guess in the way that a photograph can not be compared to a Picasso, that may be true, but not when the New York Times bases parts of its investigation on your lies.

iPhone4s When the iPhone 4S was launched, many reports were negative, dismissing the device as a made-over iPhone 4 and missing some of the real changes below the surface, like the A5 processor (itself a prediction of Apple's own chip design and manufacturing intentions), the 8MP camera and its new lens, 1080HD video, a 64 GB version, Retina display; along with this the new iOS version provided some significant changes to the way the iPhone worked and included the beta Siri.

This was just not enough for many; and with the death of Steve Jobs the day after the announcement of the iPhone 4S, more and more negatives began to appear. It did not matter what Apple did: for some everything was broken but a number of themes began to appear. The main ones followed the ideas that, Tim Cook was the wrong man for CEO; Scott Forestall or Jony Ive should be Chairman; Apple has lost its way; Apple has stopped innovating; and Apple has stopped growing.

There are others, but these (or adaptations) seem to be the main points that Wall Street, certain analysts and the bloggers out for a few quick hits, focus on.

In Part One (and above) I looked at an overview of Apple and its perceived problems - at least as perceived by Wall Street and some in the media - with some of the background. Here I examine some of the specific themes that appear in the press as apparent evidence that Apple is done and there must, therefore, be changes. Some of the comments overlap as they are to an extent integrated with what Apple is. [All images here are reproduced with the permission of Apple.]

Tim Cook is the Wrong Man

Looking at Apple over the years, Steve Jobs made some good decisions and some bad decisions. While the press ignore the negatives now in their attacks on Cook, they were less reticent in the 1980s and 1990s. Nor were some shy about criticising Jobs when, for example, the iPhone was released, Rob Endlerle (always good for a laugh), wrote, "2007 may be starting out as one of Apple's worst years this decade." and his expert analysis on the iPhone was "It comes in at a nosebleed price, it has really lousy estimated battery life, it uses the aging 2.5G wireless network, and both the hardware and the OS on it are relatively new -- read probably buggy."

To be fair, Enderle is not alone and this tone is used by many critics more and more these days: knee-jerk reaction, get in early, and being wrong is not a major problem: or so it seems. Endlerle's choice over the iPhone, by the way, was the LG Prada phone. Has anyone seen one of those recently?

Tim Cook was chosen by Steve Jobs for some good reasons and despite the round table of Executive Vice Presidents that are the core of Apple's success, Cook was nominated to head the company in the interim periods when Jobs was ill, and when he gave up the CEO position as Jobs' illness took over.

Jobs knew what time of man Cook is. His abilities to control the executives and the company were what prompted the decision, as well as the ways in which he organised the supply chain (his area of expertise - not technology per se) ensuring part of that long term profitability and growth that Apple enjoys.

Almost from the moment Jobs died - up to then some of the press felt he was like Bill Gates, hovering behind Steve Ballmer - Cook's suitability to head the company was under fire on a number of fronts. He seems to have no personality, he is not good at presentations, he does not have the vision of Jobs, and (most important) he is not Steve Jobs. Oddly, Steve Jobs knew that.

Cook is from the south and there is a lovely understated way in which he speaks. It may not be the best for product presentations, but works superbly in meetings ("Why are you still here?" ).

mini_me As to his managerial strength, while Scot Forestall was sometimes cited as a future CEO and a favourite of Steve Jobs, his dismissal showed that Cook was not afraid to get his hands dirty when the occasion arose. Forestall was well liked within his own group, but was a source of friction among other executives (notably Bob Mansfield and Jony Ive) who would only meet with Forestall if Cook was present - indicating the level of control Cook might have.

Allegedly when Forestall declined to take responsibility for the Maps app data (the app was fine and had already been used with Google data), Cook wrote a public mea culpa and Forestall's fate was sealed. Note, however, he was not dismissed immediately - despite press reports claiming this - he was removed as Executive Vice President and made to report to Cook for the next few months.

This is what officials in Thailand refer to as being moved to an "inactive position". In this way, Forestall will not be able to see any current developments, so the value of secrets he takes with him (even with the non-disclosure agreement he will have signed) is diminished when he does leave Cupertino officially.

A lot of people think that Tim Cook does little. Nothing could be farther from the reality and it is hard to understand why they think this way - they only have to look. It is also difficult to understand why some want him off the board and out of the CEO position. I have a number of ideas about the CEO job and what the real reasons may be, but those who suggest his removal are thin on evidence.

As CEO he has made more of an effort to develop a public face: that comes with the job. He spent a while in New York late last year being interviewed by some important columnists and presenters; and when the time comes for Apple product releases, he is up there now with a little more bite (even some jokes) outlining the recent successes of the company, before stepping aside to let those with the product knowledge do their job.

Particularly, we may think of Phil Schiller whose full knowledge of the products he is demonstrating are clear - he is carrying on the Jobs' mantle here with the depth of preparation. Also worth mention is Craig Federighi who also has shown a good level of understanding of what he is presenting. Scott Forestall used to do a first rate job at these presentations, but that is another story.

And when the main part of these shows is over, like the excellent ringmaster that he is, Cook returns to the stage to tie up the loose ends. He is no Steve Jobs, but Cook and the support team do as good a job.

Jony Ive for Chairman

Ives Steve Jobs has gone, if Tim Cook were to go, who would replace him. One of the candidates was Scott Forestall, sometimes referred to as Mini-me to Jobs; but that CEO is apparently not going to happen in this world for Forestall.

Also put forward sometimes is Phil Schiller who might actually make a go of it for a while, but he does not seem to have the overview that a CEO needs. He has excellent knowledge of the company and has been involved in some top level decisions for years; but something does not fit in my view, at least not for the time being. He has been with Cook to China, so is learning more about other areas of Apple over and above his sphere of marketing, but at best, for now, he is waiting in the wings.

As well as these candidates in the unlikely event that Cook were to be removed, other suggestions have been for an outside candidate to fill the CEO shoes. Those putting this forward have not been paying attention. That has been tried before, and while it seemed a good idea at the time, it turned out to be one of Steve Jobs' biggest mistakes, although the wilderness years gave him the bite to make Apple succeed when he returned.

Sculley, Spindler, Amelio knew nothing of Apple's DNA and through layer upon layer of errors almost ran Apple into the ground. Note also other companies that try this route, most notably Hewlett Packard which has managed to gut itself by moving away from the core products that made it so strong. This was also a Steve Jobs rule, Stick to what you do best.

But the same people who want Cook off the stage because they claim he is not much of an orator, are pushing someone who has even less of a public voice, unless it is pre-recorded or in carefully organised one on one interviews where he can just be himself.

Apple has lost its way

The idea that Apple is somehow wandering in a technical and financial wilderness began to form when Steve Jobs died, although the same theme had been heard while Jobs was alive too which suggests that this is somewhat hollow. No one could replace, The Steve, was the cry; and Cook, despite being the choice of Jobs, was not the man for Wall Street, nor for the blogger sheep.

Before a new product is revealed, there are countless rumours about what it is, what it will do and when the announcement is finally made by Apple, the popular press leaps on the advance with the idea that there is no innovation here: Apple is done.

Apple also is supposed to be lost in the economic sense as whenever the numbers are revealed they fail to meet analysts expectations and there is a great cry of "Woe and Alas" from the very people who got it wrong: why blame yourself when you can blame Apple?

The latest figures are a perfect example. Shares heading down for months (like the year before) expectations missed as for Q1 2012 and other quarters, and a subsequent share price drop. Only this time, an unusually large bock of shares was put up for sale in the very last second of trading: the intent here can only be to force the price down even more.

Apple may have been feeling some frustration with the way the analysts' chicken entrails were more important than its own guidance (which some suggested was "sandbagging"). To try and counteract their negative influences, Daniel Eran Dilger on AppleInsider reports on a change in the way Apple outlines guidance and now provides a range of expectations. The background in this article is worth examining and Daniel Eran Dilger has a clear perspective of the situation.

A look at what goes on at Apple - despite the limited amounts of real information available - shows that it is far from lost. Recent expansion, coupled with the revelation that it has secretly been working with the largest Chinese carrier for 4 years, as well as other plans for China are points that suggests Apple is still pushing as hard as before. Products are still being developed, by evolution as well as revolution, although much of that revolution is invisible to the eye. In several other countries too (as well as the USA) Apple has plans for expansion.

The rumour mill used to be a way that Apple could milk to generate interest in upcoming products: one email invitation launching a thousand online articles within minutes. Nowadays, rumours have become a stick with which to beat Apple around the head.

No more innovation

When the iPhone 4S was announced, some commentators immediately declared that Apple had stopped innovating, Apple was dead and we had all better move on. Some commentators did actually stop to look at the specifications and to those who did, it was clear that there had been considerable advances.

iPhone5 The same happened with the iPhone 5. A couple of weeks later, when some sites (e.g. AnandTech) disassembled the device and showed how clever it all was, it was too late: the Apple-is-not-innovative-any-more mantra had begun (and not for the first time).

At the same product announcement presentation there was also a new MacBook Pro 13" with Retina display, and a new range of thin iMacs that used a fusing technology (created at a British university) for joining parts of the front. Along with the patents concerning the way iOS devices and Macs work, Apple has a considerable number of patents for innovations in industrial techniques.

To these numb-nuts analysts and their blogger acolytes, Apple does not seem to be innovating because they only look at the last product, they only look at the surface (although how the screen change in the iPhone 5 was not an innovation is beyond me) and there is little examination of other aspects of Apple's operations, especially software and industrial processes.

Apple has stopped growing

The profit reported in the latest financial results was identical (give or take a few dollars and cents) to the same quarter a year ago. Revenues were up to record levels, sales of iPads and iPhones were up, and Mac sales were down, but this had been predicted and ignored. What was also ignored by many was that these figures reported a shorter quarter than the year before (13 as opposed to 14 weeks) and that this is a time when the rest of the IT industry is contracting: reporting lower sales, apart from Samsung in the handset business.

That sales of the devices (including the iPhone 4S which is still in production) is up, is ignored. Shipments are still at high levels and the iMac production problems are now fixed, so deliveries of these will increase.

There is also the question of market saturation, especially with the handheld devices and the appearance in the market of excellent products from other companies, most notably Samsung. While for some there may be questions about litigation between the two companies and about who created what, the reality is that there is healthy competition with (presumably) a limited number of buyers.

Sales figures do not tell the whole story here. If we were to use these as a basis, Samsung (with 37 handsets released in the last 12 months) would win hands down. Apple released one iPhone and two iPads. However, it is reported that Apple is making 75% of the profits in the smartphone market. That would appear to be a useful figure.

Currently rumours (ah, those rumours) suggest one or two new iPhones on the way (iPhone 5S and iPhone 6). Some commentators are also wetting their pants for a downmarket iPhone (for the masses). We mark this as a "who knows" but "doubtful": this is not how Apple works.

Not long after Steve Jobs died there was increased pressure in the financial press, with some of the bloggers joining the chorus, for Apple to use its cash (called a "cash hoard") and pay a dividend. Note also that the pressure on Apple to use that money had been part of the conclusion of the NYTimes articles on workers in China.

Peter Oppenheimer While Apple sees the money as a buffer - sometimes allowing it to make purchases for various reasons - Wall Street thinks it is sitting idle in a cupboard in CFO, Peter Oppenheimer's office. They also never mention that a large part of that sum is in foreign parts and its repatriation would cost the company some 30% with current tax rules. One can imagine the headlines if Apple were to do that.

With Tim Cook at the helm and the cash continuing to grow, a dividend was announced as well as a share buyback scheme: just enough to cover the shares issued as incentives to executives. With the picture now changing, some are wondering if the buyback scheme should be expanded.

Apple however is a rather conservative company financially. The cash at hand is an example of its long-term thinking and when there are bad days it will still be able to pay the staff, buy the materials it needs and continue to invest in research. The calls to increase dividends that are starting to appear are shortsighted. No change this time, so any dividend change would be impossible until Q2 2013, by which time the targets will have changed.

With its conservative outlooks, when Apple reports its financial results it usually exceeds its own estimates. This is coupled with - in recent times - some records: revenue, iPhones sold, iPads sold, profits. With the argument that what goes up, must come down, the analysts seized on the apparent flat profit report for Q1 2013. This was their "Aha!" moment: Apple has hit a cloud; it will begin to contract; shrinking; the sky is falling.

The profit was one of the largest ever of any company and this is a failure? And what many ignored was the small difference that a 13-week period (over last year's 14 weeks) made to average figures, especially at a time when almost all other IT-related companies have reported far lower sales, with many reporting losses (but without the baying media snapping at their heels).

Indeed, one of the features of Apple's financial reporting is the way that Apple's estimates are exceeded each time (that in itself a cause for criticism by some), but the estimates of the analysts are not met: Apple fails to reach the analysts' guesses and Wall Street reacts. For the last couple of years (at least) despite its excellent figures, Apple stock prices have dropped.

The way many analysts seem to come up with their estimates is to piece together small factoids - supplier chain data, internet use by device, customer reaction - to produce some figure that bears little relation to reality. Trawling for information may work well for the Intelligence community where a general picture is valuable to gauge what a suspect may be involved with, but to feed such information to investors, some of whom may be using their hard earned cash to save for later (retirement, children's education) is irresponsible.

Some Apple watchers are mystified about how the analysts arrive at these figures - always wrong - and a cartoon in Joy of Tech (Tarot cards, phrenology, tea leaves?) paints an interesting picture.

Talking it up and talking it down

As well as the inability to predict Apple's figures, there was the wild enthusiasm by some over the last couple of years to talk the share prices up: $700, $800, $1200. While some were a little more conservative about the future share price, many were not and their enthusiasm was infectious. Investors ran to Apple and the price soared.

A year ago, just after the Q1 2012 results it dropped a little to $315 after several months around $300-350, then climbed to $702, making the Corporation larger than Exxon. Since that time, the chorus of criticisms eroded investor confidence and it sagged to around $500 by mid-January. When the record Q1 figures appeared it fell, then a single sell-off of some 800,000 shares caused a sharp drop and the price now stands at around $439. The fruit is ripe for picking. The cash in hand alone ($137 billion) may have some slavering.

iMac It is my contention that talking Apple down serves little real practical purpose as the company is the same today as it was last year with good sales of its current product lines, more announcements expected in the next months and a rumour of a completely new product. While some expect this to be a TV, not everyone is sure. The CEO hinted recently about something completely new.

There is also the question of software. As a long-term Mac user, the applications that are available with new Macs (and OS X) as well as the consumer and professional apps that Apple has developed, mean I can do all of my productive work and with many apps can also synchronise with the other devices (computers, iPhone, iPad) that I use.

Although Apple is a hardware company, and some argue that this market is becoming saturated, there is still the field of software that would allow increased sales.

Apple may seem more valuable to Wall Street as a company that is ripe for stripping. The corporate raider takes over a company at a good price, then hives off the parts of the company, and makes a sizeable profit by so doing. But the price must be right.

Despite the pressure on the CEO, Tim Cook remains in charge. This should not change at the next shareholders meeting which is to be help on 27 February 2013, although in recent times corporate holders have pressured Apple on a number of questions. There are also reports that CALPERS (a large fund in California that owns a lot of Apple stock) is pressuring Apple to "institute a widely used rule that directors face majority votes in uncontested elections". What will be demanded next?

As I discussed in Part Two, changes at the top need to be done carefully and a company like Apple would be better served by those (Cook, Schiller, Cue, Oppenheimer) who have been operating within the company for years and understand what Apple is. Wall Street would not understand that last sentence; or if they did, would dismiss it as irrelevant. This is a company, shares are traded, it is subject to the laws of market physics as are other companies. Wall Street never understands the philosophies of a company: its dynamics and the chemistry; what makes Apple (or BMW or the Oriental Hotel) what it is.

The risk here is that bit by bit, the massive investors force change on Apple that decrease its effectiveness as a unique entity. Wall Street would buy a Van Gogh painting (for example) for its investment value rather than its beauty.

The Sum of the Parts

With Apple the sum of the parts is not greater than the whole: part of that complete construction is contained in the abilities (and the visions) of its staff from Cook downwards. Would any investor be able to guarantee that Jony Ive or Bob Mansfield, Cue, Oppenheimer, Schiller, et al would be there 6 months after the arrival of a corporate raider?

We have seen in the past many cases when asset strippers have arrived, or when companies are organised for the sake of efficiency. As a Brit, I think of the former British Leyland, or of the railways systems in the UK (as well as the Beeching report of the early 1960s). TWA ended up as a memory, while COMPAQ (where Tim Cook once was) has gone. As has Palm (to HP), Sun, and many more.

With the share price being forced down, Apple is in danger of becoming a target for those who would try and take over the company. It does not matter that Cupertino is strong, that products are coming, that there are expanding markets. Control of the shares is the key and - just as in Monopoly - once you have amassed enough, you are unstoppable.

From the other side of the world (where I am based) I wonder how the analysts pressures, the possible stock manipulation and the recent massive sell off are not under investigation by the SEC; or why (apart from long-term Apple observers) some of the press are not up in arms about the way Wall Street and friends are behaving towards Apple - what is the point? What is the real point?

I used to think that Apple stock was being talked down so that investors could make money when the stock price rebounds as it does with some regularity, but this time I think there are more sinister moves afoot. Wall Street will only have itself to blame if once again they slaughter a goose that lays golden eggs.

Graham K. Rogers teaches at the Faculty of Engineering, Mahidol University in Thailand. He wrote in the Bangkok Post, Database supplement on IT subjects. For the last seven years of Database he wrote a column on Apple and Macs.



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