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The great myth of Apple

Posted by admin on April 7, 2010 in Investment Information

Apple sold approximately 300,000 of the poorly named iPad (snicker, snicker) on its first day of sales. The company is universally written about as ground-breaking, cool and a leader in its field. Along with Google, Apple is the closet thing to a sexy business these days.

But the great myth of Apple is that it is on the cutting edge of technology. It is not a myth the company perpetuates having dropped the word “Computers” from their name several years ago. But the myth continues to exist.  In fact, it is quite the opposite and the rise of Apple, a turn-around story for the annals of business, holds several key insights into investing.

In 1996, Steve Jobs returned to Apple Computers, as it was then known, and was named interim CEO quickly. Completely out of ideas, the Board of Directors of Apple turned to the past and brought the prodigal son back home; Jobs was known as a talented but frustrating manager to work with in his first go around. When Jobs took over Apple Computers it had a reputation for making great product, far superior to most of its competitors, but not exactly sensitive to its customers. Anyone remember the Apple Newton- the cumbersome, highly expensive predecessor to the iPad?

What Jobs has done, on some level, is take the tech out of Apple and moved the company away from the geeks to the cool kids. Apple spent 3.6% of its revenue on research and development in fiscal 2009. To put this in perspective, Mircosoft and Research in Motion respectively spent 15%  and 6.2 % of revenue on research and development in fiscal 2009.  Yet, Apple revenue’s growth outpaced most of its peers. How has a tech company been able to spend less on research and make more money than its peers?

In a nutshell, Apple is not really a tech company. It is now an entertainment company with a technology slant. The iPhone is not the most technologically sophisticated phone on the market. However, for those of us without stubby fingers, it is an easy to use piece of hardware as opposed to the Blackberry- impressive as it is, it is truly a product of a techie. Most of its users probably use 10% of its features.

For those of us attempting to learn some investing lessons from the rise of Apple, consider some of the following:

1. New ground breaking technology may win you style points but not make you much money.  Apple almost fell because it was too technology driven following the long line of companies with great technology but which made little money for its investors (think Ballard Power System, Palm)
2. Companies with relatively low regulatory barriers to entry make money not because of great technology but because of great client experiences. Think of the experience of visiting an Apple store as opposed to buying another cell phone. It is not so much the “wow” factor of technology that wins the customer over as it is solving a problem in a customer friendly manner. Walmart’s early edge was its door greeters.  When it was doing extremely well, Starbucks was not just a run down coffee shop; the stores had a different and positive feel than its competitors. It is often an over looked factor in investing but companies who can deliver front line quality service tend to outlast their competitors.
3. You can hitch a ride with a super star CEO but the aftermath can be quite depressing. Steve Jobs has real parallels with Lee Iacocca, the superstar CEO who rescued Chrysler, in the early 1980′s. Iacocca made a lot of people money when he ran Chrysler but the company was built on the cult of his personalty. After he left, the company floundered eventually being taken over by Mercedes Benz. As much as the iPad may be an exciting product launch, Time Magazine’s cover states “Inside Steve’s Pad” and really does not mention Apple explicitly. The focus on the CEO rather than a multi billion dollar company as a whole may make Apple a great short-to-medium term play but with a potentially troubling future without Jobs.