The Critical Path #3: It's Good to Be King – 5by5

The Critical Path #3: It’s Good to Be King – 5by5.

July 3, 2011 at 6:00pm

Horace Dediu and Dan Benjamin discuss the power of cash to control supply chains in the post-PC era and how Apple is challenging conventional wisdom about its value to shareholders.

RUNTIME: 57:19

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  • Xian


    This is completely off topic, and I apologize for that, but I wanted to ask you about your APPL estimates for this quarter. Your 5.95 is considerably lower than most other independent analysts and seems nearly inline with Wall Street consensus. I'm no expert but it seems your iPhone numbers are lower than most others and perhaps the cause of your 5.95 estimate.

    Could you discuss your estimate and iPhone number?

    I value your work and opinion very much and am very interested to hear your thoughts.

    Thank you

    • asymco

      My forecast implies:

      EPS growth of 70%
      Sales growth: 62%
      iPhone growth: 80% (units)
      iPad growth: 170% (units)
      Mac growth: 32% on revenues, 26% on units
      iPod growth: -12% on revs and -15% on units
      Music: +25%
      Peripherals: +26%
      Software: +26%

      The iPhone is the bulk of growth and I'm putting out 80% on the basis of last year's 61% and the delay in next rev of the iPhone. The whole forecast hinges on this assumption. To get to median EPS in the unaffiliated consensus of $6.66, iPhone has to be above 110% growth and iPad maybe at 200%. I was just not willing to go there this quarter.

      • Xian

        Thank you very much for your clarification

      • davel

        i notice that your numbers are way below others on the apple finance board that i see posted.

        we will see in a few weeks how accurate everyone is.

        thanks for your thoughts on this and your blog in general

      • westech

        Horace, you are looking at YOY comparisons which does take into account seasonality. This can be misleading, especially if the year ago quarter was an anomaly. believe that this was the case with last year's iPhone sales. I find it hard to believe that FQ3 2011 will be less than FQ2 2011: $6.40 on a diluted basis.

  • Roo.44

    FYI your banner ad (above the Twitter tweets) for your Critical Path show clicks to the second episode rather then the complete episode page; Hate for anyone to mess any!

    • Roo.44

      and of course, mess = miss

  • 21tiger

    Congrats on all your success Horace

  • LTMP

    Great show Horace, I never fail to learn something from it.

    Regarding Apple's cash bag: Do you think they might want to buy into the set top cable box business?

    Cisco owns Scientific Atlanta, one of the large cable box makers. They (SA), do a lot of other stuff that ties in nicely with Cisco's core businesses, but the cable box business is a bit different. The boxes are primarily sold through cable companies, but they are really a consumer product.

    If Apple could leverage the technology and licenses to make iTV a true cable box replacement, they could sell 10's or 100's of millions of them.

    I'm sure it would anger the cable companies to no end, but I'd love to see Apple do a repeat of what they did to the mobile industry.

    If they could turn the cable companies back in to the dumb pipes they used to be, the world would be a better place.

    • asymco

      That's an interesting angle, but consider that Motorola (MMI) owns one of the top cable set-top businesses. How has it helped them?

      I believe Apple likes the Apple TV precisely because it's not tied into the cable business. IP is the way to go long term.

    • Omar Grant

      I have to agree with this response, the cable boxes being built by Cisco & scientific Atlanta are these huge 10 lb boxes with klutzy slow software that fail on a daily basis.

      Currently it’s a horrendously failed consumer end product and needs the Apple touch to make it refined and useable, I really hope Apple takes a look at displacing current cable box manufacturers by including a quam chip inside their AppleTV product.

      • disposableidentity

        Apple already has very good video streaming technology. They could easily add subscriptions to streams (like sports and news) to iTunes, or have people download something like an HBO app with in-app subscriptions (look at the MLB iPad app to see the future of TV Networks — the smart ones at least).

        With the addition of apps / apps store to Apple TV, it would be the best possible replacement for live TV (streaming), pay-per-view (rentals), purchased media (downloads) and video game consoles (downloads).

        The shorter answer is Apple doesn't need a set-top box company to do any of this. And they don't need or want a subsidized hardware model to make it work.

        They already make their own hardware and software, run their own media and app store, and have the server and bandwidth capacity to feed it. And Apple would want to avoid the traditional cable system altogether.

    • gslusher

      "Regarding Apple's cash bag: Do you think they might want to buy into the set top cable box business? "

      See if you can find the video of Steve Jobs' interview at last year's D8 conference. He specifically said that the set-top box business was a non-starter. He said that it would be difficult, if not impossible, to sell an independent box, as the cable companies essentially give them out free and seldom give a discount to people who don't need one. (I have two boxes, but switched to the bare minimum about 6 months ago. I can get all the channels I pay for without using the box, but the cable company won't give me a discount if I turn in the boxes. Perhaps they think that they can still sell me pay-per-view, though I've never bought anything that way.)

  • Paul Johnson

    Apple doesn't want to buy into the set top cable box business; they want to put the set top and cable companies out of business. To do that, they have to convince Hollywood and other content providers that people are willing to pay for anywhere, anytime access to desirable programming. The payoff for the consumer is $100 per month of savings on cable package deals that can never be used.

    • disposableidentity

      "…they have to convince Hollywood and other content providers …"

      Or buy them.

      • Why would they have to buy them? Jobs already sits on the board of Disney and is a majority shareholder. Disney was one of the first studios to sign up for iTunes and AppleTV. If the AppleTV does well and Disney does well, the other major TV + movie content houses will also follow.

      • disposableidentity

        We can only pray. Film, television and record companies have a long, long history of acting against their own self interest.

      • kevin

        I think Apple launched iAds in anticipation of eventually getting these content providers to come aboard an AppleTV. The current iAds for mobile gives Apple a chance to test and tweak their process and system for an even greater living room opportunity.

  • sve

    Interesting that Apple with their larger cash horde chose to partner up with competitors to top Google's offer for Nortel's patents. And this teaming arrangement avoids lawsuits with team members and their OS's (RIM, WP), yet preserves legal competition with Android/Google.

    • Kristian

      And it was nice to see that the Apple was the driving force behind this group called "rock star". This is especially nice because it shows that Apple does spend the money better than their shareholders so there is no need to pay dividends or do other hasty things. This kind of big warchest is nice to have when you never know what you will have to buy ๐Ÿ™‚

    • I think it's even more interesting that all of the remaining bidders, with the exception of Intel, chose to partner with Apple versus Google.

      I think Google's biggest problem is not a lack of patents but a lack of partners. Interesting that Horace highlighted this situation in his Android versus Google series of posts in April.

      • masquisieras

        Something to consider is that the main use of Nortel patents for Google will be as stockpile against Apple, Microsoft and Cisco in the patent disputes around Android. So if by Google acquired in coalition with this same partners the patents will be useless for Google.

  • John

    If Apple has more than sufficient cash and they can’t easily give it to the shareholders then why not lower the price and gain more share? Or add more features at the same price to the same end? In other words, if having that much cash is not helpful then why bother to keep margins high? I’m not criticizing the current pricing structure, just gaming out an alternate idea.

    • Smith

      Apples main problem right now is supply, reducing margins will only make it worse.

    • jonshf

      I agree that gaining market share is critical for apple at this time. They need to get as many people hooked on the IOS platform while the mobile computing market is growing. I trust apple to have figured it out. iCloud is part of this (adds features and sinks the hook deeper) and they will likely broaden their range of devices. A cheaper iphone model this fall is critical to market share.
      It will all work out if they keep that sparkle in the customers eye.

    • @Smith got it right. Let's see if I can explain it better.

      If Apple knows that they can only make 50 million iPhones this year, why wouldn't they try to sell them at the highest price possible?

  • jameswales

    I cover the oil industry, where most companies' main problem is the same as Apple's–meeting demand for their product.

    However, the lesson in the oil industry has been that throwing cash at supply chains that don't have the capacity to meet the level of demand growth (whether in hard assets or skilled people) results in cost inflation that outstrips gains in production.

    So it's wise to take the process of building capacity step by step, as Apple appears to be doing, even if you appear to be losing sales opportunities by doing so.

    • asymco


  • Pieter

    Thank you for your insights. I respectfully disagree with your comments on a possible Apple share buy-back. The critical aspect of a share buy-back is the valuation of the share. The larger the gap between the "market valuation" and the intrinsic value, the greater the company urgency should be to buy it's own shares. With the current under valuation by the market of Apple, a share buy-back (with a portion of the cash) will unlock the value of that part of the Apple cash. I agree with you that the market in the short term may not respond positively to a buy-back. The longterm share price will however reflect this added value.

    • asymco

      I'd love to see some research on the topic of buybacks. I've heard of many over the years and usually the companies involved end up in misery anyway. I can't help but note that RIM is busy buying back its shares.

      Here is a list of the largest buybacks in Q1:

      Microsoft Corporation is actually up since 2004, but it has spent a whopping $97+ billion buying back stock for what is less than a 10% gain.

      Read more: When Great Share Buybacks Are Clouded By Awful Buybacks, Dividends Rule (XOM, IBM, PG, EMC, COP, HPQ, DTV, TRV, KO, MCD, MSFT, CSCO, WMT, LOW, HD, PFE, GS) – 24/7 Wall St.

      • Pieter

        Is the problem with share buy-backs not that they are generally undertaken by mature companies in lower growth phase? The key factor being "low growth". A share buy back can almost be regarded as a symptom of the leadership running out of ideas how to grow earnings or how to create value with excess cash.
        The difference is that Apple is growing like a start up company.The norms applicable to other large companies do not apply to Apple. I do not think you will find any company growing like Apple's that can contemplate a share buy-back. A company growing (Apple style) does not have cash at hand.
        So one must move away from trying to get examples of successful share buy-backs, but rather focus on the arithmetic of a share buy-back at the current share price and where it could be in 2 years time versus $120 B cash.

    • That is the theory of the buy back. How well has this worked in practice in the long term? Do you have some examples to back up the long term impact of the buy back allowing future stock growth?

      Horace sighted Motorola/MMI as an example where it did not work out well. Do you have some good counter examples?

    • gslusher

      How does a share buyback help Apple, the company? It may increase the price of AAPL, the stock, for a while, but that doesn't help the company. It DOES help large shareholders, mainly institutions, which own over 70% of AAPL. If the buyback is at market price and it does raise the market price, then Apple would be paying a premium for the shares. Of course, since Apple's cash has a significant impact on the stock price, the price might actually go DOWN after the buyback.

      If Apple were to do a buyback, it should have been when AAPL was at the bottom, like the latter part of 2008 or early part of 2009, NOT when AAPL is near an all-time high. (AAPL closed at $357.20 today–THursday, July 7th. That was the 8th-highest closing price ever.)

      Then, too, how much stock could Apple buy? What effect would it have? You might want to do some number-crunching. Let's say Apple were to buyback 10% of the outstanding shares, for about $33B. (Their market cap is now at $330B.) That would reduce Apple's cash, which, given the way the market works for AAPL, might result in a corresponding loss in market cap after a brief flurry. The market cap would be 90% of what it was and the number of shares would be 90% of what that was. The ratio would stay the same. Apple would be poorer and the investors who held onto their stock, expecting it to rise, would be no better off. The only "winners" would be those who sold their shares, which would mostly be institutions. I expect that this will happen to RIM in the long run.

      • Pieter

        The question is when will Apple have adequate cash reserves? And if that level of cash has been reached, what can Apple do with excess cash? $1 of "excess" cash will still be worth $1 in 2 years time. Whilst with a share buy-back at current levels, the $1 will be worth $2 (if the share price doubles in the next two years.) Your question of how will a share buy-back benefit Apple, the company? How will "excess" cash benefit Apple? The real question is what amount of cash does Apple require?
        Apple's share price is at current levels still grossly undervalued. Apple's management will have the best understanding of where the company is heading and what a realistic share value should be.

      • gslusher

        Interesting point, but I have questions. What happens to a share of stock that a company buys back? Is it retired–it no longer exists–or does it go into a pool that the company can sell? Can a company trade in its own stock? If the stock is used for compensation (options), what is it "worth" to the company? (I expect that there are strict accounting rules that apply.) Would the stock count as an asset on the balance sheet? That's what I mean by how would it help the company, vs stockholders.

        To me, this is a bit like a company's real estate holdings. If the value of those goes up, does that increase in value directly help the company? The use they're getting from the property doesn't change/increase as a result. They can't use the increase in value to pay bills. They could sell the property, but they'd lose the use of it. They could borrow on the property, but that would incur additional costs and debt obligations.

        I actually did this. When my father died in 2004, I went to two financial advisors. One, who worked on commission, had a long list of investments I should make through him and said that I should not pay off my mortgage but should refinance the house and take out as much as I could. The other, who charged a fee and made no commissions, considering my age and situation, said to pay off the mortgage right away. I did. I got a direct benefit from not paying interest and in not having a monthly bill. However, any increase (or decrease) in value of my house is pretty much irrelevant to me unless I decide to get another loan.

      • Pieter

        If a company do a 10% share buy back, the earning per share increases by 10%. The intrinsic share value would therefore also increase by 10%. This is financially the most effective way to distribute "excess" cash to shareholders.
        The only question is what level of cash is adequate for Apple and has that being reached?

      • gslusher

        Two problems with that reasoning:

        1. The company's cash is less, which, given the size of Apple's cash reserve, would probably reduce the price. How much, I don't know.

        2. How has the price of AAPL responded to increases in Apple's earnings? Earnings per share have been rising dramatically, but the stock price hasn't. Here are two comparisons.

        I track the closing price of AAPL. For the month of April, 2010–i.e., after the close of the quarter, including the earnings announcement and the lead up to it, the average closing price was $250.46. For the month of April, 2011, it was $340.91, an increase of 36%. Wow! BIG increase, right? Well, look at revenue and earnings. Revenue was up *83%* year over year. Earnings? Earnings per share in the 2010 quarter were $3.39 (basic). In 2011, it was $6.49. That's a *91%* increase in earnings per share, but the stock price went up only 36%.

        Look at the annual earnings for the four quarters ending with the March quarter. (That's Apple's second quarter.) (I'll use the actual earnings, as the number of shares isn't the same.) This is, in essence, the "trailing twelve months" number. For the four quarters ending in March, 2010, Apple's earnings were $9,346M. For the four quarters ending in March, 2011, it was $19,552. That's a *109%* increase–but the stock went up only 36%.

        See the problem with your reasoning? The stock price will NOT go up as much as "theory" would say. It may go up only 1/3 as much, probably less. A 10% buyback would result in a 11% increase in earnings/share, so maybe the stock price would go up 4%. But, it would go DOWN because of the reduced cash, which would be about 2% of the market cap. The net increase–if any–would be very small and lost in the noise of normal variations in the stock price. It went up 4.8% in the last week. The week before, it went up 5%. The week before that, it went up 1.9%. The week before that, it went down 1.75%. The week before that, it went down 5.2%. Those are all of the same size as the probable change from a 10% buyback, which would cost Apple about $30B.

      • Pieter

        I understand you reasoning.
        Consider the following scenario. It is the year 2016 and Apple's cash reserves has reached $500B and by the way; the share price is still undervalued by 25%. Apple has maintained a policy of not returning cash to investors. Two questions:
        (i) What portion of the $500B cash reserves do you think will be reflected in the share price?
        (ii) What will your advice be to Apple regarding the cash reserves?

      • gslusher


        I wouldn't presume to give advice to Apple's management regarding the cash reserves any more than I'd give advice to an orthopedic surgeon on how to replace a hip.

        From the standpoint of the economy, the 'best " thinig for Apple to do would be to spend the mone–hire people, buy components, do R&D, build buildings, etc. That wold be better than giving money o sockholders, as stockholders are likely to save the money (which includes investing in other securies, which still keeps it out of circulation.

      • Pieter

        Apple is at the moment doing everything you ask for and more "hire people, buy components, do R&D, build buildings, etc" and they still have $25B anual free cash flow. Keep in mind that the quality of R&D is not a function of the monetary input, as proved so well by Apple.

      • chandra2

        glusher: Very well put. Another way to think about this is, the current cash is supporting the apple stock. As deagol writes at, what if Apple does not do anything with the cash but to accumulate it? In 4 to 5 years, they may have cash/share that is same as the current stock price. Whatever price Apple shares trade then will have to somehow reflect that much cash. The more I think about it, Apple should neither pay dividends nor buy back the shares, let them spend it on any activity to support the growth and new product and market opportunities and let the remaining money accumulate. I am coming around to the position that it is not a bad thing.

  • Ralf

    Great show! Also listed as new and noteworthy in German iTunes Podcasts section. Thanks to you Horace I’m now addicted to 5by5 shows. Keep up the good work!

  • What are the disadvantages of doing a share buy-back, and eventually taking the company private?

    • asymco

      Taking the company private and buying back shares are two different things. You can take the company private right now, if you have enough money to buy all the outstanding shares. Share buybacks are about the company buying its own shares and retiring them. A company can buy all its own shares but that just means it has no shareholders–a situation which cannot exist since a company has to be owned by somebody.Going private is made easier if the number of shareholders is reduced. That is independent of the number of shares.

      • chandra2

        That is an interesting scenario, Horace. Hypothetically speaking, assume a company does just that, keep buying back shares. What is that state when it buys back that last share? A bit mind bending as to what the status of the company then is with respect to ownership. I guess even theoretically it would not approach that zero shares outstanding state, since as the number of shares keep reducing the price will keep going up asymptotically and they need more and more cash to buy back more shares.

      • asymco

        The public shares can be retired but new, private shares can be issued. They can be issued to management, employees or a completely new set of owners. This makes sense if the company is distressed and the cost of reporting as a public company is a waste.

        In this scenario the buying and retirement of shares has no effect on their price since they're essentially worthless (i.e. the price of shares is nearly zero.)

        Where the self-purchase scenario becomes absurd is when the company is inherently valuable and highly liquid.

    • gslusher

      If Jobs and the board want to take Apple private, they will NOT do anything like a buyback, pay a dividend, etc–nothing that would reduce Apple's cash. To take the company private, they'd have to find financing, as there is no way that they can accumulate the necessary cash in any reasonable time. That extra cash would increase the market cap, as well, plus they'd have to pay a premium on the share price to get large investors to agree. Where would the money come from? Loans? Could Apple borrow say, $300B? Just talking about that would raise interest rates. Large investors? Who has–or can get- $300B to buy Apple–even a group of people or institutions?

  • Bennett Todd

    Maybe we saw Apple wielding their cash muscle when they defined the new product category tablet, after all the other failed attempts. So maybe this was an example of investing in suppliers to get 10″ touch-sensitive displays at a price to allow a compelling price point to introduce a new product category. Some initial reviewers basically said who’s going to buy an ipod touch that’s way too big to fit in a pocket. Then competitors saw it take off and tried to catch the wave, but couldn’t approach the price point for years.

  • sve

    Turning hard cash, tradeable for all kinds of assets into Apple shares – far less fungible is a poor choice. Save the cash, you will need it later. An orbiting satellite media broadcasting system is expensive. So is a terrestrial WiFi communications company. You'll need all that cash and more.

  • Once again, an outstanding show with Dan Benjamin. This is a show I too listen to more than once to wade thru th density of content. I completely understand Dan's protracted silence during the broadcast: there is so much good stuff to consider, reaching out in so many directions, that one need say little else…

  • iphoned

    great show.

    I think you maybe confused about how and what kind of share buybacks impact shareholder value.

    Also, at $27b/yr free cash flow and growing, they don’t need tap the cash pile to impact supply chain, so it is not going to be the solution for using that pile.

  • westech

    Choosing a market that looks attractive because it is big is the wrong way to look at it. I believe it is better to look for a market that needs a sea change, figure out what is really needed and how to fill that need is more Apple's style.

    Universal WiFi may be one such need. How could Apple do this? Should they invest in satellite technology? Or what? Or is there some other need that we don't yet know about because SJ has yet to tell us what it is?

  • Craig Griffin

    It occurs to me that in an ideal world, Steve Jobs would love to have the stock appreciate each year, for purposes of keeping the value of stock grants & RSUs nice and juicy and thus provide an incentive for key employees to stick around. Jobs has said more than once that he considers his management team to be a key to their success, and I would assume that one of the reasons the management team has been intact so long, Ron Johnson's departure notwithstanding, is that their stock has performed so well.

    As long as their stock goes up organically, perhaps Jobs views any additional boost to the stock price via buybacks or dividends as unnecessary and even counterproductive. Why not wait until the business really does stagnate for a few quarters, perhaps invoking the wrath of hedge fund managers accustomed to outsized profit gains year after year, until finally unleashing a horde of cash to support the stock and perhaps preventing an exodus of talent?

    I may be entirely off the mark here. But I seem to remember Jobs saying at some point a few years ago that paying dividends "wouldn't make the stock go up", so it triggered this sort of line of thought in my mind. To me, I think the cash hoard in insurance against a talent exodus.

    • asymco

      But if he wanted to prevent an exodus, would it not be much easier to just pay out bonuses? Why use the cash to manipulate the stock price, which is then used to compensate employees? The whole idea that the purpose of cash is to “please shareholders” is a bit perverse. The cash already belongs to the shareholders. They should be pleased with owning the company. If not, they can sell it and own another.

      • I do remember reading a few years back when Steve was asked a company town hall about various perks (exercise facilities and such) that don't seem to exist at Apple his response was to make sure the sock continued to climb so employees could more than afford those things on their own and pick their own perks.

      • disposableidentity

        Similar to his answer to "free wi-fi" for Cupertino. Apple is about focus. It's designed to do it's job, and not get tangled up in a whole lot of nonsense that's better done by someone else (the employees at home, the town).

        Some large companies have whole departments devoted to supplying executives with their own private versions of the company's products or other crazy, non-core tasks. I'm so happy to see Apple keep their attention devoted to the things that matter.

  • kyler

    I'm not sure if apple is compelled to use up its money, just because it's got too much of it. I don't believe that's apple's MO. Apple always defines a specific business/technology goal and derives everything from it. aside from manufacturing, i think one thing they might be considering is what to do with their processor technology, given that they had such a success with a4/a5 based on ARM. apple may be in a once in a life time position to challenge intel one way or another.

  • Another incredibly insightful episode. Thank You Horace!

    I think Apple is first company on planet Earth with infinite expansion possibility

    They goals of continually making the best products have no limit or expiration date. Even once market dominance was achieved as was with the iPod, they just kept going essentially competing with its own last year ipod line up as if it was a competitor.

    I also think you are 100% right that Apple needs to address the one problem that has been the bottleneck of its success and that is supply to match the demand it is creating. I am no so sure though whether they need that cash to do that or whether can can make do with the current style of small but very smart investments in the supply chain.

    I think the cash is there for several new big things and I loved the way you put it " I am waiting on that boom moment from SJ, when he make that check-mate move"

    Can't wait for next episode

  • mortjac

    It's a big event for me when a new episode of your podcast is coming! It's delightful sitting/laying down following your thoughts…
    As other above has mentioned, Apple's aquistion of the Nortel LTE patens could point to something big. China Telecom and Apple have been in discussion about an iPhone LTE phones earlier.
    I expect that the $2B for the LTE patens is a part of a bigger investment to get 4G really useful for the iPhone.
    So may be real chunk of the cash pile will be 4G waves…

  • Arun

    Dear Asymco,

    Can you offer your views on the outcome and impact of the recent Nortel patents fire sale?


    • asymco

      It was nothing like a fire sale. The price was extremely high, twice what was expected. Comments I've seen seem to indicate that it was Apple that was the primary acquirer with separate licenses for members of the consortium.Those patents are already licensed to many existing market participants. The new owners cannot revoke those licenses but it's likely that Google is not one of the grandfathered licensees. The upshot is that the new owner (Apple) may restrict who gets access to this IP and thus restrict market access. It's also probable that Google may act to prevent this. The time frame for these actions is measured in years however.IP licensing is a political matter. It is not easy to predict because there is no market mechanism. I dare not predict the outcome in general. I think Florian Mueller (FOSSpatents) is the authority to listen to on this.

      • Arun

        Thank you ๐Ÿ™‚

      • Arun

        Also, do you have numbers on approx costs that an OEM like Samsung pays to use Android?
        5$ to MS a la HTC.
        How about about software development costs? For instance, Samsung/HTC invest in creating TouchWiz/Sense etc. And Samsung [where I work] has a huuuge engineering team that works on Android phones.
        Will it become more expensive than WP7 at $15?

      • asymco

        I think this is what Microsoft is counting on. They faced this decision when they went down the path to build WP7–a time when Android was already announced. They must have thought that Android was not going to last as “free” and that in the end there were reasons for a third option.I think someone at Microsoft said: “Android is free like in free puppy.”

      • Nate

        That's a great line. Reminds me of signs I've seen in shops: "Unsupervised children will be given caffeine and a free puppy."

  • Arun

    Oh. And. The processor company that Apple bought was PA Semi ๐Ÿ™‚

  • Les S

    Maybe Apple could put some that money to good work in the supply chain for something like this:

  • Eric D.

    Thanks for another great show, Horace. I think Dan Benjamin is very brave to host a show that is so business and economics-centric. But I imagine the great majority of those of us listening are also neophytes in this area. It just so happens that in Apple we are witnesses to one of the greatest business stories of all time, equal to the railroad era, or the Ford vs GM battle of the last century. It's truly wonderful to listen to an observer with your background and analytic prowess give us the play-by-play as this saga unfolds.

    This show illuminated for me the fact that Apple's cash hoard has led it into uncharted territory. For smaller companies, too much cash on hand turns them into takeover targets by the bigger fish. Apple is safe because of its size. All that money, instead of being a burden, seems to allow Apple to call the dance. Everyone wants to partner up, be it as suppliers, developers or distributors. Being rich means getting the best prices. Nice to be the king, indeed.

    Your point that Microsoft was a very poor player with its own cash was also one of those "now it all makes sense" moments. In addition to paying out dividends, they spent a lot to buy out or quash competitors. This was a counter-innovation strategy. Most progress in the '90s and early '00s was made through the Internet, the part of computing that Microsoft never really got. We can only understand just how much tech stagnation we endured by looking at what an unleashed Apple has brought us in the last five years.

    Apple did pay dividends and offer stock splits in the early years of its recovery. What do you think was the value of that? Those who invested then have done very well, so maybe there was something to that strategy.

    • disposableidentity

      "In addition to paying out dividends, they spent a lot to buy out or quash competitors. This was a counter-innovation strategy."

      Isn't that interesting. Microsoft's approach to using cash to "stay ahead" is actually what made it possible for Apple to catch up. Microsoft wasn't staying ahead, but merely keeping everyone back. And you simply can't keep everyone back forever.

      On the other hand, Apple's approach to cash so-far really does keep them in the front.

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  • anonymous

    one cynical way to look at the cash horde strategy is in case SJ passes, and the resulting stock crash, apple will initiate that stock buyback plan.

  • Great show, Horace, I look forward each new episode.

    I think I understand your explanation for why a stock buy back would not be good for shareholders, but would it be good for Apple's desire to maintain secrecy and control over what they do? As I understand it, if they bought back enough public shares to take the company private again, they wouldn't have to open their books, hold quarterly shareholder meetings, or really be held accountable by anyone other than themselves. At that point, the public share price isn't an issue, since there's no public stock or stockholders to keep happy.

    • LTMP

      Apple going private is virtually impossible.
      As they buy up shares, the value of the company is divided between fewer and fewer shares.
      Eventually, there would be only one share left on the market. The owner of that share would own the company.
      i promise you, i wont sell my shares if I suspect that Apple plans to retire all of them ๐Ÿ™‚

      • I used to do this all the time in RailRoad Tycoon, are you telling me they were deceiving me?! ๐Ÿ™‚

      • asymco

        Going private is not dependent on buyback or retirement of shares. Going private could happen simply by putting it to a vote for the shareholders. You'd simply ask them if they wanted their shares to not be traded on a public exchange. Whether there are one million shareholders or 10, it's the same question.

        By retiring shares you may reduce the number of shareholders so the vote may be easier to lobby, but the question is still the same: do you want to have liquidity or not?

        Consider also the possibility of using up all your cash to retire shares and in the process making your company bankrupt. Theoretically it can happen since running out of cash is the definition of bankruptcy. In the end, this idea of retiring shares seems a convoluted and peculiar way of creating value.

  • Justin Dugger

    Just wanted to mention that your history of Microsoft is a bit distorted. They didn't put out any dividends until 2004[1]. As I recall, this was around the time folks in DC reduced the double taxation on dividends, and MS declared a huge dividend. They've continued paying out dividends ever since, so the assertion that Microsoft's flat share price has delivered no value to shareholders is strange to me.

    I've also heard that the first iPods had exclusive rights to the microdrives, but I've not been able to find any citations to verify it. It does fit the model you're putting forth here though.


    • asymco

      Yes, I mis-spoke during the show. I meant to say during they decided to implement in the "2000s" not in the 90s. Thanks for pointing this out.

      After the show I received information that Microsoft has spent $170 billion in buybacks and dividends. It's a staggering amount.

  • Steve Bryan

    Apple has reached such a level of growing success that one wonders if they might benefit from creating something like Bell Labs, Perimeter Institute, etc. The creeping withdrawal of government support for first rate basic research, like the current moves by Congress to cancel the Webb Space Telescope, defunding of NSF and so forth might be countered by successful private companies that care about and have an interest in advances in science. I was struck by how even the inflated current estimate for the Webb is $6.4 B, which is dwarfed by Apple's cash horde.

    This sort of initiative might be a way to gain stature and the grudging admiration from the legion of detractors who are impervious to mere technical excellence. I don't mean precisely that Apple should specifically pick up the tab for the Webb, just establishing that the scale is not beyond Apple's reach. Apple (and other US companies) benefit from the US basic science dominance which arose almost accidentally as a result of WW II (of course many more factors). But the evidence seems to be that public support for continuing government spending that would be needed is just not there. Enough prattling, what do you think?

    • asymco

      As valuable as a Space Telescope would be, that value is generally to benefit mankind. The problem is that such costs should also be borne by mankind. Asking Apple shareholders to pay for something for which they derive no exclusive benefits would amount to asking for charity. Surely it would be better for those questions to be asked outside the context of a for-profit company.

      • chandra2

        What Steve is talking about is how AT&T funded Bell Labs as a general research arm. As part of that process, they stumbled upon Transistors, discovered Cosmic Background Radiation and million other things that have in general benefited humanity without contributing much directly to the bottom line of the erstwhile AT&T. It is a poor characterization to call it 'charity'. But I do wonder why AT&T did that then and why IBM continues to do that today ( to a limited extent ). I somehow do not see Apple doing that.

      • asymco

        The value of industrial research labs is indeed legendary. I used to work in one–GTE Labs in the early 90s. But even then the concept was starting to lose its appeal. The returns were just not justifiable. Microsoft maintains research labs but hardly anything has emerged and even Gates is livid about it.

        The problem is that innovation does not seem to happen when you deliberately try to make it happen. Innovation withers when planned.

        This is quite beyond the scope of the topic and may be better deferred to another show.

      • chandra2

        Horace, Understood. Please mark it up for a future show. That would indeed be awesome.

  • John

    HD — i think you're right that the best possible use for Apple's cash is to build up capacity to meet demand. I think another great use for the cash is as a way to play technological "catch-up" as needed. Buying the Nortel patents is one version of that. Another version would be if they miss some important new technology and have to buy their way into something later than they would normally like (buying Nuance might be an example). With the kind of cash they have, this is something they can do. And eventually it is something they will have to do — nobody is perfect at identifying every important new technology early. But you don't have to be a superhuman to identify an important new technology at the stage where you can still make up for your mistake by writing a $10 billion check.

  • masquisieras

    What when do you have too much cash? and you need to do something with it. Its true Apple has much more cash that the average company, but Apple do not operate by the average strategy either. The standar procedure if I do no misunderstood is to have just 1 or 2 month of expenses in cash and use leverage (loans) for other needs, But that means you must go for a standar business procedure with which the bank are confortable with. The only way to keep doing long term not what everybody else is doing is to have enough cash to not have to ask for it to the banks. So Apple can only exist as it is right now with what for any other company will be an excessive cash pile.
    Another point is that the cash return for the cash itself is low but what is not usually account for is the cost of not having that cash, the banks do not give money for free, how much would be the financial cost to ask for the money to pay for whatever part of the 4.5 billions of the Nortel patents would be? so although the cash is giving a low benefit is heavily reducing the financial cost.

    As is usual for Apple they don't follow the more followed path the real problem here is that this means that the banks for which at the end more of the financial analyst work for are not getting their pound of flesh (they would be the final beneficiaries of the financial cost that Apple is cutting )

  • Awesome Show! I love it! Thanks, Horace for being so clear and easy to understand. Listening to you and Dan makes me feel like I'm getting a university class on the movements of the tech world for free. It's so great! Thanks.

  • gslusher

    There's a new article on Seeking Alpha that addresses this issue, with pretty much the same result, though not the level of detail or analysis Horace provides.

    The author, Travis Lewis, does add something as he looks at the performance of Microsoft and Cisco after their stock buybacks. It's not pretty. What CIsco spent on buybacks, plus its current cash, would exceed the current market cap. If they had held on to the money, wouldn't the stock be worth a lot more?

    Lewis also shows that Apple's cash is NOT that huge, compared to the size of the company. We seem to look at the absolute dollar value, forgetting that Apple is the second-most-valuable corporation in the world. He wrote that Microsoft has 22% of its market cap in cash. CIsco has 31%. Apple has 21%, so it's cash is actually LESS than Microsoft or Cisco, relative to the size of the company.

    • Good link. Thanks!

    • chandra2

      Wow, I am a suffering Cisco shareholder and I did not know that. That sucks big time. I am now beginning to think that companies should just keep the cash and invest it in a diversified conservative portfolio. All this market "wisdom" of having a lot of cash is a problem seems to be bunk. The usual reason given by these idiot analysts is that it is a sign that the company does not know how to invest the money. I always thought that is a vast generalization. What if the company is so enormously successful that it just has a lot of cash? That is the case with Apple. So, we need to shatter the myth that having cash is bad..

      • chandra2

        BTW, though the article is good, it can use an Asymco'ish thoroughness and re-presentation. For example, using the 'cash to market cap ratio' as a way to project market cap 6 years down the road is a bit loose since that ratio itself has not been shown to be of any significance.

      • gslusher


        You're right. I was most interested in 1) the historical data about Cisco and Microsoft and 2) the idea that Apple's cash is NOT that large, when measured against the value of the company.

        Andy Zacky made an attempt to correlate Apple's cash with the sock price and, if I recall correctly, found that, flawed as it was, it was better than projected earnings and growth. What Andy was trying to do was to figure out how the big investors–e.g., hedge funds–set their prices, since they have an huge effect on AAPL's price. (More than 70% of AAPL shares are owned by institutions.) The real trick in investing seems not to be figuring out how the company will do in the future but, rather, in figuring out what other people will think it's worth in the future. One can't get a good handle on that unless one has a good idea of how big investors determine their prices. They could base their price on the phases of the moon, but, if you could figure that out, you could make money on the stock.

  • If these phones aren't that labor intensive, why are they all built in China? I would think once the labor costs are factored out by automation, countries like the US become attractive for manufacturing.

    • asymco

      That's a good question. There is an effect of concentration of activity in many areas: finance in NYC and London, media production in Los Angeles, software development in San Francisco bay area, etc. I recall that not only is manufacturing broadly located in China but within China there are concentrations of types of manufacturing. One town in particular is responsible for producing something like 80% of the world's socks. These centers move sometimes as happened with watch manufacturing in Hong Kong or consumer electronics in Japan or textiles in 19th century New England. The economics is one part of it but the fact that the people who "know how it's done" tend to co-locate so they can share ideas and share resources.

      • chandra2

        It is equivalent of the 'market' effect that we see with ebay, facebook etc. In the case of ebay, it is, 'buyers go there because sellers are there, and sellers go there because buyers are there'. For facebook, it is not quite tight, but still people go there because their friends are already there. To a large extent, concentration of activities in one area is due to this reason and it takes a big paradigm shift to disturb it and make it dissipate.

    • asymco

      That's a good question. There is an effect of concentration of activity in many areas: finance in NYC and London, media production in Los Angeles, software development in San Francisco bay area, etc. I recall that not only is manufacturing broadly located in China but within China there are concentrations of types of manufacturing. One town in particular is responsible for producing something like 80% of the world's socks.

      These centers move sometimes as happened with watch manufacturing in Hong Kong or consumer electronics in Japan or textiles in 19th century New England. The economics is one part of it but the fact that the people who "know how it's done" tend to co-locate so they can share ideas and share resources.

  • Hap

    Yes, Apple is a business. But its business is supplying delightful experiences; in hardware, software, advertising, retail shopping, etc. These experiences have been so compelling that some companies and individuals try to reproduce them, though usually with an absence of panache which the derivative makes likely. (See Zune.) YouTube, for example, is overflowing with in-depth kitchen table reviews of cases for iPhones. Apple has awakened us to the pleasure of DETAIL and FLOW, something in which the human nervous system seems to delight.

    I think this focus on experience is who Steve (and now, presumably, the Apple culture as a whole) is at heart. Trying to project myself into Steve's imagination — also having matured in the Woodstock generation — suggests to me that one appealing use of the cash hoard could be to 'do some good' with it. I don't mean charity donations; rather something along the line of creating businesses where they can do the most good for the local economies. (Horace said, "You can take an assembly line and move it somewhere else fairly quickly.") Might they create global satellite cultures around manufacturing, something which could prosper and, in addition, provide education for local communities? Why not manufacturing centers here in the U.S.A? Greater labor cost, sure. But think of the jobs. (I'll resist an irony about Steve's last name.) It would be interesting to gauge the local effect of the new data center, for example, though I suspect they don't employ that many people.

    I don't mean to get all touchy-feely here, only to 'think different;' that is, to imagine how someone like Steve might think. None of us can "take it with us," so what would he/we want to leave behind for posterity that also makes good business sense? I can imagine Steve leaving a legacy not so much of cash as of CULTURE. I'd guess that would please him.

    P.S. Dan, thanks for letting Horace run with it. Mainstream interviewers seem to want to maintain control, or have to insert themselves every 30 seconds, in anxious anticipation of an imminent commercial break. Why have a guest unless one wants to learn something? These days, the notion of being curious enough to learn something from a conversation seems to be a lost art.

    P.P.S. Coincidentally, the ad linked below by IBM on its 100th anniversary speaks to some of the above. I wonder what a century of Apple will have contributed to the common good.

    * * *

  • Mark Newton

    Hi Horace. I have just caught up on Critical Path #3 and was pleased to hear you raise the prospect of Apple using its cash to ramp production throughput. It is the obvious weak point in Apple's product lifecycle.

    In my thinking on this matter, I believe that Apple is once again employing a lateral strategy that avoids the pitfalls most companies would likely fall into. Most would take the obvious path; I have read a number of articles over recent months suggesting Apple simply buy Foxconn or Pegatron.

    Apple, however, is taking a more selective approach. As you pointed out in your show, Apple is using its cash to offer supplier finance to selected device manufacturers, in return for favorable terms. I believe Apple has thoughtfully chosen this strategy over overtly buying into a manufacturer.

    Here are my Top Five reasons why Apple might not want to buy its factories:
    5) Loss of clout: Apple's buying power commands a lot of attention from the huge number of suppliers of the components in its products. Choosing favorites by buying some suppliers risks losing the attention of the others – potentially handing their preference to Apple's competitors. Retaining a broad range of partnerships gives Apple leverage and builds resilience into their supply chain.
    4) Innovation occurs in the supply chain: Apple does well by cherry-picking components from a broad range of component suppliers. They need the ability to switch out components and suppliers at will.
    3) Commoditisation: Apple tends to introduce new technologies earlier than the broader market, so they end up funding development of manufacturing techniques. However, as production improvements and volume commoditises new components, Apple needs competition between manufacturers to drive prices down.
    2) Competition: Apple is able to leverage the risk that it may take it's business elsewhere as a tool for keeping prices low. They do this with Foxconn and Pegatron; Samsung and Taiwan Semiconductor; etc.

    My number one reason, though, for Apple not buying a manufacturer is…

    1) Labour arbitrage: Apple is just too successful to own a factory in China, Taiwan or Brazil. If Apple bought Foxconn, for example, they would be besieged by demands for pay increases from the workforce. The only reason this doesn't happen now is that the labour movement in China knows Apple can take it's business elsewhere if they push too hard. There is a reason Apple is helping Foxconn open other factories in Brazil, etc.

    I'd be very interested in your thoughts on this Horace. It seems to me Apple's options for managing supply constraints are more limited than they might seem at face value, but Apple is once again very cleverly treading a treacherous path by making strategic (and secret) investments in their partner's capabilities, in return for favorable terms.


    • chandra2

      "If Apple bought Foxconn, for example, they would be besieged by demands for pay increases from the workforce. The only reason this doesn't happen now is that the labour movement in China knows Apple can take it's business elsewhere if they push too hard. There is a reason Apple is helping Foxconn open other factories in Brazil, etc."

      Interesting point… On a tangential note, that is why CIA does not hold interrogations in the U.S. ๐Ÿ˜‰ Oops sorry, do not mean to take it to politics!!

  • chandra2

    Is the information in this relevant wikipedia article essentially correct? :

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