Is Innovation Valuable?

I began thinking carefully about Apple in 2005 when the stock was priced at around $55/share. I remember that the events which made me consider Apple in a different light were the launch of the iPod shuffle and the launch of the Mac mini. Both moves signaled to me that the company was serious about competing with non-consumption. At that point I thought that the company was a potential opportunity as an investment.

But I also remember that many people at the time thought that the stock price was too expensive. At $50, the company was much more expensive than the year before. The stock started 2004 at about $11/share. The reason it had climbed so much was that the iPod began to be a real world-wide growth phenomenon. Buying Apple was buying into the iPod and many said the price was unsustainable given such a strong dependency on fickle consumer tastes. It was a much riskier proposition than that of competitors like Dell and HP which made product for reliable buyers like enterprises.

Indeed, by 2006, the shine was off. In the first half of 2006 the stock collapsed from $85 a share to $50, a fall of 40%. It was becoming clear that with mobile phones taking on more music playing features, the iPod was not going to be a big story for long. What’s more, Apple had just announced that they were switching to Intel for the Mac product line. Investors saw just how vulnerable the company still was and considered that the Mac brand was in jeopardy as it transitioned to becoming a Windows-friendly machine.

However, in 2007 the company’s value recovered with the introduction of the iPhone. Suddenly there was a new product to drive sales. Nobody knew by how much or how but there was a sense that the iPhone was enough to keep Apple from oblivion.

Yet, again, in early 2008 the company lost 40% of its valuation. In a rather inexplicable period following the launch of the MacBook Air, the company’s shares went into free fall. Inexplicable because the company continued to deliver solid growth with 2008 calendar quarters showing between 32% and 155% EPS growth.

Then the recession came. It caused another 40% share price collapse. Growth slowed to a range of 11% to 61% during 2009. As the marco “headwinds” blew over, by the end of 2009, with the help of a lukewarm response to the iPad, the company’s value recovered to its 2007 level. In the mean-time its earnings more than doubled.

It may not appear to be the case, but throughout this volatile period, the investment thesis remained fairly constant: Apple is a rather small collection of product bets. Owning Apple meant riding the iPod or the iPhone or the iPad as waves of growth. As soon as one growth wave was seen to start to fade, investors would say the same thing: Apple is done.

The chart below shows just what that looks like in terms of product contribution to gross margin.

The investment thesis is the same today. I’ve had dozens of conversations with fund managers and if anything, it’s even more about betting on products. The iPhone and the iPad make up such a large part of profits that the company seems to be nothing but those two things. So if there is any hint that those products might slow down, the stock is sold off.

What intrigues me about this investment thesis is not whether the signals of growth are interpreted correctly or not, but rather that an investor in Apple in 2006 was considered perfectly rational valuing Apple as an iPod company as much as an investor today is perfectly rational valuing Apple as an iPhone company. Why would anyone buy Apple for any other reason? There is no evidence that Apple can be anything more. Any fund manager positing a different point of view would surely be limiting her credibility.

The consensus is that the value of future, unknown products is zero. Not only that but the probability that there will be any products at all is equally zero. Not only that but whatever Apple does to create new products is not perceptibly valuable. The company is simply the sum-of-the-product-parts and nothing more. Cash flows from current products can easily be shown to be more than the current valuation so even these products are deeply discounted. If and when a new product shows up, it will be considered and maybe if it shows promise, the stock will reflect that, briefly.

A corollary to this investment thesis therefore is that the process of product development at Apple is worth nothing. It does not matter if the company has shown an ability to disrupt and to create new categories. The past is not a predictor. The value of the company is a discounted cash flow of current products–discounted for the odds of commoditization, which are seen to be quite high. A new hit product is a windfall, a winning lottery ticket. Something that you cannot count on.

Think about that in a different context. That’s like valuing Pixar on the box office revenues of its current movie. If Cars 2 is not beating records, Pixar is suddenly nearly worthless. The fact that Pixar repeatably creates blockbusters would be seen as meaningless. The way they built a reliable pipeline with predictable cost structures for movie-making is not interesting.

However, the fact is that Pixar did not get acquired on the basis of the last hit it made. It was acquired for its system of production. This can be confirmed not only by the price paid but by the fact that the organization was not folded into the Disney machine. It stands alone and is given autonomy. So at least in the movie making industry, predictability is seen as valuable.

So why is Apple not valued as a process company?

I think the answer lies in the lack of understanding or belief in a theory that predictable success in product development is possible. Until and unless an explanation is available that persuades a majority that Apple is as much a hit factory as Pixar then Apple without the products will intrinsically be valued at zero.

The premise of the stock market today is therefore that being innovative in technology is meaningless. Innovations are valuable but there is no such thing as an innovation process. If there was such a thing then we could measure it and put a number of its value. Until then innovation is nothing more than a spin of the roulette wheel.

  • GS

    I believe ignorance drives up the fear which results in people taking a step back.

  • Anonymous

    Any new product is innovation, yet most fail. The question is not so much about innovation, as about *successful* innovation. MP3 players, smartphones and tablets were plentiful before Apple barged in, yet not very successful. And on the other hand, Apple have had their share of duds (Lisa, Newton, Apple TV… even desktop Macs are not achieving very high market penetration ,and they reneged on their server commitment).
    I’d argue that Apple is not that innovative with products nor underlying technologies, and that their one recipe for innovation (to make products that look nice and good on you, and that are easy to use) isn’t changing much. That’s no longer *that* innovative, and is getting both copied and devalued.
    So on the one hand there’s no “hard” innovation, and on the other, their recipe for “soft” innovation is getting old, and has never been perfect. How much value should that have ? Historically, all Apple products have been progressively marginalized: Apple II, Macs, even iPhone is losing share already. My question as an investor would be not only whether Apple can keep turning out category-creating or -dominating products, but also, perhaps more importantly, whether they can learn to hold on to the strong positions of their products that do succeed.

    I think of Apple more as an “execution” company, than an “innovation” one. They are peerless at locking in component supplies, at designing a cuter device, and a friendlier OS, at getting a cut of all incidental revenues.

    • Les S

      They’re also pretty good at taking everyone else’s lunch-money. I’m ok with someone else taking more market-share if Apple can continue to take most of the profit and do so at an ever increasing degree. Isn’t that the point of being in business in the first place? You know, to make money and get to keep a lot of it so you can make more of it and again keep more of it? They’re not a non-profit you know.

      • Anonymous

        That’s very true. Apple has succeeded in creating pretty much the only fashion/premium consumer IT brand. Which is not the same as “innovative”. Apple has disrupted with sexiness and ease-of-use. Those are now being integrated (not as well, but still…) in competing products. Apple has reaped ample profits from getting there first. The issue is how long they’ll be able to bank on these innovations (branding, sexy, easy), and if they’re able to come with another one.

      • Ottawaman

        Consistently producing easy-to-use products IS in fact highly innovative. People are attracted to Apple’s products because they just work and are a pleasure to use. The fact that they’re also visually stunning confirms that the company really cares about details — including how they’re going to be used.

        HP, Dell, RIM etc believe that hardware specs and a thin veneer of “design” is the same thing as a solid user experience. Apple’s succes has proven that “ease-of-use” is not something you add at the end of an almost-complete product. The process of integrating a great user experience in all products IS innovative.

      • unhinged

        I think we all can reasonably disagree with the meaning of “innovative” while acknowledging that from an investor’s point of view the real issue, as you say, is whether or not Apple does indeed have a process for repeatable success.

        I would point out, though, that we have observed Apple migrating its business to markets where they clearly have managed to be disruptive. We also have repeated public comments from executive management that they don’t seek to participate in markets where they cannot make a significant difference. At the moment there is no hard data to back it up, but my belief is that Apple is better than any other company at identifying these markets and exploiting them. Unfortunately, by the time hard data is available (the efforts of Horace and Dirk notwithstanding), the bulk of the opportunity will be gone.

        So. Apple is a gamble, with anecdotal evidence that it exhibits signs of being a lower risk than the bulk of analysts agree upon. Let your investment style determine where you put your money.

      • Anonymous

        Your argument is too simplistic.
        Apple succeeds by building the best products it knows how to make.
        All the rest is secondary.
        Their hardware is best in class.
        Their software, while of secondary importance commercially, is better than most products from others.
        But most of all, they understand and value their customers

      • Anonymous

        Reminds me of that Men in Black skit: “The best of the best of the best ! Sir !”. And it’s your argument that’s simplistic: “their best”, “best in its class” actually mean nothing if you don’t define best. I’m arguing “best in social value and ease of use”, you’re saying “best of the best of the best, sir !”
        And the best in class hardware is more than arguable. There is not *one* best in class: some people value a keyboard (on a smartphone), a big screen, ruggedness, openness, cheapness… Apple is certainly not best in class on any of those criteria.
        As for understanding and valuing their customers, that’s a non-sequitur. unprovable, unproven, kind of self-fulfilling (hey, their customers are happy ! guess what, if they weren’t, they wouldn’t be customers !)

      • Guest

        Your not arguing anything your just trolling. Apple has been successful in taking over 50% of the profits in the PC, mobile phone, tablet and PMP markets. That’s not one market, thats four multi-billion dollar markets. You don’t do that by just making pretty things. Even Apples so called dud, the Apple TV brings in over $250 million a quarter. Your arguments boil down to “blah blah, blah but NO”

      • Anonymous

        And.. do YOU have an argument ? Any in general, or, better, one about why Apple’s capacity to innovate does not seem reflected in heir share price ?

      • Anonymous

        I don’t think characterizing Apple as “pretty much the only fashion/premium consumer IT brand” is helpful — it’s the sort of mindless characterization we hear from idiot Apple haters.

        I think a more useful, more accurate characterization is: “Apple is pretty much the only TRUSTED consumer IT brand”. People are willing to cut Apple a lot more slack than most companies, on the assumption that Apple will probably serve up something of value — and if not on the first serving, then in a later iteration (most likely through a free or minimal cost software update).

        Part of this is simple common sense — not promising more than you can deliver — so that sometimes Apple customers — getting much the same as what’s bought by others from other brands — are happier because Apple did NOT promise a wealth of behavior they can’t deliver. Today I think we see that in the gap between the MotoActiv and the iPod Nano Touch. The MotoActiv promises to be a watch and to have watch-like behavior — meaning, eg, that you can wear it in the shower, and that you never have to charge it. And it doesn’t deliver. The Nano Touch is well aware that we WANT a watch-like iPod; but it’s also well aware that it can’t yet provide that. So it doesn’t even hint at that sort of functionality, and doesn’t disappoint.

      • Anonymous

        I think not realizing that part of Apple success is branding and design, and that Apple’s wares are in good part fashion items, is sheer stupid fanboyism. People are cutting Apple a lot of slack because nobody ever got ridiculed for buying Apple, to paraphrase the old IBM canard. As any fashion item, this is about buying a personality crutch.
        Apple spend their time promising stuff they can’t deliver, telling users they’re holding it wrong, and that their virus-ridden computers don’t have any virus because Apples don’t have viruses, and selling the most fragile piece of jewelry on the market, that doubles up as a phone. And going after people who pick up the prototypes they lose in the most devious and dishonest ways. People are putting up with that crap because it makes them look good, and because their phone doesn’t make them feel like idiots. Aside from aesthetics vs ruggedness trade-offs, Apple also has rather more quality issues and recalls than any other tech company.
        As for Apple not telling the nano is a watch… . Yep. And it “matches your outfit”, which clearly is the product’s key feature !

      • Swordmaker

        Now you are just spouting falsehoods like “virus-ridden computers,” and “Apple also has rather more quality issues and recalls than any other tech company,” without any facts to back you up. I challenge you to prove any of that!’s claim to fame is that their OSX antivirus malware data base does not carry all the dead weight of the Windows malware and only includes the so-called Mac malware… and lists only 116 entries. However when you remove the MacOS 9 and earlier entries, the Hacker utilities and support files, including a few that allow Macs to access Windows machines, they’ve tossed in to pad the numbers, and the seven or so proof-of-concept failed OSX virus candidates that were never seen outside of a security company lab, we are left with approximately 20 TROJAN horse applications that OSX will, itself warn the user about if he downloads, installs, or attempts to run them. WOW! Not one true viable, self-replicating, self-transmitting, self-installing computer virus in the lot!

        The only recalls I can recall (pun intended), had to do with batteries supplied by non-Apple makers… including the one announced this month where Apple is voluntarily replacing some first generation iPod Nanos… after SIX YEARS because the OEM battery, which according to critics should have long since been rendered useless and been easily replaced had Apple designed it to be user replaceable, has a flaw in manufacture. The iPod nano is long out of warranty and Apple is under no obligation to do ANYTHING… but they are replacing these obsolete products with new replacements. THAT is what world class service and customer care is all about, obarthelemy! That is why Apple is #1 in customer service.

        Another recall involved the replacement of Apple notebook batteries made by Sony. IIRC, Apple replaced a run of 32,000, notebook batteries because SIX had overheated, not caught fire, just overheated. Dell and HP recalled and replaced over 300,000 batteries from the same batch of bad Sony batteries, but the headlines didn’t mention that recall… and it was a Dell computer that had actually ignited… it trumpeted the Apple recall! I wonder why?

        And finally you paint all Apple product users with an ad hominem attack implying that they need a “personality crutch” so they buy Apple products to get a boost to a crippled personality. BAH! You haven’t got a clue as to what makes an Apple product great. It is not that they are “bling” for looks. I could care less that people know I have an iPhone in my pocket or an iMac on my desk. It’s that they enhance my productivity and add to my bottom line!

      • Anonymous

        The virus story was actually about a virus outbreak a few months ago, that Apple denied, instructing Geniuses to tell customers that their machine had no virus, while it indeed did have one, and both Apple and the geniuses knew it. It was in answer to someone saying people thought they could trust Apple. I’m actually in awe of Apple’s ability to control perceptions, like making thinness a key attribute for tablets, or making breakability a non-issue for a smartphone…
        You forgot that virus incident. You also forgot most Apple recalls. I’d recommend Google. As for the cop-out that faulty parts were not made by Apple… None, absolutely 0, parts, are manufactured by Apple. So if Apple is not responsible for 3rd-party parts, Apple is not responsible for much ^^. Does that count the other way too, or only when the parts have issues ? Who should be getting credit for the Retina display ? Oh, you don’t know… well, here goes you objectivity claims. BTW, they’re not assembled by Apple either, so you’ve got even more cop-outs on hand, for next time ^^
        Apple products are certainly the best products for some users. I’ll probably get an iPad for my mom this Xmas, because “best” for her means with a Scrabble game, and iPad is the only tablet I know has a Scrabble game (it seems to have vanished from the Android market ?). But, I’m utterly certain most Apple customers buy them because it’s the thing to have, or because it’s “oh ! shiny !”, or because they’re locked into Apple’s walled garden (which actually can be a valid reason, once you got walled in).

      • jawbroken

        There was no virus outbreak a few months ago, or in the last few years, as far as I know. You might want to be more precise about your categorisation of malware.

      • Anonymous

        nitpicking much ?

      • jawbroken

        That’s not a nitpick at all. It’s a very key distinction. The only way to prevent trojans is to not allow people to install executables on their computer. Trojans are a user’s fault, whereas viruses are the OS & application developers.

      • GeorgeS

        What “virus”? Was it classified as such by Symantec or other major security firm?

        Calling a trojan horse a “virus” suggests that you are either ignorant or willing to bend the truth for your own agenda. A virus is self-propagating; a trojan horse is not.

      • Anonymous

        1- regular people don’t make a difference. Malware = virus = trojan = …
        2- this has not bearing whatsoever on the point that Apple and their employees knowingly lied to users. Substitute “malware” for “virus” in my sentence if it makes you happy. And BTW, the issue was fixed in the end, by Apple, not by the users ^^

      • jawbroken

        If they said it wasn’t a virus and it wasn’t a virus then I’m not sure how it was a lie. I am not even sure precisely what you are referring to though because you never cited any source.

        If you are talking about MacDefender or whatever then Apple released a systemupdate that blacklisted it. Not sure how this is “solvedby users”.

      • Anonymous

        Yep that’s the one. Where did I say it was “solved by users” ?

      • Darcybullock

        OMG this is my first post ever on a blog. Horace does incredible work. Have owned Apple since Jan 2008 when I first really understood what Apple had become. I am sorry Obarthelemy but I think you aren’t thinking very objectively! I am in the investment industry and have many colleges that say some of the things you are saying here. I know therefore firsthand that many people in the investment industry are in denial about where this company is headed. Possibly you are a “techie” (as I was in the 1980’s) and have been used to thinking that specs are important? Can’t think of any other reason for your slightly hateful comments….

    • jawbroken

      Macs are outpacing PC market growth handily and gaining market share. How does this fit into your narrative? Why is declining or flat market share in smartphones at this stage incredibly important, especially in light of their profit share?

      • Anonymous

        Because is means the “innovation” engine (if there is one) is not working that well. Either Android is “innovating” 2-3x as much, or “innovation” is not that important compared to other criterias (price, features, reliability, performance…).

      • Les S

        If innovation is measured by MB and flashing and testosterone filled commercials then I guess Android has been out innovating Apple. So how would you describe Siri? Innovative or not? I will grant you that Siri did not come fully formed from the mind of Jobs (or Forestall for that matter) and that they bought it. But they did buy it. They saw it (maybe Steve, maybe someone else) as a vector to pursue and pursue in way that does not require a computer science degree to use. This kind of innovation is innovation not matter how you’d like to slice it. For some the response is meh but for others (the ones willing to part with significant money while we’re at it) it’s innovation of the highest order.

      • Switch

        According to the Isaacson bio, Forstall showed it off to Steve sometime over the last summer/spring, at which point Steve tested it out and tried to confuse it. So it seems that Siri’s development had very little to do with Jobs.

    • Les S

      And by the way, innovation might be in the eye of the beholder. To my wife they are wildly innovative. To my in-laws Apple’s innovation is peerless. To my coworkers (in IT) they’re less than enthused with Apple’s innovation. Apple’s reason for being has more to do with my wife and my in-laws than it does with my co-workers. And so long as they can maintain the kind of innovation that my family and friends (other than IT) appreciate then they will continue to have a bright future. Speeds and feeds appeal to some but not all.

    • Walt French

      “I’d argue that Apple is not that innovative with products nor underlying technologies…”

      I beg to differ.

      RIM’s execs famously expressed that it was “impossible” to get the claimed battery life from a package the size of the iPhone. (And that disbelief badly delayed their effort to compete, which I believe will be seen to have been, by itself, fatal to the firm.) Here’s a great innovator biting the dust by not imagining another’s innovations were possible.

      HP/Microsoft’s FrankenSlate, preemptively announced with the intent of one-upping the anticipated iPad, was bigger, heavier, clunkier (stylus; other User Interface) and had miserable battery life while being no faster for what users actually wanted. Another example of a previously-great, but now self-satisfied company drinking its own Kool-Aid, and just falling out of the sky.

      And of course, the MacBook Air, now estimated to be a quarter of Apple’s notebook sales, famously has Intel subsidizing other firms that cannot otherwise compete. Not one firm in the whole, huge PC industry.

      On my flight home last week, I counted 17 Apple devices in use (mostly iPads; some touch/phones and Airs), 10 PC laptops and 4 Kindles. The Apple devices are perfectly designed for coach travel in terms of battery life, fitting into a cramped coach space, and ease of handling. (Maybe shiny matters more in First, where I saw one iPad and one Kindle.) All of these are perfect examples of Apple not just putting a pretty skin on devices, but creating products that solve previously unsatisfied needs — with industry-leading power-management, packaging, perfectly-right hardware, task-tuned software and media. Oh yes, lickability. If that’s not excellence in ALL aspects of consumer electronics / personal computing, what is?

      Not just shiny cases that aren’t seen during use, nor monopolizing the parts. That’s just a weak excuse from people who have no idea what consumers want.

  • Horace – AAPL is nada without Steve Jobs.
    Founders are like parents – they will do whatever to cast their kids in their own image.
    The best that non-founders can be is not even close.
    And hired parents are – well, like foster parents. Food and board meets expectations. It’s a job.

    You’ve got time to sell the stock – it won’t collapse tomorrow – APPL has some serious advantages in their markets, and they could grow, possibly even downmarket as you surmised earlier (although they’ve never made any money doing that) – but there is no one there that had the motivation or learned the lessons that Steve Jobs did, so unless everyone else falls flat there’s no expectation of yesterday ever coming back to AAPL.

    • jawbroken

      On what do you base these assertions?

      • History I guess.

        Ford, Edison, Bell… these are just a few names of founders whose companies never did as well as when the founder was there to assure unselfish leadership and undivided attention.

        The other side of the coin would be companies who did better under hired management than under their founder. I can’t think of any in this category.

      • jawbroken

        I believe people usually mention Disney at this point, along with a few other examples.

        Did Ford, Edison & Bell specifically set up a program to perpetuate their company philosophy, etc after their death like Apple University is designed to do?

        Is there a reason why you call management promoted from within the company, who have spent years there, “hired management”?

      • Early post-founder management is like adopted parents and hired management (pretty much strictly in it for the money) comes shortly thereafter.

        Apple University is not the first attempt at cultural extension – but that’s very much of an untested science with few if any cases which indicate success above and beyond what the technological and market-based advantages were to begin with.

        As I metioned earlier to Horace, yes Disney and Ford and Edison (in the form of GE) are still here with us and making saleable product – but they have been truly overshadowed AAPL of Steve Jobs, just as AAPL will eventually be overshadowed by the next Great Disruptor in the future.

        To Horace’s main point – “Does anyone value process?” Indeed they do when they see it and/or can believe in it for some good reason. Clearly the jury is out on this – and unless AAPL does something very Jobs-ish on its own, (on a product or feature that originated entirely away from Jobs’ influence) the only credible alternatives for percieved growth will be narrowed to sustaining innovation and/or acquisition, neither of whch remotely compares (in monetary value) to an expectation of Disruptive Innovation – which is in any case something that analysts are really just now learning how to evaluate.

        Putting money in the stock market under any conditions is a gamble – and those that do it based on emotion and without understanding the means whereby the perceptions of others (which creates price) is formed, are undoubtedly the basis for the saying about a fool and his/her money.

      • jawbroken

        So your prediction is that in the near future Apple will be run by “hired management”?

        Sure, of course something like Apple University is untested. It is a difference from the other companies you named, though.

        The bit about other companies being overshadowed by APPL sounds kind of ridiculous to me. So these companies are not doing well now because Apple is suddenly doing even better in largely unrelated industries? I don’t really get your point. If it is just that no business lasts forever then it’s not very interesting.

      • C’mon jawbroken, there were many companies that were as Disruptive as AAPL before AAPL and (god willing and as long as the US Congress stays out of it) there will many to come in the future.

        If we count only the few that have been mentioned in this thread alone, we can see that they come along much faster than one every hundred years – and indeed it is precisely they that make things so very interesting.

      • jawbroken

        I don’t know which part of my comment you are responding to here. I never suggested that such companies didn’t exist. Did you reply to the wrong person?

      • unhinged

        Rick, I’m loving your input here – both thoughtful and thought-provoking (yes, even the single-character wide columns).

        I’d like to make sure that I’m understanding you, so here’s my summary of your argument for you to correct as desired:

        There is no evidence that Apple has a repeatable process for creating disruptive products, and thus it is a gamble to invest money in the company because stock price growth is uncertain (and because the company does not pay a dividend, this growth is the primary avenue to investment profit). You see the risk as being significant, because historically companies whose founders have left (including Apple itself!) stop the disruptive behaviour and operate under the stewardship of management that is risk-averse.

        The countering arguments are that Apple is trying something new and cannot be compared to previous examples because it is unique, it has been built into a company that essentially captures the nature of the extraordinary Steve Jobs and has processes in place to maintain that culture for as long as possible. Also, there is unpredictable movement of the stock price even now with it seemingly undervalued from a P/E perspective ever since the GFC, so why should the death of the founder be a signal event that causes the company to be a bad investment?

        As to my thinking on this, I believe both sides have a point. There is risk to investing in Apple because the stock is exhibiting strange behaviour that we are all trying to understand – the unknown cannot be quantified and managed. We also don’t know if some other company is going to disrupt one of Apple’s existing markets. However, we also have _some_ data points that would seem to mitigate the risk, such as Apple’s recent history (iPod, iPhone, iPad), comments from the executive (in particular, from Walter Isaacson’s book relating to Jonathan Ive being viewed by Steve Jobs and others as a kindred spirit in design) and the fact that there’s so much cash on hand Apple can buy its long-term success in a market should that be necessary. Oh, and the history of professional analysis on Apple is generally not flattering for the analysts over the last fifteen years, I think that’s worth bearing in mind.

        What it all boils down to is the timeframe under discussion. When you consider investment, it is always for a given period of time (specific or general). I suggest that when we rate Apple as an investment we try to propose a timeframe as well (for me, my bet is on ten more years of disruptive behaviour, another fifteen as a Microsoft-like behemoth with reasonable growth and then a slow slide into stagnation – good timing for my retirement!)

      • unhinged, thanks for your comment – I’m pleased that you’ve been enjoying the discussion.

        The price of any investment security is related to the extent to which a regression equation (can be formal but doesn’t have to be) can be used to predict its future selling price compared to the price the market sets for it today.

        As in any such calculation, the variables included in the equation and the weight assigned to each affect the final tally.

        Horace asks why, with all other things being equal, the PE ratio or AAPL isn’t as good of a general indivator as it tends to be for some other securities – and my assertion has been that earnings have correctly been discounted from levels which would require contniued Disruptive Innovation as a result of: 1. The loss of an exceptionally charismatic (in this case, based largely on his role in the development of popular products) leader, and 2. The market cap of the stock having reached levels at which the reliability of making such predictions accurately has not been empirically proven (evidenced in the adage that “no stock price goes to the sky”).

        In his article, Horace has argued that the leadership discount is unwarranted given that the organization has been trained to replicate to make Jobs leadership skills redundant. I argue that this is not likely or suffciently evidenced at this point to warrant relief from the discount. In the ensuing discussion Horace argues that significant growth has come from professional management in similar instances in the past, and I argue that the examples provide insufficient similarity and yeild to warrant non-discounted extrapolation into this area of the market cap chart.

        From the perspective of management philosophy, whereas reliability is a prominent factor in securities valuation, “thinking different” runs fundamentally counter to reliability and when combined with the turbulence of stratospheric market valuation and other departures from standard practice which invite concern (such as an overweight cash position), the future appears both unknown and unknowable – capping the price of the stock at a level below that of companies which depend less on innovation for their future sales and profits.

        Thanks again for your inquiry which motivated and presented the opportunity to provide this summary.

      • unhinged, thanks for your comment – I’m pleased that you’ve been enjoying the discussion.

        The price of any investment security is related to the extent to which a regression equation (can be formal but doesn’t have to be) can be used to predict its future selling price compared to the price the market sets for it today.

        As in any such calculation, the variables included in the equation and the weight assigned to each affect the final tally.

        Horace asks why, with all other things being equal, the PE ratio or AAPL isn’t as good of a general indivator as it tends to be for some other securities – and my assertion has been that earnings have correctly been discounted from levels which would require contniued Disruptive Innovation as a result of: 1. The loss of an exceptionally charismatic (in this case, based largely on his role in the development of popular products) leader, and 2. The market cap of the stock having reached levels at which the reliability of making such predictions accurately has not been empirically proven (evidenced in the adage that “no stock price goes to the sky”).

        In his article, Horace has argued that the leadership discount is unwarranted given that the organization has been trained to replicate to make Jobs leadership skills redundant. I argue that this is not likely or suffciently evidenced at this point to warrant relief from the discount. In the ensuing discussion Horace argues that significant growth has come from professional management in similar instances in the past, and I argue that the examples provide insufficient similarity and yeild to warrant non-discounted extrapolation into this area of the market cap chart.

        From the perspective of management philosophy, whereas reliability is a prominent factor in securities valuation, “thinking different” runs fundamentally counter to reliability and when combined with the turbulence of stratospheric market valuation and other departures from standard practice which invite concern (such as an overweight cash position), the future appears both unknown and unknowable – capping the price of the stock at a level below that of companies which depend less on innovation for their future sales and profits.

        Thanks again for your inquiry which motivated and presented the opportunity to provide this summary.

      • Les S

        Ok. I’m confused. So history is a good guide or not? Because Apple has done well in the past we can’t count on them doing well in the future or because founders are the “best” parents then a company without it’s founder is dead in the water? Or is it the other way around?

      • Ford and Edison and Bell were arguably liabilities to their respective companies late in their lives. GM was a phenomenal growth story long after the individuals who founded the component companies were gone. Consider also Ericsson, Marconi a century after their founding. Beretta of Italy is still going strong since 1526. In fact, any company older than 40 years is likely to be a counter-point to the invaluable founder theory.

      • Horace – are you typing this with a straight face? Ericsson just left the business and GM went BANKRUPT. Beretta maybe- but that’s a boutique, not an AAPL.

      • Adrian Constantin

        Ericsson left phone making, which was never their main business, but it’s otherwise doing well, still the biggest telco infrastructure company.

      • Adrian – “doing well” is not what we’re talking about here. We’re talking about the kind of innovation it takes to continue the growth of something that’s already the size of Mount Everest. Thermonuclear vision doesn’t come in the form of companies, it comes in the form of people. The bet on AAPL now is whether (and for how long) it can stay on its current course. No one in their right mind is expecting any explosions of creativity remeniscent of Steve Jobs. If you are in the inside there and have good reason to have such an expectation, then you may have a chance to make some money here – otherwise, the smart money goes to those who are best at anticipating the expectation of the market, which is clearly reserved about such prospects.

      • “No one in their right mind is expecting any explosions of creativity remeniscent of Steve Jobs.”

        I know I’m not. But that doesn’t mean Apple can’t continue to be successful another 30 years from now.

      • Absolutely they may, but the stock price will hover around precisely what you said – that they may be successful (that is to say, continue to profit from the continuation of the paradigm which they developed) for another 30 years or so (or maybe more, maybe less, depending on the competition), which is not the same stock price one gets from a demonstrated skill at Disruption.

      • jawbroken

        Even when Steve Jobs was alive, and they had someone which you say has a “demonstrated skill at Disruption” they were similarly undervalued. How does this fit your theory?

      • Anonymous

        The current stock price of apple essentially represents slow growth, far from disruptive growth.
        If you’re expecting something in between then apple is a buy opportunity.

      • Hi Jonshf,
        Indeed if AAPL experiences greater than projected growth you bet on AAPL you win. That being said, at this price the game is too rich for most players, so you’ll be playing against pros — and pros have different tools and don’t always play by rules we are confined to by our e-trade accounts, so unless you see a pretty big difference (and see it very clearly), caution is warranted.

      • Do you mean $350/share as a price too rich for most players? My post recalled that at $50 the company was deemed too expensive. Back then the P/E ratio was far higher. Today the company has $85 per share in cash. By what measure are you defining a game “too rich”?

      • It’s the $350 pps that I’m talking about. Even a single round lot of that is $35000 plus price in and (eventually) price out. That may not seem like a lot to you my friend, but on my budget, a single-security investment of $35,000 still makes me take pause.

      • So is Google too rich as well? What about Berkshire Hathaway? Their shares are now $112,100 each most I believe most (52%) shares are held by individuals not institutions.

      • Horace, the point that you are responding to was one that simply says that round lot purchases of high-value securities involve a different (and generally more sophisticated) clientel than those involving penny stocks. So does that apply to GOOG and/or Buffett’s holding company? I haven’t reseached it specifically, but I can’t think of any reason to think that it wouldn’t. Coming back to the comment at hand – is AAPL more like GOOG or more like one where a round lot can be had for less than the price of a month’s salary. The answer there is clear as well. The higher the price, the more careful I’d be when bucking the trend. (There is something to be said about some old sayings, the primary one that comes to mind at this moment being “The trend – is your freind”.)

      • Anonymous

        What is a “single round lot”? Last I checked I could buy one share of apple. Today that would require an investment of less than $400.

      • Horace, I obviously need to get into your tax bracket.
        I’m sorry but I have to admit that a single-security invesment of $35,000 still gives me pause.

      • Anonymous

        And if Apple had not split twice already, what would a share cost today?

      • Anonymous

        If you’re investing long term then you’re not playing against anybody. You’re playing with the company you invested in. There’s nothing the pros can do that will alter the company’s earnings and the price will eventually conform to that.

        If you’re trading on a daily basis then you are indeed playing against other investors. Whatever you win is lost by someone else and vice versa. In that game the pros have fair and unfair advantages.

      • Ericsson was founded in 1876 by Lars Ericsson. Most of its growth happened after the founder died in 1926. The period of 1926 to present cannot be considered a period of decline.
        GM created most wealth long after the founders were gone during the 1940s and 1950s. Professional managers made it the largest company in the world, by far.
        Your premise that growth (disruptive or otherwise) is impossible after a founder departs is prima facie false. In fact, I would argue the exact opposite. That only through the invention of professional management did businesses achieve more than what a family could. The whole construct of limited liability is built on the premise that broad ownership and risk taking can allow businesses to scale and with limited liability came professional management through fiduciary responsibility.

      • Horace I know better than to argue stats with you – if you say that happened, I can and will trust that it did.

        On that basis then, your concern would/should be that perhaps the analysts/investors are not seeing the potential of AAPL undergoing similar professionally managed post-founder growth rather than growth from continued Disruption.

        Perhaps they are not – but then my guess as to the culprit would be the investment rule of large numbers (the larger the company, the more difficult to maintain that type of growth) and AAPL already has a larger market cap than any of the companies you’ve mentioned have (or ever had), so without the potential for more Disruption, we’re still talking about growth of the sustaining type which is unprecendented at this scale – which of course then translates to risk, which puts a limit on the price.

        Until that paradigm is broken, no one without a proven Dsruptor in his/her pocket is going to go near this thing for that kind of money.

      • Although often cited, law of large numbers actually refers to a statistical phenomenon. See The prevailing misstatement of that phrase is part of market mythology but it is free of meaning since “large” is undefined and can be anything you want it to be. Put another way, if you suggest that large is x then I shall choose to define it as 10x.

      • Aphorisms aside, my friend – without being able to depend on further Disruption, the potential for AAPL to sustain any signficant growth at it’s current size places you in uncharted waters. At this point, and without evidence past that which occurred during or was affected by Jobs’ tenure – this looks more like a routette wheel than a skill-based wager. Clearly the sentiment is not to bet the college fund for or against this one – and I’m good with that. Too many opportunities out there that afford better sleep at night – even if only a perception.

      • Apple has between 4% and 5% share in all its core markets (apart from iPod where it reached 75% and has stopped growing). Why would this be considered saturation? Is 10% share of phones “uncharted waters”?

      • Uncharated waters in terms of the need to grow from a relatively unprecendented market cap. (This space is getting too tight to type in – sorry.)

      • Walt French

        Allow me to disabuse you of the “large numbers” claim from a different angle.

        Take small fund managers; they often put up weaker numbers after they get big; that’s where I most often see the (skewed) use of the “law.” But it’s actually most often “retrospect bias” in that small managers who do poorly and never grow, never make it into the sample. The cap on skillfully managing a large portfolio is much, much higher than the lore suggests.

        Elsewhere in this thread are examples of how poorly our memories serve us in understanding what actually drives success or failure. I’d encourage you to think carefully about how firms in Apple’s general field succeed or fail, rather than trying to shoehorn companies into prejudiced statistical shortcuts that have nothing to do with the real business.

      • Walt, you might want to keep in mind that the terms success and failure are relative and subjective. What we’re talking about here is investment profit and loss – much easier to measure and stick into your wallet at the end of the day.

        Even if AAPL was to demonstrate itself as being capable of doing something that’s never been done before (grow at even the median rate of growth from its current point of capitalization), it would still take a very long time for the investment community to catch up. One-time wonders are not unusual in Wall Street or in the corporate environment. Nobody but a fool (or a really, really well-informed insider) bets on one to be the first to break the mold.

        I’m not selling AAPL short, but there is no way I’m long to the tune of the kind of growth that would require a repeat preformance of something that was never expected to happen in the first place and can’t possibly happen the same way again.

      • The more popular your opinion becomes, the better investment Apple becomes. It’s exactly the sort of analysis that creates confidence in a long position.

      • Only if the turnaround in perception happens before you sell your shares .

        Thx for the great discussion, Horace – absolutely never a dull moment here.

      • Anonymous

        So the past is an infallible predictor of the future?

    • Is Pixar also nothing without Steve Jobs? What about Disney without Walt Disney or Ford without Henry Ford or IBM without Watson or Daimler without Daimler? I am curious how to tell which founders are important and which aren’t. I also know several great companies whose founders are obscure and invisible like Boeing. Were their founders unimportant?

      • C’mon Horace – I didn’t say they were nothing.

        But the disruptive innovation stops with the founder.

        Look at your examples – Pixar is how Jobs left it, Ford is the same, Disney.., same – these are all great legacies which can be maintained for a time under professional management – they can grow sideways (sustaining innovation) for time, maybe expand into foreign markets, but that’s as good as it gets.

      • Les S

        Can you go into more depth with your perspective on Pixar? What innovative role at Pixar has Jobs death left a void in? What was Jobs key contribution here that Lasster will never be able to compensate for exactly?

      • Hey Les,

        I haven’t studied Pixar, so I don’t want to talk out of school here, but the question I would ask is whether Pixar has done anything Jobs-like (different and unexpectedly wildly successful) since Jobs left. I suspect the answer it that it has not because things like that usually “make the paper” and I haven’t seen anything like come that from that quarter.

        By the way – founders are generally fierce competitors and don’t generally get on well with other founders in their same industry. (They are more like male betas [the fish] in the same tank – one winds up dead.) Gates spoke somewhat more respectfully of Jobs when he took his hands off the steering wheel at MSFT and even moreso of late as he became far more engaged in philanthropy – but when they were direct competitors, that’s what they were 24/7. I mention this because in that same way, Jobs could not have had another Jobs working for him – or even around him. So there won’t be another Jobs coming from inside AAPL.

        Coming from outside is a distinct possibility for re-Disruption, but it seems ever so unlikely to see any outsider come in to head up AAPL – particularly since everyone inside APPL had to expend serious blood, sweat, and tears to get to and stay where they are.

        Bottom line – if you bet on AAPL because you’re expecting it to be the same AAPL as it was with Steve Jobs, your money would probably bring you greater value in Vegas.

      • Les S

        Rick, I’ve taken a passing interest in Pixar and I think I can safely say that Jobs role their was limited with regard to innovation. He was great at being the in your face parent at the parent teacher conferences with Disney and making sure the right people were hired and fired but John Lasseter has been the creative force there. Disney bought Pixar not because of the movies they had already produced at the time (which Disney owned a substantial right to) but because Disney believed that the only path to continued relevance (making waves to borrow a phrase) was to have the Pixar team, in essence, displace and take over the animation studio at Disney. Pixar was not a child Jobs lavished the most attention on but the attention he did give it (by putting Lasseter in charge) did make it very successful. So Jobs contribution was to give Pixar the space to succeed without his micromanaging the company.

      • Hi Les,

        Appreciate the insight on Pixar… You are correct, of course – even real parents raise their different children differently. And with good reason even if/when they are equally loved – since siblings can have needs that are so much different than each other.

      • Ab

        Pixar continually tells stories that appeal to both young and old. It’s a simple enough formula but very few get it right. Like Apple, Pixar is not technology first as other studios can produce equally stunning animation but its about bringing the story to life and developing the characters – its story telling in the new medium of digital animation. Its the experience that lasts the technical aspects are a means to an end and not the end in itself. The same applies to Apple sure they are a Tech company but they are not involved in a technology arms race.

      • Alan

        Not to put too fine a point on it, but yes, you did say they were nothing.
        “Horace – AAPL is nada without Steve Jobs.”

      • I did say that didn’t I.
        Good catch Alan,
        Mea Cupla.

      • So a pre-condition to disruption is that the company must be run by its founder? I think the whole body of research on disruption contradicts this. You can see a long list of technologies which led to disruption here:

      • Horace, there’s nothing in that document which contradicts my observation of the importance of the founder to Disruptive Innovation. Just because Kodak wasn’t named “Eastman” (although actually it was at first) doesn’t mean that the principle doesn’t hold true.

        On a different part of this thread you report that in many cases growth from professional management exceeded the growth experienced during the founder’s term. That may be the case and I’ve addressed that seperately in that part of the thread, but outside of that, the difference in going from 0 to 10 is still a greater percentage (and accomplishment which indicates greater potential for future growth) than going from 10 to 100 – and the analysts and the most successful investors (e.g. Warren Buffett) know that.

      • wow you know a lot about the histories of these companies. I think you are selling them far short. It is hard to remain relevant and it hard to change large companies. You have to be innovative in some ways to accomplish these task in my eyes.

      • riverlaw, you are exactly correct – it is very hard to stay on top year after year, mile after mile, but the innovation (and skillset) that is required to both continually keep the interest of the customer and fend off existing competitors is not the same as the skillset required to grow an extraordinarily large company at a pace exceeding the average. That is a feat which can only be accomplished by something called Disruptive Innovation, which is something that happens in bulk (the few times that it has happened in bulk) by way of certain types of poeple, not by companies. Companies, particularly as you say, large companies, can just barely get out of their own way most of the time. My whole message here is that the projections that Horace sees in AAPLs future imply a repeat of Job’s history of Disruptive Innovation at AAPL, and my assertion is that isn’t going to happen any more a AAPL than it will (or has) at MSFT with the gradual retirement of Bill Gates (GM, GE, and a plethora of other one-time great companies, many of which don’t even exist any more, have demonstrated this quite clearly ). Look at the history of change in paradigm (we’ve mentiioned some of the highlights here) and it won’t be hard to see that this is the way things go. AAPL is not the first company like itself, nor will it be the last – and there is no reason whatever (other than this nearterm afterglow you’re seeing) to believe that this will play out any differently.

      • Anonymous

        So, does this explain what has happened to America ever since the founding fathers all passed away?

      • I suspect that there is more of a parallel there than any of would care to admit.

      • GeorgeS

        Let’s see. Since the founding fathers passed away:

        – Slavery was abolished.
        – Women got the right to vote, as did men who didn’t own real property.
        – Legal discrimination based upon race has been pretty much ended. The desegregation of schools is just one example.
        – Social Security lifted most of the elderly out of poverty.
        – Bank deposits were insured.
        – Most people have a 5-day, 40-hour work week, as opposed to 6-day, 54-60 hours, and many get paid overtime if they do work longer.
        – Children labor was outlawed, so children as young as 5 cannot work in mills where they were maimed, killed, and driven to early death through chronic diseases.
        – Unemployment assistance helps people get through a temporary rough sport.
        – Antitrust laws broke the stranglehold some companies held (e.g., railroads in the midwest).
        – Safety requirements for transportation (aircraft, cars, ships, railroads) prevented hundreds of thousands of deaths.
        – Pollution controls brought several major rivers back to life and made the air breathable in areas where smog frequently caused repiratory problems.
        – The Pure Food and Drug Act forced drug manufacturers to prove the efficacy and safety of their products.
        – Lenders were forced to reveal the real interest rates and total interest paid on loans.

        The list goes on.

      • Anonymous

        The whole topic of the influence of the founder is fraught with difficulty. Even Steve Jobs wasn’t the same from year to year. He grew and changed over the years.

        What is possible is that Steve (or another founder) could setup a company that was engineered to succeed for a long time. This seems like an obvious goal but the difference is in actually doing this as opposed to paying it lip service.

        If you get past the official pronouncements and look at what companies actually do you can see that the de facto goals are often different from the mission statement.

        In one company I knew the CEO often said that the customer came first. Yet in the factories the employees were rewarded for cutting costs. No one was ever reprimanded for delaying a shipment or for products that didn’t work out of the box. If it was ever a choice between inconveniencing the customer or the factory the customer lost.

        There was an article in the Economist this year talking about how companies live or die based on the idea of what business they think they are in. IBM has survived because they are in the business of bringing technology to business. They are not wedded to any particular technology. Polaroid failed because they were in the business of instant film and that business went away. Dell is suffering as they are in the business of building cheap PCs. Apple may survived a long time as they are in the business of serving consumers with electronics. They are not wedded to any one technology so they have the opportunity to migrate from platform to platform.

        I would add that Apple has the chance to succeed because Steve has structured things to keep them in the business of creating new products for customers and not in the business of making money. Once the financial people start structuring the business to make money then innovation and quality go out the window. What you wind up with is the “good enough” mentality.

      • Anonymous

        you need to look at the nature of the industry. some are so stable even an idiot can run them successfully. on the other side of the spectrum is high tech, especially consumer high tech. Apple is in that far right type of industry – one that takes a genius to navigate. Unfortunately, that genius is no longer with us. :-(. Fortunately he placed the company on a trajectory that will likely last at least 5 years before any external symptoms emerge…but in the end, Apple will likely end up where they have in the past after Job’s departure…

    • Glimmerman

      When thinking of Apple, it helps to think different. Assuming Apple will follow others’ paths (even the old Apple’s) could be a very poor assumption on which to base your investment strategy.

      • Actually, thinking different is a good way to grow a brand and a company.

        Understanding and becoming effective at predicting the perceptions of others (which is what sets price) creates a better basis for investment strategy.

        Confusing the two creates risk – and risk is not investment, risk is gambling.

      • Anonymous

        The expression ‘Nothing ventured, nothing gained’ comes to mind.
        The iPhone was the biggest commercial risk Apple ever took.
        Was it a gamble? Yes.
        Was it reckless. Not at all.
        There is an excellent article about this here:

    • Les S

      And by the way, why is it that Apple always has to be evaluated in a bi-polar way? Either they’re gods gift to the univers or we’re headed to the days of Scully, Spindler and Amelio.

    • Walt French

      If you’re going to argue by analogy, you shouldn’t have used parenting: Jobs managed to do rather well despite not having been raised by his birth parents.

      Elsewhere in this thread is the claim that Jobs had relatively little involvement in Siri, which many think is actually the next big disruption from Apple. If it’s true that Jobs was barely involved — I don’t know the facts, myself — it perfectly disproves your claims. Some of Apple’s willingness to put the customer first, disrupting its own highly profitable business if necessary, MUST be learnable to people with merely above-average IQ. Corporate culture, especially when it’s as in-your-face as Apple’s, can persist for decades.

    • Anonymous

      This is too silly.
      Apple has become the giant, super-profitable company that it is with less than 10% market share in all but one of its products. It has max headroom (!) in all the main legs of its stool.
      My point?
      Apple does not need to remain a manically innovative company or a serial disruptor in order to thrive in medium term. All it has to do is to keep its tick-tock product improvement iterations going and to carry on winning market share in computers and phones. Both sectors are potentially 400% to (umm!!) 900% growth opportunities.
      Although Apple has the Lion’s share of the tablet market, penetration is still at minimal levels.
      Growth in China alone will provide Apple with about $30 billion a year in revenues starting in 2012/13.
      Of course there is scope for further disruption attacks, but there is no desperate urgency about finding the next one – but it seems to be in hand anyway btw.
      Of course Apple will not become complacent, but it does not need to be what it has been all the time and forever. In the things that it already does, it can be managed towards stellar growth for at least the 7 to 10 years.
      Finally, it can cater to the less affluent too, in time. With the iPad, Apple showed that it can produce a quality, highly capable product for about half the price that every expert was predicting before it was announced. If you look at the price-history of software that Apple sells/has sold, you will see that it has hugely reduced the price of its Pro software from the thousands of dollars to the low hundreds, while improving them beyond anyone’s expectations.
      So, the world is Apple’s oyster as far as growth is concerned. And when everyone owns every Apple product, the company can settle into an ordinary business model and chug along serving cyclical demand and doing normal things like paying regular dividends and become ever so slightly boring, but very profitably so.
      What is the problem with that?
      No company can grow forever.
      But it can survive forever in theory, if it strives only to remain the maker of everyone’s first choice of products in the categories that it serves.

  • The media tend to overvalue individuals and products, but undervalue systems, because it resonates more with the public: A genius like Steve Jobs, an iconic product like the iPhone, a hero like General xyz, etc. While all this is valid, it’s only one side of the coin. The other is the system within which those individuals operate, the infrastructure, etc.

    20 years ago, business books like “In Search of Excellence” put a premium on the larger-than-life CEO personas (like Jack Welch) leading the best companies. More recent books such as “Good to Great” at least put leadership traits (so called “Level 5” leaders) in perspective with other aspects of systemic capabilities and organization forms.

    In his book “The Lean Startup” author Eric Ries talks about systems for startups operating in environments of extreme uncertainty, looking for ways to discover sustainable business models. One of the things he specifically points out is a method he calls innovation accounting, a “new kind of accounting geared specifically to disruptive innovation”. This entails to start out with a minimum viable product (MVP) and then systematically measure whether any changes or innovations actually do improve the product. Faced with such measurements, decide whether to “pivot or persevere”. Startups following such a system are more likely to succeed, even if it turns out to be in areas different from that of the initial MVP.

    The bottom-line is not whether a company only has hit products or also flops (as obarthelemy points out above). The bottom-line is whether a company has a system to innovate and properly account for the successes or failures. As the record clearly proves, Apple’s system is one of the best. I concur with Horace that the systemic under-valuation of Apple stems from a widespread undervaluation of the underlying systems for disruptive innovation.

    • Ab

      Can someone then describe what an innovations system is and the processes within the system that leads to innovation.

      So is the key aspect innovation and not invention? Where innovation is about exploiting what is available now whereas invention is creating something new.

      • For startups the key capabilities are fast incremental delivery of value (MVP), learning what sells best (innovation accounting) and adapting the business model around that (pivot or persevere). This is a form of evolution, which, as you know, really boils down to survival of the most adaptable (but is often mis-characterized as survival of the fittest).

        Speed is essential, or as Andy Grove (Intel) put it: Not the big will beat the small, but the fast will beat the slow.

        Invention predates innovation as a necessary, but not sufficient condition. Disruptive innovation uses existing and/or newly invented pieces to produce some product or experience which leads to broad consumer adoption and transformation of consumer behavior. Smart phones disrupt the mobile phone market and their incumbent vendors. App stores disrupt the shrink-wrapped software business. As Horace pointed out, often the invention of a new input method (mouse, touch, speech) leads to disruptive innovation in next-gen products. The invention of touch-screen or speech-recognition is not necessarily brand-new, but its broad adoption in a consumer product is. I think the latter is what successful innovation means.

      • kevin

        The original iPhone is a good example of this type of focused innovation. Like a startup, Apple got to market quickly by focusing on quality for a few highly-valued key items – responsive multi-touch screen, touch keyboard with auto-correct, Mobile Safari, touch-screen iPod, visual voicemail, iTunes sync, and activation at an Apple Store. Apple left out many items already in featurephones and smartphones at that time – 3G, SMS, MMS, cameras, GPS, native non-Apple apps, cut & paste, and more.

        So a valid question is can Apple continue to identify, prioritize, and focus on highly-valued items for its products in the post-Jobs era.

      • Anonymous

        The way I see it, Apple’s strength in product design comes from
        – a very hierarchical design process. No design-by-committee, but follow Jobs’ vision. Allows radical designs, and Jobs was good with product vision.
        – no sacred cows. MS are very hamstrung by their unwillingness to endanger their user base and the lock-in they got via the UI, the file formats, … Apple had no such qualms, but then again, didn’t have much to lose, either ^^

      • Anonymous

        Apple continue to obsolete their own products if required. This is almost unique to Apple in the high end tech world. As you say the likes of Microsoft are so focused on their past winners they avoid change and IMHO have already left it too late and are basically a foot note waiting to happen.

      • Anonymous

        MS is also just plain lousy at moving users to new versions of existing platforms. Largely because of their massive installed base (and also the makeup of said base), changes are difficult to pass through. But I’m not ready to let them off the hook entirely.

        A big part of Apple’s successful iteration strategy is the company’s ability to telegraph their new products without revealing everything. Apple does an excellent job of preparing developers and users for what’s next, and updates don’t feel jarring. Even major UI changes are almost always done in a way that doesn’t leave long-time users pining for the older, more familiar versions of software.

        By contrast, every major new version of Windows or Office seems to scare users. Sure there are those who eagerly adopt the newest software, but many (particularly large customers) hang on to the old for as long as possible. With every new Windows version, there are issues with backwards compatibility, and not just on third party apps but also hardware drivers. Then we have the issues of reorganized file systems and default applications. A new/updated UI (and often the choice of maintaining a legacy UI) complicates things further.

        The Office suite is just as bad. Millions are still using the 2000/2003 version because the ribbon feature was so poorly communicated. Sure it works, but most users weren’t clamoring for a new menu system. The changes were 99% visual and layout related, with little to no increase in utility. This wouldn’t bee too bad, except that the software is a PRODUCTIVITY suite. Nothing saps productivity more than having to relearn something you already know.

        Again, Apple excels at its ability to make things that just work. Most of the key features of idevices and software require no explanation, and the few that don’t are typically the focus of keynote presentations. During these keynotes, Apple not only explains the features of new software, but also the benefits.

  • Ab

    Horace do you or anyone related to you closely have any financial interest in Apple? Be it through directly via share ownership or via an investment vehicle etc?

    • Les S

      I know I do. How about you Ab?

      • Les S

        PS: I’m definitely not short AAPL although I’m pretty sure there might be some of those here.

      • Ab

        I would be more concerned with market manipulations than any strategy long or short.

      • Walt French

        Market manipulation is against the law. You might think that supplying rational, factual analysis is, too, for as little as you see of it, but putting your cards on the table is the opposite of manipulation.

        And, of course, Horace’s ideas are put in front of a very challenging, even critical bunch of readers, the absolute worst audience for scheming.

        You obviously know NOTHING about manipulation and you’d be well advised to study up on it before dropping these types of turds in polite discourse. Asymco is NOT SlashDot, CNet MotleyFool or the many raving lunatic bulletin boards.

      • Ab

        I suggest you understand what I wrote. I was not referring to asymco as Market manipulation – I was reposnding to Les. However I think it is germaine to see if Horace does have any financial interest in Apple.

        Looks like you got the wrong end of the stick.

      • Ab

        I think it’s clear that making a statement concerning my knowledge of market manipulation it is you who does not know anything about me and yet you complain about lunatics. The irony.

      • Ab

        Looks like you jump to conclusions quite quick and wrong ones at that. I hope your investment record is better.

      • Ab

        “putting your cards on the table is the opposite of manipulation”

        Manipulation can occur in the open when Analysts talk up or down stocks and take positions accordingly.

        The pumping and dumping of dot com stocks.

      • Walt French

        @Ab wrote, “Horace do you or anyone related to you closely have any financial interest in Apple? … I would be more concerned with market manipulations…”

        from Wikipedia: “Market manipulation describes a deliberate attempt to interfere with the free and fair operation of the market and create artificial, false or misleading appearances with respect to the price of, or market for, a security, commodity or currency. Market manipulation is prohibited in the United States under Section 9(a)(2)[2] of the Securities Exchange Act of 1934… The Act defines market manipulation as transactions which create an artificial price or maintain an artificial price for a tradeable security..” (My emphasis & edits)

        The clear reading of your posts, despite my requests for clarification/retraction, was that Horace’s talking about the company could relate to market manipulation. Although you posed it as an open question, a free and open discussion of a person’s views are the opposite of what the SEC defines as market manipulation, so I asked you to distance yourself from the insinuation.

        I’ll ask again: get this ad hominem crap off of a website that is devoted to clear, insightful analysis, not paranoid conspiracy theories or claims of pumping and dumping (which is absolutely impossible for any company close to the size of Apple).

      • Ab

        I don’t have any holdings of Apple directly or indirectly. I think it helps me provide an unbiased view 😉

      • Les S

        Well I like having skin in the game. It sharpens my perspective with the financial consequence as the motivator.

  • berult

    The lifespan of a disruptor is expected to be on the short side. And  expectations drive  market behaviors. Jesus, Mozart, …Jobs! They all lived on the edge …on the cutting edge for Jobs, and sold short as they died… Their very lives were ‘self-discounted’ as a necessary step, a self-sacrifice towards universal perennity. And universal is the key word here.

    If I were on the side watching you dive into the ocean to save a child from drowning, I’d put a wager on the child to survive the ordeal and we …to lay a wreath on your glory. From what you would have done, the child would have gotten a life of his or her own …in all due respect to your memory.

    History has shown that as one sacrifices one’s life, one forsakes the rest of the Story…

    • Anonymous

      Wow. Can I get some too ?

  • Ab

    As you mention the Ipad and Iphone have quickly become the main drivers of Apple profits as they were disruptive products. A disruption by its very nature is unpredictable and you cannot foretell when it will arrive but when it does it changes the industry rapidly.

    What the market is saying is that it does not know whether the disruptions will occur externally or internally – whereby Apple releases a product which cannibalises its own sales. If it’s an internal disruption we can see that it will maintain Apple profits however if its external we could see profits decline rapidly.

    Now Apple provides very little visibility into future new products so as far as the market is concerned the lack of information can only be valued as zero or unless you want to speculate which if thats the case you can apportion any value to it.

    You mention that Pixar and Apple have become hit factory’s but as they release new products infrequently alot rests and rides on these products and until they hit the market we are not sure what impact they have so there tends to be a conservative slant. I suppose a baseball analogy may clarify my point. Apple doesn’t play and miss it simply hits it out of the ballpark which it has done consistently but what happens just once it plays and misses? I think this is what the market is factoring in.

    • Les S

      I think Horace has been making the point (if I may be so bold as to offer an interpretation) that disruption is in Apple’s (with/without Jobs) DNA. Apple sees disruption as it’s differentiation in the market. The bet many of us (myself included) are making is that Apple has turned this seemingly chaotic and unpredictable thing into a repeatable and well defined process that they will not share with others. The only thing about Apple you might be able to predict (on a time-scale that is more then just a few months) is that they will do something unpredictable in an area that others have given up for dead or have not been able to create value for themselves. I think the degree to which Apple has in the past been underestimated by their competitors has also been strategically valuable to Apple. Apple’s competitors continue to trash-talk Apple’s efforts but I think some are beginning to not take Apple’s forays as blithely as they have in the past. Not all are but I think Google is doing it’s best to reverse engineer the recipe. I think those who undervalue or underestimate Apple continue to leave money on the table. I think Apple like’s to bet big and sometimes those bets won’t pay off but on the whole they do and that’s why they are able to reap outsize rewards. Also, I think Apple understands that failure is always and option but that the best way of dealing with it is to learn from it. Fundamentally, any company that spends all of its resources trying to defend the status quo that got them where they are is most susceptible to a slow slog to irrelevance. It seems like the safest least risky thing to do but it’s probably a poison pill that kills you over the long term. Apple has demonstrated that they are interested in defending their own ideas from being stolen by others but they have not demonstrated an inability to change, to adapt and to create new paths and learn from the screw-ups along the way.

      • Anonymous

        The way Apple disrupts is always the same: take something nerdy and not user-friendly, and make it chic and easy-to-use. It *is* innovation, but they’ve been doing the same “innovation” (PCs, than MP3 players, then smartphones, then tablets) for ages now. My guess is: that specific innovation is running out both of new markets and of space within each market, and the competition is getting wise to it (hence, the lawsuits). Unless Apple moves into enterprise or gaming consoles, they’ve pretty much run out of MS clunkers to magic up ?

      • so innovation is disappearing. alert someone quick! I like how you describe innovation in a broad spectrum of computers, then call it the opposite, “specific”. (BTW computer are the most adaptable tool we have ever had, hence innovation for ever in this space!)

        The enterprise is no longer the main driving force behind technolgy . Consumer tech is. Apple is already in the console business to some degree. There a bunch of games for the iPad that can play on the tv through apple tv. Games and apps made for a TV can not be far away.

      • Davel

        I would say fire or a rock is more adaptable.

      • Nerdy and/or not user friendly: PVRs, textbook industry, microwave, programmable thermostat (already covered by Apple Inc ex-employees), wearable electronics…

  • gbonzo

    Analysts are claiming that Apple EPS will grow slower than their revenue in the future. I am pretty sure that this is because in their estimates the gross margin will decrease. The cause of this would be negative trends in either product mix or Average Selling Price (ASP) of products.

    So, essentially competition would eat into profits of iPhone and iPad.

    Scary, huh? Furthermore, if we believe this scenario, then the discounted free cash flow of current products would maybe be lower than current market price. The difference being the value of innovation, a positive figure.

    • gbonzo

      On the other hand, if we believe the reality distortion field of Horace, Nook Color and Nook Tablet are not tablets, so there can not be competition from Barnes & Noble (or Amazon?) in the tablet market. Therefore we do not need to care about the competition!

      • r.d

        Reality has well known liberal bias.

      • Anonymous

        Actually, I think thermodynamics says ‘reality has a conservative bias’.

        And that’s more than just a quip – it takes a substantial amount of energy to disturb the trend towards entropy. That’s true in product cycles, too. The ability of a company to amass and then expend energy is another metaphor for its ability to innovate. The question that Horace has raised is in some respects whether there’s a good model for assessing ‘conditional probability’ – if you disturbed the flow many times before, can you do it again? It appears the analysts (emphasis on the first half of that word 🙂 assert that disruptive events are always independent.

      • Walt French

        I can see an apparent intent to be insulting here, but not the attempt to provide any facts or argumentation. What did you mean to say that would be helpful?

      • gbonzo

        I was referring to Horace’s claim that Nook Color is not a tablet. After that I assumed that things that are not tablet, would not be threats to tablets, since they are hired to a different job.

        Was that helpful or not? How can I be more of help to you, just let me know, sir.

      • Kizedek

        One can certainly be picky about what the definition of a “true tablet” is, when others evidently reserve the right to be picky about the definitions of “PCs” and “smartphones”.

        Apparently, the iPad is not a PC. Apparently it is a “media tablet”. However, Windows tablets (the non-existents ones until next year at least) are, apparently, “Tablet PCs”; apparently they are “PCs” in a “different form factor”.

        Apparently, any phone running Android or any variant of Android is a “smartphone” for the purpose of counting “activations” and things like this. Doesn’t matter how well they browse the web or anything like that; heck, doesn’t matter if their users even use them to browse the web at all.

        Trouble is, hard numbers (such as those of monthly or quarterly Android activations, or those of Windows and Android units shipping to channel), or those of new “tablets” (any tablet, please, find me a tablet somewhere) are used to discount Apple as though they pose some imminent danger of direct and credible competition, no matter what kind of underlying faulty reasoning they are based on.

        So, let’s feel free to call the Nook and Kindle’s “tablets”, as long as we call them “media tablets”, and call the iPad a “Tablet PC”; and acknowledge, that yes, the iPad has had an impact on the netbook market, and yes, Apple can be considered a rather large PC company.

      • gbonzo

        Drawing lines around markets and product categories is not exact science.

        But first to blame some analyst for not counting the iPad to the same category as a desktop pc (I could agree with that, they can be in the same category) and then drawing a dividing line between iPad and Nook Color (I disagree strongly with that) is just insane.

      • Kizedek

        I realize what you are trying to say. However, I am not just trying to have it both ways. Neither am I attempting to be arbitrary for the sake of it.

        Rather, I am trying to illustrate just one of the insane views that “analysts” present to us all the time, and which you seem content to perpetuate:

        The Nook is supposedly a potent competitor to the iPad based on it’s shared “tablet-like-ness”, while the iPad could not possibly be affecting the Netbook market, “why just look at the iPad’s ‘un-notebook-like-ness’ “.

        The analysts are just confused about what the iPad actually is, what it does, who uses it, what they use it for and how they use it. They have no idea of the nature of the disruption, and seem to think that Apple somehow gets lucky time after time, while it is inevitable that competitors are going to come along later and get it right, sooner or later putting Apple in its rightful place — ie. with at most 10% in any market, because, after all, that is how the PC wars turned out.

        So, we are forced to shift the iPad into and out of several arbitrary categories: low-end PCs, media tablets, tablet-PCs, consumption devices, creative devices, you name it. Every time someone analyses the industry or puts out new statistics, it is either somewhat unfair or misses the picture entirely. Hence 90% of the discussion on this site.

        Therefore, to correct the picture commonly being portrayed and perceived, an analyst like Horace who takes a moment to look past the end of his nose, may well variously say things like:
        There is no “tablet market”, only an “iPad market”; or,
        iPads are disruptive to low-end Windows PCs, but the Nook is not disruptive to the iPad; or,
        The Nook isn’t really a “tablet” given the job it is being hired to do; or,
        Android is not a true ‘platform’, etc.

        So, yes, let’s look at things like “function”, “use” and “jobs hired to do”, instead of getting hung up on the outward form-factor of a device like the Nook, and how “tablet-like” that seems to make it. For, surely, if the Nook is a “tablet” and not just the frontend to a store, then the iPad is indeed a PC.

      • Davel

        The tablet is not a pc for now.

        The nook is not a tablet for now.

        That will change.

  • MEG

    Sad but true. As an investor it is clear that companies can lose their mojo and can be lost in the woods for years (Sony, Apple after Jobs left the first time). Systems can break. The movie business has been around for over a hundred years vs iPods vs iPads vs iPhones.

    We are also reminded to “not count the chickens before they are hatched”.

    Finally to expect every product Apple makes to become a mega hit would be foolish, but to doubt their potential would be equally foolish.

    • Anonymous

      What is a “single round lot”? Last I checked I could buy one share of aapl. Today that would require an investment of less than $400.

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  • Anonymous

    Sorry, reply to wrong comment.

  • Anonymous

    What is a “single round lot”? Last I checked I could buy one share of apple. Today that would require an investment of less than $400.

  • Anonymous

    My hypothesis is that analysts generally are not technology savvy and are not following the technology details of these businesses.

    The point missing in most analysis is the viability of Apple’s technological moat. Apple has the ability to create huge disruption in the markets where it competes. And it develops its disruptive devices and ecosystems without pre-announcement, birthing them good to go. Then, from this running start, they accelerate. They are essentially impossible to catch.

    No one ever made a viable iPod competitor. The only valid iPhone competitor is being shown to be built in ill-gotten technology. And no one can come close to the iPad and its actual computer capabilities. (Web, books, mail and movies? that’s not an iPad. Name any tablet maker that has a shot at garnering FAA approval for their tablet to be a paper replacement in commercial airline cockpits…)

    I think there is way too much analysis of Apple as a mathematical phenomenon on a technical stock graph and not nearly enough analysis of the technological dominance that Apple has. This may simply be because everyone can fancy themselves a stock analyst, but very few actually have the technological background to do the analysis from an engineering and science perspective. Regardless of the cause, to ignore this side of the valuation is to miss the moat completely. (pun intended…)

    • Davel

      Regardless of whether or not Google steals from others is irrelevant. By the time it goes through the courts the market will have decided.

      Samsung sold 20 million phone last quarter. Apple has competition. The Fire is competition. It is not the iPad, but at $200 it doesn’t have to be.

      Those are two of the biggest drivers of Apple. All of these are serious threats to Apple.

      I think Apples advantages are its app store, iCloud ( if it executes ) and Siri. If Apple can get Mandarin for Siri next year Apple will be huge in China. In reading this I notice I list software and not hardware as the differentiators. Odd since Apple is perceived as a hardware company.

  • Anonymous

    The so called “process of product development” at Apple could be no more than Steve Jobs effect. With him gone, so will the “so called process”. Now, only time will tell, but to say that Steve left some kind of magical process that will perform in a similar fashion without him at the help is to hope.

    • Anonymous

      I think there is sufficient information available to say that the process of product development at Apple was and is not simple a Steve Jobs -effect. Sure, he had the ultimate say in everything, but to imply that there was/is no process to how things are made is, in my opinion, just plain wrong. In fact, I would say that it is impossible to develop such complex products without a proper process. A process does not equal the decision maker.

      • Steve Jobs did not have ultimate say in everything. He contributed to about 10% of the products shipped (based on conversations I’ve had with persons familiar with the process.) The 90% of products (outputs) that shipped untouched by SJ were still influenced as developers took their cues from the 10%. However, this still required interpretation and sometimes deviation from what was perceived as the “right thing to do”. Arguments would surely flare up on how to do it.
        When SJ left he told Tim and others not to ask “what would SJ do”. He told them to do what they think is right, to go with their instincts and heart. That is what I call a process. It’s a set of priorities.
        You can read some additional commentary here: (May, 2011).

      • Anonymous

        That’s very interesting information, especially considering how few products Apple actually ships. Or does that count include every piece of software Apple does as separate entries? If so, then I can see the number climbing much higher.

        Anyway, if 90% of shipped products were developed without direct input from Steve, that’s all the more reason to believe that the process is actually very well established and functioning.

      • Apple has a small set of products but they are modified frequently and every change requires hundreds of decisions. Not to mention the marketing strategy (pricing, positioning, placement, etc.) Then there are the ads, the brand, the negotiations with the value chain, strategy decisions, hiring decisions, etc.

      • Anonymous

        I don’t think Apple modifies the products that frequently, to be honest. They certainly have less product variations than most other competitors have entirely separate products. But even so, you are right, and that further reinforces the point that most of the work that goes into the products and services and marketing etc. is done by regular Apple folk. And they face mundane questions and problems every day that they have to resolve without asking the upper management. It might not seem like a big deal, but it’s those small things that add up to what we perceive of Apple, and the perception is overwhelmingly positive.

        Regarding the ads, the Ad Contrarian wrote that Apple ads will most likely be the very first sign if things start to go awry. Kind of like a canary in a mine.

      • Anonymous

        Steve Jobs seems to have had the unusual attribute of creating positive tension. The disagreements that resulted usually led to improved thinking and better solutions. In other companies tension usually results in resentment, people digging their feet in, and resistance to change.

      • Anonymous

        I recently discussed the “parable of the stones” ( ) with my friend, and we sort of came to the conclusion that that kind of group dynamics require an outside “balancing” force or else the group will break apart. So, yes, Steve Jobs and his example probably acted as that kind of force that could keep the disagreements and tension from becoming harmful. But, if that is the case, what will be the force that keeps things together in the future? If Steve was able to really instill his vision of Apple and of the future at all levels of the company, it could be enough.

        Another question altogether is how accurately the parable actually describes how groups work at Apple. I don’t have an answer, but if anybody has it would be really interesting to know.

      • Davel

        I think these are the principles that are Apple. If they can stick to these they will be ok.

    • Additional reading if you want to learn more about the processes at Apple:

      • Anonymous

        >>Additional reading if you want to learn more about the processes at Apple:

        Having more opinions about it doesn’t make it any more true.

        So far the only hard evidence is that Apple with Jobs has been a success and Apple without Jobs has failed.

        As for the future…I’guess we’ll have to see how it plays out. But hoping that Apple without Jobs has somehow mastered what it could do with Jobs at the helm, is not thing but “hope”.

      • The Stupid Manager Theory of business failure is still the most popular theory describing why companies fail. Its corollary is the Brilliant Manager Theory for business success. Both are easily disproved but it does not deter their popularity.
        This was the subject of the second Critical Path podcast Synchronized failure and a quick post in August 2010:

      • Davel

        There is no denying that Jobs had vision. He was able to cut through the unimportant and understand how to merge form and function into a device that performed its function well.

        You bring up the $10,000 question. Can Apple do it without Steve?

        Honestly no one knows. He was an important force at Apple. The team must adjust and continue on its own. The managers need to work as one without turf wars.

        The biggest thing to stand out for me in the 4s intro was the lack of focus. Steve knew how to relate functions to usability. Why was it useful. Why would you love it. That connection was not there. The best sell of the product was the video.

  • Anonymous

    What the analysts are missing is how incredibly well run Apple is as a company. They may be the best run large company ever, and they do this while still making their incredibly great products better. This shows, for example, in their tight control of operating expenses. Usually when a company is as profitable as Apple is they become sloppy in their management. This is the case for Google, whose operating expenses are climbing.

    Apple is well managed in all phases of their business. In retail sales, for example, they don’t make the common mistake of trying to squeeze the last dollar out of the customer. Ron Johnson, who developed the retail stores: “…the most important component to the Apple Store experience is the staff, and that a network of well trained employees not working on commission is integral in creating an environment where customers’ needs come first. He claims to have reinvented the sales associates’ job, saying that a tech store’s staff shouldn’t prioritize the sale.

    “[The sales associates] have one job: to help you find the product that’s right for you, even if it’s not an Apple product,” Johnson writes. “Compare that with other retailers where the emphasis is on cross-selling and upselling and, basically, encouraging customers to buy more, even if they don’t want or need it. That doesn’t enrich their lives, and it doesn’t deepen the retailer’s relationship with them. It just makes their wallets lighter.”

    Apple keeps their product line simple. This allows them to focus on making a better product, doing it consistently, and giving them the lowest manufacturing costs. They have only three basic iPhones and one iPad, all with minor variants.

    Their product quality as measured by independent surveys is almost always at the top.

    Their inventory control is outstanding, as is their balance sheet management.

    They don’t release a product which is not market ready.

    They don’t hype new products until they are ready to come to market. No vapor ware.

    Clearly their planning is as good as it gets. I am certain that they have a roadmap for seceral years out.

    Even if Apple did not come out with the nest new disruptive product they would be growing and dominant in their current markets. If they had to get into a price war they would smash the competition, but probably make less money.

    I credit much of this to Tim Cook. This bodes well for the future.

    • Secular Investor

      The Market has priced at a forward PE of 9.6, which implies that its growth is soon going to fall off a cliff.

      One of the common misconceptions is that Apple needs a new disruptive product to continue its exceptional growth. That assumption is plain wrong.

      Horace Dediu makes the point that Apple’s share price does not reflect its potential for innovation. Personally I give no value to Apple’s future products or innovation because the share price is absurdly undervalued as it stands.

      Apple already enjoys so many competitive advantages as a result of its past innovation to date that there is no need for any further disruptive product or innovation for some time, for the company to continue to grow extremely strongly for several years – far faster than the PE of 9.6 implies.

      Also, despite many hours every day of diligent research in the sector, I have so far seen no disruptive technology amongst potential competitors, which is likely to significantly affect Apple’s growth. Of course I might be wrong, but if I am my continuous research will, I believe, quickly identify innovative threats and their potential impact on the market in general and Apple in particular,

      Meanwhile Apple enjoys so many unassailable competitive advantages including;

      • Apple offers the best combination of hardware and software, which is unique in its vertical and horizontal integration

      • Apple is the only company to offer market leading devices in three distinct categories: the iTouch, the iPhone and the iPad

      • All the above devices use the same iOS software, sharing Apps and contents, so all Apple’s work perfectly together. No competitor challenges this advantage

      • Apple offers by far the best range eco-system: easiest to download and pay for digital content with more developers producing more and higher quality Apps (500,000 Apps for the iPhone/iTouch and 145,000 Apps for the iPad), and the widest range of music, TV programs, movies and games. Uniquely all this software can be synced and shared across all the user’s and family’s different iOS devices.

      • As a result of all of the above, Apple’s devices score significantly higher in all user satisfaction surveys.

      • Apple has the best regarded Brand in the sector and highest levels of user loyalty and “stickiness”

      • Along with Blackberry, Apple iOS and Mac OS are the most secure. This is especially important in the enterprise sector where iOS devices are gaining remarkable traction. Over 90% of Fortune 500 companies are trialing or deploying iPhones (which have a leading and increasing 44% enterprise market share,) and the iPad (a remarkable 96% enterprise market share). Android is extremely vulnerable to security risks.

      • Apple has the most efficient, well organized procurement, production and distribution operation in the sector, which results in Apple enjoying the lowest costs.

      • Siri – the competition are way behind in offering this new GUI using AI, which appears to have strong consumer appeal

      • According to surveys, iPhone users are more affluent, better educated, take more holidays, browse the internet more where they buy more products compared to Android users. This makes them the most desirable targets for advertisers.

      • The above results in two thirds of Google search queries comes from iOS devices.

      • The above also makes iPhone customers the most lucrative for carriers who are prepared to provide large subsidies for iPhones, which are the most profitable device for the carriers despite the upfront subsidies

      • For the above reasons Apple enjoys the highest margins in the industry and its profits are more than half the total for the entire mobile sector.

      Android enjoys a couple of significant competitive advantages.

      • Firstly, Android is available from numerous OEMs with a wide range of specs and prices points under cutting iPhones prices.

      • Secondly, Apple is only available from a limited number of carriers whereas Android is available from almost every carrier on the planet.

      However Apple is combatting and eliminating both of these Android advantages

      * Firstly, Apple is now offering iPhone 3Gs from just $0.99 deposit and 4s at $99 deposit, undercutting almost all Android offerings. Apple’s iOS is backward compatible, which means that buyers of these entry level premium products at discount prices are enjoying the latest iOS, except for Siri, which only available with the top of the line 4S. Android cannot duplicate this masterstroke because Android is so fragmented that older Android phones cannot be updated with the latest software.

      * Secondly, Apple is recruiting more and more carriers, steadily reducing this Android advantage. Initially many carriers resisted Apples terms, which not only require them to make large subsidies for iPhones, but equally significantly, carriers are not permitted to overlay the iOS with their own “bloatware” thereby ensuring a better user experience for the iPhone. Sooner or later carriers have been forced by market forces to agree to Apple’s terms because refusal to do so results in losing market share and/or lower profits per subscriber.

      A poorly informed observer (i.e. most of the market) looking at the second above chart is likely to come to the wrong conclusion that they are looking at a bubble and that Apple’s profits growth is in danger of falling dramatically. That is what is implied by Apples forward PE of just 9.6 which equates to a growth rate of just 10% per annum.

      As can be seen most of Apples revenue and earnings growth has come from the iPhone and iPad, which make up more than 70% of earnings. However the exceptional growth of these devices is the result of the previously described competitive advantages, which are not going away. On the contrary, if anything they will strengthen.

      Despite the iPhones exceptionally strong growth since its launch years in 2007, according to Gartner it still has only 3.9% market share of the total mobile phone market, so there is huge headroom to grow. The smartphone market as a whole is growing at over 40% a year and the iPhone has been growing at around twice that rate. It is plain daft for the market to conclude that Apple will only grow at single digit rates over the next few years.

      The iPad is growing even faster. According to Gartner’s latest forecast:

      • worldwide media tablet sales to end users will total 63.6 million units in 2011, a 261.4 percent increase from 2010 sales of 17.6 million units.

      • Media tablet sales will continue to experience strong growth through to the end of 2015 when sales are forecast to reach 326.3 million units.

      • By 2016, more than 900 million tablets will be in the hands of users,

      • According to IDC * the iPad had 75% of the tablet market in FY Q3 2011

      • As said previously iPad completely dominates enterprise with 96% market share

      So far Apple’s iPad is as dominant in its sector as the iPod in its, because of the competitive advantages previously listed. Despite all the repeated clamor about the next iPad killer, Android tablets have failed dismally to unseat iPad’s dominant position.

      There is now a lot of talk about the Kindle Fire. But almost all the reviews recognize that the Fire is no iPad killer and most think it will only partially affect iPad sales in USA, but only marginally in the global market, if at all. The also say that in reality the Fire is serious competition for other Android tablets, and is disruptive for Google’s advertising model.

      In fact the Fire and iPad may be considered different classes of devices, with significantly different size, capabilities and target markets. If anything the Fire may be more properly considered a competitor for the iTouch, which now has a similar entry price of $199 for the 8GB version.

      However, the iTouch specs make it significantly more capable than the Fire. The iTouch is also the world’s most popular gaming machine with 100,000 gaming Apps. But the iTouch makes up a small part of Apple’s revenue and profits. Apple’s next move may be to produce a larger screen iTouch, which would make it a better gaming machine and media consumption device to go head to head with the Fire.

      There is talk of the Apple TV being its next disruptive device. I don’t factor in any value for this innovation.

      It is just unnecessary. Apple enjoys so many competitive advantages that its growth is sure to be well above that implied by the ridiculous forward PE valuation of 9.6.

      Year after Year Apple will deliver results well above market expectations, and Quarter after Quarter the share price will be ratcheted up by actual results rather than misinformed forecasts.

      Meanwhile being so undervalued Apple makes the ideal long term investment for those that bother to do their research.

      • Wow, very well thought article. Thank you.

      • Wow, very well thought article. Thank you.

      • Davel

        The problem with software is it is easy to copy. The techniques and processes are common knowledge. Why was it so easy for Android to copy iOS? Does it matter that it is not quite finished? Microsoft has also copied it.

        The Fire is absolutely disruptive. Price is a disruption. It is a value thing. For $200 many will see it as good enough for media consumption.

        Apple has many competitors, Android has copied the look and given it away. This allows the un imaginative or unskilled to copy what they can ( hardware ) and add the OS.

        Facebook owns social. From there they can compete on games, apps, music, media,etc.

        Amazon is taking aim at Apple. The Fire is the first. They are rumored to build on it with bigger devices and even a phone. They are not competing on features. In fact they are doing what Apple does. Pick a niche and develop a product to fill the niche. Everyone laughed at the phone and tablet until Apple destroyed them. Don’t underestimate Amazon. I don’t quite understand their strategy. Why build a device and give it away to sell products you can sell with a great website or app? I don’t know the answer to that, but I bet Bezos does.

      • I wrote an answer to a similar question here:

        When devices are the predominant method for accessing information and if you are in a business that depends on access then control over that product becomes necessary. The device is the gate to your business. If you let someone else, especially a competitor, own the gate or be the trusted gatekeeper you put your whole business at their mercy.
        This is why Google decided to enter the device business through Android (and later with Motorola). This is why Microsoft still feels it needs to be in the device business and this is why Baidu, Alibaba, Amazon and Facebook will be in the device business.
        Unlike previous generations of computers, devices are not easily user-configurable and cannot be relied upon to be open, especially as they need to evolve rapidly in response to new usage metaphors and have short useful lives.

      • davel

        I never thought of it that way.


  • Ajay S

    Brilliant as usual Horace.

    Would be interesting to see Apple share price vs Apple products on the market.

  • One thing that’s automatic with Apple: All of its innovative products are copied … in large quantities. Apple is clearly the main source of innovation in consumer electronics, and dozens of other companies copy its every move.

    Significance? This helps produce the pattern of profits and share prices about which Horace writes. It’s not that investors disregard Apple’s accomplishments for no reason; investors discount Apple’s accomplishments because they aren’t valuable for very long due to the copy-cat phenomenon.

    If Apple can continue improving the quality of its ‘ecosystem,’ the problem will be less pronounced. While hardware can be easily copied, the iTunes store and various other services (like iCloud) can’t be as easily copied, so Apple will retain more value from its innovations.

    • Commentator

      Actually, Apple products are not innovative !
      They are almost all a new much improved and high quality version of old products, which other companies could not make with such a quality and user friendliness.
      SO, APPLE DOES NOT HAVE INNOVATIVE PRODUCTS ! They are just better quality ! Most of the features have been done before, but they were not succesfully implemented and marketed.

      Zerox user interface -> success when adopted to Mac (nothing new, just a good implementation with latest tech available)

      MP3 players -> success when implemented with high quality and combined with harddisk, internet and webshop (nothing really new, but good combination)

      Phone, touchscreens, smartphone -> iPhone (all same features existed before, apple just made it better user experience by adding more powerfull processor, bigger battery, better touchscreen and better browser, where are the innovations, nothing new)

      iPad, just a bigger version of iPhone without phone or iPod touch.

      iCloud -> Clouds existed before and current implementation is maybe more frustrative for normal advanced user than competitors, easier to use, yes, when copying and backup is the only feature. Definetely not an innovation !

      • LordRobin

        “Actually, Apple products are not innovative !
        They are almost all a new much improved and high quality version of old products,”

        Remember folks: It’s not innovation unless you invent something from scratch, using no parts, processes, or ideas that have already been invented.

        By this definition, there hasn’t been any innovation since the dawn of mankind.

      • Jmail

        I disagree. The dictionary definition of innovation does not align with your position. Innovation is to create something new but its also making changes to something established. We have had touchscreen, gyroscopes, and various other little components that have been around forever in their little vertical existence. Brining these components together into a new product such as the iPhone WAS NOT DONE BEFORE and has completely elevated the paradigm of the user experiences and technological capabilities that users now expect from their phones. No other company was doing anything like the iPhone, iPod, or the iPad before and that is a major reason why they’ve been so successful and why some many other companies try to imitate; not because of some cute white packaging (of course this has helped).

        Besides Apple, auto manufactures developing new advances to improve fuel economy in piston engines (an invention hundreds of years old now). Those kinds of things are innovation. These things didn’t exist before, required research and resources to develop, and will no go a long way towards improving the efficiency of our vehicles and protecting the planet. How is that not innovation? Everywhere and everywhere there is a constant stream of innovation flowing and its not fair when we dismiss these efforts as “whatever” because some part of it has existed before in some form in another application.

      • Jmail Cocom

        You don’t know what innovation is. So what if those product categories have been around before? Did they sell well? Where they known by enough consumers to matter? Did anyone care? Innovation doesn’t have to be creating something that is absolutely new and then applying for a patent. Some of Apple’s products are the some of these older inventions but have been integrated and enhanced in way that no other company has done before. Had any other company done so before, then Apple contributions wouldn’t have been as valuable. To even take a position that Apple isn’t innovative is just silly.

      • @Commentator: Interesting comments, but not responsive to my post. Whatever Apple does — even when it borrows/purchases ideas from other companies — the company makes the product popular and earns a big profit from producing it.

        Then (my argument was) Apple’s profits are eroded by copy-cats like Microsoft, Google, Samsung, HTC, Asus, Intel, etc. None of those companies, it seems, can succeed by developing their own products but wait around waiting for Apple’s next move so they have something to copy.

      • Pali

        Everything is a remix. See for illustrations from entertainment industry.

        You are conflating innovation with invention. And even in invention, most of original work is based on recomposing existing ideas in new settings.

        From what you’ve written, even the myth of creation barely meets the bar for your understanding of innovation.

      • Innovation is the process of adding value to invention. Without value, an invention is without meaning.

      • Pavol Vaskovic

        “I invented nothing new. I simply assembled the discoveries of other men behind whom were centuries of work. Had I worked fifty or ten or even five years before, I would have failed. So it is with every new thing. Progress happens when all the factors that make for it are ready and then it is inevitable. To teach that a comparatively few men are responsible for the greatest forward steps of mankind is the worst sort of nonsense.”
        — Henry Ford

      • kevin

        Was putting wheels on luggage innovative? Wheels existed before on all sorts of products. And luggage existed before as well.

        Was a flat-screen TV innovative? TVs obviously have existed for a while. And flat-screens for computer monitors have existed for many years as well.

        Innovation includes combining features, technologies, and qualities (previously-existing or not) in new ways to create a new or different product or service that enables a valued job to be accomplished with satisfaction by the user.

        Innovation in user interface and aesthetics count just as much as (or sometimes even more than) other elements of a product. The extra space on the iPad makes it a much different product, not just a bigger version of an iPhone or iPod touch; but only if the UI has been intelligently altered to take advantage of that space, which is what Apple has done.

      • Davel

        Please name 3 companies that were innovative and what those innovations were.

  • Adrian Constantin

    Investors may actually look in the past, but they probably do not use Apple as a lens, nor do I think they should. Harnessing disruptive innovation has been a story of mixed results.

    You can have the one hit wonders like Atari. Somewhat more methodical/lucky companies, like DEC were able to milk an initial innovation for longer time, but ultimately failed to move on. There are the occasional disruptors, like HP, who were able to create more than one disruptive product, but not through any systematic process apparently. Then you have the likes of IBM, who has taken turns in being disruptor or disrupted and stubbornly kept on going despite repeatedly falling casualty.

    Serial disruptors are a rare breed. Sony has been a serial disruptor for decades and that stopped, coincidentally or not when co-founder Akio Morita stepped down. 3M has been able to sustain the process for even longer, but can anybody predict for how long it will continue?

    Looking at the past is not very encouraging for investors. Trying to predict whether the next Apple product will be a success or not is like trying to predict in 2001 how many times Lance Armstrong would win the Tour of France. Would it be 4 times? Or maybe 6? How about 8 or 9?

  • Pingback: OnlineMagazine » Blog Archive » Asymco: Apple’s ability to innovate is valued at $0.00()

  • Very good analysis.

  • Anonymous

    Sorry AB, wrong

    Having stock or not is meaninless in the quality of the analysis of Horace, must of the articles are supported with strong data and official figures…so, what is your problem?…perhaps no providing the kind of quality comments …having stock or not….


    • Ab

      So you don’t need to declare potential conflicts of interest. That’s new to me and the rest of the thinking world. The analysis still has opinion and bias attached.

      I hope you see the irony in your response.

      • You’ll have to take your chances with my writing. I can assure you I have hundreds of conflicts of interest. If you don’t think I can separate conflicts arising from my nationality, residency, memberships, education, background, citizenship, family ties, friends, biases, asset ownership, class, race, etc. from writing which is designed to stand on its own then there is nothing I can do to persuade you otherwise.

      • Anonymous

        Failure to declare a potential conflict of interest may be new to you, but I assure you it is not to the rest of the thinking world. You will not get analysis without opinion or bias attached, and anybody who tells you otherwise is either ignorant or deceitful.

        I suggest you worry less about bias and more about how accurate the underlying reasoning behind the analysis is.

  • Anonymous

    Does innovation have value?

    What a question, Horace!

    It does! But innovation is not an attribute that the market understands or admires (in value terms).

    Apple suffers at the market’s hands because the winning attributes that it has are beyond the market’s imagination. We have never seen a steady inexorable path of corporate performance and growth such as Apple’s achievements since 1997. Well, we may have, but in all other cases they proved to be bubbles that eventually popped. Gravity is such a killer. Always there ready to pull you down, no matter how high you fly.

    Apple, however, thinks different, and especially so in comparison to its market competitors.

    It has disrupted its way to glorious success beyond anyone’s imaginings. You could write a book about the case history of each competitor that Apple has disrupted. But there is more to that story.

    Not content to stick to disrupting others in its markets, Apple is doing the unthinkable.
    Apple is disrupting things for Mr. Market himself. Apple is breaking the rules of corporate performance. Apple is flouting the rules about what is possible. And Mr. Market is unhappy about that because according to his measurement tools, Apple’s metrics do not compute.
    Mr, Market doesn’t like disruptions to his comfortable assumptions and the established Laws of the Possible.. He doesn’t like it at all.

    Let us go back a little to review the situation.

    There are many well-run (more or less) companies that are the benchmark for Mr. Market’s beliefs about reasonable behaviour and corporate performance. He likes them because they do not think different and their performance metrics usually match his expectations. They are predictable. They conform to his laws…until they don’t and then they die. They have a history of success but that is no guarantee of future performance, right?

    What is becoming evident, among the corporates that Apple disrupts and competes with is that most of them appear to major on complacency and are clueless about innovation or original thinking (I/OT) The names Samesong, HTC and others come to mind. I don’t include GOOG, MMI or MSFT and others because although they are mostly clueless about I/OT, they are not well run. They know how to do things right and they refuse to think different. Different means change. Different means effort. Different means investment. Different means thinking outside their comfort zones. Different means risk. They cannot ever see the merits of contemplating their vulnerabilities from time time and so they never meditate upon change. They know how to do what they do, but they have no sense of changing directions, of their vulnerabilities, or of destinations better than where they already are. When change is forced upon them, they adopt it with reluctance. They believe in the inherent rightness and strength of their practices and so they cannot imagine who or what might disrupt them. They set their targets and strive to meet them and so they smile in complacent dismissal at any suggestion that a little innovation might be a good thing – like an apple a day – not not an Apple. If you work for such organisations and you dare to think different, you will be politely fired for having some kind of aberrantly perverse mental condition that is upsetting to them.

    Thinking Different has cost Apple dear in terms of winning enduring market belief and support (as Horace implies here). Their supremacy in I/OT is not understood for its near-uniqueness. Nor are the values of such change-agent qualities recognised for what they are. For Apple, these hard-won attributes have been – are still – the key to huge commercial success arising from considered but opportunistic forays into vast markets that were ripe for mass disruption. It is not easy to think different. You have to occupy that lonely space that is the natural home of any contrarian. The world is wary of things that are different. And, as I have suggested, Mr. Market distrusts everything that does not conform to his well-proven, unbreakable, never-to-be-challenged metrics of business performance and his Laws of the Possible.

    But Apple, since the return of Jobs, Thinks Different, with a vengeance. And, yes, I have been careful with my choice of words in this sentence.

    In order to understand Apple’s success today, you have to admit its myriad errors and idiocies before 1996. When Jobs returned to revitalise Apple, he had a personal reputation for serial failure to live down. So did Apple. Unlike the lacklustre copyists like Microsoft and the franchilse-less commodity manufacturers of Wintel PCs, Apple was not the darling of Mr. Market. And, as you ought to know, Mr. Market has a long memory. He likes to pore over corporate backstories. Apple has a rich and very colourful backstory pre-1997.

    But when Jobs returned, change was the only item on the menu. Changes in products, in people, in strategy and in thinking.

    Mediocrity – meet lustre, or leave.
    Confusion – meet direction.
    Chaos – meet congruence.
    Apathy – meet purpose or leave.

    Change upon change upon change.

    Let’s cut a long story short. Well I’ll try.

    Until companies like Braun AG (only during its early years though) and Apple, post 1997, showed what was possible, the mass consumer market rarely became aroused by issues of great design, or fantastic ease of use or the ‘it just works’ phenomenon. They did not often get the chance. If a company happened to get something right in one iteration of a product, the advantage went unrecognised and disappeared in later iterations. Sadly, Braun lost its way after the 1960s, was later bought by Gillette and thereafter it has chased its own tail towards design mediocrity in commodity products. However, traces of its chief designer’s* greatness remained scattered around: to be found and lost and found again to be eventually adopted by Jony Ive. Minimalist design in CE products, thy name is Dieter Rams.

    Consumers rarely saw such pleasing attributes (like great design, or fantastic ease of use or the ‘it just works’ thingy) in the products on the market before Apple II, i.e. post-1997. Today, after at least a decade of Apple II, the mass consumer market has learned to think different and looks critically at any products out there, and measures them against personal benchmarks they acquired through using Apple’s products.

    Once you have experienced a sustained customer-centric product and service culture; one that serves you from before the earliest design stages right-through all the other processes up to and including your purchase and possible, occasional, need for user assistance down the line; you can never be satisfied with less. Your critical faculties are forever enhanced by such experiences. For example, and in a much more mundane way, who would choose to buy a B&W TV once they have watched TV in colour? Who would buy an American car, once they have test-driven an Audi? Who doesn’t appreciate being treated with respect, and even generosity, in every aspect of their interactions as a customer? This too, is innovation.

    These are among the secrets of Apple’s success. Mike Markkula* may have described the way forward for Apple, in terms of its cultural principles, but it was Steve Jobs and every other influencer at Apple who has walked his talk and made it so ever since, and without fail, even at the worst of times for the company. Those principles were a founding innovation and they have proven to have immeasurable value to Apple ever since.

    But Mr. Market has no interest in such matters. He has no methods to measure such metrics. He frowns upon anything he does not understand because he is convinced that he has seen it all and understands everything. But he does not equate innovation with value or lasting profits. And so, today, there is no widespread investor belief in I/OT as a valuable, reliable and commercially profitable trait for any corporation to adopt. And so there is a lack of faith that any innovation can have enduring value and sustain a company like Apple in the long term. Innovative products will at best be merely brief flashes in the pan of profitability. They cannot lead to enduring success. But that isn’t exactly right imo.

    I disagree with Mr. Market’s thesis. It is my belief that no business can thrive or even survive without an ongoing, inbuilt, commitment to innovation. Not do so, is to stagnate, to wither and to die. For this reason alone, if you accept the premise, we can assert that there is indeed an ultimate kind of value in innovation. Possibly lots of value too; some of it measurable perhaps. If innovation is a commitment to survival it must have value for that reason alone – unless we are talking about suicidal corporations. Corporate survival is everything, isn’t it? It certainly looks that way from every boardroom I can imagine. And yet very few boards or investors place any kind of value on it. Weird.

    This does not mean that I believe there is a golden path to endless corporate growth paved with tiles of innovation or anything else…but that is a different kind of creature altogether and a topic for another day, perhaps. How about it Horace?

    Thinking Different has made Apple the success it is today. Nothing else. Thinking different is about looking at things, any things, from different angles and perspectives, trying to find a better way forward, to a different and better corporate destination. That sounds a lot like innovation to me. Therefore innovation has value. The guys at Apple did not just think different in product design, they thought different about EVERYTHING, including how to make Apple the best organised, best run, most disciplined company in the world. They thought different about how to come back from disaster and defeat their enemies not by competing with their mediocrity but by putting them into a tailspin with ‘bouleversing’ disruptions – making it hard for them to compete or by making them potentially irrelevant to most people (the suggestion of a post-PC world rsn).

    Innovation was at the heart of all these disruptions. Innovations like focusing on the real customer and not channel intermediaries (the creation of not just satisfaction but joy and delight too) all of which leads to admiration and loyalty. Innovations like keeping a product in place and steadily improving it so that buyers were always sure of getting more for the same money (sometimes less). Innovations in careful design that seemed to turn consumer wants into must-haves. Innovations that taught consumers to desire things they never knew they wanted in the first place. innovations like unmatchable attention to detail and to quality, in the choice and use of materials. How about innovation in expanding and enhancing the consumer experience with comprehensive and seamless ecosystems? Innovations in striving to be inclusive and so to serve ALL of its customers with costly development investments in extensive, thoughtful Accessibility features. Innovations in procurement, manufacturing, even in shipping to manage costs and quality and to be timely in launching whatever the company had just announced. the list goes on. does any of this have value? Oh, yes! Can you measure their value? Not easily, but in aggregate I’d say around $300-400 billion, give or take $50 billion. What do you think? Under Sculley and subsequent CEOs and their signal failure to innovate, I think Apple’s value today would be a truly round number.

    Apple has shown the world that there is immense value in innovation. Its competitors are learning that lesson the hard way as they are forced to face up to repeated failure in almost everything they do to match Apple. I can think of few companies that invest in innovation as Apple does. Is there value in such investments? You tell me. How much has Apple’s value grown since it became Innovation Inc?

    Given some of the comments here, I will add this point. I believe that when Jobs returned to Apple, part of his single-minded motivation to create success was to show that he could do so together with a mischievous (rather than a malicious) penchant for a little revenge on those who had tried to damage him (and his Apple) in the past. As much as he was a reckless loose cannon in his early days at Apple, he was a sharp-focused micro-manager when he returned. He brought many operational innovations to Apple to make it the well-run company that it is today. The force for changing Apple for the better came from him but he understood that he must delegate the execution of individual aspects of Apple’s renaissance to others with the specific knowhow in the main areas of operations. In the same way, Jobs also acted to implement Markkula’s ‘rules’ of engagement with the consumer, and to do so with renewed vigour, always and in all ways. But the idea was Markkula’s stroke of genius.

    Jobs was in touch with the wants of people in Apple’s markets.

    Jobs was ever aware of Apple’s vulnerabilities as well as its strengths.

    Jobs knew that Apple could never win against Microsoft in the personal computer arena. And so he created a new arena that would gradually render the traditional PC market unattractive and so irrelevant to 90% or more of consumers. He did it by sleight of hand – shelving the tablet project in favour of a phone, establishing that phone as the world’s first truly mobile computer and then offering the world the iPad to demonstrate what truly personal computing could be. Enter the post-PC era. This was strategic innovation and, given the results we see, I value it at $500 billion over the next ten years.

    He made these things happen but the ideas were often not his own. Jobs’ gift was to see the possibilities in the ideas that crossed his desk and to reject all but the inspired ones that could be developed into great products. Among Jobs’ undersung innovations were his serial actions to drop old technologies in favour of new ones that served consumers better. Many of his greatest innovations were in his thinking about the big picture issues – like introducing the idea of a digital hub in 2001 – an idea that underpins the success of Apple today. Worth hundreds of billions over the long term. Another was the difficult decision to migrate the Mac line to Intel chips. In one difficult, self-disruptive stroke and in a short time frame, the world grudgingly came to recognise that the best Wintel PC you could buy was a Mac. Hoo Ahh!! Never again did we hear the casually dismissive hater’s refrain that the Mac could never compete with Windows PCs in the sheer choice of software available. Suddenly, the reverse was true.

    I make these points about Jobs and innovation because it is pointless to agonise that Apple may be found to lack further innovation in its future, now that Jobs has gone. It is nonsense to suggest such a thing and those who do, are simplistically posing a problem that they see while steadfastly refusing to perceive the attendant opportunities as well.

    Jobs greatest creation is Apple Inc., itself.
    The Apple that Jobs left behind remains the same deeply entrepreneurial, start-up minded organisation it was during Jobs’ two stints at the company. I believe that the key people in place today, at many levels within the company, are devout followers of the Think Different philosophy. Of course, the possibility exists that many of these individuals would be able to walk into any other company in Tech or elsewhere and name their own terms. I have no doubt of that. But I also believe that if they left Apple for another company, they would soon come to deeply regret the move no matter how well they were rewarded. I believe this because anyone making such a move would suffer a sharp and deep attack of culture shock and, soon after the realisation of what they had left behind at Apple, they would be on the move again, and again. There is no substitute for working at a place where you are daily challenged to do your best and encouraged to think different. I have been fortunate enough to have worked for a great consultancy firm which honoured their commitment to me and developed me as a thinker and a manager. I then moved to a firm with a crippled culture of ‘Don’t you dare to think different’. As a management consultant, my duty was to try to think different. That is what my clients paid me for, after all. I don’t recommend such a move. It set me on a path self-employment which has been the best thing I could find as a way of life.

    It seems to me that Steve Jobs had no fear for the future success of Apple after his death. He has said that the best is yet to come. He urged his teams never to try solving the problems they would encounter after his death by asking each other ‘What would Steve do?’. He urged them to have courage and to follow their sincere and considered convictions. And innovation surely includes the possibility of people being prepared to take an existing idea, to pull it apart to discover its robustness or weakness and, if it survives such scrutiny, to make it real and to ship it.

    Apple’s DNA is different to any company that I can think of because within that genome are some powerful expressors of dissatisfaction with things that are merely ‘good enough’, a drive for self-reliant success; a refusal to settle; a predatory sense for the under- or ill-served markets, a readiness to reject whatever does not work and so on. Foolishness. Hunger too.

    Don’t underestimate Tim Cook. He has a wise head on broad shoulders.

    Don’t overestimate Jony Ive. Designers hate to axe what they believe is a good idea.However, I think Ive has worked long enough with Jobs to be objective about what will work and what will not.

    As a customer of over 35 years standing, as a shareholder, as a mere interested observer even, I am impatient to see Apple’s future unfold. I believe that it could be even better, because of Jobs’ influence yes, but also because of the shared backstory and the culture.

    It is a culture thing, when all is said and done. Complacency can only come from a lack of hunger. To be foolish is to always look at the world askance and see something different, every time you look. It is about ‘possibilities’

    All innovation is about considering the possibilities.

    In a previous response I quoted from W. E. Henley’s Invictus*** poem. I think the last two to four lines or so, say everything there is to say as an encapsulation of Jobs’ life and beliefs, the foundations for Apple’s future success. Like Jobs, Apple is indomitable. It has endured a lot during its history. I believe it will do mow than endure in the future and it will be continued foolish, hungry innovation that makes it so. . I look to the company’s ongoing ability to keep confounding the market by the strength of its contrarian beliefs, of taking great risks, of never giving up, of the purity of its simple business mission, the disruptive and highly profitable power of its innovations – past, present and future.

    For me, it all begins with the genius of Woz and the vision of Steve. But it has prevailed largely because of the seminal principles that underlie Markkula innovation**. And please don’t say that a business practice cannot be an innovation. This was a strategic innovation that has benefited Apple since the 1970s and is coming into full and bountiful fruition today and tomorrow and the decade after that.

    Never ever lose sight of your customer. Teach the customer to have demanding expectations. Then manage those expectations.
    Even better still, exceed them.
    Get that right and everything else will follow, dontchaknow.

    I close by borrowing from Henley:
    Apple is unlike any of its competitors because it is the master of its fate. It owns the whole widget – to misquote Steve Jobs a little.

    Horace, thank you for this article. Every so often you write something truly special. Your masterstroke was to pose your thesis as a question. Please cease and desist from doing things like this. Every time you shed light on topics that invite discussion on the Apple factors that confuse and confound Mr. Market, I end up writing you a damn essay!! And anyway, you always knew the answer to your question. Hah!

    Chandra Coomaraswamy

    * Dieter Rams
    ** Markkula’s Three Principles at Apple
    ***Invictus by William Ernest Henley

    • Anonymous

      This is the best, most thought provoking piece I have read in quite a while. Thank you, Chandra. You have crystallized Apple’s success so the rest of us can understand and enjoy it.

    • nexmedia

      How come if you buy into a firm with widespread predictably mediocre products, this is called sensible and if you invest in a firm with a track record of innovative products it is called a bet?

      I would have liked to reply directly to Horace, but had no time to develop. Your arguments are valid, Chandra, and possibly might appeal to forward thinking investors. Actually, I simply hope it will. But I’d also like to suggest to Horace and Mr. Market a few ideas to explore:

      1. How about deriving this value from the «Me too» companies? What would Microsoft be worth without a graphical user interface? The PnP approach? Etc. What about the Samesong and HTC phones and tablets? That ought to be quantifiable, no?

      2. Chandra has another thing right: Mr Market can’t see the process IF the Company IS the process. Find a way to assess that, and welcome to the 21st century.

      3. The business world once liked to quote Miyamoto Musashi and Sun Tsu when it came to describing successful strategies. Both highly value “unpredictable” as a predictor of a successful outcome. Ponder this, Mr Market.

      Thank you Horace for asking a question that would make most other companies uncomfortable. Thank you Chandra for helping me realize there might be a trend here and that Mr Market might one day see it. Innovation is sustainable. Mediocrity isn’t. I am now ready to become Mr. Market and my money will be riding on Apple and the likes.

      Claude Dubois

      • Microsoft is a low end disruptor and is willing to wait until a technology commoditizes so they can sweep in an bring it to the masses at a low price. This strategy has worked for them for a long time, especially for enterprise software which tended to be very expensive and dependent on custom hardware. However I would argue that the device model has upset their strategy. Devices like PDAs, the iPod and iPhone and the BlackBerry went from innovation to commoditization and replacement more quickly than the time Microsoft thought they would have to reap the low end rewards. Investing in Microsoft is safe as long as you believe low end disruption is possible or as long as there is not something even “lower” than Microsoft’s offering.

    • Kan

      What a tautological piece -repeating yourself doesn’t strengthen your argument.

      Only two of rams principles referred to minimalist design. I’d like to see how the principle of design being eco-friendly is being employed.

      Thinking differently? Apart from the Ipod which was unique in design, the Iphone, Ipad and macs all looked similar to what had been developed before.

      If Original thinking is keeping people within a closed ecosystem then none of them in the system are actually “thinking different” – more like thinking the same
      And so he created a new arena that would gradually render the traditional PC market unattractive and so irrelevant to 90% or more of consumers.

      This is fact? Evidence?

      He did it by sleight of hand – shelving the tablet project in favour of a phone, establishing that phone as the world’s first truly mobile computer and then offering the world the iPad to demonstrate what truly personal computing could be. Enter the post-PC era. This was strategic innovation and, given the results we see, I value it at $500 billion over the next ten years.

      So we are in a Post PC PC era? You say we are in a Post PC era then mention the tablet as a personal computer? Make your mind up. This “Post PC” moniker is just another throwaway statement picked up by those who can’t Think Different.

      But the most delicious irony is that you wax lyrical about Apple minimalism and ability to focus yet you don’t apply the same methods yourself by being more concise.

      • kevin

        “Apart from the Ipod which was unique in design, the Iphone, Ipad and macs all looked similar to what had been developed before.”

        Might have looked the same, but the iPhone/iPad user experience was much different due to the responsiveness of the system to multi-touch. Is it really about looks? Or is it about the overall user experience, of which looks is just one small factor?

        As for PC, we are in the post-Windows PC era. Multi-purpose computing is no longer going to be led by or dominated by MS Windows, which had as much as a 95% share of the market, and the words “PC” are no longer to be tied to the Windows formulation of a PC. Windows also dominated the software development industry but the dominance has also been broken by the creation of viable alternative platforms.

      • Kan

        Post-Windows – lol what evidence you have of that? “post” seems to be the new prefix.

        There has been a viable alternative to windows with web based apps, networked apps etc for over 10 years. Dominance broken? Lol. Come on bring out some facts and evidence.

        You would be better arguing that MS faces some big challenges – not insurmountable but with the current braindead management perhaps too much.

        The same argument was made re web based apps on the desktop and phones would make native apps obsolete but as there are still huge challenges with web based apps you see the dominance of native apps. Now with native apps connecting to the cloud the benefits of web based apps declines even more.

      • Anonymous

        The evidence is in, for example, that there are more (non-Windows) smartphones and tablets sold now than Windows devices. Windows PC sales are stagnant or declining, whereas smartphone and tablet sales are growing fast. This all contributes to the fact that more and more “computing” is done on non-Windows platforms and devices.

        I don’t know if we’re yet at a point where the total time spent on non-Windows devices exceeds the time spent on Windows devices, though. But if not, that time will come with almost absolute certainty.

  • James

    Fantastic analysis, and that graph is fascinating. Is there any other company (in any sector) that has experienced growth like this so late in its “life”? (30+ years). Serious question!

  • mbotta

    @horace: if you check out this article in the wall street journal, covering greg joswiak’s talk about the four keys to apple’s success, you’ll find that he uses apple’s dependance on so few product lines as one of the key success factors. namely: focus.

    Focus—”It means saying no, not saying yes. We do very few things at Apple. We are $100bn in revenue with very few products. There are only so many grade A players. If you spread yourself out over too many things, none of them will be great.”

  • Rick

    Well, you could say that the market does put a value on innovation, “Goodwill”, price minus book value. For Apple at $376.51, goodwill amounts to $299.44 or 80% of the share price. That’s the premium investors are willing to pay above book for it’s innovation prospects. Goodwill tells you how much confidence the market has in the company’s future product development.

    Since goodwill represents wholly intangible prospects for future growth the recent 11% decline in Apple’s price comes solely at the expense of goodwill because recent earnings growth has been excellent. So we might say that the market is 11% less confidant in the future of Apple development today than it was just before Q4 earnings were released.

    Try to imagine what the next innovative products from Apple might be. I can’t beyond what’s already been hinted at, perhaps an Apple TV system. And that’s the reason goodwill is so high. If we could imagine the future Apple product line, so could any of its competitors and they’d all get there at the same time. “Think different” isn’t just a slogan, and if you have a corporate culture that can implement it, it’s a great competitive advantage.

    But since goodwill represents the confidence factor in pricing, it’s bound to be volatile and a difficult metric on which to make a buy/sell decision. It’s Mr. Market on a podium. So, if you put aside goodwill and look at company fundamentals, you get a better picture of what really counts and that always comes down to how well managed the business is. In that regard I don’t believe there is a better managed business anywhere.

    • The company’s present value is the discounted future cash flow plus book value. You can account for future cash as “goodwill” but the idea that it’s also attributable to “innovation” is a leap of logic I’m not willing to make. It’s far simpler to account for that premium over book as the value of current products’ future cash flows since they can be easily measured. Innovation implies something beyond what is foreseeable. If you can foresee $300 in cash flow per share then it is not attributable to innovation. It’s attributable to existing information namely present customers and likely upgrades. I argued in the linked post above that cash from current products can easily add up to more than the current value. That’s where the idea that the company is “bereft of new product ideas or a process of coming up with new ideas” comes from.

  • Anonymous

    Asymco web has been for long providing information in smartphone and Apple those who reads him knows the quality of information he provides, so you comming as a new just 5 min. reader fellows questioning his independence is what is surprising….end of argumentation.

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  • Anonymous

    > “Yet, again, in early 2008 the company lost 40% – Then the recession came. It caused _another_ 40% share price collapse ”

    I’m not “analyst” but this is just bullshit. Open finance site and watch early 2008 for Apple and Google – they both took a dive, I don’t why but they did, it’s symmetrical. That summer Apple recovered almost all loses, so it wasn’t “another” -40% dive. And again everybody crashed in 2008 fall.

  • Einstein

    Innovation is valuable but you have to wonder about the “Jobs is gone” thing. Sure Apple is more than a person, but unless it was brilliant marketing, Jobs got a lot of credit for choosing the products and core strategies. The wrong product can crush your stock for a few years or longer, assuming they recover at all.

    Personally, if I had a $1m to invest for a newborn and Apple, Google, Microsoft, IBM and Intel were among the choices, I’d skip Google and Apple.

    Apple innovated but what they odds that during this decade they distinguish themselves so much from others and what’s the upside, considering their roughly $400 stock price?

    • kevin

      I guess you would’ve avoided Berkshire Hathaway stock when it was $400 way back when, and missed its growth all the way to its high of over $148,000.

      • Einstein

        Funny. What’s their market cap? Oh, it isn’t $7 trillion? Nope, just under $200 Billion.

        —–“Nothing you’ve said appears to be more helpful or informative than rolling a die would be. What’s the odds during this decade that Microsoft, IBM and Intel “distinguish themselves so much from others”? ”

        That’s what investing is anyway, rolling a dice. Those that use charts and other nonsense get it just as wrong.

        MS, IBM and Intel will still be here 10 years from now and will still make money.

      • jawbroken

        Again, that’s just an uninteresting assertion. Since you seen enamoured with extrapolating history, why would you predict that Microsoft, a company that has been largely stagnant by any metric in recent history, would outperform a company that has been exhibiting strong growth with no sign of slowing?

        I guess your form of investment is just picking completely at random.

    • jawbroken

      You don’t seem to be a rational investor at all, or at least you have great difficulty explaining your investments in a rational matter. Nothing you’ve said appears to be more helpful or informative than rolling a die would be. What’s the odds during this decade that Microsoft, IBM and Intel “distinguish themselves so much from others”?

    • jawbroken

      You also appear to have a strange fixation on the $400 stock price. If they split 10:1 and the stock was at $40 with the same market cap would they suddenly become a sound investment?

      • Einstein

        Nice try, market cap is key. On top of my head only Exxon, Petrochina and Shell that have been in well over $200b for a while

      • jawbroken

        You’ve repeatedly mentioned the $400 price so don’t pretend that I’m trying to trick you in some way. If it is irrelevant then stop talking about it and wasting everyone’s time.

        So your theory isn’t based on any particular analysis beyond a form of pseudo-historical statistics. Good to know.

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  • Anonymous

    Perhaps we keep forgetting that the vast majority of people who did not understand the Mac, 95%+, for 20 years, are now a large group of people who still do not understand Apple even though there are a couple hundred million iOS devices in the wild. Amongst those who do understand, it seems that a tipping point has passed amongst consumers and we talk amongst ourselves and we seek out others that understand like us so that it seems like there is great understanding in the general populace, but it’s just not true. I look at my own family to remind myself how hard it is to change perceptions.

    My siblings are all well-educated with graduate degrees and have computers and smartphones and they all know I’ve been a Mac advocate since 1987. And yet, I’ve been unable to convince my sister to get a Mac until last year. I was unable to get my older brother to get an iPhone until a month ago. I even gave him an iPod back in 2003! I convinced my younger brother to get an iPhone almost 2 years ago, but he won’t use a Mac. I’ve advised my siblings to buy Apple shares twice; once in October of 2008 when Apple was about $90 and Steve had just intro’d non-GAAP data which clearly showed how much Apple was truly making; and once earlier this year when Apple was about $320, when Apple’s share price was significantly lagging its earnings. None cared enough to even ask me any questions.

    I’ve long ago learned not to do the hard sell with my family, but as long as they don’t understand Apple, I think there will be a vast majority of people and investors and money managers who don’t get it, and only value Apple for the last hit product and nothing more.

    I wanted to add that this situation reminds me a bit of the movie Field of Dreams where the brother-in-law is trying to get his sister to sell the farm because they are about to be foreclosed. After his niece nearly chokes, he can finally see the ballplayers and asks, “where did the ballplayers come from?”, and then says, “don’t sell the farm”. My siblings and the vast majority of the investing community are like the brother-in-law. When they get it, they ask why didn’t you tell them before, as if it was your sin of omission and not their own blind ignorance.

  • Anonymous

    Well, it can be said louder but not clearer than Horace, the way Hedge Funds handle Apple is the most destructive approach against an American company ever!.

    The problem with that is that different factors affects the stock price, some of them are internally generated by Apple itself with some radical decisions Steve Jobs made in the past in relation with institutional investors some years ago…. (basically he sent them to hell…) and others are “market” generated.

    Perhaps the solution is in Apple hands if they decide for some actions that could make a more honest and stable situation specially for the small investors.

    Basically it could be actions that promote participation of the small stockholder with a buy and hold approach that reduce the volume of stock daily traded (today the highest in Nasdaq), there is a paradox,   people loves Apple but big investors hate it and that creates this distortion that is affecting thousands of small investors (as me) that see how  a investment in the best company in the World today  is boycotted with no chance to strike back on them…….pity….really a pity.


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