In the final installment of my “What’s going on at Apple?” series (part 1 | part 2), we look forward. Can we Apple (AAPL) investors feel confident that the company will be in good hands in the event that Steve Jobs decides to step down?
Aside from the seeming correlation between Apple’s success as a company and Steve Jobs’ tenure as CEO, any company as dependent on customer perception as Apple needs a strong management team at the top. Management vision is the ultimate source of the company’s competitive advantage especially when its products do not necessarily exhibit entrenchment qualities. That is, an iPod, iTunes, and MacOS are ultimately very substitutable products should the luster of brand image, ease of use, and general attractiveness dull. This could change in the future as MacOS reaches a critical mass or if Apple finds a better way to make its products more interdependent, but as I’ve argued before, Apple is currently better compared to fashion retailer than a tech firm. Basically, its products are luxury substitutes of staple consumer tech goods.
What we already know is that Apple’s board is likely to choose from the current management team. So, let’s take a look there.
Timothy Cook (1) - Apple’s COO and by far highest paid management team member. Cook came aboard from Compaq computers in 1998 and he handles essentially all the nitty gritty for Apple and is an operations maven. He keeps costs under control and manages the balance sheet as well as anyone in the business. There’s probably no one better suited to run the Apple business than Tim Cook, and in fact, it’s likely that he already does, especially after stepping in as interim CEO when Jobs took a leave of absence in 2003. He, however, seems to prefer having Steve Jobs as Apple’s front man, and has stated that he’s not quite so interested in personal visibility. It’s also hard to say how much Cook could contribute as far as continuing to fill Apple’s pipeline of innovative and creative products. Fortune Magazine recently had a terrific article on Cook, which I think, is a must-read for Apple investors.
Joni Ive (2) - The Senior VP of Industrial Design at Apple, Joni Ive has been with the firm since 1996 and reports directly to the CEO. He’s responsible for leading the design of the iMac, iPod, MacBook Pro (both models) and the iPhone. Ive is a good speaker and Steve Jobs has even given him a few chances to present in his stead. That being said, Joni is intensely private. Rumor has it that Apple’s HR doesn’t even know his real birthday. It’s hard to say he would really embrace the role of CEO when he’s already an industrial design superstar. It’s possible that he’d be best suited simply taking an expanded role driving the creative side of the company should Steve Jobs’ step away.
Philip Schiller (3) - The man who will present for Apple at MacWorld Expo this year. Philip Schiller is Apple’s senior VP of marketing and has been for 17 years. He’s ostensibly responsible for greenlighting the now iconic Apple iPod silhouette ads and the Mac vs. PC campaign. He’s a mainstay at Apple informational events and has given presentations for Apple in the past, but can sometimes lack the charisma that Jobs brings to each performance. In fact, he had a rather embarrassing interview during the iPhone launch in London last year. Clearly, he’ll need a bit more practice before stepping into Jobs’ shoes as Apple’s top salesperson let alone as Apple’s top executive.
Ron Johnson (4) - Ron Johnson came to Apple in 2000 after reaching stardom in retail circles at Target. He single-handedly built Apple’s retail presence and created the “Genius Bar” that’s now synonymous with the Apple experience. Interestingly enough, anecdotal evidence claims that Ron pushed several retailing ideas that Jobs was initially resisted and has since earned the credibility to really push retail strategies on his own agenda. Ron is also a very charismatic public speaker and has all the tools to fill in for Jobs as the head of the Company should Apple begin focusing even more on its retail presence.
Tony Fadell (5) - Fadell, former senior VP of the Hardware, left Apple in November along with his wife who was VP of HR. Jobs claims that Fadell will continue to have some role in the company, possibly as a special advisor to the CEO. The story is that he left with his wife to focus on their children, which means it’s a long shot that he’d take on the job of CEO if it were offered to him. However, prior to his departure, many thought Fadell was on the shortlist of potential CEO candidates, since he is, after all, the man who invented the iPod. The little known fact is that Apple’s former senior VP of the iPod division, Jon Rubenstein, bought Tony’s idea after he shopped his idea of a hard drive-based MP3 player linked to a web-based music store throughout Silicon Valley. Fadell went on to head up the engineering team behind the iPhone, as well as the iPod.
Mark Papermaster from IBM (IBM) has since replaced Fadell. Unlike Fadell, Papermaster was one of the main architects of the PowerPC chip at IBM. It also seems that Apple has shifted its focus from just hardware design to chip design.
It’s hard to say that there’s any singular candidate who could perform all of Jobs’ tasks as a salesperson, creative guide, and executive. It is clear that Jobs has assembled a terrific management team at Apple and that there is more than enough talent to continue to guide the company going forward. While the company needed a transformative thinker in the late 1990s to revive it from irrelevance, Apple’s three key products - Mac, iPhone, and iPod - have set a solid foundation for this talented team to build upon, and manage for continued success.
The company trades at a 16 P/E today, which implies a growth rate in the mid-teens if you assume PEG trends towards 1. Apple’s international sales are just 42% of revenues. It’s anyone’s guess how much market share MacOS can take and the company is leading the charge in the development of a mobile computing industry. Clearly, the company is well positioned, has a highly talented management team, and its products - outside of the iPod - are far from mature. Even without Steve Jobs, one could say the company is at least fairly valued and possibly trading at a modest discount.
Let’s not forget it also has nearly $30/share on its balance sheet, and to date, we know that Steve Jobs is highly reluctant to spend Apple’s cash. New management could be more willing to distribute at least some of this cash in the form of a buy back or dividend to shareholders.
Full Disclosure: Author was long shares of AAPL at the time of writing.
