With all due respect, there is a reason Wall Street manages money and not companies. Its focus tends to be numbers and the next short-term catalysts for a share price move. Understandably so, I may add. But when you manage a company, short-term consideration must be trumped by the far more critical decisions that will ensure the survivability of the company and its prosperity in the very long term. As in the next 20 years, not only the next three.
Apple (AAPL) and Tim Cook have been bashed to a pulp since the launch of the iPhone 5 last September. Wall Street suddenly sees issues all around this company: what is the next big product; proliferation of competition, particularly from Samsung (SSNLF.PK); a horde of cash that Apple seems to be stubbornly sticking to and is unwilling to return to investors.
What most people may not realize or simply choose to ignore is that Apple is facing the most critical strategic juncture in its history. Let me try to explain: Apple's magnificent growth in the last decade can be credited to its visionary ability to understand the world around it and anticipate the social and cultural trends that will shape consumers' needs and wants in the future (read more on this here). Then, it has boldly changed itself as a company to pioneer completely new product categories that happen to meet and leverage those trends. Let's not forget that Apple was a computer company. What does a computer company do launching a music player or a phone? With the iPod, and most importantly, iTunes (emphasis here), Apple revolutionized the languishing music business. With the advent of the iPhone and its apps, Apple really created the smartphone category. The iPad was the kiss of death for the ailing computer industry (from which Apple came). But you all know that. So, the question everyone has right now is what's the next big product? Enter here speculations about Apple TV, gossip about a wristwatch concept, and soon we may hear about a new coffee-maker.
As I mentioned, Apple's strategic challenge is far bigger than just another cool product. It all has to do with the ever shortening sustainability of technological advantages, the proliferation of devices that is saturating the market and the consumer, and with that, the commoditization of technology.
First and foremost, Apple can't rely anymore in the constant churning of chutzkes with new bells and whistles to ensure a bright future. There are only so many devices consumers need or can handle. Anything more portable than an iPhone presents, not technological limitations, but human limitations. Not sure what a person could see in a wristwatch beyond a few numbers and letters. Large household devices, like a TV, present other challenges: long purchase cycles, hard to create meaningful differentiation, etc. Besides, Apple's competition have been well trained in rapidly copying its ideas, so again, the competitive advantages of new technology have become, at best, ephemeral. In order to succeed in the future, Apple needs to go beyond being a hardware manufacturer. By the way, there is reason why they recently dropped the "Computers" moniker from their corporate name.
The hardware is thus less and less important. It's not ownable anymore. What is important is what consumers do with the hardware. For the consumer the hardware is only a mean to obtain the content they want. Content is key to success because it is becoming the only true source of differentiation and can be ownable. Therefore, in the long run, Apple's success strives in moving from a hardware-centric company to a content-centric company.
This is not completely new. Every Apple success in the past has relied not so much in the piece of technology it has launched, but in the now famous eco-system it has created around it. iTunes for the iPod, and the App Store for the iPhone and the iPad. What is the next layer in Apple's eco-system? The next frontier is, naturally, the living room. That's where Apple TV comes into place. But as it has been repeatedly discussed, the big cable operators are not the moribund music labels that can be arm strung into a deal favorable to Apple. And, as I have stated before, launching just another TV set without the complementary eco-system, as nice as Apple can make it, is a non-starter. It would just push Apple into the generic appliance game.
Apple's only strategic alternative to expand and lock-in the eco-system it has built is to morph again and become the complete owner of that next layer. As content companies like Google (GOOG) and Amazon (AMZN) are launching devices in an attempt to tighten their grip on their customers, so Apple needs to turn into a content company to fully enhance, complete and seal its robust eco-system. Millions of "Appleites" will be only too happy to oblige. In order to get there and truly dominate the space, Apple will need more than just a device: it will need to acquire a broad range of content properties, production capabilities and the infrastructure to deliver this unique content. Only then can Apple create a true, sustainable and impenetrable competitive advantage with high barriers to entry and thus ensure another decade of continuous growth. This is a tall order, and there is no time to internally develop those capabilities nor, as the Maps fiasco demonstrated, assume the risk to do so. Those capabilities must be acquired.
So, leave Apple's cash pile alone. When would anyone so stubbornly insist in sticking to more than $140 billion in cash when they know they will need it soon? It's a matter of survival. As bold and outrageous as it may sound, I'd venture to suggest that it will need a bit more than $106 billion in the next few months. That is Comcast's (CMCSA) market capitalization.
Additional disclosure: I actively trade AAPL options.