Can Apple Remain the Unique Innovator It Was, Without Steve Jobs?

As a long-term investor in Apple (AAPL), I was accumulating more shares during 2008 as the market was spiraling downward, and stopped, guess I had to, when my cash ran out, sometime long before the market bottomed out (longer if the new lows it reached the first week of March were not the bottom). I had strong beliefs in Apple's growth potential, based on its international appearance, and another one was based on the future of the Mac computers. The sole cornerstone of this all was my belief in its unmatchable powers of innovation.

I'd like to admit that my research on AAPL was not thorough enough, because I had this unanswered question both before and after I jumped in, and I am still having the same question today: why no other companies are capable of coming up with anything to match the iPod? Bottom-line, it is just an MP3 player. Resource wise, there are many others that can match or beat Apple, the most obvious being Microsoft (MSFT).

So why is it Apple, Apple Only, and Again and Again Apple Only? Though I couldn't find any answers that I myself felt 100% satisfied with, all my reading seems to suggest that AAPL has established certain forms of corporate culture, a systematic way to encourage creative thinking and channel such creativity through the product development life-cycle. Once such a system is in place, its innovation became sustainable and in return, gave the company a significant competitive edge that is usually pretty difficult for competitors to surmount. This is the underlying theory of all my analysis of AAPL, including my Buy decision. However, I found my belief system cracked a little bit when several weeks ago, CEO Steve Jobs declared a medical leave with very slim chance of returning to the helm again - at least according to some analysts.

Apple ranked high every year in various versions of the Most Innovative Companies list, side by side with companies such as Intel (INTC), GE, Microsoft, Amazon (AMZN), eBay (EBAY), P&G (PG), etc. However, if you look deeper, you can find the type of innovation that AAPL delivers is different from almost all the others.

1) The difference between Apple and companies such as eBay and Amazon is like the product vs. the business model. The main focus for eBay or Amazon is not to introduce new products to the world, and eBay is actually more interested in used stuff. But I always have the opinion that eBay may be one of the best business models ever invented in human history. To summarize, it is smart and lazy; smart, because it brings in fat margins; and lazy, because once it is in place, you just sit back and count the money that keeps flowing in.

Basically, Apple's innovation is never about its business model. Instead it sticks to a very traditional one - build something and then sell it above cost to make a profit. You can argue it is a revolution for Apple to combine iPod with iTunes, but this has more meaning for the digital music world than for the MP3 player, and I think ultimately the popularity of the music store was driven by the popularity of the MP3 player, not the opposite. Furthermore, I don't see anything new the way AAPL sell the iPhone. And in the Mac computer sector, again, nothing is truly fresh in the past 10 years - they still stick to and protect their bundling strategy, i.e. Mac OS is allowed to run on Apple computers only. I do believe this bundling strategy gives Apple some edge in software development, allowing it to stay elegant and creative by avoiding a face-off competition with Microsoft (read analysis here). Still, I don't believe this business model is anything innovative.

2) Similar to Intel and GE, Apple's innovation focuses on the product. However, for companies such as Intel and GE, they delve into brand new areas with only a handful of competitors having the expertise and resources to tap in. For example, Intel continuously made breakthroughs in the CPU technology, or GE introduced various means to generate green energy. Apple didn't actually invent MP3 players or smart phones. Rather, they just built on the existing concepts and innovate to revolutionize the user experience. Nothing explains this better than the iPhone, or another more recent example, the new iPod shuffle, the first MP3 player that 'speaks for itself', as they tout. In other words, these are innovations that interact with each individual customer.

From another perspective, we can say innovation for companies like Intel is more about implementation, the idea is already there - making the CPU run faster or running several of them together seamlessly. But for Apple, the innovation is more about bringing up the right ideas, and the implementation seems to be relatively easy.

I'd like to say that Apple's innovation is a lot more demanding, which requires more than placing the right talent in the right position. How difficult is it? Let's say this, there is only one company in the world that is capable of doing it. Microsoft tried with Zune, Dell (DELL) tried with Jukebox and Creative tried with Zen. They simply couldn't match up. For this very reason, Apple's innovation became the cornerstone of its competitive edge and the driver of its future growth. If a new version of iPod fails to impress or a new iPhone is something mediocre, then we may see their market share drop overnight. This is the pattern of competition in the technology world.

As this is so critical an element of Apple's success, we must question its sustainability. Steve Jobs must have played a critical role in this process of constant innovation. Apple sounds like a huge company on paper, but at the end of the day their product line is very simple and limited - several versions of MP3 players, one wireless phone, iTunes and several varieties of computers. I wouldn't be surprised to find out in retrospect that Steve Jobs actually controlled the entire product development process when he was at the helm. With Jobs leaving, can Apple really be the same constant innovator of unique products? I don't know. I admit I am a little nervous, and I am watching.

Disclosure: I am holding a long position in AAPL, but am considering selling it.

Comments

[frs:]

In response to the article title -- YES, certainly.

Mar 17 12:14 PM

[ali k:]

Excellent article and analysis. Short of buying a good company at a good price - I have no solid reason to believe that this company is a shoe-in for long-term growth. It's quite possible that they will be - but the downside risks are too high. All it takes is one new innovative product, and Apple's stock price will fall.

Mar 17 12:29 PM

[Roger Knights:]

Yes, Apple's edge is intangible--but that's not a bug, it's a feature!

Mar 17 12:44 PM

[Kevin K2:]

I put up this poll to see what people think: (linkback) Yes or No? Can Apple Remain the Unique Innovator It Was Without Steve Jobs? [VOTE] - www.pikk.com/20f80

Mar 17 12:52 PM

[Contrarian ...:]

Here’s my big, bold prediction: AAPL is heading south. Short AAPL (or buy a put option if you’re feeling saucy) and ride the sucker down to $83 a share.

www.contrarianprofits....

Mar 17 01:54 PM

[Roger Knights:]

Lookee here (just posted an hour ago):
macdailynews.com/index.../

Headline: "Apple previews iPhone OS 3.0; Releases developer beta SDK with over 1,000 APIs, 100 new features"

Apple's lead over its smartphone competitors is widening (not narrowing as bears forecast). Another year at this pace (especially after the 3rd generation iPhone comes out this summer) and the iPhone will be as "dominant" as the iPod. Shorts beware!

Mar 17 03:18 PM

[iJah420:]

Roger K.

RIGHT ON!!!!

AAPL 200 this time next year.

Mar 17 05:11 PM

[nukldrager:]

Agree. Apple folks must have had a lot of k points to get that operating system.


On Mar 17 11:44 AM iJah420 wrote:

> Steve will be back.
>
> In this day and age. Less is More.
>
> OSX is simple to use yet is powerful and beautiful...IF you know
> how to harness that power. ie. Knowledge of UNIX.
>
> Look @ Windows.....WHAT THE!!! BUT if you choose to run Windows on
> your Mac you CAN!!!!. THAT Flexibility is your choice IF you buy
> a Mac. IF you don't like it DON'T BUY IT. Stick with your Monkey
> Boy Genius and Tell Mr.DELL & HP to stop whining about licensing
> OSX and make up you own OS for your third rate copy cat ways.
>
> These kids today HAVE NO CLUE. They don't even know what UNIX IS
> for crying out loud. But the Mac just works. Simple or Complex you
> only need one Box. Linux can run on mac hardware too. Linux is great
> but its so fractured in scope. No synergy. Lots of HACKS with omnipotent
> thought processes.
>
> Even Linux Gnome UIs are trying to copy the look and feel of OSX.
>
> Driver support for Linux is a MESS too.... Too many third rate offerings
> with support from the ULTRA GEEKY of cyberspace. Most people JUST
> DON'T HAVE TIME!!!!!! DUH!!! Keep it Simple Stupid.
>
> What seems so simple when it comes to Apple in fact is anything BUT
> Simple. Competitors lack the vision of Apple. Its NOT about HOW MANY
> features. Its about the user experience. If your not a GEEK and don't
> want to be one its a mind !@#$% and time waster.... you want you
> computer to work RIGHT?.... and for the record from what I have studied,
> Vista did not work all that well. NOT FUN BY ANY MEANS. Computers
> are no longer a GEEK thing. Enter into the new age of computing...
> get a Mac. If need be run Windows on it then do it. Before long you
> will be booting up OSX and Loving it.
>
> $30b is a good number and the numbers don't lie. That's CASH boys
> and girls NO DEBT for Apple and more in the product pipeline than
> ANY OTHER competitor out there.... DELL wishes they had the margins
> or for that matter computers Apple has.....Dell is @ the mercy of
> M$FT...and its OS... Apple is both hardware and software. Components
> may be similar but the experience and end use is a totally different
> story. Why? Because Apple was daring enough to Think Different and
> now all others are envious, bitter and write SMACK about a company
> that BUY THE WAY was NOT saved by MSFT. Do your homework Office for
> Mac was a revenue stream for MSFT that they did not want to go away.
>
>
> Some people you just can't REACH!!!!! AAPL long.

Mar 17 06:25 PM

[Anthony B:]

Steve Jobs has done a great job, and he demands perfection. However, you must keep in mind that he is one man, in a team of 35,000 that deliver these products. Do you think that Steve Jobs went line by line debugging code? Apple has put into place the best software and hardware design teams in the world, they aren't going to stop functioning just because the big boss is gone.

Mar 17 10:35 PM

[Minlita:]

Apple has always had talent even when Jobs was gone there have great engineers but they were badly managed.
Then Steve Jobs came back and surrounded himself with talented people like him.
Apple as innovation but a company without a leader with vision can easy go down. The next "Steve" must also have charisma and people have to want to believe them.
For me Steve is Apple and Apple will be punish Apple if Jobs goes.

Mar 17 11:07 PM

[o.c.d.colle...:]

Ebay is no longer counting as much money coming in as it once did. That's because it's management changed. never underestimate what can happen to a company when placed in the wrong hands. Just watch carefully..

Mar 18 12:24 AM

[mollytjm:]

jobs doesn't do the inventing... he put a team into place that can do without him. Apple will remain at the top of the list... the sheer number of brilliant people there plus the financial stability of the company makes it one for the long haul. disney survived walt, wal-mart survived sam... we owe Jobs a big thank you for making Apple a powerhouse that can do without any one person, even him.

and did you see the new iPhone innovations? they did it without him!

Mar 18 09:29 AM

[HTHTFH:]

APPL will be right back where they were the last time Steve Jobs was thrown out of the picture and John Scully was in. Anybody remember some of the crappy offerings from back then? The apple "laptop"? System 7? Ugh. Once Steve is gone, he's gone for good and so is the company.

Mar 18 09:35 AM

[pk de cville:]

"So why is it Apple, Apple Only, and Again and Again Apple Only?"

1 - Jobs has created a unique culture of 'Spartan' innovation. I say Spartan because of his oft-quoted remark about Apple's innovation is great because of the 95% of the great ideas and projects they DON'T do! All the genius energy has been corralled and placed behind a very few arrowheads. (Genius is hard to direct, just like a herd of cats.) Don't worry. Jobs has taught the lesson and they will continue with Spartan innovation even without Jobs.

2 - Jobs has also created a unique culture of "Army of One" innovation. They all get strict secrecy as a huge corporate advantage. They all get integrated innovative development: design, marketing, sw, hw, factory production, business plans et al all get worked out in an integrated responsible fashion. They all know the NEW THING takes precedence over mgt politics.

3 - Jobs has nurtured the open source rooted Mac OS beginning as the NextOS in the mid 80s. The quality, breadth and efficiency of the code base is an incredible advantage over all competitors. Windows is collapsing under the bloat of its huge unwieldy Vista blob. Apple's OS is leaping ahead of every OS in execution, functionality, ease of use, and ability to continue innovating. They marry the OS to the Things, Marketing Plans, Business Models to create an unstoppable juggernaut for market dominance.

4 - Finally Apple lives for the future like no other 800 pound gorilla has before. Apple embodies great brilliance, discipline, speed, sizzle, and the will to create the future of personal tech THINGS.

I don't know of any other large cap company that acts so much like a startup as Apple.

Mar 18 11:07 AM

[A person:]

ONE WORD NEWTON

Mar 18 01:35 PM

[hwyflier:]

Steve will be back come July. But, no one will hear a word until he shows up on some stage.

Mar 18 04:33 PM

[William Cowie:]

Apple may well do better without Jobs. It's difficult to draw exact analogies, but consider this: Iacocca turned Chrysler around and, through his unique personality, redefined the company. However, when he left, Bob Lutz, Tom Gale & co. really made the company much better. So good that they were more profitable, in absolute dollars, than both Ford and GM. (Of course, Daimler bought the most profitable auto maker and in their first year, a good market year, figured out a way to lose $8 billion, but that's another story.)

Jobs, don't forget, was the guy who insisted the original Mac have nothing more than a 400k floppy drive, resisted adding a hard drive, insisted on not having a cooling fan, focused on computer hardware, not software, etc. Next was not a stellar success, either. His tech history has been strong on style, less so on substance. Not to bag on the man, he's clearly not an idiot. So, let's take it easy on the kool-aid - he's not God’s gift to innovation, and I'd say the odds are innovation will at least continue, may even flourish, without him.

Again, this is not a Jobs bash, far from it, it’s just a reminder there many others at Apple who will carry the torch for innovation.

So, Jack, I think your money is safe.

Mar 19 02:25 AM

[rob skmm:]

I believe one important subject is forgotten. Apple is a superb marketing machine, really connecting with its customers.
An innovator in every aspect, after 3 month I threw the box of my apple laptop away. The package was a real piece of beauty.
For sure I hope steve jobs comes back if it is only for his own sake.

Mar 19 08:08 AM

[HTHTFH:]

"...They marry the OS to the Things, Marketing Plans, Business Models to create an unstoppable juggernaut for market dominance."

Market dominance? A juggernaut OS should be found on a bit more than only 4% of the worlds computers. That scarcity is often mistaken for OS security too, which it is not.

Yes, AAPL has a loyal and growing customer base, but for now, other than Starbucks lounges and college campuses, MSFT is still the business and government standard.

Mar 20 02:22 PM

[neutrino23:]

It is really hard to quantify the effect Steve has on Apple. My take is that he brings discipline (being able to say no to distractions) and he keeps the company focused on the product, not on the bottom line. A couple of years ago Apple replaced their best selling iPod mini with the iPod nano. If there had been a timid CEO in place or if accountants and lawyers ran the place that never would have happened. They would have run that cash cow into the ground before starting on a new product. Before that Steve, on the strength of his personality, pulled the customer base over from PowerPCs to Intel CPUs. Apple has great financial and business people, but they don't manage Apple by watching the stock price. That would be death for Apple.

My take is that Apple is about excellent personal and industrial design. Fitting the product to the use. That makes it hard for pundits to evaluate Apple products. Time and again some will look at an Apple product and count the gigabytes and megabytes and clock cycles and pixels and give the product low marks. Yet the customers love them.

One other point is the interconnectedness of Apple products. It adds value to an accessory to have it connect to the computers to and to the online stores. Yes, the iPhone is tied to your Mac, but those are golden handcuffs. The iPhone and iPod are better, more useful products because they can connect to your Mac.

So when someday Steve does retire from Apple the danger for Apple is not a lack of creativity or engineering or design talent but having the discipline and courage to stick to their path.

Mar 23 07:40 PM