Apple's Hubris: Will All The Hype Go According to Plan?

When we talk of things that could go wrong at Google (GOOG) -- or at any hot company -- it often comes back to something as simple as this: That they'll wind up believing their own b.s. or hype, making them vulnerable to get hit by something out of left field. Apple (AAPL) is clearly in the "believing its own b.s." stage, with an arrogance that comes from success, but an arrogance that can also lead to failure -- not as in failing as a company, but creating a level of hype and anticipation that can ultimately work against shareholders if all doesn't go just according to plan.

As anybody who has followed my writings on Apple knows, I will sing the company's praises for coolness and, with iTunes, spectacular technology. I own multiple Apple products; I'm typing this on a Dow Jones-supplied MacBook Pro that runs Windows 99% of the time. (Wouldn't know this is a Mac.)

My comments, in the end, are about what Apple is worth. Maybe it'll double from here. Or triple. Maybe it won't. But the sheer arrogance of rolling out a product with a name (iPhone) owned by Cisco (CSCO) before getting Cisco's approval is the ultimate of arrogance. (If you haven't seen the news: Cisco is suing Apple. This update: In the ultimate show of arrogance, Jim Goldman reported on CNBC that Apple calls the suit "silly.") Sure, Cisco probably purposely dragged its feet on striking a deal to get the highest price possible in a licensing deal, but still: Laws are laws, patents are patents and trademarks are trademarks. And while Apple is great at thinking outside the box, brazenly violating trademarks isn't outside the box; it's below the belt and strikes to the heart of the company's culture -- something that if it isn't careful could work against the company.

Speaking of the iPhone: As cool as it is, it's still unclear whether it really is a game-changer. One great game-changer from days past that doesn't get much attention these days is Adobe's (ADBE) Acrobat, then dubbed "Carousel." Bulls touted it as the reason Adobe would be the hottest software company this side of Microsoft. This, after all, was software that would let us read documents on line. How cool is that? (Very!) Turns out Adobe made next to nothing on Acrobat (the reader); it's given away for free. The iPhone (or whatever it'll be called) won't be given away for free -- at least not by Apple -- but the question remains: When prices fall so everybody can get their hands on it (assuming they want it by then) how profitable will it be?

Final tidbit: With its rapidly rising stock, Apple has twice the market cap of Motorola (MOT), but less than half the sales.

AAPL/MOT 1-yr comparison chart

Comments

[Julian Ivan...:]

The only person showing extreme arrogance is, as usual, Herb Greenberg for shooting his mouth off before checking his facts. This, from The Guardian in the UK:

The Guardian: AAPL Will Keep Name
By Charles Arthur / Apple 09:47pm
----------------------...
The more we look into this, the more it becomes (as Malcolm Gladwell points out in an excellent New Yorker article) like a mystery, not a puzzle - that is, the answers were all out there already, but needed to be put together. (Gladwell's piece is about Enron. Highly recommended.)

Apple did indeed register the "iPhone" trademark in the US, and it was granted in September 2006. Don't believe us? See this page. Sure, it's down for "Ocean Telecom Services", but the description (not to mention the typography) are all that Apple gear. And as 10layers noted in October, Apple had been filing with the same description all over the world, including the UK.

Now, if you look at the results of a search in the US Patent and Trademark Office for "iPhone", you get 9 results, of which 6 have been abandoned. The only others, besides Apple, are for a hotel internal phone, and Cisco's, which arguably doesn't conflict with the Apple one - the trademark is in a different field, of "computer hardware and software for providing integrated telephone communication with computerized global information networks", not "handheld and mobile digital electronic devices for the sending and receiving of telephone calls, faxes, electronic mail, and other digital data..."

So Apple might squeak through this one without having to shell out to either of the other trademark holders.

2007 Jan 11 08:28 AM

[SA Editor J...:]

Tommo, can you please disclose if you own Apple shares? You seem a little too defensive about the company to be an impartial bystander.

Right on Herb! I love apple too and am also writing this on a Core Duo iMac as we speak while listening to iTunes and charging my iPod. Still, while I wouldn't bet against Apple, if anything at all goes wrong, or iPhone margins begin to suffer, I think this stock will come down to earth before long (after probably hitting $125 first). The Motorola comment is right on. And as the stock climbs and the forward PE shoots towards 40 again, I wonder if most investors will recognize a great company that is no longer offering a discount at current prices.

2007 Jan 11 08:39 AM

[Julian Ivan...:]

Jonathan, of course I own AAPL shares :-)

Someone has to counter the complete rubbish that Greenberg often writes about AAPL though.

As for the MOT comment, check out growth rates of MOT, and growth rates for AAPL, over the last 5 years, and tell me that AAPL doesn't deserve to be pricing in growth at least double that of MOT. MOT is a one-hit wonder - the RAZR. AAPL has been a consistent 40%-70% YoY growth machine since 2001. Of course AAPL is higher priced. It deserves it. AAPL's forward PE is well under 30, for a company forecast to grow earnings 30-40% for the next few years. That's underpriced, not overpriced, as far as I'm concerned. I suggest you research the fundamentals a bit deeper before comparing Apples to Oranges - or MOT to AAPL.

And iPhone margins? Good lord.. the device isn't even out yet and already Herb is questioning whether its going be a financial failure. The iPod was $500 for a 5GB black-and-white LCD display. It now costs half that, for an 80GB version with a colour display, just a few years later. Apple's margins are still around 30%. As I pointed out elsewhere, component costs fall, production costs fall, selling prices fall. AAPL's margins? Pretty much remain as they have been. No reason to expect the iPhone to be any different.

2007 Jan 11 08:58 AM

[Tom B:]

"And iPhone margins? Good lord.. the device isn't even out yet and already Herb is questioning whether its going be a financial failure."

If I were a business "road warrior", I'd be on my knees begging for one in front of my boss already, for sure. I think they'll sell a few. And more next year, if they do a lower end model.

2007 Jan 11 09:12 AM

[Macbth:]

To add: Herb tells us he is using a Mac, but is using windows OS 99% of the time on it. And brags about it.
What does that tell you –?
Anyone who uses both systems will tell you hands down that Mac OSX is 90% better. Why would anyone want to use a system with virus and blue screens then one that has none of that and lot more?
WYSIWYG anyone-Herb do you know what it stands for?- Macs OS have it / Windows no.
Does he own Microsoft? – I do own Microsoft and Apple.
Why did he buy a Mac in the first place?
I’m writing this on an iMac G5.

2007 Jan 11 10:16 AM

[Tom B:]

"Herb tells us he is using a Mac, but is using windows OS 99% of the time on it. And brags about it."

I drive a Ferrari, but I only use it to haul manure.

2007 Jan 11 01:04 PM

[Gene Milhoan:]

"I'm typing this on a Dow Jones-supplied MacBook Pro that runs Windows 99% of the time. (Wouldn't know this is a Mac.)"

Your comment above says it all:
1. You do not have sufficient knowledge of Apple, the Mac, The History, etc.
2. Your witness to the Windoze system working great on the Mac, confirms that, as windoze users become aquanted with the Mac and the Mac OS, they are switching over to the Mac. Apple's stock price will tripple over the next couple of years.

You have managed to totally discredit your stated position with this witness.

I am writing this on a G4 Mac Book.

2007 Jan 11 12:09 PM

[David Lentz:]

Just wait a week to see if AAPL's valuation is justified. When the earnings numbers come out, many financial "experts" will have yet another opportunity to notice that Apple is still making a considerable chunk of revenue from selling computers. And most will, predictably, continue to ignore that. Apple has multiple product lines, ALL of which have better margins and better growth rates than their competitors.

The typical Windozer looks at Apple's tiny market share and immediately dismisses it. The typical Mac zealot looks at the same tiny market share and sees incredible growth opportunities.

No doubt about it, Steve Jobs is arrogant as all get-out. And so was Bill Gates, when Microsoft was growing like gangbusters. Winners are never timid.

And the trademark tif is just a tempest in a teapot. While Apple would probably have paid almost any monetary amount for the iPhone name (and promptly gone after any other users of that name, hammer and tongs), what Cisco was/is asking is that Apple open up the architecture to allow Cisco to insert their hooks and ride the Apple carpet to greater profits. It's entirely possible that this might be a deal-breaker for the Apple-Cingular arrangement, and in any event, Jobs has never been much of a believer in "open products", despite OS X having a substantially open architecture. The easy way for Apple to resolve this, if they can't win in the courts, is to change the name. ApplePhone, iPodPhone, MacPhone are all viable candidates, and the name change would give the product another 15 minutes of media exposure.

The bottom line is that the bottom line is what it's all about, and we'll see how that goes next week.

Oh, and "one more thing" ... I'm writing this on an old iBook, and have a significant (to me) position in AAPL.

2007 Jan 11 01:15 PM

[Michael Church:]

I am at work writing this on a awful Dell. If i were at home, id be on my MacBook Pro. Apple has passionate fans, because the product creates this passion. I know, i am a hard won convert.

But bottom line is this. Herb has an agenda, and has had one for a long time. Its tough being wrong.

The iPhone is great. But the real news is Apple TV. Apple made its play to become the de facto distributor of all video and audio content world wide. If succesful its sales will undoubtedly approach and exceed that of motorola.

Technology in the consumer arena is hit driven, and while this puts an asterisk next to everyone, Apple is the only player to prove capable of churning out hit products. Ask motorola how it fared in following up its own hit the Razr. The Slivr, the Crazr, or whatever they crapped up. Motorola stumbled upon the Razr, and as of this weeks anouncement, is stumbling over its own inflated stock price, as it proved unable to follow thru.

Apple is expensive, and i know why Herb hates it. But sometimes things are expensive for a reason. This may be one of those times. Whoever wins the digital distribution game will make a nice penny. It may be Softie, it may be Sony. Or Apple. Whoever it is will win big. The winner is anyones guess. But this is for certain: Apple just fired the first shot and it is now on its way, no one can stop it. So look out Blockbuster, look out Netflix. And even Comcast and other On Demand players. Apple, soon to be Microsoft are comin to town and they will want everyones lunch. As a consumer I cant wait!!

2007 Jan 11 04:38 PM

[Michael Eis...:]

In Herb's defense, it is interesting to note that one of the longest running growth stocks ever, MSFT, would consistently beat earnings by a penny or so and then guide lower to lower expectations going forward (unfortunately no Seeking Alpha Transcripts dating that far back to prove it but any MSFT follower knows it). It is an effective way to set a stock up for long term growth rather than big spikes and drops. I am not suggesting that AAPL did this with stock market guidance but sometimes all the hype and expectations can lead to disappointement and the stock can follow suit.

2007 Jan 12 07:28 AM

[david levy_:]

Besides AAPL, who makes devices that can be used to play iTunes and view video from the iTunes store?

2007 Jan 15 05:46 PM