What Apple Could Do With Its Cash

| About: Apple Inc. (AAPL)

As the investing world knows, Apple (NASDAQ:AAPL) has an enormous amount of cash in its coffers. As of the end of its first quarter, Apple now has $97.6 billion in cash and securities.

Lately, there has been growing discussion about how Apple could use that cash. The talk intensified after the passing of Steve Jobs. Observers now think there is a greater likelihood of setting a policy besides the current strategy of "letting the mountain grow." In fact, during the Q1 conference call, it was mentioned multiple times that Apple was "actively" thinking about what it can do with its money.

One of the most-discussed potential uses is instituting a regular dividend. While that may make the stock more attractive to some institutional investors, particularly value-oriented funds, it still doesn't seem like a great use to me - what's the point of letting $100 billion continue to do nothing while paying out a few billion each year. Another group wants to see a large one-time dividend - say, $50 billion, or about $50 per share. While that would certainly please some people, especially owners with a low cost basis, it's not a "magical" use of cash ... and Apple prides itself upon being a "magical" company.

So what should they do?

They should revolutionize education in America. (For additional suggestions, please stay tuned for part II of this article.)

I'm not just talking about iBooks 2. I'm talking about completely shifting the educational paradigm.

There are about four million students in each K-12 grade in the United States. The average per-K-12-student spending on textbooks was about $65 in 2006; lets call it $70 today. That extrapolates to $3.6 billion in textbook costs per year. But textbooks are less than 1% of the overall cost of educating students. Another significant cost has to be technology spending. Let's say that's another $70 per student per year, and double our overall total to $7 billion. Lastly, let's round down to $5 billion, because kids in grades K through about 5 should probably learn primarily the old-fashioned way, with pencil, paper and back-breaking books. I'm also going to not address college students; the following plan could be replicated beyond high school, but I chose to leave them out of this demonstration.

Now, this is the market that Apple should go after, and they should use the cash horde to make an offer that schools cannot refuse.

Apple already announced partnerships with the entities that print a vast majority of U.S. textbooks. They should work to partner with the federal government, or states, to implement the following iPad-ization of American education.

Apple could provide any interested school with a no-upfront-fee iPad for each student. This iPad would be more magical than any tool a school has had before - it would be pre-loaded with every textbook that a student would need, along with helpful tools like calculators and dictionaries. Best of all, the content would always be fresh. Schools would no longer have to choose which set of books to update in a given year while keeping others shamefully outdated (I remember books containing maps of the USSR or East and West Germany in grade school - and high school - even into the 2000s). Every curriculum would be refreshed by the publisher each year. This would benefit students immensely, especially at poorer schools, where frequent updates to physical books would be otherwise impossible.

This would be extremely lucrative for Apple, too. Much of the $70 textbook cost would be funneled back to publishers, but Apple would be able to keep a large slice for itself - probably something on the level of the iTunes 30% rate - which publishers would probably be OK with due to the elimination of printing and transportation costs and the guaranteed revenue stream. Apple would also enjoy the $70 technology revenue portion. So Apple could take in about $100 per student per year - or something on the level of $3 billion.

At face value, that's not a huge bump - Apple already has more than $100 billion in annual revenue, but this revenue stream will be dependable and highly profitable. The cost of manufacturing an iPad capable of handling primarily textbooks for the next few years has to be pretty low, and would be recouped in the first year or two of such a deal. Of course, Apple would only be leasing the iPads to these schools, so any threat to stop payment would be mitigated by Apple's ability to take back its property. The deal terms would probably include a technology upgrade after a certain number of years - at that point, Apple could likely refurbish or sell the older items to poorer regions to realize even greater returns.

Beyond the $3 billion, Apple would realize a potentially-greater benefit from fringe revenues. The educational iPads would have some modified functionality that would allow additional application purchases - say, review software for SAT prep for high schoolers - that could generate additional revenue (while simultaneously blocking fun apps that would distract children in the classroom).

But the even greater benefit will be indoctrinating America's youth into the cult of Apple at an early age - when someone starts spending eight hours a day with an iPad at age 10, will he really switch to an Android (or whatever is around in 10 years) device when he's buying his first recreational tablet or cell phone?

This massive endeavor would consume some portion of Apple's cash. Between paying publishers (or promising set future payments) to create content, negotiating with school districts or governments, manufacturing and distributing iPads and any related hardware, and potentially training teachers to use them effectively, this operation could use up $10, $20 or $30 billion. But the benefit would outweigh the cost - Apple will realize even greater mind share and influence in American culture, a $3 billion-plus annuity, and an unquantifiable increase in sales of other Apple devices.

That sounds like a better way to create shareholder value than a dividend.

Please read part II of my article, too.

Disclosure: I am long AAPL.

Additional disclosure: Long APPL via OTM calls.