On The 'Decline' Of Apple

| About: Apple Inc. (AAPL)

George Colony, CEO of tech research publisher Forrester Research Inc. (NASDAQ:FORR), recently blogged a line designed to bait clicks worldwide:

Apple will decline in the post Steve Jobs era. Here's why.

George Colony, "Apple = Sony"

His principal thesis is that Apple Inc.'s (NASDAQ:AAPL) global operations and sales depend on a charismatic leader-figurehead to succeed. This article will not attempt to challenge Steve Jobs' success as a lightning rod for attention or his ability to sell, but it will explain that since Apple's purchase of NeXT (which from the changes in titles following the transaction could also be viewed as NeXT's takeover of Apple), Apple's sustained success has flowed not from personally-brokered triumphs of charisma but from calculated business strategies that depended on skills Steve Jobs recruited rather than skills Steve Jobs supplied personally.

Deals and Charisma

Early in his tenure as a returned executive, Steve Jobs famously brokered a deal with Bill Gates in which Apple was assured software development for the Mac, and peace purchased through IP cross-licensing, in exchange for a modest but then-valuable $150m investment in Apple (from which Microsoft (NASDAQ:MSFT) profited nicely when it converted the preferred to common in 2003 at $8.25/share). The freedom from Microsoft litigation, the promise of key application development at a time the Mac platform's future was in doubt, and cash were all important to Apple when the deal was announced in 1997.

Deals like this were probably essential to preventing the company from making a nose-dive into unrecoverable territory. It's no exaggeration to say that without Jobs, Apple would have died an ignominious death making beige boxes, probably experimenting with status as an OEM licensee of NT or betting the farm on a doomed but slick-looking operating system like BeOS.

Apple benefited from Steve Jobs' deal-brokering again when Jobs lined up the music deals that allowed the company to sell songs through the music management software it bought from Cassady & Greene and rebadged as iTunes. Without iTunes as a counter to the then-inevitable-looking tide of Microsoft-licensed DRM, Apple would have been put to the choice of selling a music player that didn't play new music or a player whose profit was diverted to Microsoft in the form of DRM licensing fees. By breaking the lock of a closed standard on the music business, Apple was able to protect its iPod business from being smothered in the crib.

But what did Steve Jobs' charisma do to create profit? Despite his reputation for being able to sell "anything", he displayed singular inability to derail major flops both before he was ousted the first time (the $10,000 Lisa in 1983, RIP in 1986) and after he returned (the beautiful but doomed-in-the-market G4 Cube in 2000, RIP in 2001). Don't ask about the ROKR Jobs introduced in 2005. Heck, Jobs' entire return to Apple in the NeXT acquisition was driven by Jobs' long-running failure to make any money for NeXT, driving the firm out of the hardware business - where inventory costs dramatically worsen the impact of poor sales - and following its failure as a software vendor, to the auction block.

Jobs' charisma managed to sell NeXT to Apple, but when did Apple last need to be rescued by a strategic buyer?

Where The Money Comes From

The shiniest bike from Harley-Davidson (NYSE:HOG) isn't worth much if you can't keep it running rather than stranded on the side of the road. As the iMac hockey-puck mouse and the G4 Cube attest, cool-looking products aren't enough to make sales happen. The thing has to be usable to inspire love. Chrome won't get you home.

So, where's the magic at Apple? In a 2008 blog entry (and a 2011 follow-up) describing the difference between a low-margin commodity vendor and a differentiated product capable of sustaining margins, I explained how a combination of Apple-owned software and the best supply chain in the business combine to give Apple lower costs of production and a more valuable end product (as measured by customer willingness to buy). Dell's (NASDAQ:DELL) outstanding supply-chain management offered advantages over less-agile competitors, but did not constitute a durable competitive advantage. Rather, it was a set of techniques that could be duplicated by competitors, particularly Apple. Apple's advantages in supply-chain management - which now is superior to Dell's - are not a result of Jobs' charisma. They are a result of careful supply-chain design, component selection, strategic investment, large-scale supply contracts punctuated with massive prepayments - unsexy but effective components that do not in any way depend on the presence or approval of Steve Jobs.

Another possible advantage is careful business organization. At Apple's enormous size, modest investments in tax planning that would consume more than the entire overhead of a small business offer enormous returns in avoided taxation. Tax treaties facilitate careful identification of jurisdictions in which to site subsidiaries with particular kinds of income, and Apple has been a pioneer in international tax planning. (But no, Apple doesn't have a tax rate below 10%.) International tax planning wasn't a Steve Jobs strength, either, but if the company's tax rate is put into the range of 25% when a risk existed of much worse, this works out to the advantage of shareholders. Still, this isn't the sort of thing that's hard to copy.

The sustainable competitive advantage at Apple isn't its acumen in building boxes, or organizing a firm's operations to avoid unnecessary taxation on the international sale of hardware and software. The soul of Apple's sustainable competitive advantage is it's Apple's outstanding software. The user interface, the stability, the security, the connectivity, the multi-processor performance, the reliability - all those things affect users' impression of the Apple brand and lead to repeat sales. And, guess what? Steve Jobs couldn't write a line of code.


Apple will miss Steve Jobs, and so will many of the rest of us. Steve saved the firm from the fire a time or two, to be sure - and the company benefited from his charisma at least as much as it suffered from his abruptness, volatility, hostility to enterprise customers, and seemingly childish last-minute product lineup changes conducted to punish transgressing suppliers. Losing its lightning-rod CEO may even impact the zing in some of Apple's product launches. But the average customer doesn't hang on video replays of Steve Jobs presentations - the average customer buys products based on their apparent utility. Apple's software folks have only improved the platform in the last decade, making development tools and APIs better for programmers while making the operating system better at getting things done predictably and speedily for users with zillions of desires in a world that besets them with network-based attacks. Apple's supply chain will continue to deliver at least as good a hardware production opportunity as exists for any competitor while Apple's internal expertise continues to be dedicated to improving the utility of everything the firm sells.

Forrester Research seems to mistake one author's categorization of types of successful firms for a tool to predict share prices. Perhaps a read of Jim Collins' From Good to Great is in order for those who don't get what makes a firm like Apple suddenly start to succeed in the late '90s and keep it up for more than a decade. A preview? It wasn't a handful of tricks held by a CEO, it was (among other things) a culture that promoted focus and valued quality. And those things endure at Apple: Apple may sell a Unix operating system with the Cocoa development environment on desktops, laptops, handhelds, smartphones, TV set-top-boxes, and tablets - but that's what it's selling on every device material to Apple's bottom line. To support that business, Apple operates some online stores, but Apple knows what its product is - and it's nothing Steve could (or did) do himself. Apple sells some applications, but principally to prevent users from being forced to look to another OS to affordably solve their problems. Focus on Apple's NeXT-derived operating system has allowed it to commit to an annual update schedule, something its principal competitors have not yet matched.

We'll miss Steve Jobs, but not because we will make less money. We will, in fact, be making more and more.

Disclosure: I am long AAPL.

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