Apple Is Biting Off More Than It Can Chew

Hearing Apple’s (AAPL) earnings announcement on Monday, I found myself thinking about what Apple will look like post-Jobs. Jobs is a pioneer and one of the most admired CEOs of all time. He’s my role-model, idol and inspiration.

Just like everyone in the industry, I’ve been very worried about his health, ever-since his surgery a few (I believe 4) years ago. My worries exacerbated seeing him at the launch of the 3G iPhone last month. Here’s a shot from that launch and it is obvious that it’s not alright– despite what officials from Apple say. I really hope Steve’s not in declining health and I wish him a speedy recovery.

Now coming back to the topic of Apple post-Jobs (an inevitability as one can’t go on forever), let’s take a look at how Apple fared before Jobs came back and led the renaissance.

• Apple was overly reliant on outdated software due to its inability to release a major operating system upgrade
• It was badly managed
• It was near-bankrupt in the early-to-mid 1990s.

Steve’s progressive stance on open source and Unix underpinnings helped create an extensible, solid foundation for an operating system—popularly called OS-X. Steve is both admired and criticized for his persuasion and salesmanship– the reality distortion effect, which has helped Apple reach the heights it has.

During Monday’s earnings announcement (See Call Transcript), Apple dropped its forecasts for this year despite:

• significant market share gains of Macs as well as its continued domination of the digital music player business, in the recent 3rd quarter
• a bumper quarter for iPods (11M sold) and iPhones (750K sold)
• the recent launch of iPhone v2

The reasons quoted for the conservative estimates for the next quarters were wide and varied and it’s a stretch connecting the dots here. The reasons ranged from:

• Reduced margins were planned on taking away the “umbrella for the competitors"
• educational discounts
• component price adjustments
• a new product line that is widely rumored to include redesigned laptop computers
• some investments ahead which couldn’t be discussed today

Huh? This paradigm shift can be equated to Neiman Marcus (NMG) taking on JC Penny (JCP) or Ferrari taking on Honda (HMC). Apple’s always taken pride in being a boutique business.

I partially agree with the analysts that the reduced margins are mainly because Apple has tasted blood with its surging Mac PC business. It’s now the 3rd largest OEM in the US after Dell (DELL) and HP (HPQ) and wants to build its stature there. Apple does benefit from the stickiness its digital lifestyle offerings such as iPhone and iPod create, however, this change of heart does signal that Apple’s ready to grind it out.

Though the skeptic in me thinks that this is the trademark Steve Jobs reality distortion effect– a bait and switch. My sneaky feeling is that Apple maybe preparing for a post-Jobs era here, if Steve is planning to retire or cut down on his work-schedule. His legacy at Apple will then be a self-sustaining business which grows through volume. I wish his legacy instead is his vision, out-of-the-box thinking and innovation, which seemingly only he’s capable of doing in this company– unfortunately.

I believe Apple is biting off more than it can chew– no pun intended. I just hope the company's overarching ambitions doesn’t get the better of it and the company doesn't forget its basics. Let’s hope Apple's innovative touch and ability to build the singular end-to-end customer experiences doesn’t fade away in its zeal to become a major platform player in the industry. But maybe that’s the only role it sees for itself without the company's charismatic and fearless leader at the helm.

What do you think?

Apple’s currently trading at $162 and change. I’ll analyze it in a post later this week.

Disclosure: None

 

Comments

[huerix:]

This new product transition is very mysterious.

I think it may be a new affordable tablet multi touch kind of thing...

The cell phone business showed them that reducing margin to gain volume can be a good thing.

I truly hope Mr. Jobs is feeling fine, not because I worry about Apple, but because he is one cool human. That being said, if he were sick, the stock would be punished heavily- but it takes tons of talented people to run that outfit. He could one day be sort of a techno L Ron Hubbard if you ask me, but seriously, I mean that in a good way.

2008 Jul 23 04:48 AM

[scooter_smd:]

wow, what insight (add your own sarcastic overtone). I just wasted 5 minutes of my life reading this. And yes, I'm a slow reader.

2008 Jul 23 04:54 AM

[Julian Ivan...:]

You're completely wrong. Apple has been selling computers that, spec-for-spec, are ALREADY cheaper than equivalent Dells and HP's - and that includes both desktop and server platforms. Its just that people don't realise it yet.
Go to the HP or Dell website and try it for yourself. To use your own analogy, Apple is already selling Ferraris and Honda prices, and at higher margins too - so they can afford to get even more aggressive, even whilst HP and Dell can't.

Do yourself a favour and think before you contribute any more rubbish like this. garbage in, garbage out.

2008 Jul 23 05:13 AM

[aaplnow:]

WHY are you so focused on one man? Apple is "defined" by Steve Jobs, but can you and the other PUNDITS please realize that Apple is a company? A sum of all parts. When Jobs was out of commission for a month in September of 2004, Tim Cook was publicly named, by Steve, to run things "in his absence." That particular quarter had stunning results.

SJ is an icon and a man who does it all. Thank you for recognizing that fact. But get over the notion that he cannot be replaced. He can.

And so can you.

2008 Jul 23 05:17 AM

[123pescao:]

So much to say in response to so little substance. IMHO, Apple is following thru on a five to ten year plan to develop the most compelling operating system anyone has ever seen or dreamed of. Mac OS X has been overlooked by the general public on account of the iPod popularity. Perhaps that is where Steve's genius truly shines. No doubt Steve is and was instrumental in re directing Apple towards creating the Mac OS X / iPod revolution, and he will be missed whenever he steps down or leaves this world. However, I believe whenever he leaves Apple he will have the company positioned for at least five more years of innovation, if not ten. I don't see anyone getting close or even moving towards an operating system that's in the same league as OS X. It is dreadful to think that rapid growth will have its nefarious effects on Apple, and Steve, however, given the alternatives (i.e. windows vista, linux) I'm still placing my bets on Apple. I'm looking forward to OS XI in 2010 !

2008 Jul 23 06:05 AM

[wildfeed:]

Jobs has turned Apple into a company with a solid base that can and will survive and thrive after he has left. I believe his successors will milk the cash cow that he has grown. Through licensing and a slight dilution of the customer experience, Apple will grow to become a financial powerhouse as the novel gadgets become commodities.

2008 Jul 23 08:29 AM

[digivision:]

Apple was overly reliant on outdated software due to its inability to release a major operating system upgrade
NONSENSE. ALWAYS AHEAD OF MS IN SOFTWARE RELEASES
AND MACOS 9 WAS PRETTY DECENT, FAST AND RELIABLE UNTIL OSX CAME OUT
It was badly managed
ARGUALBLY, IT WAS WELL MANAGED BY PEOPLE WITH NO VISION

It was near-bankrupt in the early-to-mid 1990s.
NONSENSE IN THE EARLY TO MID 90'S APPLE HAD 1.4 BIL IN CASH AN NO DEBT
APPLE WAS NEVER IN DANGER TO BANKRUPT,APPLE WAS IN DANGER TO BE ACQUIRED BUT NOT TO BANKRUPT

2008 Jul 23 08:55 AM

[Mac'em X:]

"I believe Apple is biting off more than it can chew– no pun intended."

No pun detected.

2008 Jul 23 10:17 AM

[Stockerati:]

Fanbois, inorder for Apple to really become a volume player it has to rechristen itself as a serious platform. For this it has to
-- focus on creating a h/w ecosystem. No more of the only apple products work with your Macbook thing.
-- develop the s/w ecosystem; attract ISVs over. In today's date, MS and Adobe are the two main ISVs for Mac products and then the long tail starts
-- Apple will have to invest heavily into evangelism. No more of the secret only comes out at Macworld mantra.

My take is Apple traditional strength is a few key vertical experiences-- neat, sexy and thoroughly planned. Will it be able to give up control of the platform and experience if it were to expand? Additionally, can you please tell me which other exec from Apple do people know or have heard of besides SJ? The problem with strong personalities such as SJ is that they often eclipse people under and around them-- this is concerning if a change in guards is in the works.

Flame on :)

2008 Jul 23 10:57 AM

[brewer:]

Stockerati, I didn't believe your BS from the start of this article. You were never a fan of Apple. You idolize steve jobs? Really? I doubt that, that's farther than most of us supposed 'fanbois' would go. It's totally clear from your comment though, that this whole article was a total sham. There are lots of other famous and recognized people at Apple. You asked for one example==what about Jonathan Ives, they guy who designed the iPod, the iBook, etc... I guess you have never heard of him though, even though he is very well know, has been on magazine covers, won a very coveted design award, etc... because you are a day trader staring at a Dell all day, etc... and have no clue about Apple, their history, significance, etc...

How is your short looking today?

2008 Jul 23 11:22 AM

[mollytjm:]

apple of the old days can't be compared to the company today. it was Apple Computer...remember? now it's Apple. Why? because it's no longer a one trick pony...music, film production, phones, gps, a zillion apps, ipod, lots of different computers, STORES that are more profitable per square foot than any other retail space!, and tech support above and beyond the others.

when Jobs left originally, Apple had a computer. he DID an awesome rescue but he also made the company so strong that it will survive even after he is gone (though i don't think he's going anywhere anytime soon!) but do you really think he sits in an office all day and designs EVERYTHING? His talent has always been in outward design. There's a huge, very talented staff, with more stuff already in the pipeline. and...the Chinese are coming. The Apple store is open in time for the Olympics. Value investors will continue to make $ with this stock.

2008 Jul 23 11:46 AM

[REB:]

A larger touch screen will cost more than Apple can charge on a tablet iBook. It can be surmised that Apple expects the price to drop to enable better profit margins on that product in the future. Along with it, a portable line case redesign, along with engineering costs will be booked in earnest in the introductory quarter, lowering margins. Jobs health is OK and speculation was an obvious attempt, right at earnings, to manipulate the market. It's happened a number of times and should be investigated by the SEC.

2008 Jul 23 11:50 AM

[Neil Anderson:]

Apple's price for entry into the Mac world is prohibitive for some. With a lower entry point Apple will gain market share even faster. Once Apple has new customers they are likely to keep them. And when those folks upgrade in the future they may choose a higher-priced higher-powered machine.

2008 Jul 23 11:51 AM

[Tom B:]

The tipping point is coming. If Apple just bundled a free version of Free Cell, I think they'd own the Enterprise market in a single quarter.

2008 Jul 23 01:03 PM

[Dirtt:]

Or. This mysterious product "theory" could be what props up the stock in the coming weeks so Jobs can take his 'final bite' at the Apple. And it gives the 'blindsided' analysts time to unwind as they talk up the "theory."

Meanwhile. Macroeconomics out the door. Maybe Paulson will team up with Apple. Buy a Mac notebook and get a free 2000 square foot home in California.

2008 Jul 23 01:11 PM

[KenC:]

I think it is incredibly wrong to imply that there is something definitely wrong with Steve. You are NOT an oncologist.

The rule of thumb is that 5 years post-op, cancer is cured. Steve is well past 4 years post-op. As time goes by, the chance of recurrence is increasingly unlikely to the point, 5 years out, that the cancer is declared to have been cured. Steve is almost there. Rumoring around now, is incredibly irresponsible.

2008 Jul 23 04:37 PM

[Peter W:]

I"m with KenC, mollytjm, Brewer (especially him), bsclatza, digivision, 123pescao, scooter_smd, Tommo_UK & aaplnow.

Looks like I'm not the only one who can't stand this blogger. I'm really looking forward to see his "analysis" of Apple equity. Another cut/paste along with an outlandish price target he can't defend perhaps?

2008 Jul 24 03:42 PM

[Stockerati:]

I understand the sentiments of everyone and respect their feedback.

But I do wonder what people to think of an equity analyst who claims to have a MBA from a top-10 B-school but trolls and steals analyses from SA. Peter, what do you think?

2008 Jul 25 11:48 AM

[Peter W:]

Hilarious, just another typical childish remark from a hack analyst. The only reason I come on SA now is to read your "analysis." Since you have been so "respectful" of my feedback, I continue to provide it. I'm simply pointing out how shallow/worthless your analysis is. It's nice to see plenty of others are seeing it as well.

"I do wonder what people to think of" <-- NICE grammar

Looking forward to your valuation of Apple

2008 Jul 25 02:07 PM

[Stockerati:]

Fantastic!

Peter can you point us to any article written by you (ever), if you can even write.

Keep coming back. We all love clowns like you :)

2008 Jul 25 04:45 PM

[Stockerati:]

I had a feeling, the tea leaves were lining up for an Apple without Jobs. Bummer!

stockerati.com/apple-t...

Jan 14 11:51 PM