Seeking Alpha
Long only, special situations, contrarian, research analyst
Profile| Send Message|
( followers)  

On October 29, as the markets were closed, Apple (NASDAQ:AAPL) announced, in a terse press release, that both Scott Forstall, the head of iOS engineering, and John Browett, head of retail, were leaving the company. Forstall's responsibilities will be split up between Eddy Cue, who is taking charge of Siri and Maps, Craig Federighi, who is taking charge of iOS engineering, and Jony Ive, who is taking control of software design as well. The retail division will report to Tim Cook until a replacement retail head can be found. The suddenness of this move stunned many in the technology world, and, as with most things involving Apple, it generated a good deal of coverage. Our analysis of the situation has shown that these actions reveal the best in Apple's corporate management practices, and also show that Tim Cook is working to assert himself not simply as the Steve Jobs' replacement, but as a CEO in his own right, even as he preserves the vision that his predecessor worked his whole life to achieve. In this article, we will attempt to explain why Forstall and Browett were ousted, and why Apple's investors should view this as a positive.

Ousting Forstall & Showing that Apple is the Antithesis of Microsoft

How a company's executives interact with each other and conduct their daily business is just as essential to a company's success as what it makes. A company whose executive team does not work together is unlikely to succeed. Microsoft (NASDAQ:MSFT) serves as proof of that. We have written about Microsoft several times before, and each article we write mentions the company's corporate culture, and its executive team, as one of the key factors holding the company back. The vicious corporate warfare that occurs inside Microsoft causes its divisions to spend more time fighting each other than its competitors. And Steve Ballmer's inability to control his lieutenants is one of the reasons we have repeatedly stated that he must be ousted as Microsoft's CEO.

At Apple, however, corporate politics did not exist under Steve Jobs. Jobs listened to his executive team, but he did not allow infighting to develop. Through sheer force of will, Jobs kept his lieutenants in line, including Forstall, who came to Apple as a part of NeXT when it was purchased by Apple in 1997. As Forstall rose thorough the ranks, eventually becoming the head of iOS engineering, the stories of his controversial managerial style became more numerous, as did the stories of his clashes with other Apple executives. Under Jobs, however, these clashes were held in check. But now that Tim Cook is CEO, things are different. For better or worse, Cook simply does not have the force of will that Jobs had, and he does not seem to be able to control his lieutenants in the same way that Jobs was able to. And that is why Forstall had to be ousted from Apple. The corporate infighting grew to a level that Cook could no longer tolerate, and he dealt with it swiftly. Forstall and Jonathan Ive could not stand to be in the same room together, according to many sources. And Forstall's ambitions, including becoming the next CEO of Apple, were much more obvious than that of a typical Apple executive. Conditions deteriorated to the point where Apple's other VP's would meet with Forstall only when Tim Cook was present. The "last straw" for Tim Cook reportedly came when Forstall refused to sign Apple's apology letter regarding its iOS 6 Maps application

The ousting of Scott Forstall shows the difference between Tim Cook and Steve Ballmer. Cook does not shy away from firing those who do not conform to what is best for Apple. And when Scott Forstall's continued presence as head of iOS engineering was no longer what was best for Apple, he was ousted, and his responsibilities split up between several different executives.

Ousting Browett: Returning to Retail's Core

The ousting of John Browett was almost buried by the news of Scott Forstall's ousting. In fact, Apple's own press release does not mention Browett until the seventh paragraph.

Many industry observers were puzzled when Browett was first hired to replace Ron Johnson as head of Apple's retail business, given the mixed record of his performance as head of Dixons, whose emphasis on profits stands in stark contrast to Apple's leading customer service. Browett's tenure at Apple was marked by several controversies, including what appeared to be the firing of Apple retail employees in order to boost the divisions profits, which is a very "un-Apple" thing to do. Apple's retail stores are already the most profitable stores in the United States, with sales per square foot double that of Tiffany's (NYSE:TIF). Apple's retail stores are about more than just selling the company's products. As with any luxury brand (and after all, Apple's products are a luxury, not a necessity), Apple's stores must do more than simply sell the company's products. They must cultivate the brand, and serve as symbols of why Apple is different. The fact that most sales of Apple products occur either online or through retail partners is irrelevant. A shift to an emphasis on profit in retail would run counter to the very thing that made Apple so successful: a focus on making great products, not great profits. It is why people line up for hours whenever a new iPhone or iPad is launched. In contrast Microsoft has to pay customers to stand in line for its new products. Apple's retail stores help promote the Apple brand, even if most Apple products are no longer sold through them. By ousting John Browett as head of retail, Tim Cook has sent a message that under his watch, Apple will not allow its retail stores to become a profit-centered machine.

For the time being, the retail team is reporting directly to Tim Cook as the search for a new head of retail is carried out. We hope that Apple's next head of retail will dedicate his or her attention to creating the best customer experience possible, and leave the financial details to CFO Peter Oppenheimer. We have consistently stated that CFO Peter Oppenheimer is one of the most underappreciated executives at Apple. His dedication to and control of the company's cash and finances allows Apple's divisions to focus on making the best products possible, and not worrying about costs. Apple is so profitable not because it disregards profit completely in its operations, but because it has handed control of its finances to just one person: its CFO. At Microsoft, for example, CFPO Peter Klein shares power over budgets and costs with Microsoft's various divisions, a practice that inhibits innovation, as managers focus on saving money instead of creating new products to compete with Apple and Microsoft's other competitors.

Asserting Tim Cook's Authority: A New Managerial Style

When Tim Cook was appointed CEO of Apple, this time permanently, back in August 2011, many industry watchers believed that Apple would suffer under his reign. After all, Tim Cook is not "he is more accessible," a notion that Steve Jobs himself has stated. But, it is important for investors to remember that Apple's renaissance did not occur simply because of Jobs' vision. It occurred because of Cook's ability, as Apple's COO, to execute Jobs' edicts and manage an enormous supply chain with army-like precision. Tim Cook runs Apple differently than it was run under Steve Jobs. That is to be expected, for they are different people. We, however, do not think that this is a negative for Apple, at least not at the present moment. Tim Cook brings his own set of benefits to Apple's corner office, starting with the fact that he is more accessible than Steve Jobs.

But, Tim Cook, at least from the outside, seemed to suffer from a flaw that his predecessor did not have: an authoritarian streak. As we explained earlier in this article, one of the things that sets Apple apart is the company's ability to control dissent amongst its division heads, and united them in opposition to Apple's competitors, not each other. Steve Jobs kept executives such as Scott Forstall in line through sheer force of will. Tim Cook, for better or worse, does not have the luxury of that. However, the ousting of Forstall and Browett did more than remove two executives of increasingly questionable value to Apple: they served to assert Cook's authority over the company, and let both its employees and industry observers know that this is his company, and that he will not let it deviate from the path that has made it successful.

By firing Scott Forstall, Cook has shown that while he may not be able to control his lieutenants with the ease that Steve Jobs could, he is ready and willing to fire them if they put their own interests and ambition ahead of Apple's. These executive moves are meant to assert Cook's authority within Apple just as much as they are meant to fix what was seen by industry observers (and Apple employees) as a pair of executives that the company no longer needs. Multiple sources indicate that employees are pleased that these executives have been ousted, with the ouster of Scott Forstall garnering a special level of support. A senior employee at Apple indicate that, "This was better than the Giants winning the World Series. People are really excited." Maintaining the morale of its employees will be crucial for Apple going forward. Because Steve Jobs is no longer here to offer employees his unique style of motivation, it is now Tim Cook's responsibility to convince Apple's employees of the importance of their work, as well as make them want to work at Apple and make the best products possible. One of the most important rules of the business world is that happy employees are productive employees. And while Apple is an exception to many corporate rules, it is not an exception to that one.

Solidifying Jobs' Vision: Jony Ive Leads the Way

Perhaps the most important result of the ouster of Scott Forstall and John Browett is that Jonathan Ive, known by most as Jony, is now responsible for both industrial design and human interface, which essentially gives him control over all of Apple's design processes, on both the hardware and software side.

Perhaps more than any other executive on Apple's team, Jony Ive embodies the design and product spirit of Steve Jobs. Laurene Jobs herself stated that, "Jony had a special status. He would come by our house, and our families became close. Steve is never intentionally wounding to him. Most people in Steve's life are replaceable. But not Jony." And Steve Jobs has said that, "the difference that Jony has made, not only at Apple, but in the world, is huge. He is a wickedly intelligent person in all ways. He understands business concepts, marketing concepts. He picks stuff up just like that, click. He understands what we do at our core better than anyone. He has more operational power than anyone else at Apple except me. There's no one who can tell him what to do, or to butt out. That's the way I set it up." Ive's responsibilities have now expanded under Tim Cook, in part because he is "a product guy," and wants to stay as one. Sources close to Apple indicate that Ive has no particular interest in becoming CEO after Tim Cook retires. And yet, he may very well find himself as Cook's successor. As Business Insider noted, Ive now has control over the design of both Apple's hardware and software. Only one person before him has had control over both of these areas: Steve Jobs. The symbiotic relationship between software and hardware has been at the core of Apple's success, and now that control over the design of both is in the hands of Ive, Steve Job's design vision is solidified. And with Forstall's other responsibilities split between 3 other executives (Cue, Mansfield, and Federighi), there will be less ability for executives to challenge Ive (with the exception of Tim Cook). Part of what makes Apple function so well is that its management team spends its time working on new products and ideas instead of in conflict with each other (a prime reason for why Forstall was ousted). With control of software and hardware design under one person, the chance of conflict between divisions is lessened, and Tim Cook will still retain the ability to settle any disputes that may arise.

Rightly or wrongly, one of the chief concerns regarding Apple in the post-Jobs era was who would be the company's "product guy." Tim Cook may be a capable CEO, but his areas of strength lie elsewhere. So who is to be the "product guy?" The ousting of Scott Forstall has given investors an answer. Jony Ive is Apple's "product guy," and as one of Steve Job's most important lieutenants (there is debate as to whether or not Cook or Ive was more important in the investment community), Ive was instrumental in getting Apple to where it is today. And now that he is in charge of all aspects of Apple's product design, he will be instrumental in getting Apple to where it needs to be in the years to come. Steve Jobs' vision of design has been solidified under the control of Jony Ive, and we believe that this serves as further proof that Apple's success over the past 15 years (1997-2012) has not been a fluke, but will continue for many years to come.

Conclusions

Because of Apple's status as both the world's largest company by market capitalization, and its unique place in America's (and indeed the world's) culture, everything the company does is scrutinized. And while some pieces of news regarding Apple are over-analyzed, we do not feel that the ousting of Scott Forstall and John Browett fit into that category. These executive changes highlight the strength of Apple's management and its ability to right what is wrong with the company. This ability is one of the things that sets Apple apart from its competitors, and it will be one of the key qualities that will allow Apple to continue to thrive in the post-Jobs era. These executive changes are a sign that Tim Cook is asserting control of Apple, letting the entire company know that corporate infighting will not be tolerated, and that he does not want to see Apple shift to a focus on profits before products. Apple occupies a crucial place in America's (and the world's) consumer sector, and we continue to believe that its stock should occupy a place in the portfolios of investors.

Source: Thoughts On Apple's Ousting Of Forstall And Browett: Asserting Cook's Authority, Solidifying Jobs' Vision

Additional disclosure: We hold shares of Microsoft via the Fidelity Growth Company Fund.