Jason Schwarz's  Instablog

Google is looking to grow through acquisitions.  Is this good news for investors?  Let me offer up a sports analogy.  In baseball, the lifeblood of a franchise is the minor league farm system.  Producing your own talent produces a success that is more sure than trying to build a winner through free agency.  Once every ten years the Yankees might win a World Series with a team built through free agency but I’ll show you example after example of how a team with a solid farm system outperforms.  Growth through acquisition is akin to a baseball team that abandons their farm system.  Google management is sucking the life out of their R&D team each time they purchase a Youtube or an AdMob.  Employees who innovate at Google might get used to the new growth through acquisition model and come to expect it.  It doesn’t seem like working R&D at Google is as appealing as it once was.  

Back on December 5, 2007 I sent the following note to investors (economictiming.com): 

The easy money has been made!  That 3.5% GDP report was artificial!  When the first time home buyer credit expires we’re doomed!  Yes, it seems to be that time again.  The bears are telling us that the rally is over.  I first warned you about premature top calls when the bears came out in full force with the Dow at 8400 back on May 7th (http://seekingalpha.com/article/136078-2009-is-the-year-of-premature-top-calls), then I warned you again with the Dow at 9500 on August 28th (http://seekingalpha.com/article/158844-four-reasons-we-re-headed-even-higher).  Here we go again.  

Microsoft CEO Steve Ballmer gave us a glimpse into Apple’s future with a statement he made at the Windows 7 release.  When asked by CNBC’s Jim Goldman to respond to the threat of competition from Apple, Ballmer remarked,(www.cnbc.com/id/33419795)  “It's amazing: people say Apple sells 10 million PCs. There will be 300 million Windows PCs sold in the same time frame. So it is interesting to me that people spend so much time talking about the 3 percent of the market in that case...I wouldn't trade our 300 million new users a year for their 10 million. I just wouldn't do it. I kind of like what we're doing and the way we're serving the market.”

It’s looking like this earnings season has a consistent theme among US companies.   Most are showing an ability to manage their way through the recession with cost cuts but hardly any companies are showing significant revenue growth.  Except Apple.  Apple’s report stunned just about everyone.  Apple’s closed ecosystem is proving to be the way to win in modern technology.  Unless your business model has some kind of moat surrounding it, you are destined to become just another commodity caught in a pricing war.  Apple’s earnings report defies the logic that says you can’t sell high priced computers in a recession.  3.1 million Macs and 46% net income growth shows that avoiding the low margin netbook fad is the way to go.  Oh by the way, real earnings growth was much higher.  Apple’s real net income was $2.85 billion on revenue of $12.25 billion (non-GAAP).  Consumers are rewarding this company because they trust the products. 

The big debate going on in the tech world right now is whether or not Google’s Android is going to put an end to the iPhone market share growth.  Android is an open platform akin to the Microsoft operating system that dominated share in the PC market for so many years.  Because of Microsoft’s past success, many assume that Android will eventually overtake the iPhone for similar reasons.  The problem with this assumption is that modern tech is too complex; the only way to simplify it is to control both the hardware and the software.  Steve Jobs’ insistence that Apple maintain such tight control on the Mac OS hurt Apple during the last generation but it will propel them to greatness in the future.  In a world of constant downloads and upgrades it is imperative that all users can seamlessly perform such functions.  The latest release of Snow Leopard has already doubled the rate of Leopard.  It’s so easy to do and it only costs $29.  Most who upgrade to Windows 7 are going to need a new computer along with new software that is compatible.  That doesn’t work for today’s generation.  

Apple is so good at what they do.  They shouldn’t be the best at both software and hardware but they are.  The resulting pricing power is yet another reason why I’m predicting the 2010-2020 decade will be known as the Apple Revolution.  The latest earnings release merely reconfirms that the Apple trend is on solid footing.  

DISCLOSURE LONG AAPL

It’s looking like this earnings season has a consistent theme among US companies.   Most are showing an ability to manage their way through the recession with cost cuts but hardly any companies are showing significant revenue growth.  Except Apple.  Apple’s report stunned just about everyone.  Apple’s closed ecosystem is proving to be the way to win in modern technology.  Unless your business model has some kind of moat surrounding it, you are destined to become just another commodity caught in a pricing war.  Apple’s earnings report defies the logic that says you can’t sell high priced computers in a recession.  3.1 million Macs and 46% net income growth shows that avoiding the low margin netbook fad is the way to go.  Oh by the way, real earnings growth was much higher.  Apple’s real net income was $2.85 billion on revenue of $12.25 billion (non-GAAP).  Consumers are rewarding this company because they trust the products.