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Marc H. Gerstein ( or if already on Twitter, search for @MHGerstein) is an independent investment analyst/consultant specializing in rules-based equity and ETF investing strategies, with particular emphasis on small-cap equities and leveraged ETFs. Many of is views... More
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  • Apple: The Second Coming Of AOL? 2 comments
    Apr 14, 2010 2:46 PM | about stocks: AAPL

    As we all know, Apple (NASDAQ:AAPL) remains on an amazing roll. Its products are now beloved by consumers and its stock is beloved by investors. There are detractors (a situation Apple shares with winners in other walks of life, such as the New York Yankees), but their utterances typically attract storms of rhetoric from the company’s many loyal fans. That’s why I suspect I’m about to attract some very hostile comments as I point out some troublesome aspects of Apple’s core product philosophy; a trait that, I believe, revives memories of another once-but-fallen king: America OnLine, or as it’s now known, AOL, Inc. (NYSE:AOL).


    A Case Study In Usability


    When it comes to usability, Apple products are as clear, comfortable, sensible, elegant and magnificent as anything imaginable – if you use them the way Apple product developers assume you will use them. But if you use them in a way Apple didn’t anticipate, its offerings can be as awkward and clunky as anything Microsoft (NASDAQ:MSFT) or anyone else has ever been accused of peddling.


    I’m not a tech person. So I’m not going to get into things like open versus closed architecture or anything like that. Plenty of others can, have, and still are addressing that far better than I can.


    I’m just a middle-aged iPod lover who can’t help but notice Apple’s failure to anticipate what I do with it and how awkward it is for me to do what I do. I’m also an investment analyst with a couple of decades of experience who can’t help but recall how often I’ve seen how tiny, hardly-noticed seldom-discussed, flaws in how a company does business can, in fact, reflect conditions that can, over time, derail corporate progress and eventually send high-flying super-stocks into oblivion, especially when mixed in with hubris and a lack of leadership depth.


    We can easily dispense with the last two topics. Apple has shown itself to have ample leadership depth, as we recall from the way the company flourished back during the time when Steven Jobs was in exile. And of course when it comes to corporate hubris, who could ever imagine Apple in that way. (Wink, wink.)


    Now, please be patient with what follows. So much of the love surrounding Apple stock stems from the supposed usability of its products. It is valuable to consider a close-up case study suggesting a contrary view and what the details of this one might suggest for a big-picture assessment of the investment case. Pretend you’re sitting behind a one-way mirror watching me and my iPod in a focus group (the sort of focus group Apple probably never convened). After that, I’ll explain what this suggest for a big-picture view of Apple.


    That said, here we go . . .


    A One-Person Focus Group


    I love medieval, baroque and classical music and have loaded my iPod accordingly. I also have various other kinds of music.


    I’m in the mood now to listen to a concerto by Corelli. So I turn on my iPod, scroll to composers, and look through the Cs. Guess what: no Corelli.


    That’s odd. I see Carl Philipp Emanuel Bach (not sure why he’s not under B) and a bunch of other completely unrecognizable names. I go to my computer and open iTunes (Did I mess up when loading it?) and sort the 2,548 items in my music “folder” by composer: still no Corelli.


    But I got lucky. Under A, I notice Arcangello Corelli. Cool. I didn’t know his first name was Arcangello.


    I go back to my iPod and check the letter A under composers. Yup, there he is, Arcangello Corelli. Live and learn. I know some first names, Ludwig and Wolfgang for instance. But it looks like I’ll have to go to Wikipedia and look up and memorize some others.


    I also notice one of my favorites under the As, Antonio Vivaldi.


    Oh, wait a minute: right below Antonio Vivaldi, I see a composer named “Antonio Vivaldi (1678-1741).” Huh! Under Antonio Vivaldi, I see 96 “songs” spread among four albums. Under Antonio Vivaldi (1678-1741), there are a couple of dozen songs from what looks to be two albums but they aren’t subdivided so I need to look again more slowly when I have time.


    I’m getting a headache and am starting to shudder when I contemplate looking for a piece by something by Mozart.


    I know this probably isn’t Apple’s fault. They depend on the recording companies to supply data for fields like Composer, Artist, Album, etc. and obviously, the latter aren’t quite so wired into usability of modern electronic products. That will be especially important when I want to find Medieval instrumental or vocal works, for which Apple has no recognizable category.


    So I’ll take matters into my own hands. I’ll organize things the way I want, into folders, oops, I was supposed to say playlists.


    I can do that, sort of.


    It turns out I can’t organize content around a collection of sub-playlists that make sense for me. All playlists must be co-equal. So I can’t have a grand Mozart playlist under which is a sub-playlist for concertos, another for operas, another for symphonies, and another for sonatas. I need four separate and co-equal playlists (ouch; I’m going to wind up with an incredible truckload of playlists when I’m finished) or a more manageable number of incredibly huge playlists. (I looked hard to see about sub-folders; if I’m wrong and they can be done, please tell me so. I can use the help!)


    It gets more cumbersome.


    I don’t just listen to music. I have audio books. I buy mp4 lecture series from the Teaching Company, some dealing with History, some with Philosophy, some with Literature, etc. I like to save and archive some of the many podcasts I listen to as well. I have a great collection of poetry readings.


    A straight alphabetical sort of a hundred or more playlists is going to become a real pain. So I invest some time to create a system of prefixes to help me recognize families of playlists which I can keep together since, it seems, iTines sorts all the lists alphabetically (whether I want to or not). I these could have been grouped together under subfolders,  but what the heck, it is what it is. Some of my prefixes are MC for classical music, MG for general music, MS for sow music (I like that, too), T-HI for Teaching Company History sets, T-LI for Teaching Company Literature courses, PC for Poetry-classical, B for audio books, etc.


    If my focus on a particular audio book or Teaching Company lecture series is ongoing, I add an A prefix to push it up to the top of my incredibly lengthy list of iPod playlists (A-T-HI-Name or A-B-Name).


    Tell me again how easy and intuitive Apple products are! Oh well, too bad (for me) Apple’s product developers failed to anticipate my existence.


    Actually, there’s more. Apple never heard of the Teaching Company, or at least never considered anyone might use an iPod to listen to its courses. So as far as iPod is concerned, a course consisting of 36 lectures is really 36 separate audio books none of which have any relationship to any other. Getting them into the iTunes library and organized into “playlists” is quite a messy process, but I’m not going  to bore you with that. Instead, let’s get end the one-person focus group and consider how this relates to an investment case relating to Apple stock.


    My travails will not throw Apple stock over the edge. Nor do they prevent me from enjoying my iPod. I’m a big boy. I can handle it. I started with pcs back in the DOS era! But they do say something scary about the way Apple thinks, something that reminds me of the old AOL.


    Let’s see the connection.


    Two Product Design Philosophies


    Think of product design (at least insofar as it pertains to the new generation of mass technology) as being divided into two camps.


    The first approach is one that leads users by the hand, guiding them every step of the way. It controls the user experience in order to make it as accessible and as positive as possible. Apple is obviously in this camp. As another example, consider such offerings as Quicken, Turbo Tax, etc. I’ll call this the Guided approach.


    The second approach is one that empowers users to do as much as possible on their own in order to give them as much freedom to decide for themselves what they want to do and how they want to do it. Consider for example, Excel which, out of the box, is, essentially a platform allowing users to do an incredible variety of things; budgeting, taxes or whatever. Apple rivals lean, in varying degrees, this way. I’ll refer to this as the Self-Directed approach.


    If you’d like to directly experience a side-by-side comparison of these philosophies, go to and complete the free registration process. (This is a recently launched individual-investor version of the Portfolio123 screener I use.) Go to the tutorial area, check the PDFs, and start trying to screen for stocks. Pay particular attention to the alternative interfaces we offer: Rules Wizard and Free Form.


    No, this is not a subtle plug for my site (though we would love to attract new users). I can’t think of any application that offers such a thorough and stark side-by-side contrast between the two aforementioned product-development philosophies. It will help you see the Apple-versus-others debates in important new ways.


    On paper, the Guided approach seems great. It also wins flat out when demonstrated at a trade show or in a store. Reviewers, bloggers and consultants love it. Novice and generally less dedicated users also love it. This is why Apple, the bastion of Guided product design, is flourishing so brilliantly right now.


    What about other users. As you can see, for people like me, the Guided approach underlying iTunes and iPod have actually been making things harder for me. (In case you’re wondering why I continue to use iPod, the answer  is inertia. I don’t use iPhone nor will I use iPad. And when my iPod battery dies, who knows which way I’ll turn.)


    I presume Apple would not be happy to hear of my struggles with its product as described above. But when you develop Guided products, it’s not feasible to accommodate every possible thing every possible user might want. There’s way too much variety in the world for that to be feasible.


    Guided products need to be designed with certain kinds of users in mind. That means, by implication, that other kinds of users will not and can not be considered. Some designers cynically ignore users outside their target. Others know they’re there, but are consciously aware that no company can be all things to all people and hope they’re doing the best they can for as many as they can.


    Guided Products Can Be Great


    Sometimes, the Guided approach turns out to be a great business decision.


    Consider Turbo Tax. Aside from professional tax preparers, people do taxes once per year and dread the experience. They have no motive to learn how to build their own tax preparation spreadsheets even if, arguably, a custom developed sheet would be easier to use. It’s worth it to grit one’s teeth and put up with Turbo Tax’s endless interview once per year.


    Consider Quicken. This is a long-term use, and obviously, nobody can create a better budget program for you than you can for yourself with Excel. But for most people, it’s not worth the effort. Hence the success of the Guided-philosophy Quicken product.


    At Portfolio123, we know our core Do-It-Yourself “Free From” interface is a powerhouse that can do things most investors wouldn’t dare imagine they could do with a web-based screener. But we also know that it takes a real commitment to learn how to use it. When we decided to introduce StockScreen123 for individual investors, we knew we’d have to give them a Guided version (the “Rules Wizard”) to help them ease into the process. Readers who have followed my screening articles on Seeking Alpha can’t help but notice the drop-off of late in the number and frequency of submissions. Work in connection with building StockScreen123 has been quite consuming. I point this out as evidence of the fact that I have tremendous respect and admiration for Guided products.


    Now, consider internet. Back in the late 1990s, this was a confusing, and in many cases, scary phenomenon. Getting access was often a challenge in and of itself. (Does anybody besides me remember an access module called Trumpet Winsock?) And once you do get on line, what then? Where do you go and how do you get there and once you get there, how do you go someplace else, and once you get someplace else, how do you get back to where you were if you used to be if you choose to so do? For a large segment of the population, these were complex and exhausting issues.


    Enter, which pretty much waved a magic wand (dial-up access and a walled garden that conveniently bundled browsing, e-mailing, chatting and shopping). It was magnificent. It was a revelation. It made internet easy and accessible for everyone and anyone. It changed the way we live. And it put AOL on top of the world even to the point where it could snap its corporate finger and swallow up a powerful media giant like Time Warner. It looked like another case of the Guided philosophy leading the way to commercial success.


    Limitations On Guided Products


    But there was a difference between AOL and Quicken or TurboTax. Internet is a perennial activity. Even the greenest of novices gets the hang of it eventually. Moreover, comfort grew exponentially as broadband solved access issues, and better linking, bookmarking and tabbed browsing made it much easier to get around. The AOL walled garden, arguably a major factor in helping internet to become a mass phenomenon in the first place, eventually became more trouble than it was worth relative to the Do-It-Yourself approach.


    Novices always struggle with the Do-it-Yourself approach. But how much of a business opportunity do novices really present?


    If, in the late 1990s, something like internet bursts into the world all at once, it looks like the novice market is massive. Everybody is a novice, whether you’re a six-year old, a twenty-something, a forty year old or an older person.


    But that didn’t last. Eventually “everybody” outgrow internet newbie stature. Now, the only novices are those young children that, each year, reach the point where they can start using internet. This is a bona fide market. But it’s dramatically smaller than what the novice market looked to be back when AOL ruled the roost and ultimately, it turned out to be way too small to allow AOL to remain viable in its turn-of-the-century configuration.


    What’s Ahead For Apple?


    Now, let’s turn back to Apple, the new hero for novice users who, on day one, find it a lot easier to point to pictures and move their fingers and let things get done for them automatically then it is to type or scroll to words or numbers. They, and even non-novice but less-committed users, have good reason to love Apple, as we see all the time on the web including, often, in Seeking Alpha.


    But what will happen down the road as all these hand-held intelligent super-gadgets start to become passé?


    What will happen as the increasingly experienced user base wants to do more and more things that didn’t occur to Apple’s design team back on day one?


    What will happen when these several hundred dollar phones or tablets have to be sent back to Apple for who-knows-how-long for battery replacement?


    What happens as the increasingly computer savvy population comes to wonder whether they really are better off paying so much more for an Apple laptop compared to a comparably-powered Wintel machine?


    There will always be a core group of novices for who Apple will continue to be the vendor of choice. But how big will that market be five years from now? AOL and its adherents thought they were looking at a powerful market. It turned out they were in fact looking at a one-time surge that was about to become a slow-growth market from a much smaller base.


    AOL, its fans, and its investors once dismissed such questions as not being worthy of consideration.


    Apple, its fans and its shareholders are equally free to be dismissive or even derisive, as I’m sure some will be once comments start to appear below. But for those who do actually own the stock, it may be a good idea to at least start to wonder about the nature of the market segment served by Apple (those who favor Guided products) and what its prospects are for growth or shrinkage, as time passes. That, and not the here-and-now acclaim Apple is earning, is what will ultimately determine the company’s fate.


    Speaking for myself, I see no immediate danger. If Apple appears in any of my screens, I’m willing to buy it. I don’t marry my stocks. I rerun and rebalance all my models every four weeks. But if someone were to ask me about Apple as a stock that could be put away as a long-term holding, I’d feel compelled to say “no.” In fact, if I were better at technical analysis than I am, I’d be on guard for an opportunity to consider long-dated Puts.

    Disclosure: No Positions in apple
    Stocks: AAPL
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Comments (2)
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  • plugger
    , contributor
    Comments (26) | Send Message
    Interesting philosophical theory tho I think just that ie not especially applicable. Having lived thru and experienced AOL & Apple from their birth to present it seems to me AOL prospered initially simply because they were first with widespread dial-up access to the net and a (guided) package of usable products. Dial-up was their cash cow until broadband became widespread, at which time their products didn't compete.
    I would think a more applicable analogy would be: AOL was the first gas station on a newly opened stretch of interstate highway where as Apple was / is the gas station with the best gas and service, thus selling at a bit of a premium.
    15 Apr 2010, 08:01 AM Reply Like
  • Rookie IRA Investor
    , contributor
    Comments (2685) | Send Message
    I agree about the iPod. Actually there is an open source operating system for iPods and some other music players called Rockbox that does exactly EVERYTHING that you want. I have used it for years and would not dream of using the inferior Apple system.


    It is superior to the iPod software in every way, and it is completely free.
    5 Jun 2011, 11:32 PM Reply Like
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