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PULLING THE APPLE CART ESSAY

Apple, Inc. is coming to another important crossroad in its corporate history. If you read business magazines and Wall Street analyst reports, one would get the impression that Apple is a company on the verge of collapse. But the reality is that Apple continues to be the most profitable business on the planet. But Apple management has steered away from founder Steve Jobs vision. Jobs famously said “customers don't tell us what they want; we tell them what they want.” Apple set its own product cycles. It created its own integrated hardware and software environment. It created its own high end market against established competitors. It did not listen to outside opinion on how to execute its business plans. But ever seen Jobs died, the Apple board has been listening more and more to the pundits instead of being truly independent. First was the reversal of the stock dividend. Jobs was always adamant against giving shareholders quarterly profits. The reason for this was simple: in his first tenure with Apple, his company ran out of cash and had to borrow money from Microsoft, who needed to keep its small competitor alive to avoid anti-trust concerns in the PC market. Jobs believed that dividend dollars were better spent in research and development. He felt that if the company did well, the stock appreciation price was sufficient return on investment. But Tim Cook is more of a consensus builder. After years of relentless calls from Wall Street firms and activist shareholders, Cook's board passed its first corporate dividend. In one respect this was a way to cut the ties to Jobs' lasting legacy which still is a shadow in the Apple headquarters. It put Apple into the mainstream, and not the image of the feisty, rebellious start-up. Widows and orphans own dividend stocks. Second, while Jobs was a technology visionary and brutal taskmaster (products had to be perfect before released to the public), Cook is more a bean counter. Jobs hated the idea of borrowing money. When the Mac computer line was a success, he quickly repaid Microsoft loan because he detested to being beholden to an outsider, especially when it came to money.

But in order to continually to pay dividends, Apple had a problem. Most of its revenue was now being made overseas. Under current U.S. tax law, if a company wants to re-patriot its overseas earnings, it has to pay full corporate income tax of those transfers (which can be 35 percent tax on the privilege of bringing your own money home.) One solution is to leave the foreign cash stashed in overseas accounts by borrowing money in the US for the sole purpose of distributing it as dividends. Wall Street loved the idea because Wall St. firms would be paid fees to issue and sell these Apple bonds.

As you can tell, Wall Street's motives are not the same as Apple's core principles. Financial firms make money by buying and selling stocks (and making good and bad reports, earnings estimates or critical predictions which affect stock prices) and by selling securities (corporate bonds). Apple did none of these things in the past. It was against its corporate culture of being a self-sufficient organization.

In another move to appease certain large shareholders, Apple used its massive excess cash reserves to buy back billions of dollars worth of stock. Again, Jobs would have believed that it would be a waste of corporate assets to retire shares of stock. But corporate financial people find these tricks beneficial for insiders. By reducing the number of outstanding shares of corporate stock, the company's price/earnings ratio (a Wall St. staple for share valuation) would increase because earnings per share would be inflated because there are less shares on the books. Also, retiring public shares allows corporate employees who have stock options more control of the company. Jobs did not like the corporate politics of balance sheet and stock manipulations. He believed it was a distraction. But in today's board rooms, these types of deals are like oxygen.

One could discount the corporate governance, the dividend, the stock buy-backs and borrowing as currently acceptable accounting and financial management tools that all of the Fortune 1000 companies do. So long as Apple is generating tens of billions of dollars in hard earnings every quarter, no one seems to care about these inside side issues. These issues used to have very little in the Apple culture of product development.

But the company continued to listen to the outside drone. Analysts and tech pundits questioned Cook's leadership and product creativity. They opined that Cook's Apple would never be as great as Jobs' legacy until Cook developed his own new products. So against Jobs' past views, Apple soon built a bigger screen iPhone. Then, because everyone else had a tablet, Apple created iPads. Then, because wearable tech was going to be the next great thing, commentators badgered Apple into creating the Apple Watch.

Apple has become reactionary to outsider's views on what products Apple should develop and market. This is a complete reversal of the Jobs philosophy. It is true that Jobs had a vision that Apple would place itself as the hub of a person's digital lifestyle, he would have not felt the pressure of public opinion to put out a new iPhone every six months, or making huge advances in laptops or tablets every year, or to create a new product like the watch which no actual consumers were clamoring for to supplement their iPhone experience.

The same holds true for the weekly reports and rumors about the Apple Car. Even though it makes little practical sense for Apple to build cars, the constant drum beat is that Apple needs to create an expensive and risky new product line in order to keep up with Google's self-driving vehicles, Amazon's use of delivery drones or Tesla's future electric cars. Except, if you look at the automotive market - - - it is highly competitive with high end manufacturers ebb and flow with the whims of consumer fads, extreme regulatory hurdles and high unionized labor costs in production and assembly. Despite all the great press, Tesla Motors has yet to make a profit. Amazon's delivery drone concept is facing burdensome FAA regulations. And the Google self-driving car is counter-intuitive to why people spend $50,000 for their vehicles - - - to drive them.

The Apple Car is a perfect bear trap. Just as Wall Street likes to build up companies as the greatest thing since sliced bread (i.e., IPOs), Wall Street likes to sell companies short with bad news (whether real or imagined). The same people who wanted Apple to create and sell its high tech and expensive watch, now pan it as being a slow selling novelty. That is the celebrity media culture at work: build up something in order to tear it down.

There are many product lines that Apple has put into the “other” or hobby category (which contributes very little to the bottom line): Apple Music and Beats; Apple Radio; Apple TV; and the old dog iTunes, which is being hinted at a possible revamp.

Why would a company like Apple even listen to people who have never created a mega product in their lives? Of if they were so smart and brilliant, why don't they make their own Hi-Tech Car and keep the profits for themselves? Because it is easier to be an armchair quarterback and make money watching stock charts rise and fall on rumors and unfounded expectations.

The pressure on global executives is measured by their company's stock price. Their golden parachutes and retirement plans are top heavy with their own stock so there is an inherent conflict of interest on what is best for the company: meeting Wall Street expectations and product cycle hits or sticking to one's own internal product strategies and release dates?

The attempts to meet these outside expectations has led to buggy software releases, marginal upgrades to iPhone features, and the movement away from long time desktop creative customers needs to force mobile OS on everyone.

But not everything is dire. Down played in most reports is the fact that Apple's non-traditional services are producing rapidly increasing profits. Its cloud services and Apple Pay are keys to long term sustained company growth. Those were the key reasons why Cook took such a hard stand against the FBI on its encryption court orders. Apple needs to secure its customers data and payment options otherwise this business segment will implode.

Apple will continue to be the great American success story. It should just listen to its internal heart beat than trying to please everyone.

Note: Publisher Ski is an Apple shareholder.

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THE WHETHER REPORT

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* Educated Guess

* Possible

* Probable

* Beyond a Reasonable Doubt

* Doubtful

* Vapor Dream

* Educated Guess

* Possible

* Probable

* Beyond a Reasonable Doubt

* Doubtful

* Vapor Dream

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