Back in August 2011, I posted a prediction that Apple’s growth would slow. Today Apple announced flat profits and the stock declined 6 percent in after-hours trading despite the company not having suffered a truly failed product launch (like Windows 8!). One of my follow-up comments on the original posting explained the theory better than the original post:
Mark: “Five years from now you’ll be using some new Apple product that you aren’t even imagining yet.” That’s also true of BMW (1/10th the market cap of Apple) and just about every other company that makes consumer products. The capacity to innovate is already priced into Apple stock, just as it is into BMW’s, and does not have infinite value. Since Apple has been very successful in the past, the stock price reflects investors’ estimate that they will be very successful in the future. So where another company might get a huge lift in value from a new product launch, for Apple it will already have been priced in. By contrast, a failed product launch could bring Apple’s perceived value down.
(The stock price, of course, could still go up if Apple decides to retain earnings or do stock buy-backs rather than pay dividends.)
How would you have done if you’d read my posting, thought about it, and sold Apple in early September 2011? You’d have received about $400 per share and presumably purchased the S&P 500. The stock closed at $514 today but the after-hours trading decline of 6 percent suggests a price of $483. SPY has gone up 26.5 percent since then so you’d have $504. I don’t think that this analysis correctly reflects the difference in dividends paid by the S&P compared to Apple. The fact that the two investments performed so similarly suggests that my hedge fund genius friend Tom is correct when he says that all investment classes should be expected to produce the same return.
Readers: What’s the next act for Apple? Let me start by listing off a partial list of somewhat expensive products that are painful to use, contain at least some electronics, and that would be relatively easy to improve:
- big-screen televisions and Blu-Ray players (whenever I want to use one the device decides that it is time for it to download and upgrade its software)
- cable television (flipping up and down through a list of 1000 channels?!?! How is it that an interface developed for a TV with a rotary knob to select among 10 possible channels was ported to the 1000-channel case?)
- compact digital cameras (a million buttons and menu items, almost none of them relevant to a photographer’s objectives in making a picture)
- Windows 8
- Android tablets other than Amazon’s (I have the Google Nexus 7 and it simply cannot hold a charge so it is essentially limited to being plugged in full time; ridiculously poor power management compared to the iPad)
- automobiles (start with the fact that the speedometer is front an center rather than a moving map; why would I care about my speed if I’m in heavy traffic (which I always am, since I drive in the U.S.) and/or if I am traveling at a legal speed (which the car knows from its navigation system database))
- houses (even a toilet knows when you’re standing in front of it; how come all of the stuff in a recently built house isn’t smart enough to detect the “nobody is home” case and turn down the heat?)
Apple’s superior profitability seems to stem from the spectacular stupidity of other companies and sometimes industries. One would think that this source of profit would dry up as the world economy becomes globalized and market discipline kills off the dullest competitors. However, the examples above show that there is still a tremendous amount of opportunity for a company with enough scale to reach consumers and enough taste not to make something absurdly bad.
Your points resonate with me, Phil.
I bought Apple at $20/share and sold it at $25. My future as a stock seller is, err, limited. But that’s not really very interesting.
What is interesting is that Apple continues to innovate in hardware. Software, not so much. Evidence? The ubuntu guys would have run roughshod over OS X years ago if it weren’t so difficult to get the mac’s bootloader to behave. Take a look at the ubuntu mac install docs. I think my head exploded two paragraphs in. I still don’t know anybody using a mac for software development that doesn’t complain loudly about the the command line usability delta between OS X and Linux, but that’s a deep well.
And then we get to the desktop… Innovation? Stagnant. Show me a UI that enforces consistent physics among ALL UI components ubiquitously and we have a winner. No one has done that yet arguably because it’s just plain difficult. And our lizard brains complain while they try and wrap their little stems around the fact that nothing behaves consistently. Nothing. And there are magical affordances at every corner. It still boggles my mind that we are stuck in X/Y cartesian coordinate space when zoomable UI has had the answer in Z-order for years. But that presumes that gestures like pinch and zoom actually worked consistently on all UI objects, not just media, which, of course, implies that you’ve got vectors down deep, not rasters, lest your retina display explode with the hideousness.
As for consumer electronics. Macrohard has had the keys to the palace for a few years now and seems incapable of doing the obvious: make the entire house kinect-enabled. The kinect experience on netflix is both wonderful and painful, because it highlights the fact that the integration needs to occur a bit deeper, at the hardware level, not the software.
And what happens when your mobile has a kinect sensor?
I occasionally drive with my samsung galaxy note 2 wedged in front of my speedometer. The fact that google hasn’t seen fit to put speed in the display is telling as to how little thought is going on. I don’t really care how fast I’m going, since speed is not the cause of accidents. But the cop behind me sure seems fixated on it. As long as that’s the case, the gadgets could do great work by getting out of the way and warning me that I just went from 50 in a 45 zone to 50 in a 25 zone. I’m pretty sure the metadata’s there; how else would they have known how long it would take me to get where I’m going? But I don’t drive much, so this is actually not an important use case to me relative to urban bike, walk, transit routing.
Finally, the real answer to your question lies in the fact that these industries are governed by bureaucracy, not design thinking. If they weren’t, we’d have insulin pumps that looked like iphones instead of soviet era tanks, and they’d crash just as frequently as a mobile app too. That just wouldn’t be good in a medical device. Embedded in that statement is the notion that there are opportunity costs built into government oversight: FDA, FCC, etc. And those costs are what keep us focused on function over form, which is precisely why the innovation will continue to happen in games, where there is no regulation outside of Tipper Gore and the thought police. I wish it were different, but that would be wishful thinking.
About your Nexus 7, are you satisfied that the inability to hold a charge is not just a defect with your unit?
David: I have three of the Nexus 7s (I bought them as Sonos controllers) and they all behave in the same way. They worked a bit better after I told them not to stay connected to WiFi when asleep but still nowhere near as well as the iPad without any special settings. It seems as though little thought was put into the difference between a phone (you probably have just one, given the insane monthly fees; you probably use it a lot and expect to charge it every night or two) and a tablet (you might have a bunch strewn about the house).
> “Today Apple announced flat profits”
Nitpick: This year’s quarter has one less week in it than last year’s, so if profits were exactly the same as last year that would actually represent a ~7% increase. Adjusting for that, profit growth isn’t quite “flat” yet. But agreed, it’s getting pretty close to “flat”. Which is a big change from years past.
Apple has $135B in the bank, its time for them to go shopping:
– Netflix with a market cap of $5.5B should be an obvious acquisition: Netflix on prominently on every iDevice, Netflix content on iTunes, build a Chinese version of Netflix.
– Bose audio: tight wireless integration of every iDevice with all Bose products, especially their premium audio systems (don’t snicker) in high-end automobiles.
– Garmin: everything everywhere will soon have GPS, put iDevices in the middle of it all, simplify the crazy G1000 interface.
– Archives of every Chinese movie studio: stream it on iDevices via Chinese Netflix as the Chinese middle class eclipses the West.
– Write excellent textbooks for all K-12 curriculum then make them free on iTunes+iBooks, thus saving schools hundreds of million$ while encouraging every student to own an iDevice
Thank you Phil. I actually just bought Nexus 7. It arrived yesterday. I plan to leave it on my nightstand. Looks like I may have made a poor choice. Love the size and the Google integration. I am a big fan of Gmail.
David: Try it out for a week of very light usage and see how the battery fares without a recharge. Then email me with a report! I think you’ll find that if you use it like a phone, e.g., intensively for a day or two and then recharge, it will work great.
philg,
Check out the nest thermostat. I installed 3 of these, and am not handy at all. I think they are great! They know when someone is home and were designed by someone who worked for apple.
I completely agree regarding Nexus 7. I have the same problem with it – it’s very power hungry compared to my wife’s three years old iPad. I find it very irritating that I need to turn it off if I want to make sure it won’t eat 20-30% of the battery while standing-by for 12-24 hours.
Another idea for a product Apple could improve: car media systems. I find it ridiculous that even after paying an extra $1500 (which is actually part of a $3000 package …) to get a better audio system in a brand new car I still have to deal with the following:
1) The audio system is built around a … cd changer. It’s only a question of time before the discs and the cd changer will be affected by some type of mechanical problems. The audio system has no SD card reader, no USB interface, no iPod interface (and no way to add one) and a Bluetooth interface which doesn’t support streaming.
2) The Bluetooth interfacing with the phone is primitive – no synchronization with the phone agenda, no conferencing, no displaying of texts and emails, no voice interfacing with the phone etc.
3) Incomplete implementation of the RDBS system (digital info broadcasting on the FM radio frequencies). For example, there’s no way the radio can automatically switch to a station which broadcasts traffic info.
David: http://productforums.google.com/forum/#!topic/mobile/SR-icYeqW_k%5B26-50-false%5D is a thread on the Nexus battery drain issue. If you spend a few hours searching and configuring you might be able to get battery performance a little closer to that of an out-of-the-box iPad. Perhaps Android needs a big switch in the Settings app that says “Don’t let any apps do background sync unless I am plugged into a charger.” Also maybe a setup screen that asks questions such as “Is there any chance that you would ever want to use NFC with this device?” [if nothing else in your house is NFC-compatible, why would you want the device to spend battery power on this?]
Apple seems to have figured this out, albeit mostly by saying “That would be a cool feature to have but it will consume too much battery so you can’t put it in.”
David Watson: “. As long as that’s the case, the gadgets could do great work by getting out of the way and warning me that I just went from 50 in a 45 zone to 50 in a 25 zone. I’m pretty sure the metadata’s there; how else would they have known how long it would take me to get where I’m going? ”
The “how long” is an estimate. While the gadgets might know the general speed limit for a road, they don’t necessarily know exactly where and how the speed changes along it. Rural roads (especially) in the US have a standard speed that drops when going through infrequent towns. I suspect that the data assigns one speed to many of those roads.
Jean-Louis: Regarding the cash position of Apple, see http://seekingalpha.com/article/916121-apple-s-cash-position-is-overstated-by-70-billion and http://www.zerohedge.com/news/2012-09-30/presenting-worlds-biggest-hedge-fund-you-have-never-heard
That is a lot of money!
davep: I could drive for a full year in the Boston area without ever referring to the speedometer (and in fact I almost never look at this dashboard-real estate hog). I do not think that I am going to get pulled over for speeding if I am going the same speed as the 100 other cars that are traveling the same road within +/- one quarter mile of me. Maybe you’d want a car smart enough to see that there were in fact no other cars on the highway (the Sunday morning at 6:00 am situation or the lonely rural road situation that you raise) or that the driver was a teenager. Consider all of the accidents that occur when people are leaning over to see a phone or an off-center GPS screen or, God forbid, a paper map. Anyway, if I paid $40,000 for a car how come I can’t choose whether an enormous speedometer or a moving map is more important to me?
[And don’t get me started on the front-and-center dashboard real estate occupied by tachometers in low-performance vehicles (e.g., minivans!) with automatic transmissions. The tachometer is sort of nice to have in a helicopter but I don’t feel the need in a rented Ford Taurus…]
Hmmm… it looks as though these comments have gone off topic. What about more brilliant ideas like the one in the first comment? What can Apple actually do to double their revenue/profits?
“What can Apple actually do to double their revenue/profits?”
Make something useful that’s not a music player? Raise their prices to even dumber levels? Isn’t a company making so much money and then “dropping” just regression to the mean? I’ve never really found any of they’re stuff innovative. They just hit a large (user wise) but niche (product wise) area, and now that others have learned they are doing just as well if not better.
Most of those ideas don’t strike me as particularly useful and aren’t what people look for when buying a product anyway. I bought a 50″ Panasonic plasma because it’s electrons are better than others, not because of how it deals with TV channels. I personally only watch DVDs/Blu-Rays on a player I’ve never once went into a menu for. Turn on TV, put in movie, watch movie. It’s a damn simple process. Cable TV is dumb. There’s only 5 good TV shows on a year, and they’re on-line for free. I’ve never actually seen a person use a tablet for anything useful outside of work or home – they have a phone for that, or maybe they learn the great art of speaking to other humans. Toilets sorta know you’re in front of them if you walk directly in front of them but not too far or not too close, and then maybe only some of the time (not to say this can’t be improved). I can imagine all sorts of hell dealing with a whole-house system that takes care of itself, something that can be fixed for free by planning ahead 5 minutes.
The only extremely useful idea is upgrading cars – devices that nearly everyone agrees have been in the hands of finance, not engineers, since at least the 1950s. Also, when was the last time you’ve seen an article in a car magazine that didn’t focus entirely on engine specs, torque ratings, transmission stats, and maybe some obligatory references that the car’s interior is “sleek” and has comfortable leather seats with state of the art 19th century lumbar support. I mean hell, we probably need to get past the point where cars still advertise their anti-lock brakes, power-steering, power windows (yes, you still can buy cars without power windows, which are probably better since they can’t fail), and air conditioning.
Apple could double its revenues…but its margins will collapse. Or Apple could keep its margins and lose half their revenue. Only one outcome seems likely to me.
It seems unlikely that other manufacturers will be caught so flatfooted as they were with the telephone/networked computer combination.
It’s true you can take almost any consumer electronics and add “/networked computer” to it and get something likely to be important. But as far as television, automobiles, houses, etc. Well, smart television is already being done well by Samsung and Google seems to be working on the cars.
After Apple’s runaway success with the telephone I doubt other companies will be caught so flatfooted….
JB: I have a “smart television” from Samsung (most recent generation/software). Much of the time it is necessary to type some text either into the core Samsung operating system or a subsidiary app (e.g., Skype) running underneath the OS. I paired a Bluetooth keyboard with the Samsung TV and the OS listens to it, but it doesn’t work with any of the apps that I’ve tried. This is just one example of pretty poor usability. I don’t think it would be difficult for to make a television that people enjoyed using a lot more than the Samsung that I have.
A smartwatch.
Why does it take some indie kickstarters and not a multibillion $$ company to design a smartwatch?
I have a smart pocket watch. It’s called my cell phone.
My year old Vizio TV has much the same problems as your Samsung. It came with a bluetooth remote with a full keyboard, but the remote is badly made and important keys like volume and power will quit working. I’ve been able to pair my Android phone with it, but there are no apps that will control the TV. I haven’t tried a bluetooth keyboard.
Sorry, but I have to gripe about this: “why would I care about my speed if I’m in heavy traffic (which I always am, since I drive in the U.S.) ”
A perfect example of urbanites and their one-size-fits-all thinking. I live in the middle of nowhere and commute 70 miles a day round trip to a small city. There are millions of us who do this sort of thing. Most of my driving is on wide open roads. The speedometer is very important to me. What I want is a better way to mount my smart phone on the dash board, instead of having to hang it on the windshield which obstructs too much of the view.