Marshall Auerback: Apple Has an Early Case of GE’s Disease

By Marshall Auerback, a market analyst. Produced by the Independent Media Institute

The boom witnessed in the U.S. equity market over the past few years has begun to echo the latter stages of the high tech bubble of the early 2000s, right down to the investor interest ultimately gravitating toward five stocks that have posted substantial gains, and obtained an almost cult-like status among their respective devotees. In 2002, it was Lucent, Cisco, Microsoft, Dell, and Intel. Today, it’s Facebook, Apple, Amazon, Netflix, and Google. They’ve even got an acronym among their followers: FAANG. Taken in aggregate, these five stocks account for approximately one-quarter of the NASDAQ’s total market capitalization. In fact, just three months ago, Apple alone became the first publicly traded U.S. company to reach a $1 trillion market capitalization. But just as the Big 5 of the last high tech boom ultimately came unstuck, so too, one by one, today’s tech titans are gradually being “de-FAANG-ed,” as investors have come to reassess their growth prospects on the grounds of anti-competitive/anti-trust considerations, abuse of privacy, and deteriorating top-line growth. Apple is the most recent example, but it tells a much bigger tale, which speaks to a longstanding disease infecting the overall U.S. economy: namely, financialization.

“Financialization”—which denotes “the increasing importance of financial markets, institutions and motives in the world economy”—manifests itself clearly in the case of Apple. It is becoming another example of an American company that is increasingly valuing financial engineering over real engineering, as its core businesses get hollowed out amid product saturation and declining global sales.

Like General Electric some 25 years under Jack Welch, Apple under current CEO Tim Cook increasingly represents a microcosm of the changing role of U.S. markets as they have become less a vehicle for capital provision, more akin to a wealth recycling machine in which cash piles are used less for investment/research and development, more for share buybacks (which are tied to executive compensation, elevating the incentive for, at a minimum, quarterly short-termism and, at worst, fraud and corporate looting). All in the interests of that flawed concept of “maximizing shareholder value,” in which the company’s stock price, rather than its product line, drives corporate decisions, determines senior management compensation, and becomes the ultimate measuring stick of success.

Usually, when this trend becomes ascendant, it doesn’t end well. Perhaps the adverse reaction to Apple’s recently reported earnings is the first warning of what could follow.

To be sure, this is not the first rough patch for Apple since its resurrection under Steve Jobs when he returned to the company in 1997. In the early 2000s, the company came under scrutiny for the manner in which it improperly backdated stock options and didn’t report this to the SEC. As a result, Apple was found to be systematically understating its profits and defrauding its shareholders (stock options were classified as “non-expense expense,” which allowed them to be omitted from the profit and loss account, thereby artificially bolstering reported earnings). Having already obtained iconic status in Silicon Valley, then-CEO Steve Jobs got off lightly. Likewise when Jobs was directly implicated in a wage-fixing cartel with Google, among others. More recently, Apple’s aggressive tax avoidance strategies have come under scrutiny.

The backlash has hitherto been comparatively muted, however, because many of the foregoing practices came at a time when Apple was producing one hit product after another, inspiring a cult-like devotion among consumers, and generating investor enthusiasm on Wall Street. Unfortunately for the iPhone manufacturer today, the “hit parade” of new, earth-shattering products appears to have dried up, and the global market is increasingly being saturated with comparable products, creating prices pressures and declining market share.

Apple is increasingly deploying its substantial cash pile, not for investment/innovation, but for share buybacks (which refers to the repurchasing of shares of stock by the company that issued them). Buying back shares helps to support the share price both by reducing overall supply and also by inducing “herding behavior” by institutions, encouraged by the vote of confidence conferred by management insiders (who presumably understand the company’s prospects better than most). Additionally, by reducing the number of shares outstanding, this practice is accretive to earnings per share, which helps dress up the financial statements further. As a “growth stock,” Apple’s investors generally evince a preference for earning momentum, as opposed to a heavy stream of dividend payments (which is generally preferred by “income”-oriented investors).

For all of the theoretical reasons why share buybacks are supposedly a good thing, the dirty little secret is that the real reason for them is that they help to enrich senior management directly, because their compensation (via extensive grants of stock options) is increasingly tied less to the performance of the company, more to the company’s share price. Like so many other major listed companies, Apple has been starting to embrace this trend with more gusto. As Eric Reguly of the Globe and Mail wrote earlier this year: “In May, Apple announced that it would vacuum up another $100 billion of its own stock, taking the total buyback since the end of the Jobs era to roughly $300 billion.”

To be fair to Apple, it is hardly unique. As early as 2010, market analyst Rob Parenteau noted that company managements, “ostensibly under the guise of maximizing shareholder value, would much rather pay themselves handsome bonuses, or pay out special dividends to their shareholders, or play casino games with all sorts of financial engineering thrown into obfuscate the nature of their financial speculation, than fulfill the traditional roles of capitalist, which is to use profits as both a signal to invest in expanding the productive capital stock, as well as a source of financing the widening and upgrading of productive plant and equipment.” Likewise, Professor William Lazonick noted in his work, “Profits Without Prosperity,” that the 449 companies that were publicly listed between 2003 and 2012 “used 54% of their earnings—a total of $2.4 trillion—to buy back their own stock, almost all through purchases on the open market.”

Share buybacks were effectively illegal under SEC rules until 1982, in the midst of the Reagan deregulation wave, when SEC Rule 10b-18 was introduced. Until that time, buybacks had been considered a form of stock manipulation. As early as the mid-1980s, more and more companies have resorted to them, and the practice has grown exponentially.

But as the title of Lazonick’s paper makes clear, the buybacks created a lot of prosperity for the corporate executives and shareholders, but did little for the underlying profitability for the companies themselves, largely because cash piles were diverted away from productive uses such as R&D and capital investment. “Maximizing shareholder value” provides a fancy and bogus rationale for blatant stock manipulation, this time tied to executive compensation. The arguments for the tight restriction of buybacks pre-1982 are, if anything, even stronger today, given the scale and the corresponding degradation of corporate balance sheets as a consequence of the practice. Like the pigs at the trough making one last grab for cash before the bubble finally bursts, it creates enormous incentives for “control fraud.”

Apple has not fully crossed over to the dark side, but it is probably more than coincidental that their share buybacks have accelerated just as their explosive rate of growth appears to have stalled. Wall Street analysts seldom give outright sell recommendations on hitherto beloved stocks (the corollary also applies, which can amplify booms and busts). But there was enough in the last Apple earnings result to provide some cause for concern.

This presents a classic chicken and egg problem: Is Apple now using its cash to buy back stock because it is failing to produce new earth-shattering products like the iPhone or iPod (or, earlier, the Macbook), or is it the case that a lack of innovation a direct outgrowth of deploying the cash largely to buy back stock?

Either way, there is no exciting new epoch-changing product in the pipeline that would drive unit sales. The new Apple Watch certainly hasn’t been a game-changer. And, as Reguly argues, “Every dollar devoted to buybacks is a dollar not devoted to uses such as research and development, employee training, acquisitions and community giving.”

Tellingly, what Apple isn’t going to do in the future hints at bigger problems ahead. In addition to projecting weaker-than-expected holiday sales, the company surprised investors when it indicated that the company would no longer break out how many iPhones it sold each quarter. The obvious conclusion to be drawn is that is because Apple will soon have to rely on price, not volume of unit sales, to keep the show going. Which likely means more stock buybacks to support the share price.

Unfortunately, that’s not a particularly healthy scenario, coming at a time when smartphone sales are coming under pressure globally, which is being reflected in major product price cuts across the entire industry. Consider Samsung’s Galaxy S8, which can be purchased on Amazon.com for anywhere from 30 to 50 percent below the original launch price (depending on phone company). That’s significant because Apple has been losing global market share to companies like Samsung for something like five years now. And if Samsung is experiencing these kinds of pressures, then Apple’s strategy of trying to offset the loss of market share by raising prices (or resorting to tricks in which Apple uses software updates to intentionally slow down the iPhone and deliberately impair the battery life) is likely to prove problematic.

Much like Microsoft after its first phase of growth, Apple is morphing into a slower-growing cash cow. It’s hard to sustain a $1 trillion market cap under those operating conditions. Increased functionality in a smartphone can only go so far; there are only so many ways to improve taking a selfie or enhancing facial recognition for security protocols. And those kinds of marginal improvements are likely insufficient to create a huge new wave of global sales. The smartphone has evolved considerably over the past decade, but at this stage of its product development, the incremental improvements are marginal. So the cash pile will continue to go toward buybacks, an increasingly destructive strategy during a time of falling markets and declining sales, when the cash should be husbanded as a defensive measure, not dissipated and replaced with debt.

Apple is neither the first nor the last company to find itself in this position. Slowing product growth and the inexorable pull of untold wealth that could be derived from a stock market bubble is a deadly combination that has infected companies well beyond the hitherto beloved creation of Steve Jobs. The misallocation of capital via share buybacks (at a cost of sacrificing innovation, research and development) is yet another example of the fantasy of efficient financial markets and the notion that markets are always the optimal means of intelligently allocating capital. We see the development of a bogus theory of “maximizing shareholder value” used increasingly to mask blatant stock manipulation. The practice appears particularly perverse when one sees companies’ core businesses dissipate against a backdrop of balance sheet deterioration (as the cash is replaced with debt). As financialization increasingly hollows out Apple’s core, it provides a broader symptom of everything that is wrong with America’s bubble-ized capitalism today.

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64 comments

  1. John Beech

    Well said, Susan, eloquently stated. I was in APPL when it was $15 and got out a year ago (thus missing the huge run up). Yet I don’t feel bad and have no regrets regarding my timing because my mantra is the pigs get fat, the hogs get slaughtered. I never – not for a minute – been sad about taking a profit.

    Reply
  2. Marco (BBA graduate student)

    Great article, really putting the blame where it is supposed to be. I would personally change Netflix into Microsoft to make a proper comparison to the millenium/internet/dotcom bubble. I’ve never heard of the big 5 of tech without M$ in it. Furthermore, I don’t see Netflix being of any relevance to the problem described here. Although I’m not familiair with their buyback schemes, they have a market cap of 130 billion compared to the big 5, with Microsoft at the bottom of that list, with well over 700billion.

    I’m still running a 2012 macbook pro and a iPhone 6s, I grew up with this stuff, always getting the newest when my old one probably could have lasted longer, but I don’t plan on buying any more Apple stuff. Prices on the notebooks have skyrocketed to the point I cant afford them, and their screen sizes and removal of the home button make me don’t want an iPhone anymore. And then there’s how they handle their finances.

    But let’s be honest, what’s the better alternative? When it comes to privacy and data collection for instance, I think they’re still the better choice. At least they sell products and not their customers like fb/gg/amzn.

    Reply
    1. Huey

      Apple is buried just as deep in the data misuse of it’s customers as Google and their Android phones.

      If you really want privacy, while still having a cell phone, Yves’ dumb phone option is one of your safer bets, though nothing beats no phone at all. If you need a smartphone, your next best bet is to get an android and flash it with a more user-friendly OS like Lineage, or have the people at Copperhead overhaul your phone completely for maximum security.

      Even if you don’t flash the OS there are apps, mostly on FDroid, that can use root permissions to lock down most unwanted activity always running in the backgroun on your phone. RIght now the firewall Netguard does something pretty good up that alley, without the ‘can of worms’ that is rooting your phone/comp.

      In terms of PCs, using any free and open-source OS (ergo not Windows or Macs) already makes you better off, especially if you take privacy/security on it even further. A lot of people are taking up Linux, for example.

      But to your final point, I don’t see how Fb or Amazon offer any comparable alternative to Apple products. That and, just saying I’ve never understood the appeal of Apple, even assuming they weren’t sucking up all your data (while charging you both arms and a leg for it), why use them at all for privacy when free and libre options exist that are generally much better. One of my favourite things about Linux is the amount of control you have over literally everything your computer does.

      That’s just my 2 cents. If you want any more in-depth stuff, a good website I used a lot is https://www.privacytools.io/ with some good tips for healthy habits/apps overall.

      Reply
      1. Marco

        Thanks for the detailed reply! I don’t use Google products, period. So Android is not an option. Going Linux would only complicate things for me because in my professional life I rely on software and services that either don’t work, or I don’t know how to get it to work without having to put in too much time/effort. I’m not a journalist so the need for extreme measures like a Copperhead overhaul might be better suited for someone else, but I didn’t know this yet, I don’t live in the states but in the Netherlands.

        And for me it was never about understanding the appeal of Apple. Just as someone who grew up with Windows is kind of locked into that user experience, I was locked into Apple’s at 4 years old in 94′, because dad owns a design bureau and they were the place to go in that time and onwards. So automatically everyone in the household was using their products. Once you’re in that ecosystem, where every device works together, and things just always work, it’s hard to switch out of it.

        Of course Apple has tried the data thing before, but they couldn’t cut it. Look at iAd, flopped. it’s because their business model is simply not aligned with massive data mining, but is about selling products (and more and more services) and keeping their customers happy. Same reason why stuff is stored locally in many cases and their machine learning is not as sophisticated as say Googles’.

        Whereas for the rest of them, their entire business model, the core of the company, revolves around data collection. Saying Apple is buried just as deep I think cuts them short. Remember, they need to keep their customers happy to make them buy their new expensive products, while FB/GGL just capitalises on its users. Amazon does the same with it’s retail store, compensating those losses with their cloud services, all while destroying the competition cause they actually have to rely on the profits of selling their products.

        Reply
        1. Huey

          No problem, always happy to spread whatever I know about privacy.

          Sadly I need a smartphone for my job, so I use Androids (Alphabet’s gateway drug) as they’re both affordable and hackable. Then I try to console myself that whatever data still does get through to Goog et al isn’t so important.

          I suppose I have been fortunate in never being ‘connected’ much to any ecosystem so it was easy for me to dump Windows when 10 started rolling out. But then I went and uninstalled it on almost every other PC my family lets me manage so idk lol.

          And Re: Apple’s data-mining I don’t doubt they do the ad-mining nearly as much as Goog but I’m positive the MIC (our 3 lettered friends) have their hooks in them same as any other. I will have to reread about that though as I am admittedly going off some ‘aging’ articles (in last 5 years). It is not as bad as being big data’s marketing toy, in a sense, but it makes me just as uncomfortable.

          Reply
      2. oh

        Do you have a website url fro Copperhead? I have a Samsung Note 4 from AT&T and those a**holes haven’t updated the OS in 4 years and there’s no current way for me to root it. I’ve tried all available programs to root it to no avail. It looks like AT&T has locked the firmware in. Do you know how I can root it?

        Reply
    2. PlutoniumKun

      I guess one problem Apple have is that their products are (or were) genuinely well made – my much used and abused Mac Air has lasted over 6 years without a problem, far longer than any laptop or desktop I’ve previously owned. As such, I would consider it to have been excellent value. I’ve used 2 second hand iPhones in succession, both of which worked very well for several years, until eventually claimed by fading batteries.

      It would be nice of course if they just focused on being the Mercedes of hardware, making a high quality premium non-nonsence product with occasional genuinely new and exciting kit. But this doesn’t satisfy the gods of the share price, so the crapification is becoming all too noticeable.

      Reply
      1. JonS

        I still use an iMac I purchased in 2007 as my primary home computer. The OS can no longer be updated but Apple is still producing security patches. I’m a software engineer by trade and just use it for cruising the net, email, and writing some funky code for fun. I keep thinking I should buy something new, but why? I can get the latest and greatest at work.

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      2. david lamy

        IMHO, Apple products were well made up till Tim Cook took the helm. Now quality is sacrificed on the altar of thin and light. My 2011 17” MacBook Pro is going to outlast my 2016 MacBook. Already my 2016 MacBook return key is getting bounce errors which is incredibly unhelpful for writing computer code. I am old and frail so light and thin sounded good but my hope was for a computer more robust than me.

        Furthermore, if you can avoid it do not upgrade to Mohave unless you really want to turn your computer into an iPhone. In fact avoid High Sierra too. (There is a problem in that the mitigations for Spectre and Meltdown are probably only in those two MacOs I mentioned, but if you want the security of running GPL licensed software Apple is currently now making it impossible to install dmg’s that are not present on its App Store (a program is an App?, gag me!) or its developers on Apples approved list.)
        So my MacBook is probably going to be running a Linux or BSD soon. But then I could have bought another Lenovo Carbon X1 for that.
        It is a shame what Apple has done to their laptop line!

        Reply
        1. Tinky

          I co-wrote and edited three books on an original Macintosh desktop computer in the ’80s, and have been a dedicated Apple computer user since. I don’t own a smartphone, and share your sadness relating to the degradation of what was for a long time Apple’s core product line.

          Reply
          1. PlutoniumKun

            Perhaps its memory playing tricks on me, but after a few years on pre-Windows machines (which baffled me, I’m not a techie), I was astonished by the late ’80’s Macs. Everything was so intuitive and beautiful. I couldn’t afford one for many years and cursed successive Windows versions for being cheap rip-offs of what Apple was doing. So I was very happy when I could finally afford one.

            But I’m baffled again by how they can make the most up to date machines somehow much worse than the ones i remember from 30 years ago. They are no longer intuitive and increasingly, not even beautiful. The only reason I might stick them is that Google seems even worse for unethical behaviour and judging from my work pc’s, Windows, having improved significantly in the ’00’s, seems to have started to crapify again.

            Reply
            1. flora

              My 2 cents: Mac OS 10.6, released in 2009, was the last full featured, user-centric OS released by Apple. Mac OS 10.7, released in 2011, began the OS software de-contenting process. You no longer got an included OS restore DVD or CD with the purchase of a 10.7 machine or several of the prepackaged utilities. You could go the App store and buy programs that had been automatically included in the earlier OS’s. I noticed what I considered a serious degrading in the Mac hardware about 1-2 years ago. The latest, newest, summer 2018, MacbookPro I setup was hardware faulty right out of the box. Instant warranty repair claim. The retina screens are incredibly fragile. Then there are all the dongles to buy since the ports have been decontented to USB-C only. ( One USB-C port along with standard USB-A and other ports would have been fine. imo.)

              For windows, I think the last good full-featured OS was Windows 7 pro, released 2009. After that came Windows 8 and Windows 10.

              Interesting to me that both Apple and Windows had been in competition to develop the best OSs and hardware they could do, that reflected what end users wanted in an OS, up until around 2009-2011. After that point it seems like both companies decided user requirements were less important and could be discarded in favor of whatever the companies’ managements wanted. And here we are.

              Reply
              1. PlutoniumKun

                Thanks for that flora. I don’t follow these things closely enough to know the details of what they do, and obviously much depends on what you use the machines for (in both work and office I use quite a limited but specific range of functions), but that certainly chimes with my experiences.

                I was just mentioning to a colleague lately that I was once ‘the guy in the office who you asked to sort out a problem when the IT helpdesk was too busy’, but now I’m the one who sits with a baffled look on my face when something goes wrong. For me, Windows has ceased to be either logical or intuitive. We’ve been given new Surface notebooks for my work use and I find it horribly buggy, I really hate using it. Of course, maybe its just advancing age…

                I suspect that when my Air finally dies I’ll just replace it with an iPad and bluetooth keyboard, that seems to be a much better value proposition – and then maybe buy a desktop in the unlikely event I find I need more power.

                Reply
              2. flora

                adding:
                reprinting an important part from the original post (great post, and thanks to NC):

                “As early as 2010, market analyst Rob Parenteau noted that company managements, “ostensibly under the guise of maximizing shareholder value, would much rather pay themselves handsome bonuses, or pay out special dividends to their shareholders, or play casino games with all sorts of financial engineering thrown into obfuscate the nature of their financial speculation, than fulfill the traditional roles of capitalist, which is to use profits as both a signal to invest in expanding the productive capital stock, as well as a source of financing the widening and upgrading of productive plant and equipment.

                “Share buybacks were effectively illegal under SEC rules until 1982, in the midst of the Reagan deregulation wave, when SEC Rule 10b-18 was introduced. Until that time, buybacks had been considered a form of stock manipulation. As early as the mid-1980s, more and more companies have resorted to them, and the practice has grown exponentially.

                “But as the title of Lazonick’s paper makes clear, the buybacks created a lot of prosperity for the corporate executives and shareholders, but did little for the underlying profitability for the companies themselves, largely because cash piles were diverted away from productive uses such as R&D and capital investment. …”

                Reply
                1. Enquiring Mind

                  Now, Ron, see, there is all this equity sitting locked up on balance sheets and we need that equity to win the Cold War. Ron, do your patriotic duty and help us unlock that equity. No, I don’t think they’ll brand you as a neo-liberal. You can make a joke about age and brush that off. Tell Nancy it will be okay.

                  Reply
              3. Unna

                “…the last good full-featured OS was Windows 7 pro, released 2009.”

                I agree. I run Win 7 pro on a Lenovo and am very happy with it. I have Linux Mint Mate19 loaded on a USB and Mint works very fast and is easy to use. I’ll use the Win 7 pro for as long as it works, and I don’t care about updates. Security can be handled otherwise.

                I’m using the Linux Mint off and on for fun and learning and comfort level. Not ready to download it onto my machine so long as the Win7 pro is still all OK but I’m determined to never use Win 10.

                I’m very surprised with the improvements they’ve done on Mint and how easy it is to use for non computer people like me. There are other flavours of Linux that give the user more “Control” and that’s fine for the geeks. But it seems that now, anyone who can use a Win OS can use Mint, and as they say, that’s a good thing.

                Reply
                1. flora

                  Yes. I’m looking for ways to increase the implementation of the appropriate-for-task Linux flavor at work. Linux plus Virtual Box? Not sure, but studying the issue per task requirement.

                  Reply
    3. pissed younger baby boomer

      My self i had 2 android tablets from odd ball companies both crapped out. I went to walmart paid extra for current tablet Lanovo my 3 tablet i see how long this one will last ,

      Reply
  3. paulmeli

    Apple succeeded because Steve Jobs was a visionary. Very few CEOs are visionaries. Bill Gates was one, and maybe Elon Musk today, but who else? What companies are creating excitement (as opposed to hype)?

    Giant corporations tend to become giant extraction machines. As someone said recently, the entire stock market has become the Mother of all leveraged buyouts.

    Reply
    1. Huey

      >Apple succeeded because Steve Jobs was a visionary. Very few CEOs are visionaries. Bill Gates was one, and maybe Elon Musk today

      So again, the self-worth of a company is predicated solely on the expertise of their CEO? No wonder we lavish them with lucrative pay some extravagant multiple more than the measly worker ants who slave for them.

      I’m glad you never mentioned Bezos in this but Musk? Really? And Gates? Microsoft got a toe in the market when IBM contracted them to make the OS in one of their first PCs. Unlike today’s tech-giant market where a company can own every line of code an employee writes right up to their termination, IBM never made Microsoft sign any exclusivity agreement, and Gates went right along and sold his OS to everybody selling a compatible PC, which was nearly everybody. Apple could’ve honestly done something similar too if Jobs never decided to build his architecture on a completely different standard from PCs of the day. In that light it was pretty easy to become ubiquitous when literally everyone was already introduced to you as the leading OS developer for the fastest growing PC architecture. You tell me if that’s visionary or just being in the right place, at the right time.

      Reply
      1. paulmeli

        …the self-worth of a company is predicated solely on the expertise of their CEO?

        Nowhere did I imply that, merely pointing out that there’s a huge difference between some CEO’s and your run-of-the-mill short-term grifter/careerist (your typical CEO), failing upward.

        Expertise ≠ Vision

        Visionary = sees a future that no one else does, acts on it, creating entirely new markets changing the way that many of us interact with the World. Making money is a goal not a passion.

        FWIW I’m not a fan of Gates or Musk, and I know that Jobs was a dick. But I’m not sure that these guys did it just for the money. History is littered with people that tried to compete with Big Auto and failed. It’s a massive undertaking and the chance of success is infinitesimal. There has to be something else there that few CEO’s have.

        Reply
        1. oh

          Jobs copied Xerox’s (PARC) windows interface. And Gates copied Apple’s. Musk’s companies are riding on US Govt subsidies . What great visionaries!

          Reply
      2. Phacops

        Musk is an absolute novice when it comes to manufacturing! Looking at stack-up of tolerances for their assembly it is obvious that there is no expertise in process control there, and they never should have gone into the level of automated assembly they use with ca 1980s quality. The upshot is the dunning-kruger effect in practice.

        Why is Musk trying to reinvent lessons every automaker has learned decades ago?

        Reply
        1. Octopii

          It’s a shame about the manufacturing but if he copied everything there is to know about how Big Auto designs and builds cars, Musk’s would not have been any different. And in fact they are extremely different in a positive way, whatever one things about the CEO’s behavior or manner, he is for certain a visionary.

          Reply
      1. paulmeli

        Yep, everyone saw a future where licensing your product to every PC built (except Apple with their 5% market share) would lead to market domination. Oh wait…

        FWIW I despise Bill Gates for a lot of reasons and I’m certainly no fan of big business (although I am and have been an Apple user since 1988), but once again the point has been missed…

        …there is a huge difference between Jobs, Gates, Musk and your run-of-the-mill CEO. I’m shocked that’s even remotely controversial.

        The fact that success at that level tends to monopoly or oligopoly is irrelevant. It’s another argument altogether.

        Reply
        1. Anon

          I’m not sure what your point is, but Bill Gates was not/is not an innovator. He took advantage of the emergence of the personal computer revolution by offering a marginally useful operating system to newbies while using anti-competitive (monopoly) business practices to lock-in his product users and lock out any other non-Microsoft products.

          I use Win10 (with ALL privacy settings in place) only because I’m too time constrained/lazy to move to a Linux species.

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          1. Lord Koos

            Wasn’t Microsoft’s first product the DOS operating system, which was actually just a tweaked version of an open-source operating system, DDOS? Behind most great fortunes is a great crime…

            Reply
            1. Grebo

              Microsoft’s first product was a BASIC interpreter. While there are rumours that they were aided by dumpster diving at DEC they probably did write it.
              DOS was based on 86-DOS which they paid maybe $100k for.

              Reply
              1. The Rev Kev

                The way I remember it, DOS was written by some guy named Thompson who sold it to Gates for about $20,000. Ironically, years later after Microsoft took off, Thompson later got job with them. I wonder if he included the bit about writing DOS on his job application?

                Reply
                1. RMO

                  QDOS was written by Tim Paterson and though he claims otherwise it certainly seemed to be, uh, an “homage” to CP-M. When IBM came to Microsoft looking for a turnkey solution to the OS side of the PC they wanted to build they were under the mistaken impression that Microsoft owned CP-M. Gates sent them to Gary Kildal who wrote CP-M but they wouldn’t sign IBM’s frightening non-disclosure agreement that the required before starting negotiations. IBM went back to Microsoft and Gates, mostly because he was worried about losing the language business which was their bread and butter at the time, hurriedly adopted QDOS to keep the IBM connection. They made multiple versions of DOS for many systems but the big break came with the PC clones that could use the IBM OS and software. That’s what made Microsoft big. Gary Kildal made some strategic and tactical mistakes with marketing CP-M after the PC came out that led to the decline of his company.

                  Of course later on Microsoft largely copied Apple and the Mac OS with Windows. But then Apple copied Xerox’s innovations with the whole GUI OS in the first place.

                  Reply
        2. Hayek's Heelbiter

          I was a developer at a major chemical company when M$ was co-developing the operating system of the future, OS-2, with IBM – to this day, a far better operating system than anything M$ has produced since. I will leave it to the techies to explain why.

          I don’t know how many classes and seminars I attended.

          And once OS-2 was about to go live, M$ announced they were canceling their partnership with IBM to release a new operating system that they had been secretly building behind everyone’s back – Windows. Surprise!

          So much for the operating system of the future.

          All those hours, all the sunk costs in emotion and classes by my colleagues and my company.

          Once again, I felt like Charley Brown about to kick Lucy’s football.

          I’m afraid this behavior is deeply embedded in M$ corporate DNA. Alas.

          Reply
          1. paulmeli

            I will leave it to the techies to explain why

            Maybe we get to buy what they want to sell us not what we want, and IBM was too full of itself to think it could be outsmarted by an arrogant geek with poor personal hygiene.

            Anyway, the quality of Microsofts products notwithstanding, the opportunity to parlay a $50,000 investment into one of the most successful companies in history was there for the taking by any number of actors…but only Gates saw the future and did it.

            I think the guy is evil but…it is what it is. Microsoft products were “just good enough” perpetually beta software that (apparently) gave people what they wanted. Steve Jobs used to mock Gates for the mediocrity of his products. Plus Gates was a ruthless businessman.

            The genius wasn’t in the product itself, it was the licensing scheme. It’s the reason Windows is installed on 90% of the Worlds computers.

            Reply
            1. Anon

              Umm… no it is not!

              The “genius” was anti-competitive tactics (lawsuits) against competitors whom designed better spreadsheets (Visicalc), relational database, and word processors. (The dominant use of personal computers in the early 80’s.) Made NOT to perform on Microsofts operating system. If anyone, today, thinks that any of MS apps are top notch, raise your hand!

              The Feds didn’t file an anti-trust suit against Gates for just the chuckles. He did lose that case; but the subsequent remedy was inconsequential.

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              1. The Rev Kev

                Microsoft has a long history of, ahem, “borrowing” software and features and then hiding behind their money pile and battalions of lawyers daring anyone to make a case of it.

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                1. oh

                  Now Apple’s doing the same with a different twist – get broad patents and sue the other compnies that have something even slightly similar to their interface.

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      1. Octopii

        It’s working out just fine. He really needs someone to run the day to day at Tesla like Shotwell does at SpaceX. Then he can do more of the vision thing or play around on the shop floor or whatever.

        The obvious absence of vision at Apple is disturbing. And while Tim Cook is unique among the Fang CEOs for understanding the importance of personal privacy, the vision needs to be that and then some. Like re-“embracing” (lol) their design shop customers with high power machines that have all the I/O.

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    2. John k

      Jobs and Musk yes. Tim and Gates no… granted gates was a robber baron that did unusually well exploiting the opportunity presented to him by ibm… Tim is simply cashing in, as quickly as possible, the equity built up by jobs.

      Reply
  4. Polar Donkey

    AutoZone has been buying back its own stock for years. They raced to put stores in as many locations as possible. 90% of its business is do it yourself customers. The company would lie to itself about why it couldn’t expand more selling parts to repair shops. Make up excuses about time it takes to get parts to repair shops, etc. AutoZone has the worst parts with high failure rates, simple as that. The senior executives made that decision long ago, sell low quality stuff to people who wouldn’t know better, divert profits to stock price, never acknowledge we sell crap, ride that business model till we retire, or amazon\ rockauto\ walmart puts us out of business. Seems with Apple, Tim Cook has same plan.

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  5. Thuto

    It used to be that a company’s share price wasn’t divorced from the underlying fundamentals of the business/sector/management capability etc, that’s clearly no longer the case. We have trillion dollar valuations for companies living off past “hit-maker” glories and unable to provide, in the present, anything by way of breakthrough innovation. Investors can’t price strong growth into the share price because, frankly speaking, the prospects for a company like Apple aren’t what would wet the appetite of any investor with two brain cells to rub together. Add to this the inertia to said growth created by anti-trust issues snapping at its heels, R&D starved of any meaningful investment, competitive headwinds (bringing about pricing pressures) and the smartphone being at the end of its cycle as a form-factor/conduit through which innovation can be brought to market, and it’s easy to see why a corporate leader cut from the “maximizing shareholder value” cloth would (mis)allocate the corporate cash pile towards share buybacks and PR campaigns to keep the fanboys (and gals) ensnared by the belief that the company conveyor belt will keep rolling out cool, innovative products when the reality has been so far from this.

    Share buybacks, much like QE for the larger economy, are the blood transfusion that keep the game going while the managers, shareholders and their ilk line their pockets. It’s all gonna come crashing down, I won’t go so far as to say soon (still too many suckers spending freezing nights on pavements waiting in line to be the first to get their hands on the latest version of apple products) but, as the Bob Marley song says: “You can fool some of the people some of the time, but you can’t fool all of the people all of the time” so while the gig will be up at some point, it’ll be a while still before we see a “sell” recommendation on apple stock.

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  6. Re

    Cute, but incorrect. If Apple hs starving its R&D, why is it killing Intel in chipmaking, and managing to miniaturize a Kinect and sell it in millions of smartphones so effectively that nobody notices?

    Their real problem is being too rich. And having zero real competition because everyone else is tasteless.

    Reply
    1. Thuto

      Re: Apple killing Intel, i’m not sure what you mean by this. Do you mean Apple is discontinuing the use of intel chips in its macbooks, if so how does this disprove my point that Apple isn’t bringing out anything new and exciting to the market. It’s like saying Airbus will now make its own jet engines, as opposed to procuring them from Rolls Royce and pointing to that as “proof” that Airbus is an innovative company. That’s backward integration, not innovation. If on the other hand you mean Apple is killing Intel in global chip sales, please provide proof.

      Re: Kinect, Apple didn’t miniaturize the Kinect, when they acquired PrimeSense the company was already making the miniature Capri 3D sensor so let’s not heap on apple praise it hasn’t earned. This was acquired innovation that didn’t originate within Apple’s own R&D division so again, this example does not disprove what I said.

      Reply
      1. Anon

        Re: Apple killing Intel, i’m not sure what you mean by this.

        Apple has been designing their own SoCs for iPhones and iPads for years now, instead of relying on off-the-shelf parts from vendors like Qualcomm. Apple’s SoCs have consistently been well ahead, usually years ahead, of every competing SoC with similar power consumption. It’s not just one metric either — they have consistently been significantly better in performance and power efficiency. At this point, Intel has stagnated so badly over the past several years while Apple has been on a very impressive run, that Apple’s phone and tablet SoCs are actually reaching or even beating Intel’s laptop CPUs. Ars just had a good article about the A12X, which is in the new iPad Pro, and you can see this tablet SoC is actually in the same performance class as the quad-core i7 chips in the MacBook Pro. A Bloomberg article from April said that Apple would start using their own chips in Macs, replacing Intel, in 2020.

        There’s no reason to believe Apple has any intention of selling their chips as raw parts rather than as parts of a final product, so they won’t be “killing Intel” in that sense (but AMD is posing a great threat to Intel now). They are, however, killing Intel (and every other vendor) in the sense of making better chips, even if you can’t buy the chips except as part of a final product.

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      2. John

        It’s not just that they make their own SOC, they make one far better than anyone else does. The A12X benchmarks like an i7 while consuming much less power.

        Apple R&D is running about $11B a year and growing. This puts them in the top ten R&D spenders in the world. Hardly starved for funds.

        Even when Steve was CEO there were gaps as long as 6 years between major product introductions.

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    2. John k

      And too greedy.
      Why not have easily replaceable batteries like in most other portable e products, and like new dell tablet?
      Ditto expandable storage, again like in cameras and like dell now offers?
      Because built in obsolescence, so replace tablet, as I just did, because battery fading. And they charge a fortune for increased storage when u buy.
      Apple eco has advantages, but competitors are beginning to compete.
      New iterations offer not much that adds much value for most, including new chips. Sales stagnant or falling, so to boost revenue only solution is raise price. That’s not competing, just cashing in equity and bringing forward the switch to those that are competing.

      Reply
  7. Procopius

    As a result, Apple was found to be systematically understating its profits and defrauding its shareholders (stock options were classified as “non-expense expense,” which allowed them to be omitted from the profit and loss account, thereby artificially bolstering reported earnings).

    This sentence is self-contradictory. “Understating profits” means reporting less profits than would be required by Generally Accepted Accounting Standards. “Bolstering” profits means increasing them, in this context artificially. You can’t be doing both at the same time.

    Reply
  8. Jim A

    Just to point out that stock buybacks for companies like Apple that have more money than they can seem to find productive use for are nowhere near as problematic as they were for Sears, where they were done largely with borrowed money. Frankly, I wish that using borrowed money to buy back stock was regarded as “unjust enrichment.” by bankruptcy courts. To the extant that Apple has debts, my understanding is that they are largely a tax avoidance scheme. (borrow money to make payments in the US secured by profits that have not been “realized” in the US)

    Reply
  9. Mike Robinson

    We should also remember the experience of IBM, especially during the time described in Lou Gertsner’s Who Says Elephants Can’t Dance?   The company re-learned the painful lesson that it was behaving as though its true customer was Wall Street.   It was focusing myopically on next quarter’s financial numbers and not on computer and office equipment.   Lou dosed the company with some very strong, very bitter medicine – which worked.

    The cold reality of the situation is that it is (of course) utterly impossible for Apple or any other company to conjure “trillions of actual dollars” out of anything, or every single thing put together, that it actually does.   These “unbelievable numbers” are precisely that – unbelievable.   The money is not actually there at all.   The speculators are running the circus … and for the good of the company and its millions of actual customers, this fantasy must be stopped with a minimum of long-term damage.   Because that’s precisely what it is: fantasy.

    Reply
    1. Malcolm Crout

      Yeah, I’m glad someone understands the difference between the cash position of a business and the profits earned, which is depicted only by examining the profit and loss statement and the cash flow statement. In reality, companies are able to make enormous profits while leaking cash through the back door over accounting periods. I was reticent to raise this point to avoid being bogged down explaining accounting principles, so if anyone is interested, then just accept PROFITS DO NOT EQUAL CASH. I’m an FCPA and yet trying to explain this to lay people is always near impossible. Most of my peers concur.

      Anyway, the country where profits are realised has no relationship to where the cash is accumulated. We don’t haul bags of gold around the globe to complete transactions, but settle via funds transfers. As Apple is a US corporate, there is high probability that accumulated cash finds it’s way to somewhere with a sweaty climate and lots of yachts. The City of London are past masters at this little number having practised with the Channel Isles for decades.

      So where is the cash derived to fund these buybacks? They are borrowed domestically via the generosity of the central banks promoting ZIRP/LIRP which makes the process legal and aptly able to be buried in the books of account so that outsiders inspecting the books have no clue as to the sources of funds, but believes the buybacks are funded from profits. The auditors are not going to blow the whistle as they are complicit in washing the funds of global businesses on a daily basis. After all, that’s what the books say – right? Except they don’t. Whatever cash is derived by global corporates is happily working away in some tax retreat earning super profits made by funding the pillaging of resources from countries unable or unwilling to face the reality they are being plundered. This is how the real owners of global businesses are tucking away the wealth of nations as the rest of we plebs are getting poorer.

      Why is Wall Street collapsing as the Fed ticks up rates? Wellee, all these buy backs funded by lazy cash are staring at rising rates, so any redemptions has created cash panic. Like all market panic, it starts with a slow burn. This is why there is a push back from the corporatocracy against the Fed increasing interest rates irrespective of whether the increase is underpinned by sound macroeconomic fundamentals. All the noise over bond rates is just background fluff. They could care less as they have skin in the ZIRP/LIRP game, but have spotted the lights of the oncoming express. So the author is kind of on the money (sorry) as to the jeopardy facing the Apple ilk, but has skipped the underlying fundamentals.

      Apologies in advance for my loose terminology concerning cash. I’ve been literally liberal while being economically slack for purposes of brevity. The author’s message is true though……. Wall Street is in deep schmuck!

      Reply
  10. Jeremy Grimm

    I thought the basic design for the first Apple Computers was created and developed by XEROX PARC. While I admire much of the product design Apple promoted I disagree with the assertion Apple once produced “…new earth-shattering products like the iPhone or iPod (or, earlier, the Macbook)…”

    In my opinion the Apple products once represented high-quality product design and cutting edge packaging techniques — but neither of these are exactly earth-shattering. What is earth-shattering is that they are so rare in the products of today. And the quality and reliability claimed for Apple products once characterized products “Made in the USA”, back when there were products “Made in the USA”.

    Today’s Corporate Management manages self-rewarding looting of what value remains in the carcasses of once great Corporations. And the trillion dollar valuation of Apple stocks is like the once-upon-a-time prices paid for tulip bulbs.

    Reply
  11. John

    Apple is spending a huge amount on R&D.

    https://phys.org/news/2018-03-apple-biggest-spender-world.html
    https://ycharts.com/companies/AAPL/r_and_d_expense

    They have made a large number of acquisitions, but not of big companies. Armchair CEOs wanting to spend Apple’s money suggest they should make splashy acquisitions like Tesla. Not likely to happen. They make targeted acquisitions to gain needed technology.

    https://en.wikipedia.org/wiki/List_of_mergers_and_acquisitions_by_Apple
    Wiki lists over 100 acquisitions.

    Apple does pay a dividend, but there is a penalty in paying a dividend as it comes from after tax funds and then is taxed again by shareholders.

    Apple has publicly stated that they will reduce their retained earnings to near zero in the next few years. After that, presumably, the scale of the buybacks will drop precipitously.

    iPhone sales were up a smidgeon in the last quarter while the rest of the market shrank by 7%. I don’t see this as gloom and doom for Apple.

    At the last iPhone introduction Apple made a point of announcing that they are making their products last longer and that they would support them longer. You can now install the current iOS on a five year old iPhone. I think their feeling is that they are better off expanding the pool of Apple users rather than trying to get everyone to buy a new iPhone every year. Also, all those people who get second hand iPhones/iPads/Macs still buy content from Apple. They recently loosened the restrictions on third parties repairing older Apple products.

    It is way harsh to criticize Apple for not introducing a blockbuster product like the iPhone every few years. The iPhone is a once in a generation or longer new product. I will never see another hit like this in my lifetime from anyone.

    One reason is that the iPhone is a platform that subsumes new features. The original iPhone didn’t even take video. The new iPhones take 4k video, slo-mo video, have fantastic cameras, incorporate augmented reality, have much better WiFi and Bluetooth, have larger and far better displays. If a new product comes out that needs portable computing it is very likely to be made as an accessory to the iPhone rather than as a stand alone product. As an example look at the FLIR far infrared camera, or GPS maps (either Apple or Google).

    Apple is hard to critique because as outsiders we are looking in the rearview mirror. The products they announce today were designed over the last five years. We only have a faint glimpses of what they are working on for the next few years.

    Reply
  12. Scott1

    So if I had money to buy stocks I’d be looking for transformational products from companies using their money to make useful things and pay dividends to me so I could just hold onto the shares I’ve got and maybe buy more of them.
    I can’t get a deal when the transformation has been accomplished and I’m competing with companies whose accountants can manipulate the stock, which they get to do legally now.
    Seems like it takes a lot of the fun out of it.
    What if Apple issues a line of Sat phones?
    Whenever I see an advertisement on TV for a GE Jet Engine,
    I wonder why I am seeing it?

    Reply

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