Apple's Attempt at World Domination…without Steve Jobs?

August 24, 2011

Apple's Attempt at World Domination…without Steve Jobs?

It is truly amazing that not one day goes by without Apple appearing in the news. Clearly, I, myself, am getting fascinated with this organization seemingly eying world domination. Apple's pursuit of lawsuits/litigation (see Apple: Litigation as Business Strategy) gains momentum on a daily basis, as evidenced by today's ruling against Samsung in a Dutch court. Galaxy tablet sales had already been banned in Australia, and today, Samsung was informed it can no longer sell smartphones Galaxy S, S II, and Ace because of similarities in the screen scrolling function with Apple's iPhones. A strong win for Apple.

Tomorrow, Samsung will find itself in court in Germany, trying to defend its technology. One of its arguments will be that Apple stole/copied the idea for the iPad from the 1968 movie "2001: A Space Odyssey." [The famous YouTube video everyone is talking about can be found here.] The goal is to prove that the external appearance was not first invented by Apple "and this may be enough to prevent Apple from enforcing its alleged intellectual property rights in relation to the physical appearance of its latest tablet." Go for it, Samsung. [This is turning into some sort of "reality show" and nobody can look away. Investors just seem to be wanting more, and more, and more…]

The same day Sprint announces that it will be able to make the new iPhone 5 available to its 52 million subscribers come mid-October 2011. The third-largest wireless carrier appears thrilled to add the iPhone to its portfolio and avoid customer attrition, but will have to accept a change in cost structure; Apple demands high margins. The new iPhone will supposedly be even lighter, thinner, with an improved camera and operating system. Another strong win for Apple.

So, on the same day, Apple claims victory over one of its rivals and announces a new ally. Even though, the term ally may be an overstatement. I find it hard to believe that the wireless carriers consider their Apple agreements as true alliances and partnerships instead of simply a "must-do" at "nearly-all-cost".

And then,…on the day when Apple appears to be just one step closer to world domination, the feared announcement is finally made: Steve Jobs resigns as CEO. Tim Cook, who previously served as COO, is reportedly taking over the reigns. While T. Cook has been in charge of managing operations, sales, etc. it has always been S. Jobs, who has been the visionary at the company, who created the dream [occasionally destroyed others'], set R&D priorities, and called the shots. Of course, Apple has faith in its new leader. The news seemingly came so late that it did not impact daytime trading: the stock was up. In after hour trading, the share price dropped. As of 9pm EST it was down 5.07%. In the official company press release, Apple quickly pointed out that Steve Jobs will take on the role as Chairman of the Board, and "will continue to serve Apple with his unique insights, creativity and inspiration.” Of course he is; imagine how investors would react if he was not going to remain engaged. Jobs himself was reportedly clever enough to reaffirm that he believed the most creative times were still ahead of Apple. AAPL After hours: $357.10 (-19.08; -5.07%). This is called situation management; dealing with the unavoidable. [Note: The man has accomplished great things and I do wish him well.]

I doubt that this announcement was truly news to anybody. Jobs had been on a leave of absence because of his health for quite some time. It was simply a question of how the succession would be managed and announced. I wonder how and if this announcement will impact the litigation in German courts tomorrow. The company is too strategic and smart for all of this to be coincidental. Some litigation wins were made, the ink dry on the agreement with Sprint. A good time to announce the change.

If Steve remains in the role of Chairman of the Board, I doubt that too many changes will take place in the immediate future. Operations and innovation will proceed as they did before; all in all, the focus will shift to Tim Cook for a natural phasing out of the brand Steve Jobs had built for himself. We may not notice any changes for a couple of years.

So will this impact Apple's path to World Domination? If they haven't gotten there by 2014, they probably never will.

Image: http://techicon.files.wordpress.com/2010/05/apple_world.jpg

HP: Innovator turned Dinosaur

August 19, 2011

HP: Innovator turned Dinosaur

Everyone working in the tech space these days must feel as though they are walking on thin ice. Seemingly from one day to the next, dramatic changes in strategic direction are taking place involving billions of dollars and impacting thousands of employees. One could argue that one side effect of the high-tech revolution is employment insecurity. And once again, all fingers point at Apple for triggering the latest dramatic event in the saga of "Leaders today, forgotten tomorrow."

So, is this the story of HP, historic innovator turning dinosaur? Or is this the story of HP, cracking through the shell and emerging as a newly focused entity?

HP's decision to discontinue operations for webOS devices has led to an onslaught of commentary and news, mainly critical, about the company's direction, plans, leadership. Every angle and strategic move over the past ten years has been discussed by journalists, analysts, techies, etc. [And clearly, I am unable to contain myself either.] The discontinuation of the TouchPad after less than two months of commercial availability comes surprisingly fast. Just last year, HP acquired Palm for $1.2 billion. The move even then was not considered smart by analysts who at the time thought HP paid too much for an already outdated technology with little to no competitive advantage against Apple's iPhone and iPad. At the time of launch, HP's commitment seemed hesitant at best with a lack of applications to support and build an "ecosystem". But what changed in two months that led to the decision to terminate the business that was not evident during the development of the actual platform?

The stated reasons for the potential divestiture of the consumer business (largely PC) are the low margins, and looking at the recent earnings announcement, who can argue with the decision to shift resources from a 5.9% margin business to one with margins of 13% (Enterprise, Servers, Storage, and Networking - ESSN)? Ironically, at the time the Palm acquisition was justified by HP as providing "the ideal platform to expand HP's mobility strategy" and enhancing "HP's ability to participate more aggressively in the fast-growing, highly profitable smartphone and connected mobile device markets."

No one can also argue against the intensity felt by tablet suppliers trying to compete against Apple. The executive decision to pull the plug on a venture after making the kind of investments HP has made over the past years is not an easy one. It takes guts to make that call, whether right or wrong. What is concerning, however, and will without question bear long-term consequences for HP and its reputation, is the lack of time and commitment that was given to the TouchPad.

The move will, independent of which sector HP will focus on going forward, lead to erosion of customer confidence in HP and the firm's commitment to its technology and products. The company's competencies may no longer be in the fast-paced consumer electronics space. The new focus on the ESSN group will bring longer sales and development cycles that may be more suitable for the tech giant. Nonetheless, customer confidence in the company will suffer from the latest move. And that… in my opinion… is the real danger!

The movement in share price clearly demonstrated uncertainty about the company's future. The last ten years of HP's history shows a record of a seemingly inconsistent acquisition patterns, changes in strategic direction, turmoil at the top of the organization leading to turnover in leadership. There is hesitation to believe in the company's direction after yet another twist and turn.

So now with the $10.2 billion acquisition of Autonomy,  is HP ready to tackle the next decade and emerge as a more focused entity in a space where it can provide innovation? Even with a divestiture of the Personal Systems Group, there appear to remain more pieces that do not to fit into the new vision and direction of CEO Leo Apotheker, which has been defined as "expand[ing] the company into software and services that help customers deliver computing over the Internet, via the so-called cloud." Maybe the financial services piece is next to go? Strong growth, but after the shedding the PSG group, the only remaining business unit with single-digit margins.

The 300K+ employees of HP will remain uneasy for a while. Many may find themselves laid off. I have known many HP employees and despite the controversy about pay cuts, bonus eliminations, and the inconsistency in leadership and direction over the past years, they always struck me as a loyal core.

So what will the future hold for HP? Maybe...if evolution is kind...it will give this dinosaur some wings to soar to new heights…

Google's War Against Apple

August 17, 2011

Fun fact: You think this was a pricy acquisition? Not even close… The most expensive acquisition I could identify was Vodafone Airtouch acquiring Mannesmann in 2000 for $202.8 billion followed by AOL acquiring Time Warner for $181.6 billion in 2001.

Google's War Against Apple

The 63% premium Google is offering to acquire Motorola Mobility has caused quite a stir; the pending merger of "Motorolans with Googlers" [Googorlas??] has opened conversations about the value of IP and patents, the escalating number of lawsuits due to patent infringement, as well as the question about the future of the open Android operating platform. It is hard to filter out what analysts/investors really think about the deal by looking at share price activity during the day, given the instability in the financial markets right now, but here are the facts. At 3:30pm EST on 8/17/2011...                

Google (GOOG): -1.21%

Apple (APPL): -0.14%

Microsoft (MSFT): -0.87%

$12.8 billion is a hefty price tag and a 63% premium is steep. Google is gaining access to 17,000 patents. There were discussions in the Financial Times and New York Times about the new valuation of patents and a new focus on IP. But is that really true? Maybe in this particular space, analysts have not paid much attention to patent portfolios, and only now that litigation is publicly escalating and M&A activity between these tech giants is rising, they are beginning to take a closer look. The actual competitors in this space have always had a strong eye on IP. Certainly in other industries, patents have been essential and key to M&A valuations and acquisition premiums. Look at the pharmaceutical industry. Talk about the need to patent your formulations to guarantee future revenue streams.

Of course, ownership of patents during this time seems to be more relevant than ever considering that seemingly new litigation is filed every day and everyone is going after each other, like children on a playground…fighting for world dominance (see Apple: Litigation as a Business Strategy). In general, patent infringement suits are warranted, but the recent escalation is not only consuming tremendous financial resources, but also stifling innovation due to concern over legal action among smaller entrepreneurial businesses.

Another point that has been heavily debated back and forth since the official announcement of Google's acquisition, is the future of the open operating platform, Android. In its official investor relations' announcement, Google stated that it is firmly committed to its current Android partners and the "vibrant open source community". Some analysts have speculated that going forward, Google will give Motorola Mobility handsets some kind of exclusivity. Why risk having Google's current partners switch to a Microsoft-based operating system for their smartphones? Nokia may be a bit too optimistic assuming that "the acquisition will play into the hands of Microsoft platform."  Google will have to be careful in how aggressively it pursues direct competition with its current partners. There should be plenty of room for additional customer segmentation.

Initially, I believe there is truth in one assessment, which is that Google is indeed defending Android and its partners (FT: Lex Column). The acquisition was pursued as a means to "protect profitability of the handset manufacturers that deploy Android." In reality, this may be an opportunity for Google to build a stronger core (no pun intended) against Apple, based on existing and acquired patents, but also an opportunity for further innovation.  Together with all Android-partners, which may become loyal soldiers/allies if executed correctly, they can build one united front against Apple.

So yes, I do believe this is war against Apple…

[P.S. My husband says I am a cynic and should write about more positive things. There is always next time…]

Image: http://wpuploads.appadvice.com/wp-content/uploads/2011/08/google-android-motorola.jpeg

HTC and Dr. Dre…or…The Importance of Branding

August 14, 2011

HTC and Dr. Dre…or…The Importance of Branding

On and off, I have talked about the importance of branding in these various posts. Not that I am obsessed with the subject matter, but I look at "brands" as a determining factor in maintaining gross profit margins during challenging economic times. When pressure exists to provide low-cost products at low prices, brand image can make a difference. As someone who really is not that involved in marketing on a daily basis, I find that branding sometimes explains the unexplainable. Often times, when there are circumstances or consequences that do not seem to make sense, there is the "Aha"-moment…it's because of the brand (or the lack thereof).

The importance of branding is evidently also valued by HTC, a Taiwanese manufacturer of Android-based smartphones, which on Thursday announced a $309 million investment in Beats Electronics (Beats) to acquire a 51% ownership stake. To give some background, Beats was founded in 2006 as a venture between Dr. Dre and James Iovine, Chairman of Interscope Records. A USA Today article dated August 12, 2011, gives the details of how the venture started. The main product that has sparked the interest of HTC is the high-end Beats by Dr. Dre headset, priced upwards of $150 to $350. Despite their size, the headphones have established themselves as cult objects and icons. HTC CEO, Peter Chou, made very clear that this deal is all about branding for him: "This strategic partnership with Beats also makes the HTC-experience cool."

Since the establishment of the venture, the Beats audio technology has been built into HP computers and according to USA Today, the 2012 Chrysler 300S will be equipped with the same technology come fall.

The interesting question is, would this have been a good deal for Apple and does Apple even care? In response to the first question, I am not convinced that the demographics of the target customer match. Is the iPhone user the same customer that purchases Beat by Dr. Dre headphones? I am going to venture a guess and say "No". So, does Apple care? Absolutely. Maybe not because Apple would have liked a piece of that deal, but have no doubt that any move by a rival company, with which they are currently in litigation (see Apple: Litigation as Business Strategy) remains ignored.

The move by HTC is aimed at gaining greater share in the global smartphone market, and building its brand image to reflect some of that "high-end", but hip flair, similar to what the iPhone has become associated with.… But it really is for a different customer. A brand archetype analysis would be very interesting. Without much investigation, I would classify the Apple iPhone brand under Creator (Core Desire: Creating something of enduring value; If it can be imagined it can be created") or Ruler ("Core Desire: Control; Power isn't everything, it is the only thing") [I could really see either one work] and the Beats headphones under Jester ("Core Desire: To live in the moment with full enjoyment. If I can't dance I don't want to be part of your revolution.").

For Apple this may have been attractive as a defensive move; nothing but pocket change for the organization. But can you imagine Steve Jobs negotiating with Dr. Dre and J. Iovine? Hard to say who would need whom more in this scenario and that would make the deal immediately unappealing to Mr. Jobs, who likes to feel needed and prefers to be in the driver's seat.  [Nothing wrong with that.]  Separately, headphones that size seem to completely go against the sleek and "mobile" design standards implemented in the development of the iPhone. [Personally, headphones that size go against everything I consider "mobile", but that's just me…I guess the importance of accessorizing must not be ignored in this case.]

For HTC, this move is supposed to bring new and different momentum. There are some smart business men behind the venture, and diversification away from headphones should yield long-term benefits and growth opportunities. Larry Dignan, ZDNet, has a point [loved the boldness] stating that it may be too late to bank on the relevance of music on smartphones for HTC. I am not sure that I agree that the deal is completely pointless. While the headphones were key to make the deal attractive given their success and brand creation, I am certain that there are already bigger and grander plans in the works. With the market becoming so intense and competitive, I actually consider this move creative and relatively low risk. But I am sure, some competitor action is being plotted as we speak to counteract HTC's position and latest move. Never boring in this space…

[On a side note, as I was writing this post I attempted to log on to the Beats Electronics Web site several times and got the following message: Server is too busy….Now you tell me, branding is not important!!!]

Image Credit: http://www.mobiletoday.co.uk/images/2011/Mobile/Products/HTC_products/beats-by-dr-dre-htc.jpg 

Business: Timing is Everything!

August 11, 2011

Business: Timing is Everything!

Times change fast. Especially in business and economics. Perfect conditions for one set of decision making today, cracks in the foundation tomorrow. The balance between moving fast and assessing risk is not easily found. Strong nerves are required. 

So what was different from today's issue of the WSJ and one from a couple of months ago: no acquisition talk. I pulled out the WSJ issue from May 10^th, 2011. LinkedIn was promoting its upcoming IPO and four mergers and acquisitions were discussed:

1) Microsoft looking to acquire Skype for $8.5 billion.

2) Southwest Airlines closing on AirTran acquisition for $3.2 billion.

3) Hertz making a $2.1 billion offer for Dollar.

4) Nvidia Corporation acquiring Icera for $367 million.

A total of $14 billion changing hands [generally speaking]. What has changed? There was already notable discussion of the European debt crisis at the time. Concerns over Italy's economy were front and center. Since then the words debt and crisis have appeared [I venture a guess here] at least 10 times each in each issue on any given day. In variations of course, sometimes pertaining to Spain, to Italy, to Greece, the U.S., and now to France. [For latest news on France's credit rating: go here.] The stock market has been up and down since then. Ideal timing for IPOs seems to have passed. Acquisitions will be considered more carefully now. Timing is everything.

 Image: http://www.stephenies-here.com/tag/time-is-money/

It would be interesting to take a closer look at which industries are expected to continue to grow and which ones will suffer most. And why? You could argue that consumer spending and spending choices have been more conservative since the recession of 2007. Yet smartphones for example have only grown in adoption despite the sometimes hefty price tag. So certain industries seem to be somewhat exempt from and immune to the overriding economic trends and are still able to post promising growth. Is that because of the evolution of consumer needs (no one can live without smartphones) and standards of living? How much has to do with branding i.e., Apple turning the iPhone into somewhat of a cult object? Trends change and whether you are able to predict how significant the impact on your respective business is and when the impact will occur is essential. It is impossible to always predict what is going to happen. It takes good instincts, good business sense, creativity, faith, guts, and $$$ to take advantage of emerging trends. Sad are the stories of those left behind. After reading an article on Eastman Kodak today, I realized that the company's stock is trading at $1.77 per share. WOW. Junk bonds are valued at $0.80 cents per $1.00.

The current economic conditions are rather unsettling. Personal consequences are frightening, but still hard to predict. [See and take the poll!!!]  From a business perspective, it seems that branding remains key to maintaining some kind of profit margin in these down times along with relevant innovation in emerging technologies. Most of all for any kind of bold move, whether an investment or acquisition the morale of the story is: Timing is everything….and guts!

Walmart calls it quits: Why throw good $$ after bad?

August 10, 2011

Walmart calls it quits: Why throw good $$ after bad?

I applaud Walmart. The company admitted failure today by calling it quits and terminating its digital download store effective August 29, 2011. After briefly looking over Walmart's 2011 Annual Report, I am generally impressed with the company that holds the #1 position on the Fortune 500 list. The retail industry is challenging, highly dependent on economic conditions, but the company appears well positioned. Admirable and refreshing is the frank commentary in the Annual Report "We were simply not satisfied with our net results in Walmart U.S. this year." LOVE IT. How refreshing. Not a common sight in Annual Reports of U.S. companies. Japanese organizations seem to be more frank about missteps and admission to shortcomings. Humility is a virtue...

In terms of today's news, it must have been a hard decision to table the digital download store, but why throw "good money after bad"? Walmart initially succeeded in building a strong position in the space, but clearly took some missteps from the beginning. Competition has become intense and the rise of Apple was clearly underestimated. There is a great piece of news that outlines the history of WalMart's digital download store. I repeat in a nutshell:

2003: Start selling digital downloads in WMA format (not usable with iPod).
2007: Start offering DRM-free MP3s for iPod users.

2008: Start offering downloads directly to Mac computers and cutting prices to roughly $0.80 per track.

But by the end of the year iTunes surpassed Walmart's initiative. Walmart states that it is placing a greater emphasis on streamlining videos and is investing in advertising of the 2010-acquired vudu.com business. This time, "Apple-compatibility" is immediate, not through an app, but through a Web site that can be accessed via an iPad. The promise: movie streamlining available the day of release on DVD. The eCommerce effort remains front and center for Walmart. In the past year, Walmart consolidated its eCommerce initiatives under the Global eCommerce Division; a more cohesive effort is expected. 

Walmart is staying innovative, trying to stay ahead of changing trends, emerging technology, and carefully reviewing ROIs, as President and CEO Michael T. Duke talks about "building the next-generation of Walmart". Decisions are clearly based on their financial impact. Risk is taken, but enough humility exists to admit failure before a greater financial impact is felt.  In the U.S., where the performance fell below expectations, new formats are explored to spur future growth. In fiscal Q2:12, Walmart is expected to launch its first Walmart Express convenience formats. Stay tuned. Walmart currently generates $260 billion in annual net sales in the U.S. and has roughly 3,800 stores.

As with most organizations, growth is pursued through global expansion. Walmart has acquired chains n Europe (i.e., the U.K.) and is seeing momentum in most BRIC markets as well as Mexico.

Hard to say what truly goes on inside an organization. How much is done to create a certain image for stockholders. How it treats its employees...I have no idea. I can say that commentary on ongoing litigation is limited to one page. In either case, I can also appreciate Walmart for publishing its first Global  Responsibility Report. Quite common for organizations in Europe, still a rare sight in the U.S. Walmart has made a commitment to the environment and in October 2005 launched a sustainability program with three goals:

1) Be supplied by 100% renewable energy.

2) Create zero waste. 

3) Sell products to sustain people and environment.

Go Walmart! The company also claims a special emphasis on women leaders, though I only saw three women in the picture of the 15 board members!!! Hm... [Let's hope my snapshot portrait of this conglomerate does not crumble. The danger of doing only limited research.]

So what's next for Walmart, a company that is trying to be innovative in an industry that is, well, not that innovative? The company seems to be led by conservative, yet strong planners and with $7.4 billion in cash, there is a promise for some interesting moves ahead. The cash-cushion can only help in a market that is as volatile as it is at the current moment.

Image: www.understory.ran.org 

While Apple's market cap has been up and down over the last few days, giving it the title of highest-valued company, Walmart gained more conservative publicity. Question: Do conservatives fall as hard as risk takers?  I think not….

Apple: Litigation as a Business Strategy.

August 4, 2011

Apple: Litigation as a Business Strategy.

The article in the WSJ that inspired me today was the one entitled "Google: Rivals Ganging Up". It once again led me to look at Apple even though the more I read about Steve Jobs, the less enjoyable I find his quotes. "Picasso had a saying - 'Good artists copy, great artists steal.' And we have always been shameless about stealing great ideas." 

Professionally, I am engaged in the health care sector, which sees its share of litigation. Take a look at J&J's 2010 Annual Report and you will find pages, and pages, and pages in tiny font dedicated to ongoing litigation.

The article today drew my attention to Apple's current legal status and the amount of Dollars invested in lawsuits and patent infringement litigation is truly mind boggling. [Curious to know how many people are employed in Apple's legal department. As of today, there were 10 open job postings on Apple's Web site under "Legal". Maybe "Legal" is where today's job opportunities are.]

Lawsuits to collect royalties, prevent/delay competitive product launches, tie up resources of competitors otherwise invested elsewhere. Litigation is a fascinating business strategy! The other day, you may recall, Apple successfully closed a few select copy-cat stores in China.

By no means do I mean to imply that there is no justification for pursuing patent infringements legally. IP should be protected, however, in select industries including software, consumer electronics, telecommunications, the number of litigations seem to be escalating. True innovation in the space is clearly hard to come by and the window to benefit from the first-mover advantage and hold on to the differentiation is becoming smaller and smaller. But looking at this picture….





Image: "Current Litigation", Journal Of A So-Called Business Woman (8/11).

…. it does not appear to be so much about protecting rights as it is about stalling the competition and charging ahead.  Smaller companies who could really benefit from patent protection don't have the resources and are probably too intimidated to pursue legal actions against major corporations. Especially, since these litigations can drag on for years.

Imagine how the U.S. financial crisis could be helped if these funds were invested to relieve the government's debt. Wouldn't that be an interesting scenario: Each of the most profitable U.S. organizations acquires a stake of the U.S. government. A corporate-run America…. wait a minute!!!

"Apple, but really Nintendo… Let the Games begin!"

August 2, 2011

"Apple, but really Nintendo… Let the Games begin!"

A couple of days ago, an article appeared in the WSJ entitled "Nintendo: Apple's Latest Prey". It talks about how Nintendo has struggled with new product releases and game sales since the release of the Wii in 2006. The problem? Mainly the change in technology and its influence on the gaming industry. Specifically, the article draws reference to the growing popularity of gaming on Apple's iPhone and iPad, and other tablets and technologies. Pricing and accessibility are much more mainstream with the new technology platforms.

Image: Took some liberties here. Not an original. In case you can't tell.

I will openly admit that the tech revolution has passed me by to a great extent. I recall playing computer games on a Commodore 128/Commodore 64… haven't done much since. And the simplistic layout of this blog only gives validity to my point.

So, when Nintendo's stock price crashed after a presentation by Nintendo's president Satoru Iwata on the new Wii U, I can by no means provide an opinion on whether or not this reaction was justified. Since that day in June at the E3 Games Show in Los Angeles, Nintendo's U.S. stock (ADR) price has declined from roughly $28 per share (June 7, 2011) to roughly $19 per share today. The share price seemingly hit a peak on February 25^th with $38.29.

The WSJ reported significant declines in share price on the Osaka Securities Exchange last week following a downward adjustment in Nintendo's profit forecast by 80%. Ouch! Challenges that led to the adjustment:

·         Unit sales of only 710K of its 3DS devices in three months.

·         Drop in Wii sales by nearly 50%.

Nintendo is now looking at the Wii U as the main growth driver to turn around momentum. The product is slated for commercialization in 2012 and is based on a tablet controller. Quite frankly, with the integration of technical applications into mainstream consumer electronic devices, these products will probably remain for "hard core gamers" only. [That seems to be the correct term!] So, if the Wii U is for the hard core gamer, what is the Nintendo response to the mainstream, low cost, mobile consumer device games that are changing the industry? In my limited research, I could not actually find an Annual Report more recent than the 2008 version, which prevents me from commenting on how much Nintendo is investing in R&D and what its pipeline looks like. One article I found commented on investments of $204 million in the construction of a new R&D building in Kyoto, Japan, that is scheduled to begin in 2012. It does not look like the company intends to roll over.

For argument's sake, let's agree that there appears to be a gap in Nintendo's portfolio for the mainstream gamer/consumer as the space converts to mobile, integrated platforms. The threat for Nintendo's console business comes from Microsoft and Sony. So, was the title of today's article in the WSJ an exaggeration or a suggestion of what may come? Would Apple consider making a play for Nintendo? There has been a lot of talk about how much cash Apple has on hand as of late. Rumors about this particular acquisition opportunity seem to date back as far as 2006. If net losses continue and the stock price keeps falling, Apple may be able to purchase Nintendo for a bargain price.

Maybe this story is not about Nintendo after all… Let the games begin!

Apple - The Happy Brand

July 25, 2011

Apple: The Happy Brand!

Talking about Apple these days is hip. Writing anything about Apple will almost always guarantee readership. In fact, you probably will not be able to open a newspaper without finding at least one article on Apple or the man himself, Steve Jobs. [Is he really being paid $1 in total compensation?] I will agree, the company and the man are equally fascinating. The 10-K reads like a mystery novel, with interesting detail on units sold, cash on hand. The company is bold, creative, and seemingly full of financial wizards. So Jobs himself gets paid an annual salary of $1. In January, it was reported that he held 5.5 million shares of Apple stock, which right this minute is valued at $398.63 (up +1.36% today). Ergo, his stake is worth over $2 billion (according to the calculator on my iPhone). An article in the Associated Press from January 2011, claimed that Tim Cook's compensation, who currently serves as COO received $59.1 million in total compensation (including bonuses, etc.). Fascinating has also been to watch the insider trading activity at Apple. Senior Vice President of Operations, Jeffrey E. Williams, stands out with more than 7 transactions since the beginning of April as part of which he exercised stock options and sold stock worth over $8 million. According to Form 4, the stock option exercise price was roughly $46 versus the current share price of over $300. Happy times at Apple.

Company sales have increased  $19 billion in fiscal 2006 to $65 billion in fiscal 2010. 44% of net sales stem from the U.S. 39% of total sales are generated by iPhone related products and services, which equaled $25 billion in fiscal 2010. According to the 10-K, Apple sold roughly 40 million iPhones in fiscal 2010 and 7.5 million iPads. As of late September 2010, the company maintained a total of 317 retail stores of which 233 are located in the U.S. and 84 internationally. On a side note, I have seen the Apple store in London…it is almost intimidating. Much like one of the seven world wonders. It is very evident that Apple places a lot of emphasis on the buying experience in its stores. The Annual Report states that it is key to attracting and retaining customers… "genius".

But is there a worm in the apple? Without a doubt, when you grow as fast as Apple has, sustainability of that momentum is in question, and should the momentum slow, Wall Street will be ruthless. We have seen it before!!

Steve Jobs has been on and off on medical leave, smartphone adoption is outpacing adoption of Apple iPhones, and according to the WSJ today, Apple appears ill-equipped to address the low to mid level tier of cell phones. Analysts are expecting this market segment to be the future growth drivers in the space. If true, so the article, Apple's share of the smartphone market may have reached its peak.

Apple invested roughly $1.8 billion in R&D in fiscal 2010. One can only imagine what the engineers are dreaming up. But from my perspective this is a real dilemma. The Apple iPhone brand has developed into something elite, high-end, so have the companies computers (at least from my perspective). And quite frankly, the brand here has become a huge sales driver at this point, without a doubt. How do you bring that to the mid or low cost level without losing the brand equity that the iPhone has established for the Apple name? I wonder what the Apple brand is worth?  I am sure a business school case has been written on this topic. [Let's call HBS and find out.] Clearly, Steve Jobs gets it and does not allow any tarnishing of the Apple brand. An article published in Fortune earlier this year in May, clearly highlights the unforgiving and ruthless culture and importance of public image to the CEO and co-founder or the organization. [Love the org chart that was published as part of the article.]

Maybe the solution would be to develop a separate business unit and brand for lower-cost products that remains disassociated from the corporate Apple brand. Pharma companies have done so in order to develop and sell generic drugs without negatively impacting the image of its branded products.

The Apple brand is still strong despite its share of negative associations. Articles appeared on child labor employed at supplier companies as well as the poisoning of workers by n-hexane in factories in China. Yet the brand stays strong. Today, news surfaced that both Kobo, Inc. and the WSJ halted direct sales on Apple applications in rebellion against Apple's seemingly ever tightening rules regarding the sale of digital content. Let's just hope that Apple can withstand the current glory without developing a "God-complex" and remain creative and bold enough to protect its brand. Happy times at Apple.