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Table of Contents:


See also our discussion on:



What made apple a great innovator?

Apple was a mess in the mid 1990's, failing on multiple fronts, with a core that had seemingly unraveled. Enter Steve Jobs, and Apple began a dramatic turnaround toward the innovative powerhouse it is today. Did Jobs inject a more potent culture into Apple, or was he a better manager of the culture already there (which included Jonathan Ive)? Perhaps he "freed" the culture that previous management had repressed.


A preimier example of an American company that is able to sustain innovation over time, and maintain investors expectations at a high level.  Perhaps the stock has been bid up too high recently as "irrational exuberance" leads otherwise rational people to believe that the miracles will never stop.  With this success has come additional pressure to continuously outperform expectations. 
As others have noted, here are some of the potential troubles:



  • Valuation. With its price soaring into unchartered territory and all-time highs, Apple's stock may soon see an adjustment. Once the iPhone hype settles and the iPhone sales data is made available, buyers may make some projections and be more realistic about what the stock's price-multiple should be.
  • Cannibalization. The proliferation of iPhones will come at the expense of iPod sales, as the iPhone includes an iPod.
  • Apple's intense reliance on having a steady stream of new and innovative products forces it to spend significantly on both advertising and research and development. If it tries to lower prices to increase market share, Apple's selling points--design and innovation--will suffer.




see our discussion on:   iPhone


Possible Overvaluation?


Three things concern me about Apple's lofty valuation (trailing PE of 29 times). 


First of all, Apple recently changed their business model when they launched the 3G iPhone.  Rather than a revenue sharing model with the carriers, Apple now receives a subsidy from AT&T, reducing the price to just $199.  With that subsidized low price, Apple sought to increase volume and market share.  But with that subsidy of around $200 per phone, Apple gave up their share of subscribers fees, and risked sales of their other iPods.  Why would a consumer ever pay the full price for an iPod from Apple, when they could receive an iPhone with all of the same features, but also with phone capabilities at a much lower price?  This change in business model runs the risk of cannibalizing the sales efforts of the traditional iPods.   This could be a serious challenge to Apple because they received 42% of revenues from iPods in the first quarter of '08


The second concern that I have is that Apple not only changed their business model, but also changed their business culture.  Apple is now attempting to embrace "open innovation model", quite the opposite of what Apple has done in the past.   While many analysts herald this change as recognition of Apples past failures to dominate the PC market, it does raise concerns of Apples ability to manage this significant change in culture.  Will Apples many employees quickly adjust to the new corporate philosophy of "openness"?   Will Apple continue being the innovative icon with open standards (as it was with closed ones)?  Or, will the change of culture be superficial and difficult to really implement?


The third concern that I have is that Apple may be benefitting from a "halo effect" whereby investors pile into the stock anxiously awaiting for the next amazing iPhone.  But, while Apple may invent many more great products, the company will never be as "cool" as it is today.   With the success of the iPod, then the iPhone and the recent string of innovative successes, Apple has positioned themselves as the "master of cool", and a "marvel of innovation".  People are rightful amazed by the innovative genius that Apple has unleashed.  But, no company can maintain this level of investor and consumer fascination forever (no company ever has).  My concern here is that overly enthusiastic investors may be overlooking the changes in business model (and operating culture) as they are dazzled by the innovations and consumer fanfare.


Time will tell if Apple has the management talent to navigate these dramatic shifts in the business model and corporate culture (while at the same time maintaining the lofty Wall Street valuations that investors have come to expect)...


For more info, see our discussion on:




Market Data on Apple


Chart for Apple Inc. (AAPL)




Market Cap (intraday)5: 135.74B
Enterprise Value (4-Aug-08)3: 118.01B
Trailing P/E (ttm, intraday): 29.96
Forward P/E (fye 29-Sep-09) 1: 25.24



Market Cap: 135.74B 51.31B 108.36B
Employ­ees: 21,600 82,700 172,000
Qtrly Rev Growth (yoy): 38.00% 9.20% 10.70%
Revenue (ttm): 30.80B 62.49B 110.40B
Gross Margin (ttm): 34.08% 18.83% 24.61%
EBITDA (ttm): 6.33B 4.29B 12.85B
Oper Margins (ttm): 19.13% 5.82% 9.02%
Net Income (ttm): 4.60B 2.98B 8.13B
EPS (ttm): 5.115 1.356 3.087
P/E (ttm): 29.96 18.72 14.23









Apple, attempting to take Iphone global


See our discussion here:  Japan







Apple: What Could Go Wrong

Posted: 27 Nov 2007 01:24 PM CST

fc-apple-cover.png“Merry Christmas, Steve. Enjoy it while it lasts.” That is the sentiment of Fast Company’s December cover story about Apple, written by Adam Penenberg. (I got my hands on the cover at right, which is a computer-generated image of a sour-faced Jobs by Alex Ostroy). He argues that it is a “dangerous moment for Apple.” The stock is near an all-time high, with a P/E ratio about the same as Google’s. Everyone from Nokia to Amazon to Microsoft to Vivendi Universal to NBC is gunning for it, and its ability to sell 10 million iPhones next year—the famous third leg that is propping the stock up—is yet to be proven. Writes Penenberg:


But when you get down to it, the Apple phenomenon is as much about fashion as it is about technology. You might say that Steve Jobs is the Marc Jacobs of computers (minus the heroin), betting the house his products will be, season after season, cooler than anyone else’s. Yet fashion is, by definition, fickle. Lose the buzz, and you’ve got trouble. And for the first time in years, there are signs that Apple is not infallible and that Jobs’s reservoir of goodwill with his followers is not bottomless.

I’m not so sure I buy the arguments that Apple has to worry about the cell phone industry getting its act together, or the music industry, or the movie industry, for that matter. We still have not seen much evidence of this, although there’s been plenty of grumbling from all corners. The notion, for instance, that iTunes has anything to worry about from subscription music services is laughable. Rhapsody? Please. It is a great service, but hardly a business threat to the iPod/iTunes juggernaut. Apple should be more worried about free advertising-supported music services that are popping up.

I do agree, however, that the “iPod-iTunes pairing was the product of a historical moment that may never be reproduced.” AppleTV is certainly a bust, and Hollywood bosses will not be the easy marks that the desperate music executives were when iTunes first got started. Penenberg’s strongest argument is that in an era of increasing openness, Apple’s insistence on closed perfection might no longer fly:


What does Steve Jobs know that Albert Einstein didn’t? Einstein posited that a closed system would become stagnant over time. . . . Jobs may have to accept that Apple’s next wave of growth–or energy, as Einstein might have put it–depends on syncing up his products and platforms with those of his competitors.

In an age of convergence and simplification, customers are ever more insistent that computers, phones, TV, and music systems work together. For them, being “open” isn’t about sharing patent information or computer code but about compatibility and seamlessness, from the phones in their pockets to the movies playing on their flat screens. . . . Winning outright is a very tall order, of course. It means coming up with a self-contained system so beautifully functional that a critical mass of consumers are willing to enter that world and never leave

It all sounds good. Except that, it has been exactly this closed-world strategy that has worked perfectly for Apple so far. The digital device industry needs a control freak like Jobs to show the rest of us what is possible when everything works as it should. Open systems are great because of their inherent flexibility, but they can also be more chaotic and difficult to manage. The question is whether everyone else can learn from Apple, catch up, and surpass it. And if they do, whether Steve Jobs won’t simply join their parade (at the front, shouting loudly about his new-found open religion) just as it begins to pass by.






The company, incorporated January 3, 1977, was known as "Apple Computer, Inc." for its first 30 years. On January 9, 2007, the company dropped "Computer" from its corporate name. The change followed Apple's announcement of its new iPhone smartphone and Apple TV digital video system and reflects the company's ongoing expansion into the consumer electronics market in addition to its traditional focus on personal computers.


Apple was founded on April 1, 1976 by Steve Jobs, Steve Wozniak, and Ronald Wayne (and later incorporated January 3, 1977 without Wayne, who sold his share of the company back to Jobs and Wozniak) to sell the Apple I personal computer kit. They were hand-built by Steve Wozniak in the living room of Jobs' parents' home, and the Apple I was first shown to the public at the Homebrew Computer Club. Eventually 200 computers were built. The Apple I was sold as a motherboard (with CPU, RAM, and basic textual-video chips) — not what is today considered a complete personal computer.


Jobs approached a local computer store, The Byte Shop, which ordered fifty units and paid US$500 for each unit after much persuasion. He then ordered components from Cramer Electronics, a national electronic parts distributor. Using a variety of methods, including borrowing space from friends and family and selling various items including a Volkswagen Type 2 bus, Jobs managed to secure the parts needed while Wozniak and Ronald Wayne assembled the Apple I.


The Apple II was introduced on April 16, 1977 at the first West Coast Computer Faire. It differed from its major rivals, the TRS-80 and Commodore PET, because it came with color graphics and an open architecture. While early models used ordinary cassette tapes as storage devices, this was quickly superseded by the introduction of a 5 1/4 inch floppy disk drive and interface, the Disk II.


Another key to business for Apple was software. The Apple II was chosen by programmers Dan Bricklin and Bob Frankston to be the desktop platform for the first "killer app" of the business world—the VisiCalc spreadsheet program.16 VisiCalc created a business market for the Apple II, and the corporate market attracted many more software and hardware developers to the machine, as well as giving home users an additional reason to buy one—compatibility with the office.16 (See the timeline for dates of Apple II family model releases—the 1977 Apple II and its younger siblings the II+, IIe, IIc, and IIGS.)


According to Brian Bagnall's book, "On the Edge" (pg. 109-112), Apple exaggerated their sales figures and that Apple was a distant 3rd place until VisiCalc came along. VisiCalc was first released on Apple II because Commodore and Tandy computers were tied up in VisiCalc's software development office due to their popularity. VisiCalc's association with Apple was thus pure happenstance, not a technical decision. And even after VisiCalc, Apple II didn't surpass the Tandy TRS-80, whose sales were helped by the large number of Radio Shack stores. However, VisiCalc did put Apple ahead of Commodore's PET, at least in the US. (Commodore later regained the lead for a while with the Commodore 64 in the mid 80s, the best selling specific model of computer to date.)


By the end of the 1970s, Jobs and his partners had a staff of computer designers and a production line. The Apple II was succeeded by the Apple III in May 1980 as the company struggled to compete against IBM and Microsoft in the lucrative business and corporate computing market. The designers of the Apple III were forced to comply with Jobs' request to omit the cooling fan, and this ultimately resulted in thousands of recalled units due to overheating. An updated version, the Apple III+, was introduced in 1983, but it was also a failure due to bad press and wary buyers.


In the early 1980s, IBM and Microsoft continued to gain market share at Apple's expense in the personal computer industry. A fundamentally different business model evolved, once cloners forced-open through reverse engineering the IBM PC hardware standard. In response, IBM attempted and failed to establish a new proprietary Micro Channel architecture. The IBM compatible hardware market became highly competitive, with clones running a bundled MS-DOS from a floppy disk, or running a competing IBM-style DOS such as DR DOS.


Apple's sustained growth during the early 1980s was partly due to its leadership in the education sector, attributed to their adaptation of the programming language LOGO, used in many schools with the Apple II. The drive into education was accentuated in California with the donation of one Apple II and one Apple LOGO software package to each public school in the state. The deal concluded between Steve Jobs and Jim Baroux of LCSI, and having required the support of Sacramento, established a strong and pervasive presence for Apple in all schools throughout California. The initial conquest of education environments was critical to Apple's acceptance in the home where the earliest purchases of computers by parents was in support of children's continued learning experience.



 see more from Wikipedia




Apple today


Apple also operates 183 (as of June 2007) retail stores in the United States, and more in the United Kingdom, Japan, Canada, and Italy. The stores carry most of Apple's products as well as many third-party products and offer on-site support and repair for Apple hardware and software. Apple employs over 20,000 permanent and temporary workers worldwide



Apple's history is one of dramatic comeback. After a decade of stagnant sales, original founder Steve Jobs returned as CEO in 1997 and began a period of reinvention resulting in the release of several highly successful and innovative products, notably the all-in-one iMac PC (1998) and the iPod (2001). An aggressive and highly successful subsequent advertising campaign put Apple full into the public eye, and today Apple remains known for its catchy, clever ads.



Retail strategy


Success in building stores


the relatively overlooked locomotive that pulls the Apple train: the bricks-and-mortar Apple Store.


Apple has proven -- once and for all, we can hope -- that the branded retail specialty store is the key to success in high-margin design-oriented high-technology sales. It works with cars; it works with clothes; it works with shoes. Why not computers?


Plus, unlike the situation at general computer stores such as CompUSA, the vendor can control its own sales pitch. I have personally been baffled by two things over the 30-year history of desktop computing. The first is why any manufacturer of brand- computer failed to recognize it needed a storefront. The second is why Apple took so long.


According to Steve Jobs, in his keynote at Macworld, the company's 135 retail stores have just had their first $1 billion quarter, with 26 million people visiting during the past three months.


To be fair, Apple must have met boardroom resistance when this idea was first presented. Previous attempts by computer manufacturers to open their own stores had failed. And many of the more generalized shops had folded or become shells of their former selves. Computerland, Microsage and the Byte Shop -- early entrants to the market -- have all but disappeared. It's the manufacturer-run stores that took the biggest beating, though. And it began with IBM and its large business centers selling PCs and software in the mid-1980s. Headquartered in Atlanta, these stores were shut down out of the blue because of what the Armonk, N.Y.-based company claimed were huge operational losses.


This was followed in the late 1980s by a very successful direct-marketing company selling a PC clone called CompuAdd. CompuAdd was in the league of Gateway, Dell and Compaq during this era. It opened a chain of stores to sell its computers at retail. Until then it was specializing in direct mail-order sales. The stores are believed to have brought down the previously successful company. It was in Chapter 11 by 1993. In the late 1990s Gateway began to roll out its Country Stores, which appeared to be moderately successful, but were all closed by 2003. Apple launched its effort in 2001.




* Computer Kits (circa 1978): Sold the Altair Computer. Small shops run by an uber-geek/engineer. Condescending. Oppressive and snooty environment. Amateurish.

* IBM Business Centers (circa 1984): Oriented toward business folks and not too interested in the general public. Lively, very large stores in prime downtown locations.

* CompuAdd Computer Store (circa 1991): Very much like a CompUSA today. Not as focused on its own brand as one might have expected. Welcoming, fun environment. Large for its era.

* Gateway Country Stores (circa 2001): Very large facilities in suburban locations -- often resulting in an "Am I the only person in here?" creepiness. Seemed oriented to one-on-one sales. Not a high-pressure, stereo-store-type approach to sales, but it may have seemed like it. Not welcoming.

* Apple Stores (present era): Compact stores at first, blossoming into moderately large facilities as sustainable. Very open and modern. Visually stunning and welcoming. Generally packed with people playing with equipment. Not a lot of sales pressure.



After decades of computer-store missteps, it's apparent that Apple has a winning formula that can now be used to leverage sales of anything it wants to sell. And, unlike the multibrand, department-style computer store, the manufacturer can control the sales pitch. That's the key.


At this point it is becoming obvious that the other players in the computer game -- Toshiba, Dell, Hewlett-Packard, Lenovo and others -- will have to consider, or reconsider, this model in the years ahead.




Options Backdating Controversy



Apple Options Lawsuit Dismissed

Posted: 20 Nov 2007 04:23 AM CST

apple.jpgThe main lawsuit against Apple claiming that Steve Jobs and other Apple directors lied about backdating Options has been dismissed.

According to the NY Times, Judge Jeremy D. Fogel of Federal District Court in San Jose said that the suit was dismissed on time grounds, in that it was based on statements over 3 years old, which presumably related to statute of limitations laws.


Apple argued that the case was invalid due to time limits, and that the statements predated 3 years. The dismissal follows a similar dismissal in a related case in the so-called Apple options scandal by the same judge last week.





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