Apples and Oranges

“Those who cannot remember the past are condemned to repeat it” George Santayan

Apple has been a phenomenal company since its inception, but has not always been a good investment.  For those too young to know and those whose memory has failed them it is helpful to take a brief look back to help understand what the future might hold.

The early years when desktop computing was just beginning was a great time to own Apple.  The MacIntosh Operating System. Released in 1984, set Apple apart from the competition.  It was easy to use and intuitive at a time when the Microsoft DOS required users to memorize and type arcane command line instructions.  The processing of images and the application to the print/design world made it a big hit and allowed Apple to charge premium prices for the machines they manufactured.

Then along came Windows OS, released in November 1985, which allowed PC users to work with a simpler interface.  Microsoft never manufactured computers so their objective was to put the windows product on as many machines as possible and collect a royalty for each installation.  The race to sell machines was over quickly as the competition among manufacturers in Windows land continuously led to better and faster machines at lower and lower prices.  Apple’s market share plummeted, and even as they maintained higher margins on the machines they did sell, their share of market dwindled as did the price of Apple shares.

Apple’s next big hit the ipod, introduced in January 2001, finally gave the company relevance again.  Apple created and totally owned the category.  But with the music player market becoming saturated, Apple needed another big innovation to keep the company’s momentum moving forward.

Apple introduced the iphone in June of 2007 literally inventing the modern smart phone, and again chose to keep the IOS proprietary.  As the sole manufacturer of an item Apple invented, Apple has enjoyed out-sized profit margins and first to market leadership.  But as with all tech products, the lifespan of any innovative product is extremely short and seems to get shorter with each new product.  Google’s Android OS for smartphones, released in September of 2008 is once again a software solution buy a non-manufacturing entity who profits solely from installation royalties.  In fact the Apple lawsuits against Samsung are eerily similar to the Microsoft lawsuits of years past, as Apple attempts to protect its supremacy from competitor looking to upset their applecart.

At each step in their history Apple has chosen to be a manufacturer and rely on branded sales of their products rather than open the doors for others to add value and participate in the profits.  It is hard to wall off any area of technology for very long and once again Apple is losing market share to competitors at a rapid pace.

To keep the price of Apple shares climbing the company has now come to rely on dividend distributions and share repurchases, which while benefiting shareholders in the short term, do nothing to create future value.

The talk of the investment community has focused on Apple developing a television type product that everyone hopes will be like previous Apple reinventions, creating a totally new experience and a totally new category.  Perhaps they can.  Apple has certainly had more than their share of world changing technological breakthroughs.  But if they don’t it is entirely likely Apple could end up much like Microsoft, a company with a large cash hoard and no real idea of where to maximize the value of that cash.  I am not willing to give up on Apple today, but I would suggest they should be watched with a skeptical eye.