The speculation of what Apple is going to do with all their cash has long been a favorite topic in the tech and financial press. But the thinking along those lines is often akin to the cognitive dissonance one experiences when seeing a billionaire driving a Honda Civic; What’s the point of having all that money if you’re not going to spend it?
That thinking is what we saw when Apple recently announced their cash plans. Two common reactions went something like this:
Saddened by Apple’s plan for a huge dividend. Apparently, they have nothing truly capital-intensive in the product pipeline.
— Max Levchin (@mlevchin) March 19, 2012
@mlevchin But they haven’t been investing it! They’ve been hoarding it. They clearly have no idea what to do with it.
— Henry Blodget (@hblodget) March 19, 2012
The first argument is easy enough to pick apart, as others have explained this past week. In short, even after issuing dividends and repurchasing shares, Apple’s cash reserves will likely grow this year. They added more than $35 billion in cash and equivalents last year alone. There’s nothing “capital-intensive” that they can’t do, short of opening an Apple Store on the moon. That Apple television set that’s rumored to be in the pipeline? That’s nothing. Foxconn’s factories, for example, have a gross book value of $14 billion as of the end of 2010. Apple makes that much in a few months, and only needs a fraction of that to actually get the production lines going on a television.
The idea floating around before Apple’s Monday announcement that they would be buying a company like Foxconn or building factories of their own seems to make sense, since Apple is one of the more vertically integrated consumer electronics companies in the world. And they are, after all, notorious for both control and quality. But they’ve managed to lead the industry on the latter without owning a significant portion of their supply chain. And as for the former: they have the factory owners right where they want them — by the short and curlies. Hence the razor-thin margins Apple deigns to give them. Here’s New York Times reporter Charles Duhigg in This American Life‘s recent retraction episode:
Apple’s the gold standard. As a result, Apple has this enormous negotiating power, and they use it, I am told by our sources, very aggressively to come in and basically say, “Show us your entire cost structure, every single part of what you pay and what you… and piece of your, your, your internal economics, and we are going to give you a razor-thin profit margin that you’re allowed to keep.
In other words: Why buy the cow?
Apple also, more importantly, finances the factories by loaning them cash and buying significant amounts of components in advance. This “Bank of Apple” strategy further establishes control over the factories, locks out competition and seems to be why competitors can’t seem to match Apple’s cost structure for products like the iPad. And let’s not forget that if Apple did own the factories, they’d have to deal with the additional scrutiny of being responsible for factory employees, which no Western company in their right mind wants to do right now.
This brings us to those who think Apple has run out of ideas on what to do with their cash. The fevered result of this are the acquisition talks — hence the recently oft-mentioned and largely nonsensical suggestion that Apple should buy a company like Twitter. But Apple’s approach to acquisitions has always been extremely conservative, especially compared to their brethren. Since 2010 Apple’s bought a grand total of nine companies. In that same period Google has bought 52.
People like Henry Blodget may think that Apple’s been hoarding money Scrooge McDuck-style because Apple doesn’t know what to do with it. But if you take a look at Google’s list of acquisitions, you can make the argument that Google doesn’t know what it’s doing either.
Apple’s acquisitions — with admitted 20/20 hindsight — paint a clear picture of what each of those acquisitions were for. LaLa: iCloud. Anobit: Flash memory components. Siri: duh. In short: tactical acquisitions.
I think there’s a strong argument to be made that you can’t say the same for Google. Perhaps the grand master Google plan hasn’t become apparent to me yet. But given the inability of Google to make real money off anything besides advertising and their continued struggles in social seem to show a company that’s trying to buy a strategy for the future instead of the tools to make their strategic vision happen.
That last point, I think, engenders a lot of the thought behind the conversations we see about Apple and their cash. Five years ago, a frequently discussed acquisition target was YouTube. Everybody wants to watch videos on their iPod! Apple makes iPods! Ergo YouTube. Today, it’s Twitter. Social is big, so Apple should buy Twitter. Everyone’s tweeting from their phones! Apple makes phones!
Apple’s strategic vision for their future has always been clear: they want to sell highly profitable consumer electronic devices. Lots of them.
So how does buying Twitter — or any “social” company — help them sell more devices right now? The notion that Twitter as an acquisition target has to be “kept from the hands Google, Facebook and Microsoft” doesn’t scan. Never mind that Twitter has given no indication of being up for sale — even if they were, how does a Google acquisition of Twitter slow down iPhone sales? In this world, does Google block Twitter and third-party apps from Apple products and a significant number of Twitter users? Does that lead to massive amounts of users fleeing iPhones for Android devices?
The answer to all these questions is clear. Twitter’s success at this point is largely dependent on remaining as platform-agnostic as possible, acquired or not. A company still trying to find a serious revenue stream that is highly dependent on mobile can’t afford to cut themselves off from a huge portion of the mobile market. See also: any social network trying to monetize mobile, including Facebook. Apple’s position in mobile means they don’t need to spend a penny to give a strongly-worded “suggestion” on how high these companies should be jumping.
That’s why acquisition targets like Twitter don’t make sense for Apple right now. Again: why buy the cow? Apple doesn’t need Twitter or any company like it. Twitter needs Apple. Twitter needs the massive iOS user base and now the system-level integration. Apple is making bit factories like Twitter as dependent on Apple as actual factories like Foxconn are.
So what’s that cash for? Besides the absolute freedom and control that $100 billion gives Apple — a company that probably still remembers the time they had to approach Microsoft, hat in hand — it’s important to remember that Apple isn’t close to achieving the success they want. Tim Cook said it himself:
In our most recently recorded quarter we sold 37 million iPhones. That’s a very large number but it represented less than 9 percent of handsets sold during the quarter.
Apple still has a long way to go with all their products in markets that have been much less hospitable to the company. China, where iPhones are still not available on the biggest carriers, is a perfect example. When you consider the new territories Apple still wants to conquer — and especially in territories where Apple’s current carrier-subsidized selling approach for phones isn’t the norm — Apple’s cash stockpile doesn’t reflect a company that doesn’t know what to do with their money.
It reflects a company that packed an enormous steamer trunk for a long and treacherous journey.
A trunk full of weapons.