Apple should spend its money on its future
Carl Icahn is wrong to seek a stock buyback.
By Farhad Manjoo, The Wall Street Journal
Ignore Carl Icahn. If you're an Apple (AAPL) customer, employee, partner, or shareholder, you would be wise to follow CEO Tim Cook's example and adopt a pose of respectful deafness toward the gadfly investor's ridiculous proposals for Apple's cash.
Apple now has $147 billion in cash, a number that could rise in Monday's earnings report. But Mr. Icahn's demand that Apple use all that money (or get a loan) to buy back its stock is just about the worst use of its cash I think of. If Jony Ive designed a new iPhone out of $100 bills -- the iPhone 5$ -- even that would be a better way to spend Apple's boatloads. And that's just me spit-balling!
Mr. Icahn doesn't seem to realize that Apple, like all tech companies, is ephemeral. It is a giant perched atop an ever-shifting mountain of silicon, a behemoth whose success is as tenuous as it is fantastic. To the extent that Apple can guarantee any future for itself, its salvation is in its cash. It needs to spend its money on its future.
Mr. Icahn's plan is stuck to the present. The buyback would boost Apple's stock price for a short while, but it wouldn't improve its products, its customer service, its manufacturing capabilities, its supply constraints, nor its strategic position against other tech giants. It wouldn't improve Apple, and Mr. Cook's job is to do just that.
So, then, here are some other ways Apple can use the cash more wisely -- and note that it has enough to do more than one of these things:
Build its own Google (GOOG).
As we saw in the botched rollout of its maps app and the continued embarrassment that is Siri, Apple isn't very good at building services that rely on analyzing massive collections of data stored online. Mr. Cook seems to realize this -- the company has been hiring and acquiring talent to address the shortcoming -- but it's not clear he sees the problem as an existential danger.
He should, and he ought to open his wallet to fix it. Google's long-term vision is to turn every digital device into the Star Trek computer -- a machine that can converse with you in any way you like, that can serve you any piece of information you need just when you need it, even before you realize you need it. The closer Google gets to achieving this vision for all devices, the less important any single device becomes, ultimately lowering the appeal of Apple's gadgets.
That is why Apple should make it a priority to build a better such system for its own products.
Build or buy a cellular carrier. The iPhone is Apple's biggest product, but Apple sells almost all of its phones in partnership with carriers whose prices it doesn't control. Those costs are the biggest piece of a smartphone purchase, and, in the U.S. and many other places around the world, they have remained relatively stable for years. Your cellular carrier's technology and customer service also leave a lot to be desired.
Steve Jobs once said that Apple's goal is to "own and control the primary technology in everything we do." Cellular data service is a key such technology, and Apple should make it a goal to own and improve that service. It could start small, building infrastructure that boosts iPhone service in congested cities, but with enough investments it could build a network of its own, thus improving current carriers' service and prices through competition.
Scale up its production capabilities. Every time Apple releases a hot new gadget, customers can't get it. This is a consequence of Apple's legendarily precise just-in-time manufacturing system. Apple never wants to make more devices than it will sell, so it ramps up manufacturing in lock-step with demand. That reduces its inventory costs -- and thus boosts its profit, but Apple's production is still too slow to keep up with instant spikes in demand.
Is it possible for Apple to build products any faster than it does now? If money is no object, sure: It could set up factories in many different countries and it could invest in next-generation production capabilities that might pump out iPhones even faster (for instance, robotic assembly lines, which have the added benefit of not raising any concerns about factory conditions).
Is this wise? Apple knows better than I do how many sales it loses to shortages, so that is for it to decide. But demand for Apple's devices is going to grow quickly over the next few years, so investing in production would seem a good use of its extra dough.
Give away media or storage. Or just cut prices! Why has Apple let Netflix (NFLX) and Amazon (AMZN) run away with the market for streaming video? Why, after I've already spent hundreds on an iPhone and a cellular plan, does Apple ask me to pay even more for enough cloud storage to back up all my photos? Wouldn't it be fantastic if your Apple device came with a year of access to exclusive streaming movies, or 50 GB of space on the cloud (which Samsung already does, or any number of other goodies (like the free productivity apps it is now giving away)?
I know what you're thinking: These plans would eat into Apple's margins, and investors hate when that happens. True, but they would drive sales and improve Apple's market share, which would be a boon to Apple's future earnings, especially if you believe that its low smartphone market share leaves it vulnerable to Google.
Another way for Apple to boost market share would be to just cut prices, as Slate's Matt Yglesias has suggested. This would effectively return Apple's cash to its customers rather than shareholders. But shareholders ought to rejoice at that prospect. In the long run, it's better for Apple to curry favor with customers over investors. See all that cash? It comes from customers.
MORE ON MSN MONEY
Copyright © 2013 Microsoft. All rights reserved.
Fundamental company data and historical chart data provided by Morningstar Inc. Real-time index quotes and delayed quotes supplied by Morningstar Inc. Quotes delayed by up to 15 minutes, except where indicated otherwise. Fund summary, fund performance and dividend data provided by Morningstar Inc. Analyst recommendations provided by Zacks Investment Research. StockScouter data provided by Verus Analytics. IPO data provided by Hoover's Inc. Index membership data provided by Morningstar Inc.
The Fed may start tapering in just a few months. Here are a few of the likely winners and losers.
VIDEO ON MSN MONEY
Top Stocks provides analysis about the most noteworthy stocks in the market each day, combining some of the best content from around the MSN Money site and the rest of the Web.
Contributors include professional investors and journalists affiliated with MSN Money.
Follow us on Twitter @topstocksmsn.