Current Tech Musings and 2014 Predictions

Let’s take a step back and see how things look around the world.

Apple is Fine.

Similar to 2012, Tim Cook back-loaded Apple’s 2013. Apple went so far as to release the retina iPad mini pretty much as late as it could and still guarantee that supply would be adequate before the key holiday shopping season.  From all indications, the new hardware is selling well - as one would expect - although many Apple bloggers whiffed when judging 5c popularity.  While the sales gap between the 5s and 5c may shrink going forward, I would be quite surprised if the 5c becomes “the real iPhone” as many predicted. The sheer uproar over 5c pricing appears to have quieted down as well.  Apple’s redesigned iOS 7 doesn’t seem to have created any new “–gate” controversies, with the only complaints coming from design snobs (I say that with genuine respect).  Apple accomplished a lot in 2013, and 2014 looks to be just as jam-packed with what I would expect to be iPhone bifurcation (two distinct iPhone form factors with simultaneous development – a really big deal). An iPad pro (think larger iPad Air with possible dedicated accessories for professionals) would also seem to fit very well in Apple’s 2014 resource timeline.

Tech Industry Hardware Becoming a Snooze.

Take a look around and there really isn’t much in the way of exciting and flashy hardware innovations geared for the masses. Yes, the 5s is forward-thinking, and has the internal composition that will rival next year’s iPhone 6, but it’s hardly something to get people talking at the holiday party.  The iPhone 5s fingerprint scanner is nice (continues to work well for me), but I’m not finding it nearly as much of a salesperson as Siri (those initial demos were unbeatable).  On the tablet front, it has become an even bigger bore.  I use an iPad 2 and have absolutely no desire to upgrade to a newer iPad anytime soon.  Outside of Apple, Google is busy publicly beta testing hardware products with the ultimate intent of controlling our data and attention.  Amazon is busy spending money left and right in an attempt to sell Amazon Prime subscriptions, and Samsung is twiddling its thumbs waiting for Apple to release new products. 

Smartwatches Selling Like Cold Cakes.

The smartwatch appears to have finally hit mainstream in 2013 as Best Buy is now carving out more square footage to the concept.  Sales are, and will probably remain, “okay” for early adopters where massive sales are certainly not on the radar, but mass adoption remains out of reach.  The idea of a smartwatch makes perfect sense as the phone form factor contains numerous inefficiencies, but the smartwatch industry lacks the needed design and fashion acumen to really get things moving.  The technology does appear to be available though. Interestingly, one company has been beefing up their design and fashion human capital resume. 

Mobile Messaging App Fever. Yawn.

I’ll be honest, I get bored with the never-ending updates on how many users certain mobile messaging apps have.  In the U.S., this fascination with mobile messaging apps remains subdued as Facebook, Twitter, iMessage, (and I suppose you can include Snapchat), pretty much represent the bulk of how people communicate with each other – oh and the phone feature on the iPhone as well.  Maybe I’m just naïve (and only friends with Apple users), but I really have no desire to follow which mobile messaging app is selling “stickers” or making a play for the Indonesian mobile app market.  I never have used Whatsapp and don’t know anyone who has either. The mobile space is fast moving and people love stories of how start-ups will displace incumbents, but from my vantage point in the U.S. – Facebook and Twitter will remain important communication channels, while iMessage continues to be the sleeper hit. I still think mobile carriers are the big winner as my monthly bills will continue to rise regardless of which start-up does well. Of course critics will say the U.S. doesn’t matter, or is behind the times (and that I am clueless), to which I respond as long as the Valley remains the focal point of technology and entrepreneurship in the world, the U.S. matters.

Changing of the Tech Review Guard.

Yesterday, The Wall Street Journal announced Walt Mossberg’s replacements – relatively new names that probably will get paid a fraction of Mossberg’s current salary. I actually don’t think the WSJ will miss a beat with such a strategy, which may say more about Mossberg’s inflated salary than anything else.  Nevertheless, WSJ tech reviews still matter and companies will continue to treat them accordingly. The overall tech product review industry continues to morph and traditional sources for the “yea or nay” for a new product are now shifting to bloggers turned journalists where personal trust outshines all else.   As seen with Apple’s latest products, tech specs don’t matter as much these days and this trend will only intensify as fashion bleeds into personal technology.

Other Random Musings.  

1. It is now easier than ever to grab a few of your journalist friends and start a new company focused on delivering news.  Oh, and charge people a lot of money to read what you have to say.  I imagine this trend will only intensify as it is becoming clear that 1-5 person shops are finding a particular niche in online journalism. Some personal bloggers are pulling in more than $500,000 a year, which traditional media companies will have a hard time matching (or even justifying), while start-ups with minimal expenses require only a modest subscription base to break-even. Of course, aggregators will continue to do well in this world as well where expense growth via headcount is one differentiator versus the small shops.  Slideshows put food on the table. One has to start worrying about information overload though, right?  Hopefully?  Yeah, I know, wishful thinking.
2. A wildcard for 2014 includes Apple’s new retail chief, Angela Ahrendts, which some have already labeled as Apple’s next CEO.  My response would be let’s wait to see how she fits within the Apple culture, then we can start talking. Regardless, Apple retail needs some urgent help, so Angela will be busy.
3. The tech IPO window is wide open and many signs point to 2014 being another good year.  Housing continues to stabilize and contrary to the perma-bears, I think the housing industry will be fine from here on out.  The theme of rising interest rates (due to a stronger economy) makes sense to me as well.  While I won’t comment on which companies will see an IPO in the coming quarters, I would focus on the quality of these IPOs as one would assume quality will decline as we move past the economic recovery years of 2010-2013.
4. Angry Birds (and paid iOS app?) fever is over. It was fun while it lasted. I would be interested to see if Rovio can find another “Angry Birds”, although I remain skeptical. In addition, the overall paid app boom appears to be dead (was there ever a boom?). While there will still be winners going forward, companies solely focused on selling apps for money face dwindling prospects of success. App development, as part of a bigger strategy, seems to have a much brighter future. 

Predictions for 2014.

• Pundits will say Apple made numerous mistakes, either in terms of product pricing, marketing, or strategy.  The new iPhone will also be classified as marking the end of Apple’s popularity.
• VCs will continue to pass off personal marketing blogs as independent sources of knowledge and wisdom.
• Pundits will say Facebook is dead.
• Mobile messaging app fever will continue.
• Humans will continue to be inundated with useless information and inconsequential data points. 

Big M&A Not in Apple's DNA

What will Apple do with its $50 billon cash hoard, which is growing nearly $20 billion annually? On January 6, a Bloomberg article-stating that Apple was shopping around for a new CFO-led some to think that Apple is interested in picking up its M&A pace. In recent months, rumored Apple targets have included Disney ($75 billion), Sony ($40 billion), Netflix ($10 billion), and Twitter ($5 billion). 

Steve Jobs, Apple’s CEO, stated on Apple’s most recent earnings call: 

[Apple] strongly believe[s] that one or more very strategic opportunities may come along that we’re in a unique position to take advantage of because of our strong cash position. And I think we’ve demonstrated a really strong track record of being very disciplined with the use of our cash. We don’t let it burn a hole in our pocket, we don’t allow it to motivate us to do stupid acquisitions. And so I think that we’d like to continue to keep our powder dry because we do feel that there are one or more strategic opportunities in the future. That’s the biggest reason. And there are other reasons as well that we could go into. But that’s the biggest one.

While Steve sure sounded like Apple is looking at a huge M&A deal, I don’t expect Apple to acquire any large companies (which I label as anything with a $3 billion and higher price tag).

Company Culture. It is an understatement to say that Apple’s corporate culture is unique.  Apple managers have roles that are not typical in other companies, with more time spent on actual product development and brainstorming. Apple managers rarely just manage. Former IBM executive Mark Papermaster reportedly left Apple only a few months on the job as SVP Devices Hardware Engineering due to cultural incompatibility. On top of that, Apple had spent months trying to fill the SVP Hardware position before settling on Papermaster. It is tough for Apple to fill its top ranks due to its unique culture. If Apple were to acquire a company with a large workforce, it would be tricky to assimilate these new Apple workers to the culture that has led to so much success. Conflicting company culture is one of the biggest reasons for failed M&A and that rings even truer in Silicon Valley. 

Company Structure.  As I discussed in a previous AAPL Orchard post, Apple’s structure allows decision makers to come in contact with everything that is shipped to the consumer (Macs, iPhones, iPads, etc) and more importantly everyone who is in charge of the product (designers, engineers, marketers, etc.). Ideas are not bounced off of committees. Finished products are not required to get a certain number of approvals. I know of few, if any, large companies with a similar structure. For Apple to acquire and assimilate a company with a management structure reminiscent of a Egyptian pyramid, more than luck and hard work would be needed. 

No Prior History for Large M&A[1]. Apple has never acquired a large company. Apple’s largest acquisition was NeXT in 1997 for $404 million ($540 million inflation adjusted). Recent acquisitions P.A. Semi and Quattro Wireless were $278 million and $275 million, respectively. 

What is the right kind of M&A for Apple?

Peter Oppenheimer, Apple CFO, on Apple’s F1Q10 earnings conference call was pretty clear:

[Apple] occasionally acquire[s] small companies from time to time for their technology and talent. That is why we do it.

Tim Cook, Apple COO, shed more light on Apple’s M&A strategy at an investor conference in 2010. 

[Apple has] always been about making the best product, not having the highest market share or the highest revenue, and so acquiring a company so our revenue gets larger isn’t something that drives us.

I think Tim Cook’s quote is important.  Apple is focused on making the best products, not growing it’s earnings.  Steve Jobs knows great products drives great earnings and Apple will never follow any other rule, or its continued success will be in jeopardy.

As an example, would Apple acquire Twitter? Would Twitter help make Apple’s current product lineup better? I don’t think so. (I am not even considering Twitter’s financials and possible sale price)

So what will Apple do with it’s cash?

1) Acquire talent to plug any holes in Apple’s current team and resources.  I suspect some software team acquisitions may be in the offering as distinguishing software will become even more important for Apple to set itself apart from the competition. Buying smaller teams of outside talent makes company assimilation, from both a culture and company structure viewpoint, easier to accomplish.  A small group of acquired software engineers can be quickly lumped within the iTunes or iOS team without much disruption. 

2) Long-term agreements (aka “strategic opportunities”) for product components. In 2009, Apple paid an up-front cost of $500 million to enter into a long-term agreement with Toshiba for NAND flash chips.  Recent rumors include Apple partnering with Sharp and Toshiba to build LCD factories with a price tag over $1 billion. Apple faces supply constraints whenever a new product is released and I expect Apple to pour billions into its infrastructure, forming new partnerships to guarantee that components are available, and at a good price, when needed. Finally, Apple needs additional investments, such as the $1 billion data center in North Carolina, to support and grow its current product lineup.

3) I don’t expect Apple to buyback its stock or issue stock dividends in the near term.

All of these investments and cash outlays won’t end up costing anywhere near $50 billion, but since when was having a lot of cash that bad of a thing? 

[1] Some will say it is for this reason that Apple is interested in a more experienced CFO. I would respond that Apple’s storied history is a result of no large M&A. For Apple to change course now, especially considering how its team is performing, would be shocking to me and serve as a worrying indicator that something is awry in Cupertino.  I am not ruling out large partnerships or agreements with certain companies that are not in a position to be acquired (Facebook, AT&T, Comcast etc.), but these are a whole other ball game compared to an acquisition.