Apple and the Burden of Being a Behemoth
By John C. Abell
Aug 23 (Reuters) - In the annals of meaningless milestones, Apple's (AAPL) latest achievement -- surpassing Microsoft (MSFT), circa 1999, as the largest U.S. company ever -- is right up there. I mean, how high is up? How big is BIG? What does Apple win, Johnny!?
But it did get me to thinking again about the lifespan of successful tech and Internet companies. There seems to be a trajectory that grants them life in the fast lane for 10 to 20 years before they are overtaken, made obsolete or dismissed as boring.
The general public is a punishing grader that deifies promising, charismatic kids with hoodies and burn rates (at least for a while) but dismisses massive companies -- like Microsoft, Oracle (ORCL), Silicon Graphics (SGI) and IBM (IBM)-- that print money and arguably control the world but aren't sexy.
Microsoft is, of course, more IBM than Palm or even Sony (SNE) on my spectrum. It was one of the original Harvard dropout startups and among the first of them to mint wealthy employees (called Microsoft Millionaires). And in December 1999, at the height of the dot-com boom, Microsoft became worth $616.34 billion -- more than any U.S. company had ever been. (By one metric it still holds the record: Apple would have to reach a market cap of $842.5 billion, Microsoft's inflation-adjusted market cap, to be the clear winner of this meaningless milestone sweepstakes.)
During the tech bubble of the late 1990s there were a lot of screwy valuations for companies that are now worth exactly nothing. Netscape was valued at $4.2 billion by AOL (AOL). Yahoo (YHOO) paid $5 billion for Broadcast.com. CMGI bought a search engine called AltaVista for $2.3 billion and scotched a deal to sell another, Lycos, for more than $100 a share. Terra then purchased Lycos for $12.5 billion.
Microsoft came by its valuation honestly. It powered virtually all of the computers in the world, and its Office suite was ubiquitous -- and neither of these facts has changed. Microsoft hasn't faded as much as its buzz has.
Can Apple avoid doing the same?
I think the answer is a qualified yes, for the opposite reason that Microsoft was fated to fade.
Microsoft was and really still is an enterprise company (Xbox and Bing notwithstanding). The bulk of its revenues are based on locking in large customers -- corporations, for example -- and keeping them more or less happy, secure in the knowledge that it would be difficult for them to switch gears easily.
This bred complacency. Microsoft did not have a strategic motive to innovate, only one to iterate. Indeed, Microsoft was years late to the Internet party, launching the Internet Explorer web browser only in 1995, a full year after Netscape, and wasn't able to take significant market share until 1999.
Apple, on the other hand, has always been a consumer company. The dynamic is reversed: Apple caters to a whimsical, easily distracted crowd, winning it over one person at a time. Much tougher. To pull that off you have to be not only a serial innovator but also correct most of the time.
The uncertainty of the consumer market drives a process that the certainty of business-to-business enterprise actually suppresses. IT people don't want lots of change or upgrades. They want stability, the rough edges rounded, not something completely different.
Will Apple escape Microsoft's fate? Nothing lasts forever, but don't hold your breath. And if or when Apple is eclipsed in this meaningless milestone, it certainly won't be for the same reasons Microsoft fell from that perch. There may be some tepid selling that may depress Apple stock with the rollout of the iPhone 5 and the anticipated iPad mini in September -- this "buy the rumor, sell the news" strategy is very common with Apple. But there is no reason to believe that sales for these devices won't be as robust as those of their predecessors.
The real question is: When will Apple run out of ideas? That fear was given a new voice when Steve Jobs died last year. It is hard to imagine that his particular genius could be captured even by the management team he cultivated during the staggeringly successful -- and unpredictable -- last decade. Apple is thought to be developing a TV set, but it's greatest successes have come from new ideas like the iPhone and reimagined devices like the iMac -- released when desktop computers were already considered passé. Bold initiatives drive this company, and nobody can predict them.
Besides breakthrough products, Apple needs its beefy margins. We learned, thanks to the Samsung patent trial, that margins for the iPad are half those for the iPhone. So what margins can Apple stomach on a rumored iPad mini? The strongest competitors in the 7-inch space -- Amazon (AMZN) (Fire), Google (GOOG) (Nexus 7) and Barnes & Noble (BKS) (Nook Tablet) have settled on a $200 entry price and margins far below what Apple tolerates. Amazon is even reported to be selling the Fire at a loss just to put a virtual store in customers' hands.
Apple won't do anything like that. If Apple does start looking like a commodity player, it actually could spell the beginning of the end of its reign as an earnings behemoth that investors are betting will keep racing to infinity and beyond. But don't count on many misfires from this behemoth for some time to come.