Apple And The “Noah” Rule

Critics: Apple Has Nothing Under Construction

Following Apple’s iPhone Event last Tuesday, September 10th, the Pundits – echoed by the stock market – have been relentlessly critical of Apple’s iPhone 5C pricing strategy. Investors have driven Apple’s shares down more than 10% since last week’s event. Snippets from some of the commentary:

(Author’s note: You don’t have to read every snippet. But you might want to re-read them after I’ve made my point.)

  • (A) common theme emerges: Apple should have used the device to establish a new iPhone price band low enough to drive growth in big, price-sensitive markets like China. But it chose not to, essentially doubling down on the market’s increasingly more saturated higher end, and protecting its high margins. And, in doing so, it has — for the time being — forfeited the market’s massive not-at-all-saturated lower end to Android. ~ Source
  • “(Innovation) has slowed down,” said Laurence Balter, chief market strategist at Oracle Investment Research, when asked about innovation at Apple. ~ Source
  • (I)nvestors and consumers alike are wondering if innovation is truly stalled without the late co-founder Steve Jobs at the helm. ~ Source
  • Jobs is believed to have left Apple with a pipeline of product plans and new ideas, but the longer we get from his passing, and the longer it takes for those products to come out, the more investors may question their existence. ~ Source
  • In his (biography of Steve Jobs), Isaacson wrote that Jobs left Apple a pipeline of innovative products for several years. “We are not seeing them yet,” Isaacson said. ~ Source
  • Indeed, (what they’ve shown us is) not an innovation at all, but merely a refinement and systematic roll-out of an old idea…. ~ Source
  • Many expected chief designer Jony Ive to carry Jobs’s visionary torch, but so far, it’s not clear if he has the equivalent vision.” ~ Source
  • “The C in 5C does not mean ‘cheap’ as I had hoped. It means clueless, as in clueless about how the vast majority of new smartphone users are paying for their phones.” ~ Fred Wilson
  • “Just how far behind is Apple trying to fall? I do not get Tuesday’s release and product launches. Something is just wrong,” Doug Kass of Seabreeze Partners Management said in a note Wednesday. Customers in emerging markets are price-sensitive and want a lower-priced phone, but the iPhone 5C — or “iPhone dud,” as Kass describes it — won’t be cheap enough to drive market share gains that could lead to earnings growth.
  • “I think (Steve jobs) would have abhorred plastic, he would have thrown that out the window,” said Balter.” ~ Source
  • “Maybe we should call him ‘Timid Tim,’” Troy Wolverton writes for The San Jose Mercury News. “As Tuesday’s iPhone event showed yet again, Apple under CEO Tim Cook is anything but bold,” Wolverton writes.
  • (Cook) has demonstrated a spectacular lack of imagination as to how to spend Apple’s riches. ~ Source
  • What (the pricing policy) doesn’t represent is any clear answer about where Apple goes when that engine finally runs out of fuel. ~ Source
  • People keep believing there will be a “next big thing” at some point, but the fact is there is no next iPhone, at least in terms of the amount of value it has created in such a short time. ~ Source
  • (Apple) seems to have no idea what to do with that embarrassment of riches except to try to grow it just a bit more and that isn’t a strategy, it’s score keeping. ~ Source
  • Apple is suffering a classic case of The Innovator’s Dilemma. It invented the modern smartphone, profited wildly, and is watching the industry change beneath it. But it can’t seem to do anything about it except try to wring out as much profit from the existing business model as possible. ~ Source
  • It’s hard to be the one to kill your own golden goose and it’s much harder to know when the right time to do that is, but increasingly it feels like the time has already come for Apple. ~ Source
  • In the end, Cook chose to spare the golden goose. But the goose will eventually be cooked. Whether the CEO has a plan for that remains to be seen. ~ Source
  • These days, Apple is more like a fashion label than an electronics company….Apple is becoming more like Prada and less like Edison. ~ Source
  • Some are questioning how much more innovation is really even possible in smartphones right now. Scott McGregor, CEO of Broadcom Inc. BRCM +2.45%  said a few weeks ago in a press round table discussion that he believed innovation in smartphones had stalled. ~ Source

Pop Quiz #1

Who said:

“If you’re long-term oriented, customer interests and shareholder interests are aligned.”

See answer, below.

How Construction Works And How Construction Looks To Outsiders

(I)t’s worth noting that Apple’s strategic choice is confounding for another reason. Consider the lucky man who builds a great business and finds himself wealthy beyond imagination. He builds a grand palace overlooking the ocean. Over time, though, he realizes the cliffs are eroding beneath his palace. He could do something radical, like move his palace to higher ground or spread his real estate holdings across many different regions. Instead, he chooses to buy some new carpet and repaint. ~ Mark Rogowsky

Really, Mark? Apple’s just been sitting on its hands, not doing any additional construction? If that’s what you think, then it is no wonder that you’re confounded. Let’s take your analogy and run with it, shall we?

Construction houseIn construction, there are roughly five phases: ((There are, of course many phases, which use many names. This is just one variant.)) Foundation, Framing, Rough-In, Close-In and Finish.

Foundation: Easy to see progress. Big earth movers come in, dig out the foundation and block is laid.

Framing: Also easy for outsiders to see progress. The outline of the building quickly rises atop the foundation.

Rough-In: At this point, if you’re watching the construction, you may feel that everything has come to a screeching halt. This is when the water, electric, sewer, etc, is connected to the house. Much of the work is done underground and all of it is nearly invisible to the outside observer.

Close-In: After the Rough-In is completed, the house is “closed-in” – made watertight – and the interior infrastructure, such as air and heating ducts, electrical wiring, plumbing, etc. is added. This phase is frustrating to watch too. Although lots and lots of work is going, to the casual observers, it seems like little is happening.

Finish: Now we’re talking. Lots of action and lots to see. The floors go in, the drywall goes up, there’s spackling and painting and the cabinets and tubs, etc. are put in. Lots or motion, lots of changes, lots of progress for the casual observer to readily appreciate.

Mark Rogowsky, and the other pundits, are claiming that Apple is idly watching the metaphorical ground beneath its business being washed away while taking no more action than to “buy some new carpet and repaint.” I think this is a childish claim that blatantly ignores the known facts. Apple is doing lots and lots and lots of new “construction” to their business, however, to the casual observer, the construction appears to have come to a grinding halt because Apple is currently moving from the “Rough-In” phase of the construction to the “Close-In” phase. But just because the casual observer cannot SEE a lot of activity does not mean that Apple has not been active. On the contrary, the savvy observer can clearly see that Apple – like any good construction company – is quietly installing the infrastructure necessary to support a huge additional build-out.

Pop Quiz #2

Who said:

“We are willing to think long-term. We start with the customer and work backwards. And, very importantly, we are willing to be misunderstood for long periods of time.”

See answer, below.


So, what kind of infrastructure (mostly hidden from the public eye) has Apple been putting into place recently? Well, contrary to common belief, there’s been a LOT of activity, so let’s just list it in alphabetical order.

Appearances often are deceiving. ~ Aesop

A7 Processor:

— “Desktop class architecture”

Speed to spare, and hard to catch from behind.

While Samsung was going for brawn w/ 8 cores, Apple went for brains w/ 64-bit. ~ Adam J. Reid (@read_reid)

No one else can go 64-bit any time soon because the backward compatibility tax is too large to support. ~ Steve Cheney (@stevecheney)

It will be amazing to see what developers do to take advantage of 64 bit and create new class of applications. ~ ßen ßajarin (@BenBajarin)

Apple TV:

— Not the one that exists today, but the the one that is yet to come; the one powered by the new A7 chip, running iOS and using the new gaming controls (see “Games”).


— Bluetooth Low Energy (BLE), a technology that has been in Apple laptops since 2011 and in all phones since the iPhone 4S. Apple simply throws a switch, and 200 million users are good to go — no waiting for NFC chips.


— DoCoMo: Biggest carrier in Japan

— China Mobile: Biggest carrier in world

— ‘Nuff said.


— “Cases?”, I hear you say. “Cases aren’t innovative. Well, just chew on the following data a bit before you make a final decision on that point:

Apple’s case for the iPhone 5S: $39 For the 5C: $29 Nokia’s average selling price for feature phones: $34 ~ Benedict Evans (@BenedictEvans)


Forrester jumping on the “5S will be a big deal for business” bandwagon (I’m the driver) ~ Ben Thompson (@monkbent)

Free Software:

— iOS 7, All five iOS iWork and iLife apps, iWorks and iLife in the Cloud, (and possibly OS X Mavericks, too) all free.


Game Controller Framework

Apple’s big bet on iOS 7 gaming


— With iBeacon, Apple is going to embrace the internet of things.

Bluetooth Low Energy support in the form of iBeacons. An announcement that might well start a little revolution, not so much because Apple invented it (in fact they did not…) but because iOS support of any protocol that more of less makes sense usually ends up in a drastic uptake of its usage, and this particular protocol happens to really make sense.

— Replacing NFC

Indoor applications for iBeacons

Cash Registers


The Internet of things

iPhone 5C Product Placement:

— For all intents and purposes, Apple’s mainstream iPhone (the iPhone 5C) just dropped in price by $100.

What exactly did Apple just do? Amongst other things, halved the US price of the iPhone. ~ Benedict Evans (@BenedictEvans)

— You can’t market a one-year-old phone. Apple is already marketing the begeezus out of the iPhone 5C.

The 5C to me seems more like a play at not making the iPhone 5 feel like the “old version.” Which could work brilliantly ~ Abdel Ibrahim (@abdophoto)

— The iPhone 5C is to the MacBook as the iPhone 5S is to the MacBook Pro. The former is the company’s standard, the latter is company’s premium offering.

Does anyone really think typical consumers will see a blue iPhone 5c in store & say “oh, it’s just last year’s chipset in a new enclosure”? ~ Benedict Evans (@BenedictEvans)

iOS 7:

“The vivid realization of hardware and software together in one device.”

iTunes Radio:

Pandora’s box might have just been slammed shut.

M7 Coprocessor:

— M7 knows when you’re walking, running, or even driving. The combination of the M7 and iBeacon promises richer contextual computing.

Apple co-opting wearable tech by putting the … sensors into the phone. ~ Benedict Evans (@BenedictEvans)

Apple saw a job to be done around fitness so they did the only sensible thing: designed and built a new chip, the motion coprocessor. ~ Horace Dediu (@asymco)


Around this time a year ago, Tim Cook wrote a letter to Apple’s customers apologizing for Maps. Exactly a month later, Apple announced a major executive reshuffle. Forstall resigned. Jony Ive took charge of Human Interface in addition to Industrial Design. A new Technologies group was created, led by Bob Mansfield, who returned from retirement. Federighi and Cue took over additional responsibilities as well.

Failure is success if we learn from it. – Malcolm Forbes

Mac Pro:

Over the top power.

OS X Mavericks

— Pending…any day now…


— Mobile payments — The Holy Grail of eCommerce.

Passbook seems like a good way to extend finger scanner to 3rd parties. Controlled, no 3rd party code. ‘Unlock this pass with your finger’ ~ Benedict Evans (@BenedictEvans)

Touch ID:

— The foundation for customer convenience, personal privacy, enterprise and government security, in-person and on-line payments, and more.

The above items are the building blocks for Apple’s future. They are the equivalent of the infrastructure – ducts and the pipes and the electrical wiring – that is the very blood and guts of a new home.

Apple has not been idle – far from it. They’ve been patiently laying the groundwork for a whole new Apple, one built on a whole new foundation.

Pop Quiz #3

Who said:

“Invention requires a long-term willingness to be misunderstood. You do something that you genuinely believe in, that you have conviction about, but for a long period of time, well-meaning people may criticize that effort. When you receive criticism from well-meaning people, it pays to ask, ‘Are they right?’ And if they are, you need to adapt what they’re doing. If they’re not right, if you really have conviction that they’re not right, you need to have that long-term willingness to be misunderstood.”

See answer, below.


A building has integrity just like a man. And just as seldom. ~ Ayn Rand

What will Apple’s construction look like when it’s finished? It’s always hard to tell during the Close-In phase, and it’s even harder to tell when one is looking on from the outside, as we are. So I make no promises.

PATIENT: Doctor Doctor, will this ointment clear up my spots?
DOCTOR: I never make rash promises!

However, I – and anyone who has been truly paying attention – can tell you that Apple is slowly, methodically, painstakingly, laying the foundation for the next stage of their existence. To think or say otherwise is simply wrong-headed.

There are no shortcuts to any place worth going. ~ Publilius Syrus


No innovation at all…Tim Cook has demonstrated a spectacular lack of imagination as to how to spend Apple’s riches…Apple has no answer about where to go when the profit engine finally runs out of fuel…There is no next iPhone…Apple is watching the industry change beneath it, but can’t seem to do anything about it…One wonders how much more innovation is really even possible…

Really? Seriously? Honestly?

Are the pundits watching the same Apple that you and I are watching?

Things happen fairly slowly, you know. They do. These waves of technology, you can see them way before they happen, and you just have to choose wisely which ones you’re going to surf. If you choose unwisely, then you can waste a lot of energy, but if you choose wisely it actually unfolds fairly slowly. It takes years. ~ Steve Jobs

Based on the available evidence, which seems more likely: Apple has stopped working on innovating or the pundits have forgotten how innovation works?

Worldly wisdom teaches that it is better for reputation to fail conventionally than to succeed unconventionally.’ — John Maynard Keynes, The General Theory of Employment, Interest and Money.

The pundits want Apple to fail in the conventional way (like Microsoft, and so many other tech companies have). Apple has a different idea in mind. They want to succeed in an unconventional way.

Apple believes in the “Noah” rule.” ((Predicting rain doesn’t count; building arks does. ~ Warren Buffett)) While the pundits are spending their time predicting rain, Apple is spending their time building an Ark.

Pop Quiz Redux

Who said:

“If you’re long-term oriented, customer interests and shareholder interests are aligned.”

“We are willing to think long-term. We start with the customer and work backwards. And, very importantly, we are willing to be misunderstood for long periods of time.”

“Invention requires a long-term willingness to be misunderstood. You do something that you genuinely believe in, that you have conviction about, but for a long period of time, well-meaning people may criticize that effort. When you receive criticism from well-meaning people, it pays to ask, ‘Are they right?’ And if they are, you need to adapt what they’re doing. If they’re not right, if you really have conviction that they’re not right, you need to have that long-term willingness to be misunderstood.”


1) Jeff Bezos
2) Jeff Bezos
3) Jeff Bezos

Surprised? The pundits love Jeff Bezos. Why don’t they love Apple? Apple is following Bezos’ advice to a “T”.

Pompous Premature Postulations And Predictions Are The Pontificating Pundits’ Purpose And Purview

A PUNDIT walks into a bar and starts drinking quite heavily. After a while he starts bothering the barman, (who happens to beTim Cook), about the air-conditioning – first he asks for the air-conditioning to be turned up because it is too hot, then he asks for it to be turned down because it is too cold. This goes on for a couple of hours. To the surprise of others, the barman is very patient, walking back and forth and being very accommodating. Finally an observer asks, ‘Why don’t you just throw him out?’

‘Oh, I don’t care,’ says Tim Cook with a grin.

‘We don’t actually have an air-conditioner…

Tim Cook is ignoring the pundits’ constant griping. We should too.

Apple and Imperfection

Apple-Think Different

Near the end the dot-com bubble, smart investors finally realized that a major problem with tech stock pricing was that dozens of companies were priced to perfection: Their stock prices were so high relative to the underlying financials that only a perfect performance could justify the share price for any length of time. Very few companies could deliver perfection and the house of cards folded.

Apple these days seems to be the opposite of a bubble dot-com. Despite a depressed stock price–it was trading at a very mediocre 11.6 times trailing earnings before accounting for a sharp after-hours post-earnings plunge. Apple has now given up all the gains of the past year,

And while I am no financial analyst, this is ridiculous. The sharp run-up in the stock that ended abruptly this fall was fully justified by the company’s stellar performance and even at its peak, Apple was still underpriced by most fundamental metrics. Two things have been true about Apple’s performance for some time: Its margins and growth rate were both unsustainable. But in a reasonable world, there was room for both to decline, as they have, and for shares to keep rising, as they most certainly haven’t.

Apple has always been a stock that traded heavily on emotion rather than analysis and now is no different. If pessimists want to drive it lower, they mill, despite a P/E heading for single digits and a price that’s just a bit more than three times the cash on hand.

Disclosure: I do not have any direct position in AAPL stock, though funds I invest in may.


Why Apple’s Earnings Reports Matter

Today Apple released their earnings report for the third quarter of 2011. As was expected there was much anticipation regarding the earnings, not only from Wall St but also from media outlets. Apple did not disappoint having their best non-holiday quarter ever as well as selling more iPads and iPhones than any other quarter. Outside of continually delivering reports that shock people there is a more significant point about Apple and their earnings progress that i’d like to highlight.

Namely that Apple’s earnings are one of the biggest indicators that not only show the healthy life of the technology economy but they should also give other companies hope. That hope is that if a company truly delivers value to the market place it will be rewarded. They should find hope that consumers aren’t just after the cheapest thing on the market but that consumers truly desire products that add value to their lives and they are willing to pay for it.

It’s not a race to the bottom its a race to provide value. Apple’s earnings continually re-enforce this point.

Below are the key points from the earnings.

Apple® today announced financial results for its fiscal 2011 third quarter ended June 25, 2011. The Company posted record quarterly revenue of $28.57 billion and record quarterly net profit of $7.31 billion, or $7.79 per diluted share. These results compare to revenue of $15.70 billion and net quarterly profit of $3.25 billion, or $3.51 per diluted share, in the year-ago quarter. Gross margin was 41.7 percent compared to 39.1 percent in the year-ago quarter. International sales accounted for 62 percent of the quarter’s revenue.

– The Company sold 20.34 million iPhones in the quarter, representing 142 percent unit growth over the year-ago quarter.
– Apple sold 9.25 million iPads during the quarter, a 183 percent unit increase over the year-ago quarter.
– The Company sold 3.95 million Macs during the quarter, a 14 percent unit increase over the year-ago quarter.
– Apple sold 7.54 million iPods, a 20 percent unit decline from the year-ago quarter.

– Apple reported quarterly revenue of $28.57 billion, and profit of $7.31 billion, representing year-over-year growth of 82% and 125%, respectively
– We’ve now sold 222 million iOS devices to date
– International sales made up 62% of the quarter’s revenue, compared with 59% in FYQ2
– Gross margin was 41.7%, above our guidance for the quarter
– Apple closed the quarter with $76.2 billion in cash, compared with $65.8 billion at the end of the previous quarter
– 3.95 million Macs were sold, a record for the June quarter
– Mac sales grew 14% year-over-year, four times the global PC market growth, according to IDC
– The Mac has outgrown the PC market for 21 straight quarters – more than five years
– International Mac sales continue to be strong, growing 57% year-over-year in Asia Pacific
– Peter Oppenheimer shared that Lion, the new version of OS X, will be available tomorrow
– Apple sold an all-time record of 20.3 million iPhones during the quarter, compared with 8.4 million in the year-ago quarter, 2X IDC’s growth estimate for the smartphone market
– iPhone is being deployed or piloted by more than 95% of Fortune 500 companies, and by 57% of the Global 500
– iPhone is now available in 105 countries through 228 carriers, and year-over-year sales quadrupled in Asia Pacific
– Apple sold 9.2 million iPads in the quarter, up from 3.3 million in the year-ago quarter
– Supply improved and we’re still selling every iPad we can make – iPad is now available in 64 countries
– iPad is now being deployed or piloted in 86% of Fortune 500 companies and 47% of the Global 500
– There are more than 100,000 apps designed for iPad in the App Store
– Apple sold 7.54 million iPods, with iPod touch continuing to make-up over half of the iPods sold
– iPod maintained over 70% marketshare in the US, according to NPD, and is the top-selling MP3 player in most countries for which we have data
– iTunes Store revenue was up 36% year-over-year, reaching $1.4 billion
– We have paid over $2.5 billion out to developers, as the 425,000+ apps in the App Store have been downloaded more than 15 billion times
– Apple plans to open 30 new stores this quarter, for a total of 40 new stores this fiscal year
– Mac sales in our retail stores totaled 768,000, up 13% from the year ago quarter, and 50% were to people new to the Mac
– Apple’s retail stores brought in $3.5 billion in the quarter, up from $2.6 billion in the year ago quarter