The Tension Between Apple’s Customers and Shareholders

Apple has been a phenomenally successful company over the past 15 years, releasing three new product lines which revolutionized the markets they entered and drove enormous growth and profits for the company. Shareholders have benefited enormously too, as revenues and share price have risen largely in tandem over that period:

Apple share price vs revenues

During the period from 2000-2012, Apple pleased two constituencies equally well: shareholders and customers. Producing compelling products pleased the customers who bought them in huge numbers and the growth those customers drove pleased shareholders too. Especially as Apple introduced the iPhone, growth exploded, profits increased even faster, and shareholders made out like bandits.

But over the last two years we’ve seen a de-coupling of the previously closely aligned interests of customers and shareholders. As Apple’s biggest product line, the iPhone, has reached maturity and high penetration among its target customer base, growth has slowed. With the groundwork laid by the iPhone, the iPad has rocketed to high penetration rates much more quickly, leading to enormous early growth and a much more rapid slowing of growth than the iPhone. As a result, overall growth in both revenues and profits at Apple has slowed, even though both revenues and operating profits remain significantly higher than those at the other three big consumer tech companies – Microsoft, Google and Amazon.

At the same time, consumers remain very happy with Apple’s products, buying tens of millions of iPhones and iPads and millions of Macs and iPods each year. Customer satisfaction and loyalty rates remain very high. Apple achieves this in part by taking its time with product development, releasing products in new categories only when they can deliver them well, and often withholding what others would consider key features until they can be delivered right or perhaps never. Consider the original iPhone. No 3G, Flash support, multitasking or copy/paste. All but Flash were eventually added, but only when Apple felt adding them didn’t require too much compromise. Of course, Flash famously never was. Or consider the iPad, the concept for which Apple developed before the iPhone but postponed until three years later because it felt the underlying technology wasn’t ready. Though observers have criticized Apple for making these moves, customers don’t seem to have minded and so investors have still been happy.

Apple has therefore always been, to an unusual degree, a company motivated first and foremost by creating great products rather than driving shareholder returns. But it’s also understood the former should generally also produce the latter, even though the reverse is seldom true. But as growth has slowed, and the stock price has followed, Apple is faced with a critical decision: whether to start doing things that will make sense financially in the short term even if they’re not what’s best for its customers and for Apple’s long term success. So far, Apple has dealt with this situation exclusively through financial mechanics, with stock buy-backs, dividends and now a stock split. These actions have boosted the share price even in the absence of massive growth, major new product categories or other drivers in the core business. But unless it keeps increasing the size of buybacks and dividends, there’s only so much Apple can do to appease shareholders hungry for the kind of exceptional growth the iPhone drove.

The temptation at this point will be to start to erode the overarching commitment to great products in the interests of driving short term growth. For example, to put a wearable device out into the market at a time when those on offer are all fundamentally flawed, pointing to limitations in the underlying technology. Or to introduce a cheaper iPhone for emerging markets because that’s where all the growth is. To be clear, neither of these moves – introducing a wearable or a cheaper device for emerging markets – would be a strategic mistake by itself. But the temptation in both cases would be to produce a sub-par product in these categories out of a sense of urgency driven by shareholders not customers.

I see no indication this kind of shift in thinking is imminent. Tim Cook has shown a willingness to stand up to shareholders such as Carl Icahn and the NCPPR, which suggests he’s not going to be a pushover on this front. But I think much of the response to the reports Apple might acquire Beats seem to stem from a sense Apple might be about to succumb to that temptation, by buying growth at the expense of selling an inferior product. They are just reports at this point and we don’t know whether the deal will be done, let alone whether Beats headphones will be sold as Apple products. But I think it’s that fear that has so many people worried about what a Beats deal might signify.

The reality, of course, is if Apple did release an inferior product, or worse still several of them, it would be an enormous strategic blunder. Apple products command such a premium precisely because their standards are so high, and any lowering of standards due to short term financial expediency would be terrifically damaging long term. The fact is the tension here isn’t actually so much between Apple’s customers and its shareholders as a whole – it’s between those interested in Apple’s long term prospects and those interested in short term financial performance.

Apple’s challenge over the coming months is to demonstrate what it’s doing to secure the long term performance of the company. That will start with WWDC in a couple of weeks and continue with the new product categories launched there and/or later in the year. If Apple gets it right, the interests of shareholders and consumers should be brought back into balance, resolving the tension. If it doesn’t, the tension will just continue to increase and with it, the temptation to do something Apple shouldn’t.

Published by

Jan Dawson

Jan Dawson is Founder and Chief Analyst at Jackdaw Research, a technology research and consulting firm focused on consumer technology. During his sixteen years as a technology analyst, Jan has covered everything from DSL to LTE, and from policy and regulation to smartphones and tablets. As such, he brings a unique perspective to the consumer technology space, pulling together insights on communications and content services, device hardware and software, and online services to provide big-picture market analysis and strategic advice to his clients. Jan has worked with many of the world’s largest operators, device and infrastructure vendors, online service providers and others to shape their strategies and help them understand the market. Prior to founding Jackdaw, Jan worked at Ovum for a number of years, most recently as Chief Telecoms Analyst, responsible for Ovum’s telecoms research agenda globally.

963 thoughts on “The Tension Between Apple’s Customers and Shareholders”

  1. Apple has plenty of cash to pay off the blood suckers on wallystreet, with buy backs, etc. Apple knows; Wall Street blows.

    1. I think you overstate the case a bit. I do believe Tim Cook has the strength to hold off Wall Street and resist caving to the temptations I describe above. However, he’s not immune to them either – look at all the moves in the last few years – share buybacks, dividends and now the stock split. He’s clearly not above catering to their needs, caving to some of their demands, but so far he’s done it exclusively through financial mechanics rather than through products. The question is, does the tension increase or decrease over the next year?

      1. My humble apologies.

        When I made that comment I was skimming though your article and when I read it in depth I was wrong, once again my apologies.

  2. Apple buying Beats remains speculative and if it is done the reason will be more than the simplicity minded ideas running in blog dorm.

    It is hard to believe Apple will depart from product and customer focus without major board and leadership changes neither of which seem likely.

    It is dangerous to assume causality with correlation. I take Apple at its word that it has been working the what to do with cash much longer than the recent downturn. Although following Buffet’s strategy that when the market is idiotic and way undervalues the stock, buy the stock. As long as market keeps treating Apple as low PE 10-12 with mind boggling margins and profits and pretty good growth for a huge company, then buy the stock.

    When Apple makes it’s next big move it will define a market like Google Glass or SAMSUNG wearables, etc have not. Remember Netbooks,

  3. This is truly a feeble article. You are merely rehashing known knowns. Ahem! Waste of time and space. Brian S Hall, where are you? Deliver us from such mediocrity!

  4. You’re absolutely right, but you’ve just gotten the tip of the iceberg.

    Any successful company begins by adding value to society, and as it grows it reaches a point where this added value is fully incorporated. The market demands perpetual growth, however, and companies are then forced to use their power – their brand, their influence, their marketing, their pricing – to begin not just to add value, but to extract value. You can envision an adoption curve similar to the ones Horace Didieu occasionally shows for product adoption: while in the steep, fat part of the adoption curve, value is being added, as more and more people benefit from their interaction with the company’s products/services. As the curve begins to level off, the growth in adoption/interaction slows, but market forces demand that growth in revenue and profit continues, and consequently greater profits must be generated from non-greater value: hence, value creation is followed by value extraction.

    Apple is interesting, but not unique, in that it has a very strong value-addition focus: that is, it is focused on customer experience. When it does reach the point at which its ability to add value fully saturates society, it will be interesting, and possibly depressing, to watch, because it is hard to envision any corporate governance successfully ignoring the incessant, in-your-face demands of the market.

    The companies we “hate” are generally the companies that have long-since gone beyond the major value-addition phase of their corporate lifespans and are deep in the value-extraction phase: cable companies, cellular providers, airlines, perhaps Microsoft. Some companies – Google and Facebook, for example – we see transitioning more and more to value extraction, as their main products have become ubiquitous and the need for growth is beginning to lead to questionable, from customer perspective, changes in the way they make money.

    Apple is not there yet, and so far has refused to engage in reputation-damaging value-extraction practices. Constant, creeping price increases combined with slow reductions in quality, value and service; increased use of customer data for questionable purposes; new charges for previously-free services; and entry into increasingly less value-appropriate markets will be signs of this happening.

    There will come a day when it will be very difficult, almost impossible, for Apple to resist a movement towards value-extraction. I hope we’re not there yet, and it will be interesting to see what happens. Hope, though, that the tension between Apple’s customers and its shareholders goes up when that day approaches, because if it doesn’t, it will be because the market has won, as it almost always does.

    Written as (for now) both customer and shareholder.

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