Apple's Tim Cook: Insularity Without Inspiration
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A Dismaying Conference Call
Yesterday’s Apple (NASDAQ: AAPL) fiscal Q4 2012 earnings call left me shaking my head in disbelief. At one point, CEO Tim Cook was asked what he thought about the Microsoft (NASDAQ: MSFT) Surface, and he replied that he hadn’t had a chance to use one, but based on what he had read he characterized it as a “compromised and confusing product.” All these years I’ve been wondering whether Apple execs who claimed that Mac OS was so much better than Windows had ever actually used Windows. I guess now I know the answer.
Before I go any further, let me make my position on platform preference clear: I am unabashedly cross-platform. Three of my five active personal computers are Windows 7 systems, two run Mac OS Mountain Lion. I don’t believe in brand or platform loyalty, but I do believe in using the best tool for the job, and as a do-it-yourself PC system builder, I certainly prefer Windows to Linux. And even if I didn’t feel this way about platforms, as an observer and commentator on the tech scene, I would consider it my duty to be thoroughly familiar with any technology that I was writing about. Judging by the comments on my first post, I gather that many felt I was merely an Apple fan who is hostile to Microsoft, but I bear Microsoft no ill will whatsoever. In any case, I wouldn’t render a judgment on a product as Tim Cook did without having at least tried it.
Apple’s Corporate Introversion
Under Jobs, the corporate introversion of Apple had a positive side, and lead to genuinely original and creative products. Being oblivious to what the competition was doing freed Apple to explore avenues that other companies were not even thinking about. Apple under Tim Cook seems as oblivious as ever, but what’s missing is the willingness to explore new avenues.
What’s really gone is a willingness to take risks. Think about what a risk the first iPhone was. At the time it was such a departure from mainstream phones, and there was no guarantee of a market for it. Not since the introduction of the Mac had Apple done anything so daring.
Under Cook, Apple has become as risk averse as mainstream corporate America, but without the usual competitive situational awareness. On the call Cook made clear that he thought tablet sales could be bigger than the PC market, and that the 300 million PCs bought every year could be a major opportunity for Apple to expand its tablet sales. His vision is that the world’s Windows PC users are just dying to escape from the Microsoft yoke, typical of Apple’s mindset.
He’s got it partly right. Many current Windows owners will choose to upgrade to a tablet for their next computer, but most of these tablets will run Windows 8 Pro on Intel processors. This is the only type of tablet that will allow Windows users to keep running their existing Windows 7-compatible apps.
Good but Evolutionary Products
Apple’s risk-averse approach to new products was evident at the Apple iPad mini event earlier this week. Every single product that was introduced represented a design evolution. The new 13” Mac Book Pro, Mac Mini, and iMacs are all simple adoptions of the the Intel Ivy Bridge processor family, which has been available in the Windows PC world for about six months. As such, these products are coming late to the Ivy Bridge party.
Apple has always been a little slow about adopting the latest Intel chipset, but this had started to improve in 2011. Now Apple is back to being roughly six months behind the rest of the industry. What’s worse, Cook indicated during the call that the supply of new iMacs will be very constrained through the end of the year, effectively putting Ivy Bridge iMacs even further behind.
The centerpiece of the event, the iPad mini, is an excellent product and as of this writing the white version has already sold out. But I was surprised to hear CFO Peter Oppenheimer during the call characterize the pricing of the mini as “aggressive” (starting at $329), with a gross margin “well below the corporate average.” Once again, we heard the mantra “we just want to build the best device” chanted in response to questions about the mini, and Cook reiterated that Apple isn’t interested in building a “cheap tablet.” Too bad. Apple obviously intends to cede the low end of the tablet market, just as they did the low end of the smart phone market, probably with similar results.
Earnings below Expectations
The reader may wonder, if Apple is making so much money, why am I complaining? First of all, I’m an equal opportunity critic, and there are no sacred cows as far as I’m concerned. Furthermore, this marks the second quarter in a row that Apple’s earnings have come in below the analysts’ consensus and only slightly better than their usually conservative guidance. Revenue came in a bit ahead of the Q3 guidance of $34 billion at $36 billion, and the diluted earnings per share of $8.67 was slightly better than the Q3 guidance of $7.65.
iPad unit sales are down 18% from Q3, and that isn’t good for a relatively new product with exclusive features such as the “retina display.” No wonder Apple rushed a “fourth generation” iPad into production with the new A6x processor. This processor, essentially the same as the A6 used in the iPhone 5, except for enhanced graphics processing, offers twice the speed of the A5x processor used in the third gen iPad, so it should provide a sales boost.
iPhone sales are the continuing bright spot in the Apple financial picture, with 26.9 million sales in the quarter, helped by the September launch of the iPhone 5. But these were flat relative to the previous quarter, with only a 3% sequential gain.
Apple surprised everyone with a very bullish projection for the holiday season (Apple’s fiscal Q1 2013) of $52 billion in revenue and diluted earnings per share of $11.75. Given the number of new products, the iPhone 5, iPad mini, and new iPods, I consider the projection reasonable, although not as conservative as in previous years. Apple will make plenty of money, and their cash reserves will continue to swell. But I also expect Apple’s smart phone market share to continue to erode, as well as their tablet market share, which is beginning to show similar erosion.
Microsoft is now unleashing the first wave of Windows 8 tablets, ultrabooks, and desktops, and I expect these to eat into Apple’s tablet and Mac unit sales. I’ve been hearing and reading about concerns that the new Windows 8 interface is too unfamiliar and that consumer adoption will be slow. I plan on trying out Windows 8 Pro on my X79 PC this weekend, and I will have a business assessment of the new OS next week.
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Mark Hibben has a position in Apple. The Motley Fool owns shares of Apple and Microsoft. Motley Fool newsletter services recommend Apple and Microsoft. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.