Peak Apple

AAPL’s valuation is currently $355B and will likely go up a while. In terms of dollar value, it can continue to do so. In terms of being the largest company, or second largest on the planet, it cannot. Once you’ve made first place you can’t make zeroth. The only way is down. The question is when?

I’m fairly bearish. Last weeks event appeared to be the bottom of the barrel in scraping around for things that they’ve been sitting on for a while. Shipping the Pencil and iPad Pro was nice (people actually laughed in the audience, they thought the Pencil was a joke), but there are no new markets here. We’re now in to “copy Microsoft” territory (Surface). Once meaningful phrases are now fairly vacuous – “the only thing that’s changed is everything” would apply to iPhone but not iPhone 6S.

Share buybacks, splits and dividends – throwing money at people – will support the stock for a while. Casting around for more prototyped things to ship will too. However, the days of focus, small product selection and quality are gone. iOS and MacOS are no longer a step above their competitors, they fall apart all the time.

(Yesterday I had to kill iMessage because it wouldn’t stop recording an audio message, the swipe-to-show-delete doesn’t work either and the delete button keeps disappearing. This is about as good as Modern Mail on Windows 10 at present).

It feels like a committee is in charge of what apple should be like if it were still apple. The pre/post Jobs discussion isn’t useful. “What would Jobs do?” isn’t a useful discussion. What is useful is, “what will the new committee do?”

I predict the new committee will continue shipping nice enough incremental improvements. The machine will still print money for quite a while. But it will go the way all committees do eventually. People will turnover, long-term will give way to short-term thinking and there will be a painful descent when, eventually, the revenue doesn’t support millions of people creating the artifact.

The amount of specialization under Apple’s roof is incredible and it’s led to to an amazing core product that pays for everything (the iPhone). But it’s also very fragile. All of this is maybe a decade away. Maybe more, maybe less. That’s the trouble with predictions.

Inverting the question, what would I do differently? I would stop the dividends. I would stop giving money to charity. I would stop showing up to Cisco launch events. I would be very fearful and focus on the next thing, because the iPhone is going to die eventually just like the Mac did. And when it happens, it will be quicker and more brutal than the ascent. It will probably still be a nice business, just like the Mac is, but it’s going down eventually.

Rumors fly that the next thing is a car. The question isn’t “Will AppleCar do well?” – it’s “What should apple do next?” – they could copy SpaceX just as well as copying Tesla. Or they could start building houses or boats. I’m sure there’s a VR prototype at Apple along with a drone prototype. They could ship any of these things, and they’d be pretty good products.

But once you’re in that territory of copying or improving there’s limited upside. I’m sure an AppleCar would be marginally (maybe even meaningfully) better than a Tesla and it would sell lots. That isn’t the point. It’s this – where do the new things come from if not from Apple?

Google keeps throwing out cool new things, but they don’t tend to make any money. Microsoft seems much more aware that Office and Windows are going away and the focus shifts to HoloLens, which has a genuine shot at pornography and from there to mass market adoption. Both could be considered variations on the above theme but with different strategies.

No – for all this bearish talk I think the bullish should focus on Amazon.

Amazon’s algorithm appears to be this:

  1. Don’t spend any money
  2. Try things
  3. If success, expand
  4. If failure, kill
  5. GOTO 1.

Fundamentally the big four – Google, Microsoft, Apple and Amazon all have to be trying new things. The only thing we can do in life is try new things and see if they work. Little semi-scientific experiments to make more money.

Some large fraction of those things will fail. I posit that Amazon’s competitors are okay at steps 2-5. None are very good at step 1. The other fundamental difference at Amazon is how organic and bottom up the process is. Anyone comes up with ideas and has the ability to very frugally try them internally and externally. This isn’t exactly the case elsewhere.

Amazon isn’t perfect, neither are the rest of them. But keeping everything else roughly constant (management teams, culture and so on) Amazon is going to win. And it won’t do it by copying Surface or giving phone operating systems away for free. They don’t tend to sit around copying people. They’ll win because they’re like a big commercial arm of the US Marine corps. Everyone is iterating their OODA loops across individual, team and unit scales.

Per dollar, Amazon is able to try more things than anyone else (I posit). That would scare the crap out of me if I were their competitor. And since they want to compete with everyone, everywhere, it should scare everyone. The only people who can try more things, in aggregate, are startups. It’s arguable whether they can do it cheaper (my guess is not). In startups we drop billions of dollars with a ~5% success rate. But there is no feedback, I become a lucky ticket holder then I sell my company and go whale watching or helicopter snowboarding. Amazon keep the feedback, not dissimilarly to Berkshire Hathaway.

Today the valuations look like this ($billions) :

  1. AAPL 655
  2. GOOG 438
  3. MSFT 343
  4. AMZN 244

My prediction is this:

  1. AMZN
  2. {everyone else}

Because AAPL, GOOG and MSFT are all mere subsets of AMZN’s market and they’ll eventually eat them and everything else. We haven’t even talked about Wal-Mart. Amazon will try things cheaper and quicker and be able to ship at a lower price point. They don’t necessarily have to make more money, they can also just outlive everyone. Blue Origin’s motto Gradatim Ferociter! (step by step, ferociously) is just as well applied to Amazon.

John Boyd posited that merely executing your OODA loop faster than your competition made you certain to win. And that’s all I’m relying on here.

Or maybe I’m wrong! Either way, now’s the time to tell you I have money in AMZN.

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