Saturday 1 September 2012

Does this Apple look rotten to you? The World’s Largest Company and a $1bn Pyrrhic Victory

Apple, the world’s largest company by market capitalisation, reached two milestones last month. On 20th August, it became the most valuable company in history, in nominal terms, after surpassing the previous record set by Microsoft in 1999. And it was declared the victor in a long-running court case with Samsung over patent rights, in which it was awarded a cool $1 billion in damages.

Apple is a lot of people’s darling company. It has done incredible things: it has revolutionised many industries from computing to music through to mobile telecommunications. But its relentless pursuit of court cases based on intellectual property is a bad omen. It hints at a company that is paranoid, aggressive and insecure, not one that is cool, calm, and confident as Apple always used to seem.

Superficially the lawsuit is a rational manoeuvre: by disarming your competitors you can maintain your dominance in the market.

But that is precisely the problem. Not only does Apple come across as petty and bullying by pursuing its court cases, it appears to be aiming for a monopolistic position from which it can exploit its market power and dictate smartphone prices. This has been astutely ridiculed by Samsung which points out, “[it is] unfortunate that patent law can be manipulated to give one company a monopoly over rectangles with rounded corners.”

Courts around the world have refused to side with Apple. A judge in the UK dismissed Apple’s suit against Samsung, saying “[Samsung products] are not as cool. The overall impression produced is different.” In Germany, the Netherlands, Japan and Korea courts have found in Samsung’s favour. It is perhaps unsurprising that Apple’s only major victory was on its home turf in California – and the figure awarded in damages is absurd, like a number Dr Evil might pull out of the air.

What is also quite shocking is the fact that Samsung is one of Apple’s biggest suppliers. Plenty of management research shows that cooperative relationships across value chains contribute to long-run success – exemplified best by Toyota’s rise and longevity. Innovative technologies are shared, supply chain management can be optimised, best practices spread. Samsung is dangerously conflicted, acting as both supplier and competitor to Apple, and a long-running feud will do neither company any favours.

With regard to Apple’s new record market capitalisation this is only a nominal record. Accounting for inflation, Microsoft still holds the real record (peak valuation in $850bn 2012 dollars). Microsoft achieved that milestone in the late nineties, shortly before the tech bubble burst.  Apple is beginning to look like Microsoft in other respects. For starters it has transitioned from a rapid growth phase to the ‘mature company’ phase that stock analysts seem to dread (its first dividends, paid in July, are a key indicator of this). Microsoft adopted bullying tactics with its competitors (Netscape, BeInc…). And Microsoft did its utmost to maintain its monopolies over various software classes. It very quickly became an uncool company, its valuation flatlined, and right now it seems to be destined for decline.

Will Apple go the same way? It seems to be well on the way. Its products have been revolutionary – but its improvements with each new product generation are now more and more incremental. The release of a new iPhone (the 5th generation) will be a great test. The sales are likely to be strong, but sales numbers will be less important than the quality and originality of design when considering Apple’s long-run competitive advantage. Near field control, mobile wallet, or 4G technology cannot be considered revolutionary developments – they are already available so widely. On the other hand, soft-SIM technology, femtocells or something entirely novel could demonstrate that Apple still has what it takes to innovate.

1 comment:

  1. Good one.. But ...

    1. I am not able to get the logic of your argument. How can you say if a company bullies then it becomes un cool (Oracle has been doing it day in and day out- the reason it bought SUN)? I dont understand the reason why you compare Microsoft with apple? The core competency of Microsoft remains litigation, and lobbying! Apple is not a similiar company! And how do you connect uncoolness aspect to valuation? Valuation of a company is determined by its future cash flows, future cash flows esp for apple is determined by its future product portfolio. I dont see why people wont buy apple products just because it bullies some other company?

    2. I agree to your point on Samsungs role in Apple Supply chain. But things are changing. Apple is slowly reducing its reliance on Samsung. I think you should have discussed about it.

    3. Apple did revolutionary innovations? Is it? Really? Right from Digital music players,smart phones to tablets everything well existed in the market even before Apple thought about it. Apple just presented it well and captured the imagination of consumers. Apple just stuck to its core competency- design. Yea I agree with you that Apple doesnt look to come out with a new product portfolio thats completely different from its existing ones! Also I dont think Apple should look at things that are scientifically advanced like femto ( Thats google job). Apple rather should look on revolutionizing some other industry using its design and technology!