Is Tim Cook Losing The Plot?

Angry investors and bad press has done Apple much damage. Can CEO Cook do anything to pump some pride into what was until recently a mammoth $658 billion-worth corporation?


Five months into his tenure at Apple, Tim Cook invited a select group of Apple’s shareholders at the company’s conference center at 4 Infinite Loop building. The idea was to get those investors to understand the company and its new CEO better – understandably to take a step towards reducing the widespread discussion in the investor community about how weak-willed Apple had grown in the absence of ‘the’ Steve. Apple CFO Peter Oppenheimer first treated them to three-quarters of an hour-long presentation, following which they were served three cookies and two cans of Coke as refreshments. Something unheard of happened at Apple that day. When Oppenheimer had played half his part, Cook quietly walked into the room, chose a seat on the last row and listened. Patiently. His iPhone 4S was on silent mode, and while his CFO spoke for 25 minutes in his presence, he did not add a word. When Oppenheimer’s presentation ended, Cook walked up the front and answered questions that investors shot at him, again with great patience. He explained matters beyond what the company’s financials showed, praised Zuckerberg and Bezos, talked about competition, and in a line assured the 15-odd heads in that room that investors in America now have the freshman CEO’s ear; much unlike Jobs who mostly believed that it was below his dignity to give answers to investors and employees. In their few and many years as Apple investors, the shareholders had never believed, seen or heard of a calm Apple CEO. Jobs wouldn’t have bothered to entertain a lot of dozen-odd investors, out on a ‘bus tour’ of Apple’s campus. Cook did. That was a month before the iPad 3’s official release. That summer (in August), Apple became the world’s most valuable public company ever (with an m-cap of $623 billion), beating the previous best of $620 billion set by Microsoft in 1999. Something that Cook had done to Apple in 12 months was making the company different, wealthier and more powerful than Jobs had in the past 14 years.

48Cook was all set to blaze a trail in the world of technology. Victory in the patent infringement lawsuit against arch-rival Samsung in end-August and introduction of the iPhone 5 & iOS 6 in the second week of September, saw Apple peak on September 21, 2012. Its m-cap reached $658 billion. But that’s when the dream ended.

The six months that followed (the past half-a-year), earned Cook a bad name. Today, Apple is battling where it used to crush. Disappointing reviews of its new launches – MacBook, Siri, Apple iMap – and some grossly misguided HR strategies (like the hiring of John Browett as Head of Apple’s Retail business and his firing in 9 months flat, and the firing and rehiring of Scott Forstall, the man behind the Siri and iMaps fiascos and one who was responsible for failing to make the iOS 5 and iOS 6 seem upgrades to the previous iOS versions) have weighed heavy on Apple’s stock price.

Then of course, is the fact that Cook did little to stop the drumbeat of negativity about Apple – whether by making ‘impactful’ public appearances or by bringing to life Apple’s faded marketing mojo. It is understood that scaring investors and customers about Apple’s fast drying innovation pipeline is all a matter of ‘wrong and misguided’ print and online reporting. For those who say Apple has nothing beyond the iPhone 5 or iOS 6, pray tell us what Samsung has beyond the Galaxy S4 or what Sony has beyond the Xperia Z or what HTC has beyond the One X or what even Google has beyond a stitched-up, fragmented ecosystem of a low security-walled OS? All tech companies have a secret called a ‘laboratory’. [You bet, Apple can afford one too.

What is not true is that Apple is dying soon. What is, is that even its ads have become too product-centric, while competitors across various product categories where it exists – like Samsung, Nokia, Microsoft, Acer et al – have gone the other way (compare the recent iPhone ad to that of others and you will get the drift). Moving away from consumers towards margins and being focused only on the product is what has primarily got Cook’s peace. In the past six months, his company missed earnings targets twice (that made it three in a row – from Q3, 2012 to Q1, 2013) and it has shed 36.8% of its market value (that has fallen to $415.68 billion, as on March 28, 2013).

Interestingly, in the past six months, whenever he has made a public appearance, the stock has dipped – on October 23, 2012 (the iPad mini event), October 25, 2012 (Apple’s Q4 Earnings Call), December 7, 2012 (an interview), January 24, 2013 (Apple’s Q1 Earnings Call), February 12, 2013 (Goldman Sachs Technology Conference), and February 27, 2013 (AGM). This only goes to indicate that Cook has to come out louder, the next time he is in the open, with a major announcement and not simply acknowledge that there are challenges aplenty (recall his apology letter to Apple’s customers on the Apple Maps issue, advising them to try out apps from Microsoft, Google or Nokia?). Cook’s ride at Apple, in hindsight, seems to have been a bumpy one, considering the beating Apple stock has got from Wall Street of late after a glorious ride that made many-a-doubting-Thomas forget the “What would Steve do?” question. But allowing this short-term failure to water down the impact of his efforts would be wrong. He has tried.

50Each day of his tenure, Cook has added $117.33 million to Apple’s market value. In the six quarters gone by under his control, the company has reported a growth in its quarterly revenues and earnings on a y-o-y basis. In fact the topline achieved in the most recent quarter gone by ($54.51 billion; Q1, 2013) was the highest ever in the history of the company. In his full year as CEO (FY2012), Apple’s revenues grew 44.58% y-o-y to touch $158.51 billion. Good numbers these.

Cook, who has been an academic topper throughout his school and college days, is not one known for skipping homework. He doesn’t still, and realises well that he has made mistakes. If the Siri and Apple Maps were jokes, the launch of the more expensive, thinner iMac, and the iCloud (that works only as well as Maps does) are areas where Cook will have to reinvent. Cook has to realise that the theme of ‘thinness’ that Apple brought to the technology market with the launch of the MacBook Air is not one that can make every product look pretty, and more importantly worth the price. A thinner iMac sitting on a desk, with a processor and user experience that has been compromised on, and one which is more expensive than ordinary desktops from the company has little advantages. More so, problems with the iCloud exposes once again the prime weakness that Apple has (which it had even during the Jobs era) – Internet software and services.

51The form factor and lack of innovation with the iOS 6 introduced on the iPhone 5 (as compared to previous versions of the iOS) and the hardware of the iPhone 5 are two other chapters from which he could dig out a lesson or two. First, Cook needs to understand that on the OS platform front, it is not fighting against a stalled Windows OS or an outdated Symbian or a dormant WebOS. Its enemy is the non-prehistoric, multifaced, green bot – Android. Though sitting on a fragmented developer ecosystem, it is thriving. And each OEM, by simply altering the skin of the underlying OS gives each version of Android on each new device a different look altogether. That makes user experience fresh, each time. The iOS 6 doesn’t work in an Open environment and has natural limitations. As such, Cook needs to put someone more forward-thinking, creative and more enthusiastic, in charge of the iOS development, rather than continue to bet on the current chief of iOS development Scott Forstall. Second, the iPhone 5 lacks substance on the hardware front in many ways than one. Everywhere else, everyone else, is working on or has released smartphones with screen sizes that come between 4.7-inch to 5.0-inch, with main cameras with resolutions of 12MP or more and processors that run at a clock speed of 2GHz. Most belong to the latter group. Most like Sony, HTC, Samsung, Lenovo, LG, Nokia, Lenovo et al. On the other hand, after four generations, Apple has finally upped the screen size of its iPhone from 3.5-inch to 4-inch, its back camera now boasts of 8MP and it has a dual core 1.02GHz processor – how many generations more will it take to reach the level where the crowd is? At a time when data services and 4G are in vogue, a 4-inch screen would be like trying to make Motorola’s once-bestselling-now-outdated RAZR handsets work for Google! The smaller screen size, slower processor and non-quad core processors suit best those who don’t do much besides zapping between their SMS and Mail icons while experiencing an emotional session of Angry Birds. The message is clear, and this comes as a lesson and a strategic advice for Cook and his team. The smartphone user of today has one good habit and one bad. Good that he is a multi-tasker. Bad that he doesn’t care about either closing applications after usage or scrolling through 30-plus browser tabs at a go while checking his Email, Twitter, Facebook, editing in Photoshop and watching a video on Israel’s missile defence system or a lady go Ga! Ga! on YouTube. A 4-inch screen atop a 1 GHz processor isn’t one to make the cut. Not even with the iconic icon shining pretty on the back of the handset.

52What should Cook do? In more ways than one, under Cook, Apple has changed. Not only because it appears more open from outside, but its products have undergone the same gradual and subtle makeover as the brand. This is something that Jobs would have hated had he been around. He is not. Cook is. For instance, three years back Jobs had made clear that not introducing smaller versions of the iPad was the right thing to do because “Apple customers didn’t want it”. Within 12 months of his becoming CEO, Cook launched the 7.9 inch iPad mini that was 33% smaller and priced about 25-40% less than the iPad, and lower in product quality (due to absence of the retina display). Result? In Q1, 2013, the iPad mini not only outsold the original tablet 3:1, taking total revenues from the product to $10.67 billion, but also helped revive a stagnating revenue stream. Today, tablets contribute to 20% of the company’s topline. If Cook could replicate the same understanding and experience in the larger iPhone market, Apple could reap benefits. The iPhone contributes to 50.28% of the company’s topline (in FY2012, with 125 million units sold) and is also the highest margin business for Cook (margin of 51.14% for FY2012). What does that call for? Introduction of larger screen phones and lower-priced models that would give the company more market power in fast growing telecom markets like China and India, and the enterprise and education markets globally. Speaking on the importance of these two categories, Scott Kessler, Equity Analyst at S&P Capital IQ, tells B&E, “We believe the tablet form factor will become even more popular in the foreseeable future. We expect Apple to continue to dominate in the upper part of this fast-growing computing market, especially with the fall 2012 introduction of the iPad mini. The iPhone has been Apple’s fastest growing segment over the past couple of years, and… we still see substantial opportunities related to international, enterprise and education markets.” There is more to the introduction of the low-priced iPhone – a move that would prove beneficial for Cook and the Apple stock. NY-based Credit Suisse Analyst Matthew Cabral tells B&E that, “Our checks in conjunction with our Asian team point to Apple not only refreshing the iPhone 5 mid-year but also a specifically targetted low-end iPhone. We believe in aggregate, this is a positive as it can sustain top and bottomline growth – giving upside to our FY2013 and FY2014 EPS of $44.92 and $54.03 respectively – deal with the competitive ecosystem and volume threat from Android/Samsung, and continue to drive growth in Apple’s installed base.” The low end iPhones that Apple would deliver would call for margins of about 38%. That would be lower than the current 50%-levels that this category contributes, but would have dual benefits of making the company competitive in a tough environment and not dilute earnings at the same time. The right thing for Cook to do would be to introduce such a mid-range quality product at the $320-$340 price range (a low-cost 3G device, with at least 8GB of memory and a hardware similar to the iPhone 5). Such a product would help raise its toplines to $227.89 billion with EPS in the range of $60-66 in FY2015 (B&E estimates).

53Cook is a self-proclaimed long-term player. The low-end iPhone would be an indication if his claim is true. Additionally, such an introduction would give rivals some sleepless nights. As per Credit Suisse, this introduction would also help the iOS capture 40% share in the $300-$400 market. Our take: If Cook delivers the low-priced handset this year, when Gartner comes out with its smartphone market share findings in Q4, 2013, Apple’s share amongst smartphones will read between 24-28% (currently 20.9%).

In December last, of the 60-plus analysts covering Apple, only one rated Apple’s stock ‘Short Sell’ (as per Bloomberg data). His name was Edward Zabitsky of Toronto-based ACI Research. He was right – the stock has tanked. Zabitsky claimed that he was worried about competition, the lack of appeal of the closed-architecture App Store, and inability to innovate. (When B&E got in touch with Zabitsky, he said that “being a two person shop” he couldn’t find resources to deal with [our] request.) These warnings are what Cook should understand in full.

Cook knows that most in the investor community believe it when they hear the sky is falling. But even a keen player like him has to measure out his strategies neatly before he acts. It’s over $400 billion-plus in value he puts to risk each time. Cook cannot underestimate competition from Samsung – which is the smartphone leader today and threatens Apple’s dominance in smartphones. Its Galaxy S IIs, S IIIs and the newly launched S 4 and the Notepads are ways for the users to consume larger screen phones. Apple could also replicate the Note’s multi-window home screen. It has been Samsung’s best user interface to date. It wouldn’t hurt Apple.

On the OS front, there is much work to be done still. Working along the lines of offering fresh user interface skins with each OS released, offering services web apps (to users who want to access Facebook or Amazon, or YouTube, rather than having to get into the App Store each time), or even doing something similar to Microsoft’s Live Tiles interface (that provides updates from web services to users without bothering to open apps) could be a start. Cook has to self-disrupt the closed world of iApps to an extent. And this be better done fast.

Finally, there is a big PR problem that Cook has to deal with. And it all starts with flamers and fanboys offerings concerns about Apple’s lack of innovation. There is actually a bagful of cash ($137 billion) that Apple has on its balance sheet to help sort that problem. At present, Apple spends the least on R&D (in both percentage and absolute terms) amongst all bluechip Silicon Valley giants. It spent 2.2% of its topline on R&D in FY2012, as compared to Google, Cisco, Microsoft & Oracle – all of whom spent in excess of 10% of their revenues on R&D. Cook could divert a couple of billion dollars more into his labs and avoid another Maps or Siri debacle. It is currently working on the iRadio, the iTV, the iWatch and something very secretive like the electronically-run iCar. Whatever be the innovation, Cook has to spend billions into promoting its innovations and products like Samsung does (and boldly so), and millions into testing the product before leaking it.

Since Jobs’ exit, Cook has tried every possible means to keep Apple growing. He had glad-handled investors and suppliers, flown to Washington to grow Apple’s relations with Capitol Hill, doled out a cash dividend to company shareholders – the first in over 17 years, avoided fired anyone in elevators, and even made two visits to China in the past 12 months – that included a visit to Apple’s manufacturing partner’s factories (Foxconn) in China (to deal with labour issues) and a meeting with China’s Industry and IT Minister Miao Wei. He is a supply chain expert and a quick-witted diplomat. But trouble for him at present is at the product development front. Increasing R&D spends alone won’t help, given the historically reported failure rates. He has to create some magic with the already existing products – incremental innovation is what he has to excel at. His prime challenge will be to not change the Apple that Jobs made, while changing all that is necessary. It is time that he talks through action, tells his investors that they can shout at the moon all night, but that won’t make their boats sail any faster. Meanwhile, he has to work double tides. And keep his eyes and ears open to what ‘bus touring’ investors have to say!