An Apple legacy to make Jobs proud

While questions remain over Apple's future without Steve Jobs, its December quarter results smashed records, and the tech giant doesn't look like giving up its advantage any time soon.

Business Spectator

When Steve Jobs died last October everyone knew he had left Apple with a tremendous legacy. What was under-appreciated at the time, however, was just how extraordinary that legacy was.

Apple’s December quarter results this week have tested the limits of the vocabulary of superlatives and generated a long list of impressive factoids.

The company generated record quarterly revenues of $US46.33 billion – about $US7.5 billion more than the market expected and 73.3 per cent higher than for the same quarter of the prior year – and record net profits of $US13 billion. Its gross margin leapt from about 38.5 per cent a year earlier to 45 per cent.

The profit, as some analysts were quick to point out, is $US3 billion more than Google’s revenues for the same quarter. Apple now has a market value of $US392 billion – more than twice Google’s $US188 billion and not that far off Exxon Mobil’s $US418 billion.

With operating cash flow of more than $US17.5 billion in the quarter, Apple now has almost $US100 billion of cash reserves - $US97.6 billion to be precise. As one blogger put it, that’s more than the market capitalisations of 95 per cent of the S&P 500.

Jobs’ successor, Tim Cook, is off to a dream start. The question posed by Jobs’ death, however, remains to be answered at some point in the future. Can his successors maintain the company’s growth and its dominance? What’s obvious from that staggering December quarter is that in the near term, at least, it can. Jobs bequeathed the company not just a set of innovative and cool technologies but a formula for success.

The group’s performance is built around the success of the iPhone. Apple sold a staggering 37 million handsets in the quarter, more than double the volume of the previous corresponding quarter. It also more than doubled sales of its iPad. The record iPhone sales are particularly impressive because they were based on the release, not of a fifth generation phone, but the iPhone 4S, with its relatively modest tweaking of the iPhone 4’s features. Apple still has iPhone 5 up its sleeve for a launch later this year.

The success was also achieved in the face of a concerted effort by Google and the makers of phones using its Android operating system – and plenty of encouragement from telcos tired of Apple dictating terms to them – to slow Apple’s momentum. They failed. Indeed the iPhone 4S numbers would have been even bigger had Apple not run out of them.

It is worth noting that the first iPhone was released only in 2007 – in relatively few years Apple has sold nearly 200 million of the handsets and, defying the norms in technology-related products, has been able to increases its prices and margins, not decrease them.

Apple is extending that dominance into tablets. iPad sales grew 111 per cent despite the successful launch of Amazon’s far cheaper (perhaps loss-leading) Kindle Fire device.

Jobs took a piece of technology, turned it into a fashion accessory with clever styling and functionality and then built a walled eco-system around it which has elements of positive network externalities – both in terms of its users and its app developers – that enables its success and growth to be self-perpetuating.

He was either a visionary or got lucky, or perhaps there were elements of both in the coincidence of the iPhone’s launch and an explosion in wireless speeds and demand for smartphones that the iPhone itself helped super-charge.

Jobs superimposed a simple template for future development and growth of the core Apple products – regular and incremental improvements, accompanied by clever marketing (constrained supply and selective leaks of the devices’ new features) to stimulate interest and demand. When iPhone 5 is released, it will almost inevitably set new sales records.

As long as the Apple engineers can continue to produce modest innovation, there is a lot of life left in that relatively simple formula, given that Jobs built Apple’s first-mover advantage in mass market smartphones and the iTunes store and its apps into a position of real market and brand dominance.

The core strategy has evolved

When Apple released the iPhone4S it continued to sell, more cheaply, earlier versions of the device. When it releases the iPad3 sometime this year it is expected to follow a similar strategy. It extracts a premium for the new product while creating a lower-priced but still desirable product to protect it against price-based competition from its Android rivals.

Originally, Apple partnered with telecoms – the iPhone was initially only available to AT&T customers in the US and selected partners around the world. Today the three largest carriers in the US offer the phones and Apple’s distribution network around the world has been steadily expanding. There is a lot of growth left, globally, in continuing to make the handsets more widely available.

The other element of Jobs’ legacy and formula is ruthlessness. Apple is extremely combative and litigious, and the weird world of software patents provides plenty of opportunities to distract and deter – and delay – rival product launches. The recent legal action against Samsung’s new tablet provided a case in point.

The $US100 billion war chest, the dominance of its devices and the size of the as-yet untapped segments of the global market gives Cook the opportunity to maintain very solid growth rates without having to contemplate sacrificing anything of Apple’s fabulous margins.

With the rest of the industry, and behemoths like Google, Microsoft and Amazon, focused on dragging Apple back to the pack, however, the group will have to keep innovating incrementally and continue to exploit the scale and brand advantages Jobs created while searching for the next new big thing.

It only has to look at the once market-leading Research in Motion, whose Blackberries used to lead the smartphone market, or remember its own history and its near-demise before Jobs returned to rescue it and drew up the formula it is adhering to, to be reminded that it can’t take the future for granted.