Thursday, February 14, 2013

A Broader Strategy for Apple

Yesterday, I suggested that Apple buy Yahoo! or at least finance its acquisition in order to facilitate a long term partnership. Google is the king of internet data. In the digital economy, data is becoming more and more valuable and Google is outpacing all others. Apple has its own share of data, but only on those who purchase its hardware products. In the short term, this is fine. Apple is making fat margins and has $137 million of free cash. In the medium to long term, this lack of good consumer data is a liability. It is not operationally or logistically possible for Apple to keep up hardware sales growth at current levels. Google just needs to churn out more and better on-line products and services. And that's cheap. It requires no fixed assets. As I proposed yesterday, Yahoo! could help Apple catch up.

Apple's shareholders have filed a lawsuit attempting to force Apply to return some of its "petty cash". Apple is going the cash in short term, liquid investments earning a percent or two. The suit argues that investors could make better use of the cash and that Apple should return it in the form of larger dividends or a share buyback. Apple should absolutely NOT return the cash.

As I have argued, Apple needs to invest strategically in order to continue growth long term. And there are a number of ways, Apple could do this. Below are a few acquisition possibilities that would benefit Apple strategically:

  • Yahoo!: Enough said. Estimated cost: $33 billion.
  • Dropbox: Consumer cloud storage site would give Apple a ton of data to mine. Estimated cost: $8 billion.
  • Tumblr: Up-and-coming hip photo sharing site would be (relatively) cheap and increase Apple's already significant fashionability. Estimated cost: $2.5 billion.
  • Nokia: Old hand in the mobile devices industry with reputation for reliable, low cost manufacturing. Could help Apple easily scale up capacity without sacrificing cost or quality. This play would be most likely to happen when Apple decides to expand its mobile device offerings. Estimated cost: $18 billion.
  • Canonical: Largest Linux distributor would give Apple cred in the OSS community. Ubuntu has recently diversified into the mobile OS market. This play would be more defensive. Ubuntu could potentially pose a long term threat and Apple could snap them up cheaply. The OSS culture would be hard to integrate, so Apple would most allow Canonical to operate as a standalone while influencing its broad strategic direction. Estimated cost: $600 million.
  • WMWare: Server technology company would allow Apple to make a play in the enterprise server and hosting services market. At first, this might seem like an unadvisable play. Margins on enterprise software and services are growing more slowly than consumer revenues due to vicious competition. On the other hand, the business will be cash positive while allowing to mine e-Commerce traffic patterns and thus, perhaps, stay ahead of the competition. Estimated cost: $40 billion

Of course, there are uncountably many start-ups that might make sense and that Apple could snap up cheaply. It could easily pay cash for a all of those businesses and buy more. Of course, that would be a mistake. Over-diversification would prevent Apple from bringing its laser-like focus on quality and user-experience to its acquisitions. On the other hand, it will need to take some risks in order to continue its rapid growth.

My advice to Tim Cook:

Don't return cash to shareholders. They think that they can spend it better than you, but they can't. Do your due diligence. Investigate possible acquisitions. Pick one, two, or maybe even three that make sense. Develop a solid plan to either integrate the targets or run them as subsidiaries.

Then pull the trigger.

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