WSJ opinion: Apple has become a vertical Goliath, ripe for disruption

A sixty-something hedge-fund manager looks at Apple and sees IBM. Or maybe AT&T.

From Andy Kessler’s “How to Slay a Tech Giant (Apple)” ($) in Monday’s Wall Street Journal:

At last week’s Worldwide Developer Conference, Apple announced Apple Silicon, its own line of processors. With that, Apple finally closed the loop. It already makes its own graphics chips, operating system, applications, app store (with a 15% to 30% cut), cloud storage, Siri voice interface, maps, even mediocre TV shows—soup to nuts. Its phones, tablets and Macs are world class compared with, say, Google Maps, Spotify music streaming, TikTok video clips, or Dropbox cloud storage. Apple has become IBM, it’s become AT&T—a vertical giant waiting for a future David to come along with a horizontal slingshot.

If I were an investment banker today (Lord help me) I’d be running around pitching a Virtual Apple. Neutralize its strengths and then attack new markets. Apple is showing that it’s vulnerable by selling an iPhone SE for $399, not $999. Unit sales of iPhones and iPad peaked years ago. As the company runs out of new customers, growth is coming from adjacent markets like watches and earbuds, and from online services. And now the Justice Department is investigating its app store for abuse.

Will a Virtual Apple put together a collection of cloud services that capture the imagination of consumers? Or a robust social-media market—outside Facebook and Twitter there are scores, from Fortnite to Nextdoor. Will the next-gen consumer platform be speech, augmented reality, home automation? I’d bet on a cloud-based intelligent service that simply knows what we want and does it.

Remember, IBM didn’t fail overnight—it took decades. But its growth rolled over and the stock market eventually figured that out and cut off access to cheap capital. Apple is a machine. Its devices are sleek. But new phone features—like “Wind Down Mode” to help you get to sleep on time, and a watch that scolds you if you don’t wash your hands long enough—leave me underwhelmed. A Virtual Apple might beat it at its own game.

Friend-of-the-blog Bart Yee’s take:

As usual, they think they know Apple, it’s weaknesses and its vulnerabilities. Wrong again. The biggest thing is that the major hardware platform challenger is Android, and the jumbled fragmented Android hardware and software systems prevent them from taking control. They only lead in unit sales based on cheap or inexpensive products while depending on Google to provide software features. No coordinated horizontal response there and of course Google has its own business model to defend and grow so no incentive to topple Apple either.

My take: What Bart said.

17 Comments

  1. Romeo A Esparrago Jr said:
    “ My take: What Bart said : Wrong again. “
    Like.

    3
    June 29, 2020
  2. David Emery said:
    Seems to follow the same class of argument as ‘law of large numbers’. In this case, it’s “management will eventually screw up and sink the company.” That’s an observation, it certainly is not a -law- or statistical inevitability.

    But the starting assumption, “Apple is [only] the iPhone company,” is the key failure.

    It’s quite possible that some new unforeseen tech comes out and a new company builds that into a huge business. But I sure as hell wouldn’t give -this guy- any of my money to manage.

    8
    June 29, 2020
  3. Jacob Feenstra said:
    Apple has become a very strong and healthy company… by not taking advice from armies of the world’s Kesslers on how to strategize or how to spend their access funds. Apple can fall by either listening to the incarnations of Kessler or by somehow finding another Sculley (or Balmer) to dig holes for itself. Or they can just continue on with their current leadership and stay hungry and strong. And to stay away from the type of hubris exemplified by Kessler.

    An on “Apple is showing that it’s vulnerable by selling an iPhone SE for $399, not $999.” We will know that only after it’s been a year on market. Earlier versions of the iPhone SE did not put a dent in the more expensive models.

    4
    June 29, 2020
  4. Bart Yee said:
    Thanks for the quotes and kind words, PED and all. I wanted to stress one thing, and it was evident in the beginning of the article:

    The way Apple will be toppled is if and when it comes from within AND without, that is hiring someone like a John Sculley who maybe knew how to run a business but had not a clue about technology. Jobs (and the board) made a huge mistake by hiring him (Jobs turned to Sculley and said, “Do you want to sell sugar water for the rest of your life or come with me and change the world?”). Jobs learned his lesson well and the later result was hiring Tim Cook instead. The same can be said for the similar experiences at Disney with Eisner, Wells, and Katzenberg, leading eventually to Bob Iger. Succession and leadership is the vital key to unlock vision and execution.

    Being astute, forward thinking, and having long term vision is so critical to sustained, defensible, and repeated success. It’s a shame it is so antithetical to the quarterly-based business management styles of most companies.

    So that said, at some point, who would next lead Apple?

    4
    June 29, 2020
  5. Greg Boyd said:
    “Remember, IBM didn’t fail overnight—it took decades. But its growth rolled over and the stock market eventually figured that out and cut off access to cheap capital. “

    Okay, see you in 2040.

    4
    June 29, 2020
  6. Fred Stein said:
    It’s opinion and nothing more.

    Kessler does not understand Apple. David Emery cites the key departure from reality, seeing Apple as an iPhone company, which was never true. From then on, Kessler only sees what confirms his bias that Apple is doomed.

    Old vinegar (not old wine) in a new bottle.

    4
    June 29, 2020
  7. Fred Stein said:
    Ironic: Kessler’s sub title is correct and completely wrong.
    “Dominant firms try to do everything, but a network of smaller peers can do it better.”

    In mobile devices (larger than smartphones), Google, Samsung, Huawei are dominate giants trying to do it all. Amazon, Microsoft, and Intel wisely bowed out of the smartphone biz.

    What’s the score? Google has .5% of WW smartphones and Google Play has half the revenue App Store has, despite having far more users. Samsung lost its position as best silicon maker and has no business in China, the 2nd best market in the world. Huawei, is corrupt and backed by a dictatorship, so they remain a threat.

    Apple is actually a ‘network of smaller peers’ which include the best chip maker, the best camera sensor maker, Foxconn, the best assembly line, and more.

    5
    June 29, 2020
    • David Emery said:
      The really interesting thing to me is how Apple has both prospered from and then broken the “rule of modularity.” This is a fascinating book (and I’ve met the author and we’ve swapped emails), but it seems its conclusions don’t line up with Apple’s reality. https://www.amazon.com/Design-Rules-Vol-Power-Modularity/dp/0262024667

      In part that’s due to the failure of the ‘system integrators’ outside of Apple to produce better integration. If Google and Samsung produces the modular parts (SW and HW), who’s the real system integrator that provides value-added on top of those modules? For a time, Microsoft provided that for all the Windows box hardware companies, but now Microsoft is in the hardware business itself, trying to do a better job of integration than Dell, HP, Lenovo, etc.

      2
      June 29, 2020
  8. Jonny Tilney said:
    Kessler understands Apple as little today as he did when talking to Sculley back when.

    5
    June 29, 2020
  9. Kirk DeBernardi said:
    Kessler:

    “Will the next-gen consumer platform be speech, augmented reality, home automation? I’d bet on a cloud-based intelligent service that simply knows what we want and does it.”

    Bad bet, silly.

    My money stays with Apple. Who wants a system to “lead the way” in your life?

    I’d rather bet on a system that simply helps me lead my own way, thank you. Sounds like the very core of what Apple does best to me and is probably a large part of its continuing success — ya think?

    (Perpetually amazes me how some people espouse how they “get” Apple when they obviously don’t, especially with clickbait articles that display that they don’t.)

    1
    June 29, 2020
  10. Jerry Doyle said:
    I read this blog hours earlier and decided not to comment for all the various reasons folk above have stated. I felt Kessler’s knowledge and understanding of Apple is astigmatic. Kessler’s saying Apple is neutralizing its strengths by attacking a market selling an iPhone SE for $399 did it for me. The SE strengthens Apple profoundly. The SE is a special and rare offering of a premium device that takes away markets from competitors selling cheap devices while concomitantly offering those consumers an opportunity for a premium device into an esoteric ecosystem they never before experienced. Kessler is so naive about Apple and all things Apple.

    3
    June 29, 2020
    • David Emery said:
      But if your view of Apple is “the iPhone company,” selling a cheap iPhone is A Bad Thing.

      The alternative view would be “Apple is a customer relations company, delivering hardare, software and services to [lock in] its customers.” Such a holistic view would probably require more neurons than morons in one’s brain 🙂 🙂

      1
      June 29, 2020
    • Fred Stein said:
      Yup – Please see my reply to Joseph on this topic.

      0
      June 29, 2020
  11. Horace Dediu said:
    The transition of Macs to Apple Silicon is not a major event but a minor step in a journey that started long ago.

    The real significance of WWDC this year was the 23 million developer number and confirmation that Apple is providing opportunities to millions of makers of modules. With dozens of “kits” which allow development on multiple platforms and OSs Apple is far closer to peak Microsoft than to peak IBM.

    The difference being that unlike Microsoft, Apple is not insisting on a monolithic “Windows” but a set of loosely connected stacks. This allows flexibility and scale. Apple is effectively sucking up all the oxygen in the developer world: all the profits accrue to its platforms and thus all the developers are drawn to its gravity field and park in its orbit. Exactly what Microsoft did in the late 90s.

    The vertical/horizontal dichotomy misses completely the network effects of both users/usage and developers/ecosystems. It’s not even correct. There is vast modularity in Apple’s ecosystems; you just need to know where the lines have moved.

    1
    June 30, 2020

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