Why Apple’s Dividend Payment Is Actually a Product Strategy Story

Let me say upfront that I’m not a financial analyst so this post is intentionally light on financial analysis, focusing instead on the strategic perspective.

Apple’s decision to use approximately half of its vast $97 billion cash surplus in a mix of dividends and stock repurchase says as much about the company from a strategic perspective as it does financially.

In these days of low interest rates on savings, having large reserves of cash isn’t the strategic plus it once was, which is why financial analysts and investors haven’t exactly been getting wildly excited about that $97 billion being left to sit in the bank.  By deciding to pay a dividend to shareholders and to repurchase stock, but to leave half the money untouched, Apple is able to have its cake and eat it. It has sent a positive message to the market, allowing investors to share further in the company’s current prosperity but at the same time it will retain approximately $50 billion, a vast chunk of working capital.   To date Apple has been using its cash reserves to fund areas such as product development, strategic investments and retail stores.  Apple has had the benefit of being able to invest in its own business in an organic manner with the agility necessary to anticipate and meet market changes and consumer demand.  It is no coincidence that during the same period Apple has been able to develop an unprecedentedly successful portfolio of products.

Apple’s Message: Innovate to Win, Not Acquire to Win

A common strategy for successful companies is to buy their competition out of the marketplace, particularly when that company has large cash reserves or easy access to capital.  But such a move isn’t for Apple.  In so many of their product categories Apple is the leader, in terms of either market share or innovation leadership, often both.  Apple could have, for example, bought a handset competitor, just like Google did (though for different strategic reasons) when it acquired Motorola for $12.5 billion last year.  But instead of going down that path, Apple is holding true to its current course and its core values of building better products.  A point underlined by CEO Tim Cook’s quote from yesterday:

“Innovation is the most important objective at Apple and we will not lose sight of that.”

Apple Is Still Surfing the Success Wave

By meeting the markets half way with a dividends pay out Apple helps put one set of persistent questions to bed, allowing it to focus market attention more squarely on the product story.  And by committing $10 billion to stock buyback Apple is also showing the market just how much it believes in itself.  Apple continues to ride the crest of a very, very big wave.  It has been on top of its game for close to a decade now, establishing leadership in its three core device categories with the iPod, iPhone and iPad.  Without compromising its pricing and positioning principles, Apple has stayed ahead of the competition despite being under simultaneous attack from multiple quarters. Things should get even better this year:

• Android tablet competitors remain niche while iPad goes from strength to strength
• iPhone continues to increase momentum, with Apple now the third biggest mobile phone company globally, and the iPhone 5 will almost certainly supercharge sales further
• Apple looks set to finally play its TV cards fully.  If Apple gets its TV play right it will not only extend its footprint in the home, it will reach new households, potentially on a scale which would make current iPad sales look like small change.

Planning for the Trough

10 years ago Sony had the same momentum, prestige and allure of Apple, now it is firmly in Apple’s shadow.  5 years ago Nokia was at the top of its game, the clear global leader in smartphones, now it too toils in Apple’s slipstream.  Apple has that priceless commodity of momentum, momentum that has swept giants such as these aside.  But every single company in history goes through cycles, as indeed Apple has already done so itself.  And Apple’s management is smart enough to know that every peak of a wave has its trough.    When that time eventually comes (and it may be long way off yet) a $50+ billion cash reserve will come in supremely handy for rebuilding success, once again.

Why Apple’s Impact on Media Companies Has Only Just Got Started

There was a sense of disappointment in some quarters yesterday as Apple announced the third generation iPod, largely because it looks pretty much like a better version of the iPad2 rather than a dramatic step change.  But it was the right move for Apple.  The history of Apple’s device business in the last decade and bit has been a highly effective blend of step change, and evolution.

An Evolutionary Update for iPad3 Was The Right Move

There was no need for Apple to revolutionize the iPad now.  It is the market leading device that is still the most eagerly sought after and is continuing to leave the competition in its wake (latest figures from Forrester suggest that no single competitor has more than 5% market share).  Just as the iPhone 4S was an incremental update that left some industry observers disappointed but actually went on to perform fantastically in terms of sales, so the iPad3 delivers enhancements without breaking the winning formula.  It also enables Apple to push down prices on the iPad2, effectively turning it into the entry level device for iPad customers – a smart strategy which Apple has used to great effect with the iPhone range.

What iPad Lacks in iPod’s Scale It Makes Up for In Momentum

To date Apple has sold 55.2 million iPads (see figure), no mean feat in less than 2 full years of sales.  But to put those figures in context, Apple has sold 334.5 million iPods.  Add that to the 183 million iPhones sold and it is clear that the majority of Apple’s iDevice customers do not have iPads.  iPods and iPhones remain Apple’s most pervasive impact on media consumption and yet the iPad appears to be the one having most dramatic impact on media business models.  There are three key reasons for this:

• iPad owners are highly valuable, leading indicator customers. iPad owners are the cream of Apple’s already tech skewed audience.  They spend the most and value content the most.  The ROI on developing for this current installed base alone is enough to justify the pivoting of many major media companies’ content strategies.  But iPad owners also give us an indication of what future consumers will want.
• Tablets are a tailor made for media experiences. As much as media companies wanted to embrace mobile, mobile phones always had the frustrating restriction of tiny screens, forcing media companies to crush down their carefully crafted content into artificially small chunks.  Tablets on the other hand present most of the benefits of mobile with the visual capabilities of PC but with the added benefit of touch.  Thus while mobile was always a case of cutting down to optimize, tablets actually enable media companies to deliver richer user experiences than ever before.
• iPad growth is dramatic, and some.  It took Apple 7 quarters to reach 55 million iPad sales.  It took them nearly 5 years to reach the same milestone for iPods.  Of course there are numerous mitigating factors (the increased presence of Apple is just one) but the momentum is clearly with the iPad. 

The TV is Apple’s Way of Really Getting Into the Living Room

So the case for media companies’ obsession with the iPad has no small amount of justification (though of course it should be part of a blended device and platform and device strategy that matches the behaviors and needs of the target audience, not the personal device preference of senior management).  But at risk of sowing fear, uncertainty and doubt (FUD) into the minds of content strategists, beware, Apple has got its sights on a new market: the TV.  It seems increasingly likely that Apple will launch a fully-fledged TV product later this year.  Whether they do or not, this is Apple’s next new market.  Of course Apple has patiently plodded away with Apple TV for years, a product that still – uncharacteristically for Apple – lacks identity and if TV wasn’t so important for Apple would have gone the way of the Newton long ago.

TV matters for Apple because it needs a foothold in the living room:

• Living room technology spend is all about the TV.  Consumers used to change their Hi-Fi just because the manufacturer changed the colour, now living room tech spend is firmly focused on the TV.  Having an iPod temporarily plugged into another company’s docking station is simply not enough for Apple.  Air Port Express and Apple TV aren’t enough either.  And though Apple shows little appetite for trying to reignite the Hi-Fi space – they can leave that battle to Sonos and Google – they do know that getting into the TV corner of the room opens up a whole new market for them in the way the iPhone did.
• New markets accelerate growth.  Opening up new markets is important for Apple.  Unlike a company like Samsung,  Apple do not play for the whole market, they play for the upper part of it – not the top, as their entry level device strategy attests – but certainly from the upper mid upwards.  This means that each of their range of devices has a theoretical ceiling and Apple’s way of sustaining market momentum is to find a new market to address before growth in the former slows. (Note that hardly an eyebrow is raised at the fact that iPod growth has been in decline since 2010).  And though some might say TV feels like an unnatural fit for Apple, I remember first joining Apple analyst briefings soon after the iPod launched.  Everyone was asking questions about server and education strategy and gave me very bemused looks when I started asking questions about music strategy!  TV  is in actual fact a much better fit for Apple 2012 than iPod was for Apple 2001.
• TV helps establish the iPad in the living room. The iPad has many great use cases, and the living room is certainly one of them. But Apple doesn’t want it to go the way of the laptop in the living room and just become a tertiary device for multitasking when you are bored with what’s on the TV.  Instead Apple wants the iPad to become our universal remote control – in the way that the iPhone once looked like it might.  And to do that, it really needs to have a great big piece of Apple – or Apple integrated – kit where the TV currently sits.

Apple’s TV Strategy Could Kill Off Connected TVs

When Apple does finally play its TV card – and there are many, many things it could do – expect it to transform the sector in the way it did the smartphone sector with the iPhone.  Yes, a whole market of TV manufacturers are rightly concerned. Not just because of the competitive threat but because Apple’s TV strategy could well leave their Connected TV strategies stillborn.  I’ve been a technology analyst for long enough to see a few false dawns for interactive TV.  While connected TVs are much better than what has come before, they deliver much inferior browsing and interactive experiences to PCs and tablets.  And therein lies the problem: TV companies are trying to squeeze the Internet into TV, which is a doomed to failure.  Because we know that TV (i.e. video) experiences already work great on the web. The TV is already in the Internet.  The missing piece is simply taking the TV that is in the Internet and placing it in the TV set in a seamless, elegant, convenient and highly interactive way.  And we all know which company builds those principles into its product DNA.  When Apple flicks the switch on its TV strategy it will instantly remove the distinction between TV and web.

Apple has spent the last decade transforming media businesses and content experiences.  But the media companies pay heed: the journey has only just begun.

Amazon’s and Apple’s Mirror Opposite Content Strategies

Amazon’s announcement today of their media tablet the Kindle Fire was long anticipated.  I won’t add to the countless virtual column inches discussing whether it can be an iPad Killer (though I do agree with my former colleague Michael Gartenberg that it is competing more with the iPod Touch than it is the iPad).  Instead I think it is worth comparing and contrasting Apple’s and Amazon’s strategic reasons for being in the tablet game.

As I stated in a previous post, Amazon and Apple are 2 of Digital Music’s Triple A (Android making up the third).  Both have in their respective ways shaped online music more than any other company (Apple with iTunes, Amazon with online CD sales).  Both willplay a major role in digital music’s, at the very least, mid-term future.  But they are in digital music, and digital content more broadly, for mirror opposite reasons (see figure).

Put simply, Apple is in the business of selling content to help sell devices whereas Amazon is in the business of selling devices to help sell content.  There is a poetic symmetry the identical yet polar opposite strategies of the two companies.

The differences have direct implications that are also mirror opposites:

• Apple can happily ‘just about break even’ on music downloads because of the way it helps sales of their high margin i-devices
• Amazon can happily price the Kindle Fire so aggressively that it is priced more like an MP3 player (and expect to lose money for the near term at least) because of the volume of sales of content it expects / hopes it will drive

Perhaps most importantly music, video, games, books and all other forms of content are crucial to the success of both.  20^th century media business models may be tumbling around our ears but the fact that the future of the tablet market depends so heavily upon media products will be among the foundations for future growth.