How Apple is Not Spending its Cash

The debate about what Apple should do with its pile of cash continues. This week, Eric Jackson attempted to explain the reasoning behind why he thinks Apple should purchase Pinterest, Twitter, and Tesla. His major point is Apple's $100 billion stock buyback program is a waste of return, and should instead be used to make more "beach front" acquisitions like the ones mentioned above. As I've written before, stock buybacks are a controversial topic, so you shouldn't be surprised to see everyone sharing their opinions on the subject. That said, most of Jackson's advice is not realistic for the following reasons.

Apple does not get social

Purchasing Twitter, Pinterest, or even Path could be a profitable move for Apple, long term. But the chance of that is slim-to-none. Everything a company does regresses to the mean, which means the company's strategies will likely play out like they have in the past. Apple has tried social before, with the notorious iTunes Ping music sharing network. To say it was a colossal failure would be wholly appropriate. Without a doubt, Apple would love to have a successful social network in its portfolio, but its strengths are not in social. In fact, I would argue social is Apple's competitive weakness, because the company almost always places privacy over sharing. A social network made by a company that is fundamentally private is a magnificent act in futility. Apple could surely purchase Twitter or Pinterest, but I would expect that to destroy value, not create it. There is no historical evidence that says otherwise.

Apple isn't a portfolio company

Some companies have huge portfolios of products that range from refrigerators to televisions. They diversify, spreading risk over multiple industries, so if one operating segment flounders, the others could keep the company afloat. Apple is not such a company - it's actually the direct opposite. Apple's competitive advantage has always been differentiation, which allows it to focus on a few products that dominate the market. This intense focus only works when there are few products to focus on. Inevitably, purchasing a large company like Tesla will result in a loss of focus. Some companies are conglomerates that are able to spread their focus, but Apple is not such a company. Perfection runs deep in the culture, and spreading it over too many products will be a risk they shouldn't assume.


Wall Street professionals, most of which have a classical business education, have never understood Apple. The company continually engaged in strategies that would make a business professor squeal with disbelief. Steve Jobs famously blocked Adobe Flash from all iOS products, despite a huge demand for it. Today we know this was a good idea. Apple has also been opinionated to the point of aggression, engaging in unprofessional marketing feuds with Microsoft and Samsung. Moreover, the company has cannibalized its own products voraciously: the iPod was replaced by the iPhone, the iPad initially stole from Mac sales, and now the opposite has been true with Mac sales eating into those of the iPad. As long as people are buying some Apple product, Apple remains content. All of these actions by Apple are not traditional, and they have flustered analysts since the beginning. Sometimes these actions actually hurt the company. But overall, Apple has always remained an enigma, which probably doesn't fully understand itself. Advice by those classically trained in business should be taken with a grain of salt by Apple, since its success has come from being different.

I should mention I myself have this classical business education, so my biases are evident. But I would also highly encourage everyone else with this same education to appreciate its shortcomings. Business strategy has a huge element of luck, timing, and other uncontrollable factors which cannot be reasonably predicted. Let's not forget that.

How Apple is Spending its Cash

What happens when you become so rich that you don't know what to do with your money? You got yourself a nice black Benz with a heated steering wheel. You travelled to New Zealand to view the spectacular coral reefs. You even got a house maid. Now what?

I'm drawing an analogy, of course, but the fictional scenario above is a rudimentary representation of where Apple finds itself now. The company has too much cash, which is lying around unproductively. The main job of a corporation is to provide value to its stockholders. This value comes mainly in the form of stock appreciation and dividends, the latter of which Apple has been slowly increasing. As a company's growth slows, it tends to invest less heavily into the business, and instead spews off dividends to investors.

Tech writers almost always recommend Apple spend its mountain of cash in the form of Research & Development and hiring, but this advice is lacking an understanding of what money can buy. Apple has classically spent less on R&D than competitors, but this has never stopped them from releasing the most popular and innovative products. Just like with anything, there is quantity and quality. Spending billions on R&D because you have billions to spend is not a winning strategy - it's unlikely to provide adequate returns in the form of revolutionary products and it won't provide investor's with the value they seek. This is not the pharmaceutical industry and Apple is no longer a growth stock (it is too big).

Many industry mavens also eagerly advise Apple to staff-up, especially now, since the latest iOS and OS X releases have been riddled with bugs. They seem to think that Apple possesses a machine that turns dollars into productive employees. I assure you, this is not the case, because if it were, Apple would be far richer than it is now. While I agree that Apple should hire more qualified employees (particularly in the App Store, Search, Maps, and iCloud teams), what Apple should do is not what Apple could do. Staffing up teams quickly is a recipe for disaster, especially at a company with such a unique culture as Apple. It can take months, if not years, for an employee to be assimilated into the company. Let's also not forget that this employee will also need to be trained by current employees, taking their productive time away from work. Fortunately, Apple seems to be trying to solve this problem. From what I've seen anecdotally on Twitter and the web, many top-notch individuals have been pouched to join Apple in the last few years, and particularly this year. It's worth pointing out though - we don't know how many have left Apple in the same period.

Apple has also significantly accelerated its massive stock buyback program in order to put its cash to productive use. Stock buybacks are a divisive thing; ask 10 investors if it's a good idea and you'll hear 100 opinions. Buybacks are extremely situational, and they might work for some companies while not for others. In the case of Apple, however, I think they are a good idea because those acquired shares can be redistributed to employees, old and new. It's notoriously hard to recruit great engineers in the valley, and no better incentive exists than cash and stock.

It's easy to write advice about what Apple should do with all of its cash, but it would be foolish to think that Apple is unaware about all these possibilities. At the same time, management myopia is defintely something Apple should steer clear of, as it was that thinking that turned BlackBerry into BlackBerry.