Pushing Paper or Selling Products

October 25th, 2013

So Apple’s stock price was boosted Thursday by the news that billionaire investor and firebrand Carl Icahn had boosted his holdings in the company by some 22%, and was pushing for a $150 billion stock buyback. Supposedly such a move, if it’s done as Icahn suggests, would boost Apple’s stock price to four-figure levels. Supposedly.

Understand that, if Apple expanded the stock buyback program to the levels Icahn is demanding, it wouldn’t actually increase revenues or profits. It’s all about pushing paper, and redistributing a healthy portion of the company’s huge cash hoard from the Cayman Islands, Ireland, or whoever it is, back to investors. It won’t necessarily convince anyone to buy an iPhone who isn’t already planning to do so, nor an iPad, a Mac, or an Apple TV. You wouldn’t necessarily see downloads of digital music or movies from iTunes increase either. It’s just a money game designed to enhance Apple’s reputation among Wall Street investors, as if that’s necessary to survive.

Now I don’t want to get into the intricacies of such financial maneuvering. That’s not my expertise, and I have tended to stay out of the fray. I prefer to concentrate on what Apple is really doing to impact the tech industry, and how money is moved back and forth doesn’t mean much except to those who might gain from the stock buybacks.

In other words, it’s a diversionary maneuver, pure and simple.

So we have the recent decision of the shareholders of Dell to approve the plan to take the company private. Now that might be a good thing for founder Michael Dell and the size of his bank account. More power to him. He even boasted that he is “energized to continue building Dell.” But the real question is: What is he building?

Dell got its start as an assembler of cheap PCs, using off-the-shelf parts. There was very little design involved, other than choosing the color of a generic case, and which commodity parts to install. Indeed, there were loads of options for you to customize a Dell PC the way you want. That is supposed to be a good thing, and it’s also true that Dell’s hardware tended to be cheaper before the industry embarked on the fatal rush to the bottom.

Now Dell’s decision to go private comes at a time where PC sales are falling, and even HP is focusing on that ephemeral “services” category, where you earn money from providing support or building customized apps for the enterprise. Assuming there’s a demand for these services, profits can be quite high, far higher than selling PCs that are little different from anyone else’s PCs.

What it also means is that Dell is no longer dependent on the vagaries of Wall Street, the financial community, or massive numbers of shareholders staging a revolt. But that doesn’t mean Dell’s problems in coping with a changed marketplace will just up and vanish, and it’s not as if the chief executive has voiced any bright ideas on turning a page. Time will tell.

As to Apple, according to published reports, Tim Cook’s recent meeting with Icahn was described as “tense.” This wasn’t confirmed by the people who were present, of course, but I am not surprised that Cook would resist hard pressure to change the company’s position on playing with paper money. That can be a distraction. Wall Street might approve, but it wouldn’t make for a better iPhone, iPad or Mac. So you wonder if the exercise is worth the time and resources.

But it’s a sure thing that Wall Street has never understood Apple. The company, which so often goes its own way, is viewed in comparison to what other large multinational corporations do, or are supposed to do, according to the rules of the game. So when Apple refuses to build cheap gear, and race with the rest of the tech industry to the bottom, that is supposed to be a bad thing. When the iPhone 5c came out at a price only $100 less than the flagship 5s, that was also supposed to be the wrong move. There are even unconfirmed published reports that the 5c is an abject failure, although there is no evidence of any such thing. There’s also no evidence of what Apple expected of the product.

But it is clear that the 5c is cheaper to produce than last year’s iPhone 5, which would have become the second tier product had Apple followed the previous game plan. In the end, Apple earns more money, and if they manage to push a few more units into the hands of customers, it’s a win. But if more people buy the 5s, it’s a bigger win. If you want a cheap iPhone, get the 4s free with a wireless carrier contract, or just put it on your credit card.

At the same time, there is speculation that Apple’s move to make OS X and consumer apps free will not cost very much in revenue, or at least compared to what Apple usually earns. But it could help encourage people to become part of the Apple ecosystem, if they can be assured of free apps and OS versions during the life of their products, or as long as they remain compatible, it would make Apple gear an even better value proposition.

If Microsoft makes Windows free — and remember that 8.1 is only a free update for users of Windows 8 — it destroys a substantial part of the company’s revenue base. Of course, they could always stage a stock buyback to divert attention from what’s really going on.

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One Response to “Pushing Paper or Selling Products”

  1. Kaleberg says:

    ICahn is a liquidator. You can make money in the market by backing companies that are building something new, or by liquidating them. Apple, with its huge cash flow and cash on hand, is an attractive liquidation target. Stock buybacks are basically decapitalization. They provide a short term boost to the share price that quick actors can profit from.

    When Apple borrowed money a while back to pay dividends, the excuse was tax issues, but there is nothing like some debt on the books to discourage raiders. I’m not sure of Apple’s best defensive strategy. Maybe they should put their source code in escrow for the public domain if they are bought out. That’s not a real threat, but it would sound scary.

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