A Blogger’s Advice to Apple for its Cash Pile – Cut Prices

Apple’s cash pile brings out activist investor who took large positions in Apple and bloggers with their own suggestions to Apple for the cash.

The activist investor is Carl Icahn and his recommendation for the cash is to buyback shares at $525.  His motives are clear. It is in his right to keep asking for buybacks so he can cash in on short term stock price jump.

But the implication is that Mr. Icahn and those who believe in him will only get that huge return if about a third of Apple’s shareholders think it won’t work. Either that or they would just like to help Mr. Icahn add a few more bucks to his pile.

But there is enough evidence to show that price jump from stock buybacks are short lived and pointless.  If the intention is to return cash to investors they can do so as one time dividends. Cash buybacks are actions of a company that has run out of creative ideas to invest in its future.

Since this advice is driven by profit motives this is both sane and pardonable.

The recommendation from the blogger is – “Give away media or storage. Or just cut prices“. He does make other absurd recommendations but those don’t rise up to this level. This advice is so bad it is not even wrong.

Let us see once again what he is saying – one solution to too much cash is free add-ons and  lower prices. In what convoluted  business logic can this recommendation be labelled anything but absurd? In the blogger’s mind the answer is clear because of  these reasons:

Missing out on streaming video

Why has Apple let Netflix Inc.NFLX +4.24% and Amazon.com Inc. AMZN +1.27% run away with the market for streaming video?

Strategy is about making choices. Does Apple have to play in every market? What does “run away” here mean? Amazon has not turned profit as an enterprise in past few quarters and if they were to breakdown the line of business numbers streaming video will look really bad. Netflix seems to be able to grow revenue only with subscriber growth with no foreseeable way to grow revenue per customer.

Given these we should call into question the definition of streaming video market. It should not be measured in number of subscribers but revenue and profits to be made. If Apple believes it cannot get its fair share of value created in streaming video market why should it play there?

I can go even further and argue that if diversification is what is being suggested then the business need not do its own diversification, investors can with their money.

Free this and Free that

Why, after I’ve already spent hundreds on an iPhone and a cellular plan, does Apple ask me to pay even more for enough cloud storage to back up all my photos? Wouldn’t it be fantastic if your Apple device came with a year of access to exclusive streaming movies, or 50 GB of space on the cloud (which Samsungalready does, or any number of other goodies (like the free productivity apps it is now giving away)?

I will let you in on a secret – you do not have to give anymore value than what customer is willing to pay for. You do not have to beat customer expectations by a mile, just a foot would do.   The goal of a business is to create paying customers – they do that by creating value for customers and getting their fair share of this value created.

Sure it would be fantastic to get 50GB space, so would it be to get free money.  What kind of logic is this? If Samsung does this and if customers find this value more compelling than Apple’s products they sure can switch.

The productivity Apps are not free because Apple cannot stack up the cash, they are free because Apple is likely practicing different kind of price discrimination to get even more profit than software license fee.

Add-ons and price cuts to gain market share

I know what you’re thinking: These plans would eat into Apple’s margins, and investors hate when that happens. True, but they would drive sales and improve Apple’s market share, which would be a boon to Apple’s future earnings, especially if you believe that its low smartphone market share leaves it vulnerable to Google.

Another way for Apple to boost market share would be to just cut prices, as Slate’s Matt Yglesias has suggested.

Really? Investors like margins? Investors understand anything? What about Netflix and Amazon the blogger just quoted? But the point rich in absurdity is the need to gain market share.

It is easy for anyone to compute market share – compute market size which is sum of all revenue made and find a business’ share of that total. There are metrics like HHI index and  Relative Market Share that makes focus on market share legit and business savvy.

But these proponents fail to understand the simple concept that you do not have to sell to every person who wants your product. Your strategy is to decide which segments to go after and how to maximize your profit.  Should LVMH go after everyone who wants a purse?

So why does the blogger think Apple should gain market share? To gain share to make more money from them later? Aren’t they already making more money from the share they have than any other competitor? Let him compare revenue of just iPhone line with total revenue of Amazon.

I do not know what Apple should do with its cash. But to say cut your cash pile by cutting prices to gain market share is nothing but a pile of rubbish.

6 thoughts on “A Blogger’s Advice to Apple for its Cash Pile – Cut Prices

  1. Rags…
    I strongly disagree with your evidence that buybacks/dividends are only good for a short term pop (See IBM and other mature companies that return money efficiently to shareholders and treat shareholders like the owners of the company that they are). The key is Apple has to be better about their capital allocation (and they have been relative to the past) — allocating capital better does not conflict with their ability to innovate. Does it make sense to have a nice capital cushion in the fast changing technology world — sure. But having appx $150 billion of net cash generating 0 returns is not very efficient. Apple could lower that to a $60 billion cash hoard, and pay out 90% of their FCF to shareholders via buybacks and dividends and still be growing their cash buy $4-5 billion annually.

    Yes capital allocation is secondary to their core business. But it’s important to get right as well — and the 2 do not conflict.

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    • I did not include dividends in bad category (buy backs)
      If companies want to return capital to shareholders dividends are likely the preferred way.

      I also said it is okay for a profit seeking activist investor to ask for buy backs.

      I however think it is absurd to say give things for free, cut prices to reduce cash pile.

      Is apple’s cash cushion too much? Likely. But I don’t know for sure

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  2. I’m taking you out of my RSS based on the derpy analysis in both this and the previous post. I understand your position but in no substantive way do you even engage with these authors suggestions. You just reiterate first year business undergrad boilerplate. Even if your statements are correct, I don’t see how you’ve added any value.

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