Five Years In, Apple CEO Tim Cook Needs New Stories

July 2016

August 24 will mark five years since Tim Cook succeeded Steve Jobs as chief executive officer of Apple Inc. Big shoes to fill: Jobs, like his company, was as much icon as chief executive, a man credited not only with guiding the company to the top, but with instilling in it a sense of style, leadership and flat-out magic along the way.

So how has Cook done? On first glance, very well. The company still dwarfs any rival worldwide by market capitalization, and tops America in profitability; even in what was seen as a disappointing second quarter it logged revenues of $50.6 billion in three months. There are now over one billion active Apple devices worldwide, one for every seven of us on the planet. In April Cook increased the dividend for the fourth time in four years.

But that same quarterly result showed a 13% year-on-year drop in revenues, the first such decline in 13 years. Yes, quarterly numbers can be notoriously fickle – part of the drop was due to currency movements, and the biggest reason was because the same quarter last year boasted one-off and unsustainable 40% growth because of the launch of the iPhone 6 – but still there is a sense that the true glory days of Apple might be behind it. Apple didn’t just used to lead the market, but transform it on a regular basis. Can it do that under Cook?

“He’s very different to what Apple has had in the past,” says Jeffrey Kvaal, analyst at Nomura in New York. It is, he says, hard to evaluate Cook fairly because you don’t know what’s coming along behind the scenes. But “he may be more befitting of a company in a more mature industry. I think it’s fair to say that Apple hasn’t had a breakout new category in a few years.”

See the article as it ran here

*

The iphone and ipad lines predate Cook; he oversees revamps, reiterations, and new marketing strategies around those products, but not their outright invention and entry into the market. So in terms of signature products, the one he will be most closely associated with is the Apple Watch.

On that, the jury is still out. Cook himself is enthusiastic. “The Apple Watch has become an increasingly essential part of user’s lives,” he said a conference call in April, “from responding to messages, arranging calendars and navigating maps, to helping them be more fit – and in some cases the heart rate sensor has helped save lives.

“We were really excited about the first year with Apple Watch. We’ve learned a lot and we believe it has an exciting future ahead.”

But Apple doesn’t break out sales of the device – Cook simply said “unit sales met expectations”, adding that, like the ipod before it, it will make a huge chunk of its sales in the pre-Christmas December quarter – and popular opinion seems to be that it has been underwhelming. This may be unfair: Cook says sales of the Apple Watch have been better than for the iPhone in its first years, and analyst guesses of first-year sales tend to be around 12 million units, which is hardly a disaster.

Perhaps it’s just that expectations are so absurdly high of a company that not only sells more than $500 million-worth of product and services and half a million iphones every single day, but routinely redefines the industry as it does so. There are great stories, from a financial perspective, at the heart of Apple today: the roll-out of iPhones into India, where second-quarter sales were up 56% in a year; the launch of new iPhone versions such as the lower-end SD; the fact that Apple still has 78% of the US market for tablets over US$200. But none of these things set the pulse racing, or convince as the next must-have thing.

“Those impatient for Apple to reinvent the world on an annual basis simply ignore the reality that iteration on existing tech products is the norm and significant change is the rare exception,” writes John Kirk, analyst at Techpinions.

Analysts, who are less romantic about innovation than about numbers, still tend to like Apple a great deal. Citi analyst Jim Suva, while noting the “Apple outlook is worse than expected,” nevertheless has a buy recommendation on the stock and a price target of US$130. Goldman Sachs’s analyst Simona Jankowski’s 12-month target is $155, and Katy Huberty at Morgan Stanley is looking for $135. Yet at the time of writing, the price was around $96, having fallen 8% in a night after Apple’s May earnings announcement. Even at the more bearish end, nobody seems to dislike it: Macquarie analyst Ben Schachter, who says Apple’s latest guidance statement “will spook the market” and who cut his price target from $117 to $112 in April, still rates the stock ‘outperform’.

“I’m positive on the stock, that’s for sure,” says Kvaal at Nomura. “Perhaps it requires a little more work than it once did, but there are still plenty of industries that are ripe for change. The watch, for example, hasn’t done as well as it might have, but if you think about its potential it’s quite large. How many times a day do most people dip into their purse for their phone and wallet? Imagine that stuff being on your wrist instead of in your wallet.”

There is a therefore Buffett-esque simplicity to the case for owning an Apple Watch. “I speak for myself,” Kvaal says,” when I say the parts of my suit that wear out first are the pockets.”

*

In truth, the biggest difference between the Cook and Jobs tenures is not really about the devices, but about attitude, particularly towards what the role of a chief executive really is. Cook’s stint at the top has been peppered with causes and stands, most recently the staunch refusal to assist the FBI in accessing private iPhone data on the handset of a murderer in San Bernadino (the FBI cracked it itself in the end anyway). To Cook, this was a matter of principle, with implications around privacy that would affect companies well beyond Apple and countries well beyond America. He wrote to customers to explain himself in February. “Opposing this order is not something we take lightly,” he wrote. “We feel we must speak up in the face of what we see as an overreach by the US government.”

The FBI stand was no surprise to those who had watched Cook’s activities over the previous four years, starting with his early decision to make a public tour of Chinese factories in order to head off criticism of the labour standards that went in to the production of Apple devices. Cook then committed to work with the Fair Labor Association to improve standards. He also hired Lisa Jackson, formerly the head of the Environmental Protection Agency in the USA, to run Apple’s environmental, policy and social programmes, one of whose targets has been to make Apple a zero-emissions company. Then, in 2014, he wrote a column confirming that he is gay, in the hope that doing so would make a contribution to anti-discrimination campaigns. He wrote: “If hearing that the CEO of Apple is gay can help someone struggling to come to terms with who he or she is, or bring comfort to anyone who feels alone, or inspire people to insist on their equality, then it’s worth the trade-off with my own privacy.”

In October, he won the Human Rights Campaign’s Visibility Award. “Social issues are becoming a bigger topic,” says Katy Huberty at Morgan Stanley. “Since Tim Cook took over as CEO, he has slowly become more vocal on social issues. This has been a consistent trend for Apple, and somewhat true for the tech industry overall.”

Analysts tend to be somewhat ambivalent about this side of Cook’s management style. Asked about it, Kvaal instead gives a perspective from the investor side. “Most folks in the investor community are cognisant of their fudiciary responsibilities, which do not suggest they take a stand on these issues,” he says. “If one is investing on behalf of a pension fund, one’s responsibility is to the people who have money in that pension fund. In most cases investors try to and keep their personal politics out of their investment decisions.” Asked if that means Cook, as a CEO, should do the same and stick to management, Kvaal declines to comment.

Some argue that Cook’s calmer and more reasonable approach – being a generally nicer person to work with, improving labour conditions, returning cash to shareholders – may have come at the expense of the innovation forged in Jobs’s whatever-it-takes creative furnace. As Apple-watching writer Madan Mohan put it recently: “It looks more like a conventional company than the corporate rebel under Steve Jobs… Apple needs a visionary dictator like Jobs to keep pushing people to their absolute limits and making them hit home run after home run.

“The problem is not that Tim is not a great CEO,” he concluded. “The problem is he is not as much of an asshole as Steve was.”

*

Sooner or later, both the market and the public are going to expect something magical, or Apple won’t just be Apple. This is a practical point as much as a visionary one. “We believe that the lack of new ‘must-have’ innovative features will lengthen the upgrade cycle,” says Schachter at Macquarie. “If iPhone 7 doesn’t surprise with meaningful new useful features, we worry that consumers won’t upgrade. And unfortunately, nothing that we’ve seen about iPhone 7 thus far strikes us as particularly innovative. Apple will be a show-me story until then, at least on iPhone.”

And beyond iPhone? “The bottom line is that Apple needs new innovation either in its current categories, or in entirely new products, in order to drive consumer and investor excitement,” Schachter says, raising the much-rumoured Apple Car as a possible catalyst.

“Wall Street,” writes Neil Cybart in the Above Avalon blog, “has effectively declared the old Apple narrative broken.” The narrative he refers to is of Apple as an ever-growing seller of hardware, but as Cybert points out, that’s not the only story Apple can tell. “It is in Apple’s best interest to focus on establishing a new narrative. Apple has a base of more than 650 million users with loyalty that is unmatched in technology. There is value found with this user base, but management needs a new way to explain it to Wall Street.”

And this, perhaps, is Cook’s biggest challenge for the years ahead: finding a way to add new chapters to a story that otherwise appears to have moved into a more dull and pedestrian phase. He believes he can. “Creating value for shareholders by developing products and services that enrich people’s lives will always be our top priority and the key factor driving capital allocation decisions,” says Cook. “The future of Apple is very bright. Our product pipeline has amazing innovations in store.”