thoughts on the bank of Apple's money problem

Pity poor Apple; the company has a $100 billion stockpile of cash that it only now has figured out what to do with now that Tim Cook is CEO - pay out dividends and buy back stocks over a three-year period. From the LA Times:

The company said it will pay shareholders $2.65 per share each quarter beginning in Apple's fiscal fourth quarter, which starts July 1. The company said it hopes the dividend will make Apple stock a more attractive investment to wider base of investors, including those looking to make regular income from owning the stock.
In a conference call with investors this morning, Apple Chief Executive Tim Cook and Chief Financial Officer Peter Oppenheimer said the company would spend $10 billion on a three-year stock repurchase program. Apple is buying back shares largely to be able to award more stock to its employees without diluting the value of existing shares, which happens when a company slices itself into a larger number of smaller shares.
The company said it would spend about $45 billion on the combined initiatives over the next three years.

Good news, then, for those people who want to make money without working for it - "those looking to make regular income from owning the stock." Apple's got your bank account covered. And what of the other $55 billion? No mention of that.

While the business news is abuzz with talk of dividends, the real issue goes unexamined; how did Apple amass such a large cash stockpile in the first place? Being stingy to investors is one answer. Apparently, Apple hasn't issued a dividend payment in more than a decade according to Yahoo!Finance. But let's consider alternative explanations, beginning with the following reminder:

profit = price - cost

Alternative 1: Apple's massive profits arise from a cost that is too low relative to what its products sell for, which means that the manufacturers are being short-changed ("exploited" in revolutionary-speak). Considering that Apple has succeeded in selling pricey products, it seems reasonable to conclude that customers at least tacitly accept that the high prices reflect the high value of the products. I'd argue that Apple depends, in part, on the high prices to drive the impression of a premium brand, raising the question of whether the market would rate Apple so highly if it offered dirt-cheap products.

Alternative 2: The manufacturers are reasonably paid, and it is the price that is too high relative to the cost. In this case, it means that Apple customers are being overcharged for the products they buy. Cue Steve Jobs real marketing genius; persuading people to dish out more money than they should for products they don't really need.

The overall conclusion is: whether Apple is scrooging investors, underpaying manufacturers, or overcharging customers, its $100 billion of stockpiled cash is the result of an exploitative business strategy, aided and abetted by an uncritical customer base susceptible to hype. Some would gush about how that makes Apple a capitalist success story. I'd argue that by extracting considerably more money from the economy than it puts in, it makes Apple the poster child of exactly what's wrong with our capitalist economy and consumerist culture.


Jessica said...

One article mentioned that the *rest* of the money is offshore and Apple is loathe to pay taxes on its repatriation.

I think they're exploiting on both ends.

Frederik Sisa said...

I think you're right. The discussion could get into offshore money, and the fact that they aren't creating American jobs by manufacturing their products oversees.

Unknown said...

The answer is I believe all three - scrooge investors, squeeze suppliers and absolutely rip off their customers. What other company would get away with designs that don't accept memory cards for upgrades - so the device with an extra £10 of memory will cost you an extra £100 to buy - and thats after you throw out the first device that cost you say £400. The way Apple's customers talk you'd think they invented the MP3 player or the smartphone. My Windows phone of ten years ago could do more than the latest iphone 5 - including accepting sd cards for upgrading. That same phone could cut and paste between applications about 6 years before apple advertised that the iphone 3gs could now do it - with the hype suggesting that nobody could before. Apple treats it's customers with utter contempt, like locking them in a dark sack, taking all their money and then telling them they are enjoying themselves.

And if you look closely at this financial announcement, they are only intending to spend their likely profits over the same period - leaving them with about $100 billion still in the bank afterwards.

Frederik Sisa said...

We're on the same page, Mark, and I think you raise a good point: Apple certainly has been given credit for innovation when, really, all it did was repackage existing ideas. I'm not one to disparage someone for preferring an Apple device over a PC - to each their own tool, I say - but I dislike the dishonesty fueling the hype. Apple is a marketing company with a technology business on the side, really. Beyond treating their customers with contempt, they represent the worse side of consumerism: waste, exploitation, and profit valued more than people.

Thanks for your comment!