Apple – starting to rot? RIM and Motorola been there!

Disappointing results from Apple this past quarter just may be an early sign of more rot to come .  Being more experienced as a portfolio manager has its advantages…if only because of the benefits of hindsight.  Sexy products have a lifecycle that adhere to a familiar pattern.  The greatest risk is assumed by the entity that introduced the innovation.  The rewards are plentiful if the product catches fire, especially in the middle stages of the lifecycle (pricing power and growing demand), but gradually management is obliged to focus on producing more and more of the product; there’s not much time to devote to introducing novel improvements (research) and at some point these added features become increasingly more costly as margins fall – reducing profit margins deliberately is tough to do unless you are a Henry Ford or Steve Jobs and inclined to be oblivious to the rantings of myopic stakeholders.  Once a product reaches mass consumption (like IBM’s PC or Henry Ford’s Model T) competitors attracted by big volumes and profit margins enter the fray; introducing newer sexier versions.

When it comes to mobile phones, recall that the likes of Nokia leapfrogged Motorola (see the Motorola flip-phone commercial I added at the bottom of this commentary for a chuckle) and Research in Motion leapfrogged the mobile phone companies by introducing email on a device.

It is of course possible for companies to re-invent themselves.  When the focus of management returns to innovation – often because it’s a matter of survival – then good things can happen provided resources are made available.  After all, Apple was in dire straights not that long ago.

Bloomberg:  In 1997, Apple Computer Inc. lost more than $1 billion, saw sales tumble 28 per cent and was as little as 90 days away from bankruptcy. Co-founder Steve Jobs returned to Apple that year and did many of the things RIM is attempting now: He simplified the company, embraced a new operating system and revamped the culture to focus on products that were true breakthroughs.

It does however take a very long time for a business to recover once the bloom is off the rose.  The primary source of internal funding plummets as the “hit” product sales diminish.  And then investors run for the hills, looking for the next big “hit.”

Interestingly, the comeback typically follows the same pattern all over again.  Eventually, a new product (such as the iPhone + iPad) accounts for the lion’s share of revenues and profits yet again.  This is now Apple’s dilemma.

I recall when those flip-phones grew to become the dominant source of revenues and especially profits for Motorola, which had the advantage of being more diversified than either Apple or RIM.  Financial analysts on Wall Street grew obsessed with the market share and volumes of the phones (as if the rest of the business didn’t even exist), and the more phones they sold the more popular shares in the company became for both institutional and retail investors – until there was a frenzy to own stock in Motorola.

The chart of Apple’s stock price could easily be mistaken for Motorola shares back in its heyday.

The frenzy to own shares late in the game is more emotional than rational, and for a short while is a self-fulfilling phenomenon as the price keeps getting bid higher by frenzied buyers.

The market value of Apple Inc. has ballooned.  It really hasn’t mattered that Android devices are kicking butt; rapidly gaining market share and being adopted by the more technology-savvy consumers (the nerdy trailblazers).  Until now?

Identifying the next big “hit” product is difficult, and it can be even more difficult for investors to bet on the right stocks to play it.  Bear in mind that the Cable TV explosion (desktop box manufacturers, specialty channel providers); Satellite radio and TV boom (satellite builders, dish and content suppliers), and the rise of the Internet (fiber optic components, networking companies) all witnessed many more failures than winners.

For what it’s worth, I’m warming up to the huge market potential of devices using newer technology for commercial and industrial applications.  I might be mistaken, but it seems about time that Motorola’s re-invention of itself begins to bear fruit.

Bloomberg: Motorola Solutions, created from the legacy business of Motorola Inc. after its mobile-phone division was spun off in January 2011, is winning more technology business from local government agencies and companies. It will introduce rugged tablets and mobile computers later this year using Google Inc.’s Android platform, Chief Executive Officer Greg Brown said.

Motorola seems ripe to exploit technology designed for consumers in order to fuel quantum leaps forward in productivity advances for business.  Henry Ford made his automobile for average Americans, but it soon transformed the economics of transportation across the entire North American economy.

Motorola might seem to be a very different company than it was when the below advertisement was airing, but Motorola Solutions Inc. continues to stick to what I consider has always been the company’s core strength – using technological innovation to create solutions for real businesses.

About Mal Spooner

Malvin Spooner is a veteran money manager, former CEO of award-winning investment fund management boutique he founded. He recently authored A Maverick Investor's Guidebook which blends his experience touring across the heartland in the United States with valuable investing tips and stories. He has been quoted and published for many years in business journals, newspapers and has been featured on many television programs over his career. An avid motorcycle enthusiast, and known across Canada as a part-time musician performing rock ‘n’ roll for charity, Mal is known for his candour and non-traditional (‘maverick’) thinking when discussing financial markets. His previous book published by Insomniac Press — Resources Rock: How to Invest in the Next Global Boom in Natural Resources which he authored with Pamela Clark — predicted the resources boom back in early 2004.
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One Response to Apple – starting to rot? RIM and Motorola been there!

  1. Pingback: AAPL Sauce – The downside of upside! | Maverick Investors Rally Site

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