In 2012 Apple announced they will spend $45bn over three years on dividends and stock buybacks. They also started paying $2.65 per share as a quarterly dividend. So far, they have bought back stock only worth few dozen millions. So we can concentrate on the dividend part.
Multiplying the dividend of $2.65 with the number of outstanding shares (around 940 million) yields almost precisely $10bn spent in the first year, leaving $35bn for the remaining two years of the $45bn program. I will use $10bn from here on both to make it easier to calculate and because I’m too lazy to look up the number of outstanding shares for each individual quarter (roughly 940 million on average).
Assuming a proportional increase in dividend per year, and further assuming that Apple will only buy back enough shares to keep the number of outstanding shares constant (i.e. a low number of shares), we can see that dividends should exactly double over two years, multiplying by approximately sqrt(2) every year.
Here’s the formula for how the $45bn will be spent:
10bn + 10bn*1.414 + 10bn*1.414*1.414 = 44.134
The remaining $866 million will be used for stock buybacks.
That means dividends should increase to $3.75 this fiscal year, and to $5.30 the next
In this article I claim that Apple’s current success is unsustainable because their competition’s complacency has let them build up a huge technical lead that Apple now makes effective use of. This will change.
Apple only has a relative advantage in overall product quality, not an absolute one. From a technical standpoint, everything that Apple does could have been be done by a competitor. There is no magical ingredient. They do not write the best algorithms. They do not have the best ideas (Google is pretty good at that BTW). Apple simply delivers products (software algorithms packed in hardware) at the state of the art, and with very good attention to detail. Their advantage is that their competitors can’t do that yet.
Let me concentrate on the state of the art part.
Keep in mind that this is a very special industry. An industry that is comparably young, and that has for a long time been dominated by monopolies: first IBM, then Microsoft. Neither of those monopolies was ever driven by technology, or by trying to advance the state of the art for the sake of implementing any vision that was not monetary. IBM was essentially a business machine company, and they used machinery and computers to automate some common business tasks. That was good for their customers, so IBM grew healthily, but they were never “in love” with technology, computing, or excitement.
In the case of Microsoft, its vision was to monopolize the software industry. They did so by creating cheap – and usually inferior – alternatives to expensive, established software programs, driving the expensive products out of the market with their inferior products. Their goal was to end up being the last man standing and able to dictate the prices. They, too, had no incentive to implement, let alone advance, the state of the art.
Both IBM and Microsoft made ridiculous money from products that were far away from the current state of the art. Add to that the necessity for backward compatibility requested by many of their customers, they were essentially tied to a huge weight keeping them from significally advancing in the technical field.
This was not problem for a long time, because competitive market entrants could always be threatened, bought, or FUD’ed out of the market.
Given the comfortable situation where you dominated the market without rapid product innovation, they essentially stopped innovating for a long time.
Until a company showed up that had both the technical skill to implement the state of the art in computing and industrial design, and was influential enough not to be shoo’ed away by Microsoft’s usual tactics. Apple’s goal under Jobs has always been to build great products, especially to use state of the art computing and industrial design to build products that realize a human vision. They have always been aware that a product in the computing space consists mostly of software, but must be baked into attractive hardware. They are masters of making attractive packages of software and hardware.
So now, Apple’s products are technically far superior to their pendants from the Wintel world. But they are not superior to what anybody else could build if they tried. They are just superior to what has been built so far. For instance, while Windows 7 is still tied to legacy Windows code and thus immensely complex, slow, and a nightmare to use compared to OSX, its phone counterpart (which breaks compatibility and runs on a different chip) looks and feels comparatively slick, lightweight and is generally closer to the state of the art than any version of Windows for PCs has ever been. There are still lots of problems with Windows Phone from a usability perspective, its app universe, its timing etc., but it is not as vastly inferior to the corresponding Apple product as Windows 7 or 8 is to OSX.
Similar things as for Windows Phone could be said for Android.
To sum up: it is much more likely that the reason for Apple’s incredible success comes from their competitor’s omissions than from Apple’s own advancements. With the exception of the Jobs-less years in the 1990s Apple did not rest on its laurels like Microsoft rested on its monopoly power.
But this means that eventually Apple’s competition will catch up. When that happens, it will be a question of who has the best overall experience including ecosystem (apps, cloud services, third-party products, development tool chain etc.). Apple will have become very strong by then, but will it be strong enough? Keep in mind that Microsoft sparked a huge industry. Thousands of companies used to make money producing for the Wintel market. All of these companies were pro-Microsoft and pro-Intel. They profited immensely from the Microsoft monopoly world. They were Microsoft’s allies and Microsoft’s slaves. Most of them are losing money now. On the other hand, Apple ist more or less on its own, with only some chip and manufacturing partners. They only have few allies.
It is obvious from looking at the history of Apple’s products that iTV will not be for the most part a TV set, but rather a screen with apps and sensors for “everything you need at the central place in your home”. Just like iPhone was a screen with apps and sensors for “everything you need on-the-go”.
For iTV, I expect sensors for: temperature, humidity, brightness, noise, human presence, air flow and air quality, possibly a lot more in later generations.
Add to that apps for (obviously) TV channels and iTunes, but also interfaces to all kinds of machinery from heating to fans, and from microwave to tumble-dryer (this needs a new generation of connected household appliances, but iTV can be the spark that kicks it off).
Plus it will be a great FaceTime machine and if Apple does it right, it will be a great basis to work at home via multi-way video-chat and screen sharing. The latter is almost trivial to do for Apple now; they have all that implented already (iChat, Back-to-my-Mac, screen sharing etc.). It just needs some consolidation.
A non-mobile large-screen device like an iTV will not be much constrained regarding power consumption, memory usage and screen real estate. It would be a pretty obvious idea to have it offer several visuals at once, probably in boxes similar to how Windows phone 7 does it. One channel could be twitter, one facebook, one email, one or two live TV (one with sound), and one could even be a permanent stream of advertising to reduce the user’s monthly iTunes bill. Apple has already patented some interesting ways to make sure an advertisement is being consumed. That could be applied here.
When the iPad came out in early 2010 many journalists, bloggers and analysts in the tech sphere criticized the device as “just a big iPod touch” and “hardly a revolution”. They were right.
The revolution had happened years before, they just hadn’t noticed. The revolution is iOS, and putting in in a phone (the iPhone) was simply Apple’s go-to-market strategy for this OS. Let me explain:
As you probably know, radical changes are hard to bring to market if they replace incumbents. Lots of good ideas are shelved because the market does not accept them due to lack of infrastructure and/or backwards compatibility. This is especially true for the computer industry, where backwards compatibility is king and its drawbacks are masked by advances in clock speed and transistor density (Moore’s law).
For instance, the most widely used operating system, for example, is still carrying legacies from the 1980s around. And the most widely used processor architecture, intel’s ’86 line of chips, is bogged down by its mandatory binary backwards compatibility and by intricacies from the early IBM PC designs (ineffficient intruction set, lack of registers, A20 gate etc.).
When Apple designed its new OS for a next-generation computer it was facing the same dilemma that so many others had faced and failed on: Going to market with a completely new approach in computing. With a computer that does not “run office”, that does not use a mouse, that does not multiplex its screen by splitting it into resizable, relocatable rectangles commonly referred to as “windows”. People expect some things in a computer, and people do not always look ahead into a brighter future. Especially, people expect computers to run almost all kinds of programs.
There is a well known vicious circle in computers that runs like this:
1) A next-generation computer will not sell without appropriate software.
2) Software developers prefer to write for platforms with a large installed base
3) The next-generation computer has no installed base.
4) Start over from 1)
The new OS was obviously superior in usability, especially for the novice, technically illiterate or occasional users. Touching and manipulating objects directly on the screen is a natural thing to do that essentially no learning is required, at least if the program is properly designed. On the other hand there were no third-party developers for it, so the only software that would run on the new OS would have to come from Apple itself.
So how could Apple go to market with the radical new OS? Apple needed a virgin market, one that did not expect backwards compatibility, and preferably one that had lots of technically illiterate users (so the improved usability could play out best). If that market was large enough, then developers would start writing programs for the new OS. With these programs Apple could then, in a next step, roll out its new computer generation in more traditional markets.
Apple chose the phone market for its entry because the phone market offered exactly what it needed:
– it is huge, selling about ten times as many devices as the computer market
– most of its customers do not know computers and are easily overwhelmed by technical complexity
– it is dominated by comparatively poor products with often horrible user interfaces
It took a long time and a lot of developent to get everything working in the small phone form factor. But it was their only chance to enter the market. When they finally did, it was a resounding success. The iPhone dominated the smart phone market, and Apple sold every single device they could make, to overwhelming customer satisfaction. The iPod touch, not to forget, filled more markets with less expensive devices running the same applications.
Then Apple released the API and developers started writing programs for the new iOS. Apple’s original goal was met.
So now Apple could release their next instance of the new generation device: the iPad. After its introduction developers were scrambling to get their hands onto an iPad to develop for it. There were 15,000 apps optimized for the iPad’s larger screen real estate and improved GUI elements when it arrived on the market, plus the existing hundreds of thousands of iPhone/iPod touch apps with which the iPad was binary compatible.
Now that the market is won over Apple will release more and more devices running iOS in to more markets. Apple TV II is just one example. I am certain that larger devices will appear, with more powerful processors.
What are the competitors (Android, RIM) doing? They are being run over, techniologically, by a freight train. Marketing-wise, I doubt they even know what is hitting them. They had a hard time matching the iPhone, which they saw as a standalone device, in functionality. They eventually did it by putting a Java VM onto a Linux-based phone so they can execute programs and look like an iPhone. But this is a technically inferior solution to iOS’s native Objective-C code. When the iPad came out they tried to match that, and failed because their operating system couldn’t handle large screens. I am convinced they have absolutely no plans to converge Android with a desktop operating system, and they certainly haven’t worked for years on the large scale variant of their OS as Apple certainly has.