Apple Lives Off Others’ Intellectual Property
There’s no time for kicking a bully like when he’s down. You just have to join in.
Apple’s stock has ridden the top of the charts for years now, but chickens have finally come home to roost. The company’s shares have lost 28% of their value since hitting a high of $233 in early October, and I’m feeling an eentsy amount of schadenfreude.
The curve of Apple share price over the past eight years is shaped more or less as I predicted in August 2011, six weeks before founder Steve Jobs’s death.
The way I saw it, there would be three phases:
In the first, the shock of losing the great man would cause a short-term panic related to all that future potential lost. The stock did take a temporary hit.
In the second, a project pipeline Jobs frantically stuffed in his last days would be brilliantly executed by Tim Cook, the operations guru. Apple would consolidate its franchises and reap an enormous financial benefit. There would be stock rises for years to come. That pretty much happened, although it ran longer than I thought it would.
In phase three, the market would realize that there was a huge missing delta, a non-existent space where there should be the visionary new markets that had distinguished Apple’s breakthroughs in the past and might distinguish them in the future, but never would for the lack of the great man’s vision, the missing delta, that higher curve that would never be achieved because the visionary was gone.
And we’re pretty much there. Apple has in fact been dining out mostly on one product, the iPhone, since 2007. Its business has become maintaining the legacy of this singular pillar, which looks increasingly wobbly. Cook has done an admirable job, executing and extending, but we’re there anyway.
The magic innovation pipeline Jobs used to drive like a custom-built Ferrari has been sprouting rust despite or perhaps because of Apple’s best efforts. As in all things, the yin-and-yang adage holds here: your strength is your weakness, and your weakness is your strength.
Apple’s very DNA is built around a formula that is as much marketing as technology. Its products have always contained both leading- and trailing-edge technologies for specific reasons. The trailing-edge helps keep the bill of materials cost down. The leading edge is in some cases represented by just one feature, a must-have, like Siri, an innovation at the time, or the really good facial recognition in recent editions, something to get people to buy the product, not technology for its own sake, but to drive a specific outcome.
This is not to say, Apple doesn’t spend money on R&D. The famously in-house-oriented company even does its own semiconductor development. But Apple’s primary investment focus has been on a few features that distinguish its products and justify their luxury pricing. By keeping the bill of materials low and pricing high, Apple has had one of the greatest runs of profitability in history.
However, today’s mobile market is ever more competitive, and rivals are bringing out their own leading-edge capabilities. When the iPhone launched, Apple arguably had a three-year lead on all its rivals. Now, it’s catch as catch can. In some areas, Apple is still ahead, notably integrating the entire experience. In others, like display quality, it’s already playing second fiddle to its own supplier and rival, Samsung.
And it’s going to get worse. The next generation of communications technology — the 5G revolution — is right around the corner, and Apple is woefully out of position in this instance. 5G will open up whole new mobile experiences by raising bandwidth and lowering latency considerably. And much of the innovation in 5G is coming from Qualcomm, with which Apple is engaged in an enormous commercial dispute. For its cell modems, Apple has turned to Intel, which is behind in 5G development. Thus, as the first 5G products roll out in early 2019, Apple will not have a contender among them. Most will be Qualcomm customers with Samsung and MediaTek supplying some of the others.
One possible path for Apple is via its own 5G silicon. Some evidence exists that it is trying to acquire the necessary capabilities. But otherwise, the company is reaping the result of its general stance of not playing nice with others.
Take, for example, the standards body 3GPP, which is in charge of lining up all the technical aspects of 5G. Apple attends meetings but provides only a negligible percent of total contributions to the shared technology pool. And Apple’s patent ownership is slight, given the size and importance of the company, especially in mobile standard essential patents (SEPs), the bedrock on which the mobile industry is built. Apple just doesn’t spend billions of dollars in R&D that won’t pay back for a decade.
Not that Apple doesn’t say that it’s the market leader in 5G. Using its branding power, it has managed to convince in some cases both consumers and regulatory bodies in Washington D. C. that it is a leader in 5G technology.
By developing technology only for itself, making few contributions to standards bodies, and attacking others making such investments and contributions, Apple is potentially destroying the American goose that lays the technological golden eggs. In such a scenario, even though Huawei, a Chinese company and the world’s largest supplier of network equipment, is a bit behind in 5G development, it could outrun its U.S. rivals if they are stuck bickering among themselves. Huawei, which has the full backing of the Chinese government, is expected to bring 5G products to market in 2H19, a couple of quarters behind the front-runners.
As it is, Apple appears to be asking operators and suppliers to delay the 5G rollout, while at the same time talking down 5G by saying it’s a waste of money. This is a fairly standard Apple tactic: talk a new capability down until the company has it — and then talk it up.
But one wonders how many Apple customers are going to buy into such maneuvers with regard to a capability as important as the next generation of broadband communications. Apple could face a large defection over its lack of 5G products.