An Apple A Day: A Study In Digital's Future

Apple Corp. and its founding CEO Steve Jobs are writing the book on how companies can reinvent themselves for digital opportunities--and it just keeps on getting better.

When Apple blew past analyst estimates with stellar quarterly earnings this week, coupled with aggressive expansion plans, it was difficult not to remember the rapid evolution of an iWorld. The classic iPod with hard drive (launched in 2005) and the iPhone (launched in late June) already have revived a dead music industry and inspired the next generation of Internet-connected mobile-phone technology.

Despite how naysayers dub the less-celebrated iTV interface, the savvy aren't counting out Apple from finding the digital pot of gold where cable and satellite operators are already sparring. That's because Jobs "gets" connected consumers. Apple's catering to digital consumers has yielded a $170 billion market cap, and fiscal fourth-quarter net earnings of $904 million on $6.22 billion in revenues--up 67% from $546 million in net earnings on $4.84 billion a year earlier. Its strong guidance for the first quarter of its new fiscal year exceeds consensus, reflecting strong holiday sales (despite the economic turmoil) and launch of the iPhone abroad.



With plans to open its first storefront in China and sell iPhones in France, Germany and the UK, Apple is embarking on a global growth fast track. At a time when brick-and-mortar retail is fumbling, Apple's 200 existing stores (with 40 more planned in 2008) generated $1.25 billion in direct sales of the company's total $6.22 billion in revenues last quarter, representing 42% growth in direct sales from 2006.

The earnings news immediately boosted Apple stock more than 7% to a marketing cap that exceeds Intel, Walt Disney, Yahoo, Amazon, Dell and Sony. It places Apple a close-enough second to Google (at $206 billion). But the real news is behind the numbers.

As some Wall Street analysts observed this week, the iPhone is more than an Internet-enabled phone. It is consumers' interactive digital portable lives on steroids--from social networks and favorite music to email and streaming entertainment. Apple is morphing from a nimble electronic power into a formidable digital lifestyle company with $1.7 billion cash flow from operations last quarter alone, $15 billion in cash, and no debt.

The success Apple and Jobs are enjoying has been hard-won and instructional for media and technology companies struggling to develop new digital business models and services. Jobs brought together the right mix of creative and technical types to execute his vision for interactive communications. Upon his return to Apple in 1997, he began restructuring the company--away from the traditional hierarchy and top-down reporting--to foster fluid creativity and fast response.

Cisco is one of many companies that have implemented the same approach, according to CEO John Chambers. It's empowering staffers to provide a faster embrace of better concepts in an operational structure that has literally been blown up and reinvented.

As Jobs, Chambers and others have demonstrated, exploding the old and celebrating the new is radical and doable. But even Apple is learning new tricks--having only recently opened the iPhone platform to the ideas and applications of outside software developers, taking a cue from Facebook. (To be fair, Apple opened its computing platforms to Intel and Microsoft Windows before such universal collaboration became fashionable.)

Just as important is Jobs' intuitive sensitivity to changes in consumer habits, interests and needs. These key intangible elements have made Apple an exceptional player for more than a decade.

All through Apple's ebbs and flows, Jobs has not strayed far from the spirit of a 20-year-old college dropout who created Apple in his parents' California garage in 1976 with Steve Wozniak, a refugee of Hewlett-Packard. Ten years later, Apple was a $2 billion company with 4,000 employees soaring on the success of its Macintosh computer. In a classic case of visionary boardroom differences, Jobs was squeezed out of the company he created in 1985. It turned out to be a liberating event that freed him to enter what he calls one of the most creative periods of his life. During it, he created Pixar, a landmark animator he subsequently sold to Disney, and NeXT, a technology company that was folded into Apple and "is at the heart of Apple's current renaissance," says Jobs, who returned to Apple in 1997.

Record sales of Mac products and services, which represented 62% of Apple's total revenues last quarter, is stunning proof of just how well the company has continued to redefine the personal computer, which has been revitalized in unexpected ways in a new iPod and iPhone nation. Plus, music products and services, which represent 36% of Apple's total quarterly revenue, underscore a stark point: The music industry is not dead; it's thriving in a suspended iTunes state.

In other words, Apple's success is attributable to creating new products and business models rather than simply building on existing ones. That spurs innovation and advancement. For instance, the importance of the iPhone replacing push bottoms with touch screens as a digital device staple cannot be overstated. Still, it will be telling how Jobs and Apple competitively respond to the new challenges of a Google phone when it comes to market, driven completely by the Internet giant's core search and advertising functions. Or, if Apple dives into the wireless auction bidding early next year to pay upwards of $5 billion for operating headaches that will steer it far from its entrepreneurial course.

To hear Jobs tell it during a 2005 commencement address at Stanford University, he has been driven by a good many things, but none more important than his passion for doing something he loves--another valuable quality you won't find in the corporate guidebook.

That doesn't mean Apple is beyond reproach. The wisdom of an iTunes walled garden still draws criticism (can you say AOL?), almost as much as designating AT&T the sole domestic iPhone service provider for five years. (That partnership has generated 13% of Apple's operating income and 2 million new wireless subscribers for the telco last quarter.) The delay of its new Leopard OSX operating system has overshadowed what benefits it may deliver, and Apple's iTunes' service is being bucked by old-line content providers like NBCU, which need to maximize their off-TV sales to offset on-TV ad losses. Apple recently slashed prices of its DRM-free music tracks to compete with Amazon. And Jobs has been quick to make nice with consumers by lowering the pricey cost of iPhones and dishing out rebates.

Through it all, Apple's efforts on every level remain bound by simplified, consumer-centric technology--the new standard by which rivals measure their progress. Still, there are poignant lines from Jobs' Stanford commencement address that could appropriately serve as the new corporate makeover mantra: "Don't be trapped by dogma, which is living with the results of other people's thinking. Don't let the noise of other people's opinions drown out your own inner voice. Have the courage to follow your heart and intuition," Jobs said. "Stay hungry. Stay foolish."

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