Launching a venture capital fund would allow Apple to fund its vision for the future without making awkward acquisitions
What would you do with $12 billion?
You might have two ideas in mind, neither of which is necessarily exclusive of the other: First, do some good; and second, make sure that money keeps growing.
It's the kind of question that the financial minds over at Apple (AAPL) have to consider, for that is about the amount of cash the company had on its balance sheet the last time it reported earnings on Jan 17.
If the last year is any judge, Apple's cash position—the combination of its cash on hand and short-term investments that can quickly be converted to cash—is growing at a rate of about a billion and change per quarter. It's high time Apple spread some of that cash around, and I think one good way to start would be to launch a venture capital fund.
Big Acquisitions Don't Work
Opinions will vary about what Apple should do with all that cash. At other companies, the urge to grow by acquisition is hard to resist. But history shows that large acquisitions in techdom generally don't work well. And as I look around the digital landscape, I don't see a company that Apple has any compelling reason to acquire. A few names that have come up in the past several years are Tivo (TIVO); Roxio, now part of Sonic Solutions (SNIC); YouTube, now part of Google (GOOG); Connectix, a software outfit now part of Microsoft (MSFT); and Universal Music, part of Vivendi Universal (V).
But Apple's not that kind of company. When Apple makes acquisitions, they tend to be focused on small companies that can be integrated into projects that are already developing internally. In 2002, Apple acquired EMagic, the small German company behind the professional music software Logic. That acquisition helped begat a popular Mac software program called Garage Band. Several of the applications built into what we now call iLife were cobbled together from the acquisition of a few small, smart, software outfits. So acquisitions—at least big ones—don't seem to be a priority.
In other cases, Apple has used its considerable cash reserves to ensure a solid supply of components, like the time it bought up a big slice of the NAND flash memory manufacturing capacity around the world from companies like Samsung and Hynix (see BusinessWeek.com, 8/26/05, "A Memorable Deal for Apple and Samsung").
And sure, Apple could make investor-friendly gestures like buying back some of its stock, or paying dividends like it did during the period from 1987 to 1995. And perhaps it will.
Seeding the Software
But think of what might happen with an Apple-backed venture capital arm, funded at say, an even $1 billion, parsed out over five years. Consider this: The market share for the Macintosh is back on the rise, and Mac OS X has more buzz around it than anything coming from that little company outside Seattle. The iPod is clearly the biggest thing in consumer electronics in a decade, and the iTunes Store is the one single force to contend with in the still-nascent age of digital media distribution (see BW Online, 2/25/07, "Apple's International iTunes Controversy"). The iPhone may prove to be even bigger than the iPod, and may make iTunes even more important. Apple TV, though late (see BusinessWeek.com, 2/27/07, "Apple's TV Revolution Delayed") will round out an ever more exciting product portfolio around which an ecosystem will no doubt spring up—and to a large extent already has. But why not encourage it further?
Third-party software availability for the Mac is still not always as good as it should be. Once you get beyond the big names, like Microsoft, Adobe (ADBE), Intuit (INTU) and a batch of others, the most prominent names in Mac software development are usually small companies with limited marketing resources. Gaming on the Mac, as I've written before (see BusinessWeek.com, 6/01/06, "Apple Needs to Get Its Game On") still lags far behind the Windows world. And while there's a healthy industry variously estimated to be worth more than $1 billion in iPod accessories, the ideas for products built around enhancing the iPod, iPhone, and Apple TV are just now beginning to take shape.
I can't count how many times a software startup has come to me, shown me a great idea, and then said "We'll build a Mac version eventually." The most widely cited reason is that the company can't afford to develop both a Windows and Mac version at the same time, and Windows is where the market volume is. An investment stake from Apple would go a long way toward bridging this gap by helping small companies hire more developers, some of whom could be dedicated to Mac development. This might mean more simultaneous releases of Windows and Mac versions of cool new applications.
Beyond the Short Term
Think of the companies who do it already: Intel Capital (INTC) has invested $4 billion in 1,000 companies over the 15 years of its existence—$1 billion of that in 2006. Some 160 of them have been acquired by other companies, while another 150 have gone public, in both cases enriching Intel's bottom line in the process. Intel Capital's investments added $214 million to Intel's bottom line in its 2006 fiscal year.
But it's not always a winning year. In 2005, Intel Capital's holdings yielded a net loss of $45 million. You win some, you lose some, as they say, but getting richer in the short term isn't exactly the point. Intel's agenda is to use its considerable resources to help foster an environment where the demand for computers, servers, workstations, flash memory, and everything else it makes is constantly growing. Investing in a few dozen brilliant startups now could lead to a surge in demand for all these chips down the road.
Intel's not the only one with its own venture capital fund. Qualcomm (QCOM), the $7.5 billion wireless chip giant has one. Motorola (MOT), the world's second-largest handset maker, has Motorola Ventures, which has investments in companies like Dart Devices and Ruckus. IBM (IBM) does it, too. All of them have their own agendas and their own —often competing — visions for how they'd like to see the technology world turn out in the next decade or two, and they're putting money behind companies they see fulfilling those visions.
Given Apple's impact over the course of the last decade, I'd argue that its long-term vision compares favorably with that of any of these companies, and its financial, technical, and aesthetic resources could go a long way with many small companies just starting now. An Apple investment would do much toward helping these companies grow, but also help Apple craft its strategic vision and shape the technology market of the future.
Apple wasn't always so successful. There was a time in the mid-1990s when the company had just enough cash to keep the doors open for two months. Those days are gone, and not likely to return—at least from the vantage point of today's market. It seems to me that Apple could do itself a lot of good by helping other would-be entrepreneurs start new companies with great new products that will contribute to the ever-growing Apple ecosystem. Over the long term it could probably do right by its shareholders in the process. And isn't that what success is all about?