Apple Bond Issue? Steve Jobs Would’ve Bought Tesla
When I woke up yesterday, like every day, I grabbed my iPhone from the bedside table and began looking through my e-mail and checking my stock portfolio, Facebook and Twitter. I was interested to note that Apple Inc. (AAPL) plans to work with several car manufacturers to integrate maps and other products into cars -- the reaction, however, was scant at best.
In the Steve Jobs era, this would be the type of event reserved for the Worldwide Developers Conference; now, like the last several launches of “new” products, it was thrown into the garbage heap of “So what?”
Scrolling down, I saw that Apple had also issued $17 billion of bonds -- to which the sheepish world of value investors reacted with unbridled enthusiasm. It was as if someone had lowered the annual fees on their American Express Centurion cards. Who wouldn’t want to own Apple debt? Dividend yield? Yum yum!
This sad display is a telling sign for what was, less than six months ago, the greatest comeback story and greatest technology company of all time: There was now more excitement from a bunch of pension funds and hedge funds about debt than the sum total of consumer interest and support for Apple’s latest products. Lines of consumers outside the Apple Store have been replaced by a line to the CFO’s office. Generally, I think it portends poorly when investors are your biggest supporters and consumers couldn’t give a damn.
TVs will probably turn out to be a very difficult product category. Yield, supply chain, margin and meaningful differentiation will all be difficult, mostly because the industry has been moving forward progressively. Even if Apple wins in TVs -- what will it mean? It will have won a $5 billion market? Maybe $10 billion? This year the company is forecast to make $173 billion. Maybe this won’t be true of watches. Who wouldn’t want a watch that is interactive, useful beyond telling time and marked the next sign of the coming hipster-ocalypse?
Personally, I prefer mechanical watches. But I’m probably not the target market, which made me think, what is the most important part of my life that Apple could meaningfully improve and that I would want them to take over? How about my car?
After houses, cars are the most important discretionary purchase people make. The default rates on cars are lower than any other discretionary item. People love cars, sometimes more than they love their kids and pets. The automobile industry also happens to be an area where a supply-chain ninja like Tim Cook could unshackle himself from the milquetoast, say-nothing, uninspiring margin-tweaker image he has created for himself.
Imagine a world where Apple takes over the car for you. It will be beautiful. It will be connected. It will be intelligent. It will do all the little things that delight you: Imagine getting into the car, at which point it looks at your iPhone calendar and automatically programs the address of the place you’re going into the GPS so that you don’t have to (Tim: 5 percent for that idea, please). Spend just a second thinking of all the other insanely cool (and simple) things that would make you fall in love with your car.
It will integrate iCloud, stream your entire music collection, allow your kids to watch movies from iTunes in their seats, play games using iPhone controllers and use Apple touchscreens embedded into the headrests. The list goes on.
The point is this: Small companies become great by doing one thing well and then expanding scope logically and methodically with scale. But great companies can only stay great when they find huge new markets and boldly move into them using their skills as a differentiator against entrenched incumbents.
I don’t know about you but I would much rather pick Apple over Ford before I pick Apple over Samsung.
But where to start? Apple should buy Tesla Motors (TSLA) (disclosure: I own AAPL but not TSLA). The reasons are pretty obvious: an $80 billion-plus global car market and a company with a highly technical team that can build an amazing product at the high end of the market (and that’s run by a maniacal visionary with extreme ambition). Sound familiar?
The right move would be for Apple to enter the car space, buy Tesla and make Elon Musk the CEO. Cook could move back to COO. Obviously this will never happen. The market is too big. Tesla is too good, and Cook is probably too weak to do something this radical. Apple has shown little ability to think boldly and use its cash hoard for anything but the obvious dated plays that make it more like an oil company, bank or railroad than a high-tech world-beater.
Most important, the reason Apple won’t do it is also the reason that the long-term deck is stacked against it. Much in the same way that a cycle of innovation and risk-taking gave them a 10-year runway, fear, small mindedness and reversion to the mean will create a 10-year cycle of decay.
I for one would buy an iCar. Too bad Apple would rather sell me a watch. Or a bond.
(Chamath Palihapitiya is an entrepreneur, investor, early Facebook executive and co-owner of the NBA’s Golden State Warriors. He is the founder and managing partner of the venture firm the Social Capital Partnership.)
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