Podcast | Digging Deeper - A bite of Apple's trillion-dollar journey

We live in times when that word conjures something besides a red fruit in our mind. A phone, usually. Or a laptop, or a tablet. Occasionally, an oversized desktop or, god forbid that thing that passes for a watch. Only Apple could sell a watch that has no real watch in it and makes a profit off of it.

Indeed, typing Apple in the address bar in any browser, or in Google search or Bing or Yahoo throws up the Apple India website as the first result. For the fruit, you’ll have to choose images. For the Wiki page on the fruit, you have to search Apple fruit Wikipedia. And the page helpfully mentions at the top, “This article is about the fruit. For the technology company, see Apple Inc.”

That’s how pervasive the Cupertino, California based company is - the wiki page about Apples helps redirect to the Apple Inc page.

Which brings us to the point of our deep dive today - Apple, maker of the most sought-after electronic gadgets, now has a market cap of one trillion dollars.

That’s a thousand billion dollars. My name is Rakesh, and on Digging Deeper with Moneycontrol today, we bite into Apple and find out just how it became so juicy.

Apple touched a market cap of USD 1 trillion on 2nd August and held on to the valuation at market close. Apple’s stock gained 2.92 percent that day after a healthy fiscal third-quarter earnings report, ending the day at USD 207.39. CNBC also reported that Aswath Damodaran, professor of finance at New York University's Stern School of Business, known to some as the dean of valuation, said the stock is still cheap even at USD 1 trillion.  As of this writing, on Aug 24 2018, Bloomberg shows Apple’s stock price at USD 215.49. That gives it a total valuation of USD 1.041 trillion.

This is the only time those people who stand in queues outside Apple stores for days together to buy a brand new Apple device - Apple fanbois - don’t look silly. That sort of crazy following is a big part of what makes Apple, well, Apple.

In comparison, Google is currently worth approximately USD 852 billion and Facebook is valued at around USD 508 billion. Amazon, the other company expected to touch a trillion in valuation, is right now only at USD 879 billion.

Okay, enough jibes at Apple and its fans. Let’s move on to our main interest here - Apple’s astounding success. Mind you, this success is nothing less than astounding, considering they were nearly bankrupt 20 years ago and were lent money by, of all companies, Microsoft. Yes, Microsoft. But we’ll come to that a bit later.

Let’s look at the Apple story - from the early days to the time Steve Jobs was fired to Pixar and the iPod to the world-beating iPhone. If nothing else, it’s an educative story on calculated risks and a certitude bordering on arrogance. Because, really, how is the most expensive phone in the market the most successful? To answer that, we need to examine Apple.

Apple was started by one Steve Jobs and his pal Steve Wozniak in a Los Altos garage in California 1976. This garage, part of the house were Jobs was born, and grew up in, was designated a historic site in 2013. Ten miles away is another historic garage where a company named Hewlett-Packard was born. Despite the romance of humble beginnings, the truth is, nothing much happened there. Steve Wozniak is on record saying, “The garage didn’t serve much purpose, except it was something for us to feel was our home….[w]e did no designs there, no breadboarding, no prototyping, no planning of products...We had no money. You have to work out of your home when you have no money.”

Their first product was the Apple I, released 10 days after the Apple was born. It was a wooden contraption that you would hesitate to pay real money for. Fortunately, the next year in 1977, they released the Apple II, an 8-bit home computer, made of plastic. It was one of the first successful mass produced microcomputer products. The innovative Apple II had one distinctive feature - it could display color graphics. This feature was a primary reason the Apple logo was redesigned with a spectrum of colors.

Before the Apple II was released, Jobs and Wozniak parted ways with their partner Ronald Wayne. You will have heard of him via many retellings of an Apple legend - he was the guy who sold his 10 percent stake in Apple for USD 800 to Jobs and Wozniak. Wayne told the website Cult Of Mac, “I was 40 and these kids were in their 20s. They were whirlwinds — it was like having a tiger by the tail. If I had stayed with Apple I probably would have wound up the richest man in the cemetery.” He eventually received another USD 1,500 to close the deal.

Things turned a bit more melancholic for Wayne. Some time after leaving Apple, he sold his contract documents to an autograph collector for $500. “I thought, ‘What do I need to hold onto that for?’ he said. In 2011, the contract fetched USD 1.6 million at an auction.

In 2018, the 10 percent stake he sold off is worth about USD 100 billion.

“...story of my life,” lamented Wayne.

After the Apple II, the company doubled its revenues every four months. By 1980, annual sales touched $118 million. The application that turned Apple’s fortunes around was a spreadsheet program named VisiCalc. This app created a business market for the Apple II when it was chosen as the desktop platform. This meant home users could use the Apple II at home as well as at work.

Apple went public in 1980 and its market cap by the time the markets closed was USD 1.77 billion. It was the biggest IPO in nearly 25 years. With the capital from its 1980 public investment, Apple funded the creation of its Lisa and Macintosh product lines, ending the 80s with a 199 percent rise in stock valuation while paying quarterly dividends.

The Macintosh was released in 1984 and did moderately well. The next year, Jobs was removed from managerial duties, so he quit the company he co-founded. Over the next decade, Microsoft pushed its software platform which could be run on inexpensive computers while Apple sold an integrated experience, if you will, which cost a pretty penny. Soon, Microsoft became ubiquitous in the PC market. At one point, Apple even dragged Microsoft to court for copying its interface but the case was eventually dismissed.

In 1996, Jobs was brought back into the fold. In 1997, he announced that MS Office would run on Apple computers and that MS had made a USD 150 million investment in Apple. During this phase, Jobs collaborated with Jonathan Ive to design new iMac computers. I've would later design the iPod and the iPhone.  Apple released Mac OS X in 2001. In October 2001 it unveiled the iPod.

Admit it, you always wanted an iPod, even if they seem clunky and ungainly now.

This was, pardon the cliche, a new beginning for Steve Jobs and Apple.

The iPod sold approximately 100 million units in six years. Apple also said some time ago that it had sold 100 million units of the iPod Touch. Today, the iPod is no longer produced and the iPod Touch is the only iPod being sold. The iPod cornered 90 percent of hard-drive-based music players and 70 percent of all music players. According to Bloomberg, the iPod’s market share reached 72.7 percent in January 2007. Apple had also introduced the iTunes store in 2003.

I wasn’t kidding about the new beginning. In the same month, Apple reported quarterly revenues of USD 7.1 billion. About 48 percent of this revenue came from iPod sales. In April, Apple reported quarterly revenues of USD 5.2 billion, 32 percent of which was from iPod sales. The company also announced that it had sold 100 million iPods globally.

In 2006, Pixar, the animation company acquired by Steve Jobs after he was fired from Apple, was bought by Disney for over USD 7 billion.

By late 2007, the quality of Apple’s products began to shine through. The hard work put in by Steve Jobs and his team was starting to bear fruit. Over 30 percent of Apple’s quarterly revenues were from notebook sales, approximately 19 percent from desktop sales and over 25 percent from iPod sales.

Apple Inc reported revenues of USD 24 billion in 2007, with profits totalling USD 3.5 billion.

This was quite a turnaround for a company that was forced to borrow 150 million dollars from rival Microsoft.

In August 1997, Bill Gates stepped in and saved Apple which was on the brink of bankruptcy. While they have a love-hate relationship and treat each other like nemeses, they did call a truce at one time and settled a lawsuit. This is the stuff of silicon valley lore. Wired, the tech magazine recounts the episode like this: Apple co-founder Steve Jobs got cash - in return for non-voting shares - and an assurance that Microsoft would support Office for the Mac for five years. Apple agreed to drop a long-running lawsuit in which they alleged Microsoft copied the look and feel of the Mac OS for Windows, and to make Internet Explorer the default browser on its computers — but not the only choice.

Why did Microsoft do it? To push the image of a noble competitor for the price of a rounding error on annual revenues. Microsoft was embroiled in an antitrust fight over its promotion of IE during the height of the browser wars with Netscape. Remember Netscape Navigator, the ancestor of Firefox? Yes, that Netscape. Netscape, IE and Dialup internet. Rough times, I tell you.

Apple had a very small share in the desktop market, it was years away from the iPod and even further away from the big game changer, the iPhone. There were no smartphones. In 1997, the Nokia 3310, with its two games, was still 3 years away.

All things considered, Jobs went on stage and thanked Gates. "Bill, thank you. The world's a better place,” he said.

Okay, back to 2007, a seminal year for Apple. During the keynote speech at the Macworld Expo in January 2007, Steve Jobs said Apple Computer Inc would change its name to Apple Inc, signalling a shift from computers to consumer electronics. The event saw the announcement of Apple’s first smartphone, the iPhone. This new phone shifted 270,000 units in its first 30 hours of sales. In 2008, the company launched the App Store which sold third-party applications for the iPhone and iPod Touch. It soon touched revenues of USD 1 million per day.

The iPhone was so successful that Apple was the third largest supplier of mobile phones, by revenue, in less than 24 months after its launch. The company reportedly sold over 6 million units in five quarters. The next iPhone, the iPhone 3G, sold 6.9 million units in just the next quarter. About 4.4 million iPhones were sold in the following quarter. Apple was now racking up serious numbers and truly on its way to the big leagues. By the end of the 2010 financial year, over 73 million iPhones had been sold.

The premium pricing of the iPhone was paying off for Apple. Even though the phone had a market share barely pushing 4 percent of all cellphones sold, the company raked in over 50 percent of all profits from worldwide mobile phone sales. That’s a staggering number.

Apple launched the iPad in 2010, another device that made an absolute killing. It sold three million units in its first 80 days.

In October 2010, Apple shares reached their highest price, crossing USD 300.

By May 2017, over seven years and eight versions, 360 million iPads had been sold.

2009 was a difficult year for Steve Jobs. His health was suffering. He had been diagnosed with cancer in his pancreas in 2003. Steve Jobs’ biographer Walter Isaacson wrote, “...for nine months he refused to undergo surgery for his pancreatic cancer – a decision he later regretted as his health declined."

He had a liver transplant in 2009. It is said Tim Cook offered a portion of his liver to Jobs, because they share a rare blood type. Donor livers can regenerate after such procedures. Jobs didn’t allow it. He underwent a liver transplant and was told that his prognosis was excellent.

Steve Jobs named Tim Cook his successor in 2011, six weeks before his death. He died on October 5, 2011 following a relapse of his pancreatic cancer.

In 2011, due to a debt-ceiling crisis, for a brief period, Apple’s financial reserves were more than that of the American government. Estimates showed that the US Treasury Department had an operating cash balance of USD 73.7 billion while Apple’s reserves stood at USD 76.4 billion! Thanks Obama.

Apple released the iPhone 4S on October 14, 2011, nine days after Steve Jobs’ death. The device sold a stupendous four million units in 72 hours, eventually selling 60 million in total.

The next year, the iPhone 5 sold five million within 72 hours of its release and racked up total sales of over 70 million units. The 5S had a launch price of 199 USD as did the iPhone 5. In 2012, Apple also released the first version of the MacBook Pro that we see today. By August of 2012, Apple's rising stock price saw market cap touch USD 624 billion.

The iPhone mania was only increasing. In 2013, the iPhone 5S and 5C sold nine million units in its first 72 hours! In March of 2014, Apple announced that sales of the iPhone brand had crossed 500 million units in total.

In September 2014, it released the iPhone 6 and 6 Plus, with the designs we know all too well today. The starting price for the 6 was a whopping USD 649. Did the price hurt sales? Well, no. 10 million units were sold over the first weekend. At 649 dollars apiece at a minimum, you do the math. Sure, a large number were contract phones, but buyers end up forking over cash for around two years to the provider, so the actual cost of a contract phone might even exceed the retail price. In any case, Apple makes its money.

In 2015 came the iPhone 6S and 6S Plus, which sold 13 million units in the first weekend after launch. Wait, can you spot a trend here? September 2016 saw the launch of the iPhone 7 and 7 Plus, which saw combined sales of approximately 39 million units in the first quarter. Last year, there was no 7S but the iPhone 8 and the iPhone X, the 1000 dollar phone. The iPhone X’s sales have been disappointing, at just 30 million units. Yep, just 30 million.

It sold a total of 77.3 million phones in the last quarter of 2017. Tim Cook also announced in August 2017 that Apple had sold 4.29 million computers. You know how it is….everyone and their family now has a MacBook Air, or is planning to get one soon. Then there are Apple’s services, which account for a big chunk of revenue. Apple Music, iCloud, Apple Care and other services saw a 31 percent increase in revenue, rising to USD 9.55 billion in July 2017. The company’s market capitalisation stood at around 935 billion when it reported revenues in July.

Such fabulous sales numbers have resulted in Apple crossing the USD 1 trillion thresholds. Steve Jobs’ successor, Tim Cook, now presides over the most valuable business in modern history.

Bloomberg noted that the company’s valuation is on par with the GDP of Indonesia, the 16th-largest economy in the world. It operates at a scale that makes it hard for customers, even governments, to hold it to account. David Yoffie, a professor of international business administration at Harvard Business School, says, “The image of a company of that size certainly yields the perception of a Galbraithian world that many of us have never really considered or conceived of.” Bloomberg even goes so far as to claim that “the release of the iPhone is up there with the founding of Standard Oil as one of the greatest business moves of all time.”

Let’s also bear in mind that other companies, like Amazon, Alphabet, and Microsoft are likely to cross the $1 trillion line some day not too far into the future, and they’re every bit as good as Apple at manufacturing customer desire.

Patrick Moorhead, principal analyst at Moor Insights & Strategy, said Apple's challenge will now be to keep up its momentum by winning big in new markets and continuing to innovate. Moorhead told NBC News, "The company captured almost all of the smartphone device profits in the industry and reset the definition of what a smartphone is. Apple's biggest challenge going forward is to maintain its lead."

That, then, is Apple’s trillion dollar story. A storyline that would do Joseph Campbell proud. The rise, fall, rise, fall and rise of Apple is the stuff of legend.

But it really comes down to this - why do we know that people will flock to buy the next iPhone?

The answer might lie in Steve Jobs’ belief in the power of simplicity as a design precept. Or as the man put it during the launch of the first iPhone in 2007, “Yuck. Nobody wants a stylus, so let's not use a stylus.”

The iPod, the iPhone and the iPad are triumphs of Steve Jobs’ insight in the 80s that design simplicity was best accomplished by tightly wedding hardware and software. And Apple made a trillion dollars off that.