Business news this week included two related and titillating stories: first, Apple’s stock price hit a record high and, second, Warren Buffett quadrupled his holdings of the tech legend from 15 million to 57 million shares. Analysts and business media are having fun with the investors’ equivalent of Brad and Angelina getting together, but what does it mean behind the curtain in the real world of operations?
A. Ascendant Operations at Apple
Tim Cook is the most iconic supply chain professional to have gained the lofty position of CEO. As the hand-picked successor to Steve Jobs, Cook has been a stellar Chief Executive Officer guiding Apple through uncertainty and pullback while keeping an eye on the long term. Buried in the avalanche of news about Apple’s strategy and tactics are a string of proof points that reinforce what keeps the company growing despite its already gargantuan scale.
First of all is the eureka moment Steve Jobs must have had when he drew Cook to Cupertino in the first place, specifically that great marketing and product design are worth almost nothing without an integrated supply chain to execute. Apple’s journey to greatness ran directly through operations, which is how quality, availability and perpetual innovation came to define the “i-Experience”.
Second is the willingness to invest heavily in scalable material science when competitiveness requires a sustainable edge. We wrote a report on this back in 2012, drilling in particular into robotics and automation investments that flew in the face of conventional wisdom that “Apple doesn’t actually make its own products”. In reality, the company was pioneering massive virtual integration. Today, we’re seeing the evolution of this trend with a big bump in R&D spending – now $10 billion and up as a percentage of sales by more than 50%. CFO Luca Maestri spoke about it at a Goldman Sachs conference this week:
“Today, we do much more in-house development of some fundamental technologies than we used to do a few years ago… It’s very important for us because we can push the envelope on innovation, we can better control timing, cost, quality. We look at that as a great strategic investment.”
Third, and probably most important, is Apple’s grasp of the role that devices play in monetizing content. Jobs’ genius created a premium-priced hardware gateway to the one thing consumers crave most – great content. Better screens, navigation and form factors are all part of making big money going forward. Content may be king, but device-love provides a formidable barrier to entry for competitors willing to discount to gain a foothold.
B. Buffett’s Business Basics
Warren Buffett is a legend because he buys understandable value, holds long enough to harvest that value operationally, and takes a very macro view of business, economics and even history. His 2015 Letter to Berkshire Hathaway shareholders includes a detailed explanation of the link between productivity and prosperity. His point is made with first-hand examples from railroads, auto insurance and electric utilities.
With this kind of perspective, why does Buffett buy so much Apple while cutting his stake in Walmart from 12.9 million shares to almost nothing ? Perhaps because he sees more productivity gains baked into Apple’s position in the exploding content economy than in Walmart’s in a declining retail sector.Consider for example, Apple’s sales per square foot of retail space, which is the best in the business by a wide margin and more than ten times Walmart’s. Or, look at revenue per employee, which for Apple is roughly $1.9 million, eight times greater than Walmart and at far better margins. Productivity is clearly driving prosperity at Apple and with the ten-year anniversary of the iPhone upon us in 2017 there may be a lot more still to come.
C. Cash for Content
Pure information products are naturally zero-marginal cost. Pricing therefore tends to zero unless access to that information is restricted – something artists find incredibly difficult to enforce. Apple has trained us to value the content and the device in unison. In so doing, it’s harnessing a huge productivity boom in information.
Getting paid reliably for rapidly growing content consumption is Apple’s magic. Buffett clearly understands that value equation.