Apple's Stock Considered

AAPL shares are currently on the rise, reaching the 120s after a market-tracking tumble to the 70s. Apple's valuation is still significantly below its 2007 peak of 202 and 2008 high in the 190s. Even after rising, it is still valued too pessimistically.

As is typical, earlier highs occurred before MacWorld San Francisco, when product improvement expectations are highest but facts are hard to come by. The most feverish hype was for the iPhone, of course, despite it being costly to develop, and so damaging to earnings, and facing a decent chance it would not succeed. Generally, the stock is prone to irrational pricing when investors are being prodded with press, which is almost always about non-Mac hardware debuts. This focus is misplaced. The core Macintosh personal computing business, OS and hardware both, are the real measure of the company's meaningful potential for growth.

While the market slid, Apple followed, and then some. Without price-pumping, press-fueling announcements, nothing could scatter the clouds of generalized negativity. As shares crossed "milestones" in price models, program trades and sales by quantitative investors served to pressure shares even lower. Never mind the wild speculation about "shorts" manipulating things, something that always seemed marginal to me.

Instead of stoking the fire of speculators who lust for new consumer non-core business scope expanding widgets, Apple has released a stream of Mac revisions, an iPhone OS X revision preview, and belatedly fixed the dates for WWDC. All of these moves are vital indicators, and all have gone barely noticed.

Most important, Apple has finally routinized Mac hardware development. Until very recently, almost every new Mac Apple announced would struggle out the door. Delays, sometimes lasting months, were routine. Constrained supplies of parts, or late-breaking design issues, were something Mac buyers planned for. Promised machines even dropped in speed before shipping (the G4 PowerMac), and sometimes simply never materialized (the "3.0Ghz G5.") When hardware shipped on time, it usually meant the Mac was stagnant technologically, an equally problematic situation for Apple (the anemic last generations of PowerBook G4.)

Today's Apple can revise an entire product segment, most recently the Mac Pro, iMac and Mac Mini desktop line, simultaneously, and deliver the products as promised. Even the most exotic top-end Macs are in production and available when released, once unheard of. (The XServe was revised and ready just weeks later as well.) I waited three months longer than promised for a Dual 800 Quicksilver G4, two months for a Sawtooth G4, and six weeks after a promised date with a Dual 2.0 G5. The problems were not entirely CPU supplier related, as the ship date of the first Intel MacBook Pro slid a month and a half, too.

Ignoring the smoothness of the Nehalem Mac Pro release is a mistake. Apple's software and hardware competence is on display and most strenuously challenged by the project of turning an eight core UNIX workstation into an intuitive tool for content creation. The latest hardware makes a G3->G4-sized transition, to new bus, core and memory architectures. What once felt like watching a trapeze artist work without a net, and was hyped to match, is now as undramatic as an AirPort firmware release.

Also under-considered was Apple's preview of iPhone OS 3.0. While iPhone hardware sends bloggers into orbit, software is somehow less compelling. The requisite "copy and paste hooray, and why did it take so long" articles hit the web, but little mention was made of most of the OS advances. Besides adding 1000 new APIs, Spotlight, Push Notifications, and other features, Apple revealed that the dock connector would be a functional interface for third party hardware.

This is huge news. The iPod "ecosystem" of hardware, speakers and so on that served the narrow mandates of the simple player, thoroughly cemented the dominance of the iPod. The fees from licensing and "Made for iPod" certification gave Apple more profit-heavy, reliable revenue streams. The iPhone has a similar, but much larger, opportunity, as it is able to run complex, custom software in tandem with external hardware. Seemingly on purpose, the glucose monitor demo Apple used to demonstrate this feature was fatally boring. Game pads, keyboards, printers, etc., a huge variety of devices across countless industries (retail, medical, logistics, etc.) have the potential to add to the iPhone-only feature list and give the platform even more momentum. Include 30% of all revenue derived from the apps required to drive this hardware, and the upside is even larger.

Apple also ended the uncertainty surrounding the development of OS X 10.6 by setting the dates for WWDC. The company did this later than usual. In the weeks after an announcement was expected, many Apple watchers posited that the operating system was meeting delays, and would slide to August or later, along with the conference. That has not come to pass, and June 8 is now the expected release date.

(I have previously written but reiterate here how vital OS X, particularly 10.6, is to Apple. The brains of the iPhone and Mac are Apple's most valuable asset. This release is particularly important as the future of computing lies in massively parallel multi-core hardware, and new technology in OS X.6 will unlock a far greater proportion of the power these chips offer. Already-shipped dual, quad and octo-core Macs are supposed to see meaningful to significant speed improvements without hardware changes.)

The market slide hit all securities, but Apple's drop was truly immense. The company has cash piled to the ceiling to use in the absence of operating credit markets, no leverage or debt, and evidently invested wisely enough through the Braeburn Capital fund the company set up to manage its money to avoid taking material losses. It has fixed the Mac business and is setting OS X up for the next decade of work inside the iPhone and Mac.

Concerns about consumer demand for "luxury" Macs are legitimate, but the Mac business as a whole has so many avenues for growth besides the home market. It is still miniscule by volume in the world, and below 10% of the US market. With Windows languishing, still not up to even older OS X standards, Apple has a clear field to continue to grow Mac sales. Daring Fireball had an apt analogy equating Wintel PCs to American cars in the 1970s; inferior and doomed to cede market share to Japanese models beyond the wildest nightmares of anyone in industry. Apple's stock takes none of that potential into account.

More thoughts on the Apple Tablet

Forget for a moment that the Apple Tablet is unlikely to be released. If all the rumors are true, what is the implied "lay of the land", and what product is expected to arrive?

Apple has said OS 10.6 will be a maintenance release of sorts. Unlike past feature-oriented releases, Snow Leopard should be viewed as the fortification of past advances, and the improvement of the infrastructure gluing those features together. The most radical change rumored is a UI revision called Marble, implying Apple views Aqua as infrastructure worth upgrading, instead of a stable end feature in itself.

A tablet release implies Apple has created an OS X variant that bridges the gap between the Mac and iPhone for users, and targets a unique hardware set. No tablet buyer would accept the access and sync limitations of the iPhone. File system manipulation is a must, as is a proper PIM, from Apple or a 3rd party. To provide this, the OS X Tablet would have to blend the interfaces of both Mac and iPhone, too. After the monumental work involved, this variant would have to be coded to run on a new processor, or, at least, a very different set of chips than any other Apple.

It seems unlikely that Apple could create an OS X Tablet variant while doing the work of Snow Leopard. Making a new OS X that also incorporates the work of 10.6 would mean rebuilding a jet while it flies, without blueprints for the new jet, or a fixed destination. If Apple pulled it off, then they accomplished something truly stupendous.

The Apple Tablet has also been rumored to be like a 7in or 10in iPhone.

If the tablet is very Mac-like, even 10in of screen would be a challenge to enjoy. No Mac ships with less than a 13in screen, and Jobs and Apple have been resistant to anything smaller. (The 12in PowerBook was never replaced, despite being quite popular.) Customer expectations, driven by scrupulous Apple brand management, mean a Mac must do certain things. For example, there has been strenuous advertising of HD content consumption and creation on Macs, and the rumored size of the Tablet precludes it from participating in either. No consumer Mac will be a go-to Final Cut Pro box, but a PC isn't a Mac if it can't make iMovies.

If the tablet is more like an iPhone, it will face more daunting challenges. Changing screen size and resolution means breaking or distorting all current iPhone apps. A clever trick would be to double the current screen exactly, and split apps into HD and SD versions. The latter would be upsampled iPhone apps, with the former providing sharper UI on the tablet and greater functionality. Such a solution still fragments the App Store market, and isn't too great a way to showcase what will be a massive amount of un-optimized application content.

If a tablet of any kind is released, it would arrive at a price point few are honestly considering. With iPhones at $200, and plan-less iPod Touch models at $300-$400, any Tablet would have to start at least $500, and even that is a very low estimate. Apple cannot afford to make the iPod Touch a bad deal, nor can it introduce a telephony platform that cannibalizes the sales of AT&T plans. Pricing must go higher than the $400 of the top-end iPod Touch.

At the introduction of a radically new device, custom and cutting edge parts are ordered in small quantities, driving up even something as likely to sell in quantity as the iPhone, which was released at $600. Precedent points to a tablet that cannot cost less than $600, then, as rumors have it being as different from earlier hardware as the iPhone was the iPod. Surely the hardware and development costs necessitate an iPhone 1.0-or-greater retail MSRP.

At $600 to $800, the mythical Apple Tablet begins to match Mac Mini and educational iMac pricing, but would represent a discount from the MacBook. Shifting sales away from an established but critically growth-dependent Mac platform is risky. That each move from Mac to Tablet/OS X results in less revenue at a lower margin with fewer upsell opportunities, and then requires more intensive, educational customer support, is problematic. If the Tablet is hobbled

to prevent this dynamic, it will flounder around, an overpriced gimmick.

If the tablet is made to exceed $1000, it would have to accommodate very broad, Mac-alike usage, and be compelling enough to operate as a stand-alone computer. The cheap netbooks of the past year have proven that consumers are adaptable creatures, and willing to sacrifice and learn for the sake of a compelling enough new form factor. If Apple has a tablet so capable it matches a MacBook Air, fits into a much smaller space, and can be delivered for $2000, I would be surprised. If such a device output to just a 10in screen, it would be truly misconceived. Any larger, and the Tablet becomes as cumbersome as a laptop, but without the functionality of a keyboard or speakers, and packaged so as to make it uncomfortable to sit at or use for long periods of time.

Sadly, the Apple Tablet strikes me as unlikely. Even if the company had the development capacity to create a 10.6 "signed-content touch Mac" variant of OS X, and 10.6 at the same time, the pricing and packaging of any Tablet device cannot be made attractive. Either Apple is offering giant iPods at a small premium, or crippled, barely-profitable Macs. Even the miracle scenario of a 7in tablet with USB and video out, App Store compatibility, non-iTunes PDA-alike data management software, all for $600, results in a niche product.

The Apple of today isn't trying to cover every base with esoteric hardware offerings. A new platform that can't deliver millions of sales is not worth pursuing. The Apple TV competes in, broadly considered, the set top box market, a realm worth billions. Just having a "hobby" there drives hundreds of thousands of sales. Moreover, developing for the living room has the benefit of educating Apple and preparing it for the long-anticipated, platform-defining battle to deliver all television content.

In contrast, tablets have been available for a decade or more in various forms, but have never sold in significant quantities. Indeed, it is not possible to learn the market for tablets, because there has never really been one. Creating a market is something the Apple II and Mac did, and both suffered for doing so. Second-wave Jobs products, like the iPod and iPhone, find markets that are poorly served and then do better. Only accessories risk first-mover status, and the last to be so bold was probably the first Airport card/WAP combo.

If someone can specify a plausible tablet price point, and describe a marketplace of at least 1m total, eventual customers, it would go a long way towards convincing me this rumor isn't utter noise.

Jobs Behind the Curtain

The mythical Apple Multitouch Tablet took another step towards existing this week, gaining Apple Insider's "could be true" imprimatur.

I have a long history with AI, having first read it as MacNN Reality. It has changed hands and domains a few times since then, but the rumormongering has been relatively well informed regardless of who is at the helm. Any site making accurate predictions on the Mac Web is getting dirt from someone. A few years of quality means that someone is not leaving a trail, and AI has a proven reserve of not-fired insiders now, by my estimation.

I have long doubted the "Apple Tablet" rumor, and I continue to think it is off base. Now that AI is on record endorsing it, I must dig deeper.

As rumors go, the "Apple has a tablet in the labs coming soon" line has been around in one form or another for more than ten years. It persists because it has all the tropes that home-based die-hard rainbow-tattooed "Guy Kawasaki" pre-Copland ADB-using Mac zealots love. Its newest revival was inevitable.

The tablet is a form-factor no one has managed to sell in decades of trying, so the classic Apple "hardware and software integration" strengths should thrill upon arrival, featuring unprecedented innovations. Unlike, say, figuring out how to sell digital music, these are the works that inspire passion in Mac devotees.

The most electrifying part of the hardware rumors for longtime Mac devotees is the possibility of a new, exotic, and custom main processor. The best Apple products, and the most thrilling keynotes, have always centered on radical leaps in computing power wrung from Skunk Works-like research and development. Software is fun, and perhaps new user interface technology can move an Apple zealot's needle, but the moment a new paradigm is revealed is near-religious. The original Mac leapt past the PC and Apple II with 3.5in floppies and a screaming 680x0, the PowerPC crushed the Pentium, and the G4 with Velocity Engine brought "supercomputing to the masses." The PA Semi acquisition, and Intel-era loss of Mac CPU differentiation, have given the rejuvenated Apple Tablet rumor a sky-high interest quotient.

That arch-enemy Microsoft has spent billions to get nowhere to the drama. The iPhone 2 reveal will be huge, but the fragmented, juvenile smartphone market offers only iterative, sleepy Research In Motion as a foil. When Apple faces down an industry leader, Mac zealots lust for philosophical war. The GUI versus the command line, single-vendor hardware/software packaging versus the IBM PC/Wintel model, the new from the Other against the status quo from the hegemon.

Finally, "Steve Jobs is personally involved." While on hiatus, Jobs is contributing an unknown amount to Apple's strategic and operational plans, but he is of course obsessed with the Tablet. In the received lore of the Mac Web, the story of an Apple product team being taken over by Jobs and pushed to epic, era-defining works is cherished. That the Tablet is being developed this way is a certainty only in the hearts of the rumor obsessed, but that is all it takes.

But what do we really know? Jobs is hard to track down for the Wall Street Journal, so it is hard to believe anyone knows the specifics of his work on a single secret project. Tablet dimensions are only guesses. The parts of the iPhone told its tale, especially leaks about what became a German-sourced, highly innovative capacitive screen. A tablet would require an extraordinary version of such, and nothing has leaked of any substance. That DigiTimes says the production line is running does not count.

OS X for iPhone 3.0 was just revealed, and while it does a lot for the iPhone, only some Plist text describing "iProd X,Y" point to any development outside of the smartphone arena. Meanwhile, Tablet rumors hinge on an entire all-new "wing" of the OS coded to accommodate Mac-level usage, targeted at a wholly new CPU/hardware architecture, and ready soon. Difficult to believe, especially since the delta in quality between betas 1 and 2 of the OS is infinitesimal, not composed of the leaps found in past OS development.

Thus, I believe Apple Tablet expectations are off-base. The company would be foolish not to experiment with the idea, but the product as imminent, and meaning to compete with netbooks in price, sales volume and usage profile, represents the remotest of possibilities.