Wednesday, February 15, 2012

John Malone, Apple, and the Future of IT Hardware

In 1973, John Malone started a cable company named Tele-Communications Inc. (later shortened to TCI).

From a modest start, Malone relentlessly built his business, eventually becoming a billionaire in the process (trivia fact: Malone today is the largest private land owner in the United States, owning more than 2 million acres of land.)

Malone resigned as chairman of TCI in 1996, but not before establishing a reputation as a shrewd and ruthless cable operator.

Former Vice President Al Gore dubbed Malone "Darth Vader" due to his insistence that his company receive equity stakes in the cable programming services in exchange for carrying the content.

But here's the thing:  Malone hated the cable business.

He hated the fact that every time he wanted to raise prices he had to go before the local cable boards and, as he put it, "get my ass chewed out".

Malone hated the fact that he was constantly barraged by complaints about the service quality, even while communities tried to prevent him from recovering his costs to upgrade his equipment.

No, what John Malone really liked was the content business.

Eventually he got out of the cable business (selling at a handsome profit) and concentrated his efforts in a company called Liberty Media.  Liberty today owns a number of programming companies, including the Discover Channel, USA Network and Encore.

In other words, in John Malone's world, content is king, and the equipment is a means to getting his programming shown (and paid for).

I mention all of this today as a follow-up to my post yesterday about Apple.

Apple has taken the direct opposite approach that John Malone followed.  Content - music, videos, etc. - is for Apple merely a way to sell more equipment.  The company barely makes money on iTunes, for example, but without iTunes who would want an iPod?

Apple is a device company, not a content company.  The legacy of Steve Jobs is that the company is focused on developing "insanely great" products.

What Apple doesn't focus on is their stock price.

 UBS analyst Maynard Um told  a group of us yesterday that Apple's attitude towards Wall Street is indifference at best.  Financial people at Apple are second-class citizens, and considerations like dividends and stock buy-backs are generally afterthoughts.

Maynard also described how eventually Apple may be vulnerable.

At the present time, accessing information in the "cloud" is controlled by the hardware manufacturers.  For example, I have information on iCloud that can be accessed on either my iPhone, iPad or Mac (OK, I'm an Apple fan,).  However, I can't access my information on the iCloud on the Dell that I use at work.

But this will eventually change. As more information is in the cloud, consumers will eventually become resistant to using only one manufacturer's devices to get their data.  This means that the premium prices that Apple is currently able to charge for it products will eventually be forced to be cut, in Maynard's opinion.

That said, Maynard thinks that the pressure on Apple will not occur for some time.  All of the manufacturers have a vested interest in the current system, and have no interest in seeing device prices come under pressure if they become commoditized.

But if John Malone is right, and content is king, the fate of Apple and the other IT manufacturers will rest on their ability to integrate everything yet continue to earn terrific financial returns.