The Silly Reason Why Apple Needs to Keep Growing

M.G. Siegler wonders out loud in a recent post how Apple can continue to grow given the stupendous results they just announced for last quarter. They can't milk the iPhone cash cow forever, after all.

But again, the bar is now just set so high. What on Earth can be a bigger business than the iPhone? It’s impossible to come up with something right now because it seemingly doesn’t yet exist. It’s not cars. It’s not banking. It’s not even oil. It will have to be invented.

Or it’s possible that it does exist right now and it’s a market waiting for the catalyst that the iPhone was for smartphones. And it’s fun to think about what it could be. But it’s impossible to know. Even Apple didn’t know how big the iPhone business would become.

Exactly right. Apple would have to grab an unrealistically large share of an existing market for it to serve as an encore to the iPhone. For example, the top ten automotive manufactures in the Forbes Global 2000 earned a total of $80.1 billion over the past 12 months. That is a bit more than even the iPhone's incredible profitability. Just one thing: to replace the iPhone, Apple would have to grab more or less the entire worldwide car market.

More plausibly, they would have to create some new technology that completely upends an existing market: reinventing personal mobility, for example, rather than building a better car. Maybe a less goofy Segway or a flying skateboard or a jetpack that doesn't involve strapping large amounts of explosive fuel on your back. This is what they did with the iPhone in the personal communication space, and whether they will manage to achieve success on the same scale again is a fascinating and unanswerable question, particularly in the still nascent post-Jobs era.

So I will cravenly ignore this question and instead cast a critical eye on M.G.'s fundamental assumption: that success for Apple (or any public company) necessarily means continued growth. It is not immediately obvious why that would have to be the case. If Apple keeps on churning out $18 billion of profit every quarter for the next 20 years, it would be hard to label them a failure.

There are two good reasons and one silly reason why public companies must strive for constant growth. First of all, they risk being outcompeted by faster growing competitors if they succumb to stagnation. Scale is important, and today's 800lb gorilla may become tomorrow's adorable pygmy marmoset if it doesn't keep up with other companies in its space.

Apple doesn't have much to fear on this score. They are so far ahead in the metric that really counts, smartphone profit share, that if their profits levelled off it would still take decades for competitors to catch up. A paradigm shift that renders smartphones less relevant seems a much bigger risk than competitive pressures.

The second good reason is that growth is a great antidote to complacency and inertia. If managers of a successful company sit back and close their eyes while warm waves of profits wash over them, they are probably going to miss the strategic inflection point that will eventually doom their current business model to obsolescence. In striving for growth, they are forced to keep their eyes open scanning the horizon for the Next Big Thing.

Theoretically this could be a risk for Apple. After all, this is pretty much what happened during the decade from 1986, when Steve Jobs left the company, until he returned as part of the acquisition of NeXT in 1996. Mindless pursuit of growth über alles is just a crutch for poor management, however, which was the company's main problem during Jobs's hiatus. Apple's management is manifestly much stronger now, as is the firm's culture of innovation.

That leaves the silly reason: stocks prices have built-in assumptions about future earnings growth, and shareholders really hate it when a stock sinks in value. Does Apple's share price factor in expectations of rising profits? In a word: yes. Analyst consensus calls for significant earnings growth every year for the next four years. If profits "just" stay at their current obscene level, the stock price will fall and Tim Cook's head will roll.

It is pretty crazy to think that a company that just made the highest quarterly profits of any company ever in the history of capitalism would be in deep trouble if it continues to make the same mind-boggling profits quarter after quarter... but it's basically true. Not only would top management be shown the door, a falling share price would make it harder to attract and retain key staff. Needless to say, this speaks unflattering volumes about today's stockmarket investment culture.

Silly, indeed.

Matt

Matt