Mark

Apple cannot afford to get too big or too disorganized. That’s my takeaway from yesterday’s shocker that not only is Scott Forstall out at Apple, but also that his fiefdom is being split between Craig Federighi, Eddy Cue, and Jony Ive. We learned a lot about Tim Cook yesterday.

First: retail chief John Browett was surely done before we on the outside even heard about his scorched-earth penny pinching. My first thought when those stories started to hit was, If this is true and Tim does not fire him, there’s a problem in Cupertino. What’s telling is how long it took. I suspect Forstall had worn out his welcome long enough ago that Cook held onto Browett for a single press release. Canning Browett so soon after hiring him, then losing Forstall just a few months later, would have shaken a lot of confidence. Losing Forstall sooner would have disrupted teams and product launches. There’s only one headline now, and it’s framed in a proactive manner. From a cold business and PR perspective, I’m very impressed. Tim clearly knows every side of how Apple does things.

Forstall’s star shot upwards from a low level to standing alongside Bertrand Serlet — the man he worked under for years. When Bertrand left Apple, I was sure that Forstall would press to expand his influence, even if he wasn’t given Bertrand’s turf. When Steve departed, I felt the same way. I’m not surprised his style continued to ruffle feathers, but I’m shocked that it cost him his job. I underestimated Cook. Scott’s absence from the iPad mini event last week should have been more alarming to everybody.

If this was only about Forstall being a problem, though, Apple would replace him. They clearly aren’t: the same press release explicitly states a search is underway to replace Browett. Not only is this a profound increase in responsibility for all three of these top executives, it’s a profound change in Apple’s organization going as far back as I can remember. There’s a long-standing pattern of separating watershed products important to the company’s future. The Mac and Apple teams. Mac OS X and Classic. The iPod division. iOS and Mac OS X. Suddenly, Tim Cook has pulled the reins in. Federighi owns software. Ive owns design. Cue owns services. Period.

Apple’s insane growth has pushed the situation over the edge. Too much size and separation inevitably bring politics, chaos, dropped balls, and finger pointing. None of those things are good for Apple’s products or customers. What we don’t know is whether burdening Cue, Federighi, and Ive even further will actually improve things. These guys already had enough to worry about. The worst case scenario is one where good leadership is spread too thin, and everything suffers. These are real growing pains.

Four hundred million devices and five hundred billion dollars later, Apple is different. It’s just finally starting to look that way.

In early 2008, shortly before the iPhone SDK launch, I met a gentleman with a very big mouth. He boasted obnoxiously for some time until someone mentioned buying an iPod touch. This guy subsequently warned the entire room not to buy, because new models were coming soon. He knew this, he said, because his job involved managing the flash memory supply for iPods and iPhones, and recent capacity orders suggested the model line was about to change.

He worked at Samsung.

It’s clear to me that over the last five years or so, Samsung has built not only a multibillion-dollar business, but a corporate culture around having Apple’s number. The partnership has had irreversible conscious and subconscious effects on the way Samsung’s product divisions think and do business. The proof is on the store shelves. It’s sickening.

But is it illegal?

That’s the question we must ask ourselves as Apple v. Samsung heads to the jury. The trial’s drama has distracted from what I see as its real long-term implications.

I must say I believe Samsung’s defense has been terribly flawed. Apple has argued that Samsung illegitimately profited off of Apple inventions. Rather than “We took inspiration, but here’s why that isn’t infringement,” Samsung’s rebuttal seems to have been “These are our own inventions.” I don’t see any reasonable jury believing that for a second, but depending on Judge Lucy Koh’s instructions, they may not hold it against Samsung either.

On the topic of damages, Charles Arthur writes for the Guardian that when rebutting Apple’s $2+ billion figure:

Samsung argued that Apple, which was struggling to keep up with demand for the iPhone 4 from July to October of 2010, did not have the capacity to have delivered on those additional sales. “Apple couldn’t service its own customers with the iPhone 4, but it could service customers it didn’t have?” Samsung attorney Bill Price asked…

This took my breath away. Here’s an opportunity to say “These people chose to buy Samsung instead of Apple. We are clearly bringing something to the table,” but instead, Price concedes “These people settled for Samsung because they couldn’t have found an iPhone anyway.” (Samsung may well know this for a fact because it’s supplying many of the components Apple needs to satisfy customer demand; see “having Apple’s number” above.) It was extremely shortsighted.

The stakes in this trial are enormous. If Samsung is vindicated, it will embolden competitors everywhere to aggressively mimic the iOS experience. That would be immeasurably bad (and familiar) news for Apple.  If Apple wins, the damages check will be the least of Samsung’s problems, and Apple will itself be emboldened to further press its rights.

Most importantly, this case brings the ever-brewing controversy of software patents further into the spotlight. Apple’s case is far from patent trolling, but I do worry about the precedent it could set. If a verdict is reached, lawyers and judges across the country will surely look back to this case repeatedly during their own. In closing arguments, Apple attorney Harold McElhinny told the jury:

If you find for Apple in this case, you will have re-affirmed the American patent system.

Many people in the tech industry don’t see this as a good thing at all — so much so that one might think Samsung’s lawyers said it as an argument against finding for Apple. An Apple victory will surely inspire other far more cynical parties to beat down would-be competitors.

I must admit I’m uncomfortable with the idea that the world’s largest corporation, whatever its name, could be given such a big stick as early as this week. However the verdict falls, I feel like there are no winners here in the long term — certainly not us. Maybe that’s why Judge Koh has been begging for a settlement.

This past Sunday, Apple abruptly scheduled a Monday morning conference call “to announce the outcome of the Company’s discussions concerning its cash balance.” The call, followed by a press release, announced two initiatives: a $2.65 per share quarterly dividend and a $10 billion stock buyback. Macworld has a full transcript of the call; audio from Apple is here.

The announcement itself was intriguing. Why a conference call? What’s wrong with the press release? (I asked this on Twitter  regarding both dividends and buybacks.) When Apple stands up to talk, people expect something big. Anything less is bound to disappoint someone. I can’t imagine investors receiving this news differently in print versus audio form. It felt like a departure from Apple’s typical controlled communication style. Maybe Tim Cook just likes talking to investors.

The Buyback

Cook and Peter Oppenheimer repeatedly cited “dilution from our employee equity program” as the reason for a buyback, and it’s a good reason. Stock compensation remains instrumental to attracting and retaining talent, and Apple needs to keep that incentive strong. Horace Dediu has a nice breakdown on the buyback numbers.

People love to talk about Apple “taking itself private” as the cash pile grows. Steve Jobs famously loathed shareholder meetings, so it’s fun to think about. But it makes no sense. If Apple bought itself out, it would have no free shares to reward employees with, and no cash left to replace those shares with bonuses.

The Dividend

At face value, I don’t get it. Just look at this chart. If you’ve consistently sworn off Apple shares just for lack of a dividend, I question your sanity. If you have Apple shares, and are still holding your hand out in the face of these stratospheric gains, your hubris is breathtaking. Apple has always acted in its own interests, and spent money in places that it believed would yield benefits for the business. A dividend does not do that. How can they just start throwing away billions of dollars a year?

One thing a dividend does is encourage long-term investment, which could help stabilize the stock price. It’s bound to slow down sooner or later. The question is, when will that happen, and how dramatically? Perhaps Apple is attempting to impact that part of its destiny as it does any other. Reducing heavy speculation on the stock could cut down on future dramatic corrections, which would be good for Apple’s “real” investors — especially its employees, whose compensation is tied to the stock.

Apple grants restricted stock units (RSUs) to employees. These are shares at market value, as opposed to options, which have a strike price. With options, the stock needs to grow above the strike price before the employee makes any money. By contrast, the employee can sell RSUs at any price and get all the money.  The use of RSUs makes growth nearly irrelevant to employee compensation.

At this stage, then, management is incentivized to prevent the stock from crashing rather than keep it climbing; to keep those shares, which Apple is about to spend a lot of money buying back, stable. Viewed in this light, and alongside the buyback, a dividend does invest in the business and its employees, while also pleasing the open mic comedians who descend on Town Hall every February. It also feels more like Apple-style thinking, which is to say not your average executive team that mortgages everything just to make the stock go up.

Apple said Monday’s news was all about cash, but it was really about stock. It highlights the company’s shift from an underdog-turned-juggernaut, to the world’s biggest company securing its position as the world’s biggest company.

These people do not get it:

Under a new deal between the two companies, Netflix users won’t just have to wait 56 days to rent Warner Bros. movies on DVD. They’ll have to wait 28 days to add the movies to their queues.

Also under this new deal, pirated movies remain free of charge, free of non-skippable ads, free of five-minute load times, and are now nearly three months ahead of the competition.

iTunes changed the music industry because it was more convenient than stealing. Most people made the value judgment that ten bucks for a clean, legal digital album was worth the alternative of fishing around for files that may or may not be damaged or infected.

Hollywood continues to completely ignore that lesson. It continues to punish the people who play by the rules with an insufferable customer experience. This is the sole reason piracy is up and profits are down: because doing it right totally sucks. And that’s apparently how the studios want it.