TMO Analysis - Apple's Cash in a Recession Zaps Competition

by , 8:30 AM EST, November 14th, 2008

Observers who follow Apple are worried that Apple's customers will dry up in an economic downturn. On the the other hand, Apple, once again, has a unique opportunity to use its cash to develop products and services that will take control of the market while other companies cut back their R&D and essentially sleepwalk through the downturn.

In Apple's last earnings call on October 21, Steve Jobs said the following:

"...we have almost $25 billion safely in the bank and zero debt. This provides us tremendous stability and the ability to invest our way through this downturn. This is what we did during the last downturn. We [increased] R&D investments and created some of our best new products and businesses, like the Apple retail stores for one. This downturn may also present some extraordinary opportunities for companies that have the cash to take advantage of them, like Apple does."

What Mr. Jobs meant was that weak companies without a good cash position will tend to cut R&D spending during an economic downturn. The basic survival of the company becomes at stake and making payroll and paying invoices is more important than research -- with no immediate ROI.

Apple's cash allows them to catch these companies napping, so to speak. While customers who aren't in great economic shape cut back on items that aren't necessities, hurting the low price competition, the people who are better off will tend to spend their money on quality Apple goods that they know will last and have value.

Product Leverage

Mr. Jobs and company did the same thing during the last downturn and came up with the retail stores, the iPod, and the Titanium PowerBook, leaving the competition gasping during the downturn and then far behind Apple's technology when things got better.

This maneuver by Apple may already be starting. On Thursday, TechCrunch published a story, a rumor, about how Apple may be working on its own search engine for Safari. More specifically, the story went on to describe how, rather than building its own clone of Google farm of 3,000 PCs, Apple is actually working on a better search interface, especially for Safari on the iPhone.

Other current and emerging technologies that Apple could seek to perfect, in second generations, and install into its user base during a downturn include:

• Secured patents on gesture language and dictionary
• Sproutcore
• Holographic display technologies for small devices
• GrandCentral
• OpenCL
• Snow Leopard
• DisplayPort across the product line, new video products using it
• LED Backlit stand alone displays that cater to graphics professionals (option for matte finish)
• IPv6
• The so-called iPhone nano
• The so-called MacBook touch
• Apple TV 3 that leap frogs competition

Economic Leverage

Another piece of leverage Apple will have is the ability to pay cash on delivery for large volumes of various hardware components: memory, CPUs, GPUs, and SSDs. That will not only give Apple a lower unit cost, but put it at the front of the delivery line. While other companies whine, seek to string out payment and order in smaller quantities, Apple will become the suppliers' favored customer, cash on hand, able to exert its own special brand of economic leverage against the competition. Kapow.

As a result, companies that were seeking to compete against Apple (or feed off its food chain) during good times won't be around when the inevitable economic upswing happens. For those companies that do survive, they'll wake up from their sleep to discover that Apple will have developed and refined advanced technologies that make them look like they've been standing still. Apple did that with the iPhone -- but under different conditions.

Technical Leverage

Finally, with the help of PA Semi, Apple will have access to proprietary ASICs that the competition cannot match because they cut back on R&D and have to buy their ASICs on the open market, ASICs that don't give them a competitive advantage against the other guys. Without advanced software, hardware and services they'll be left to compete, once again, on price, and suffer a miserable existence.

Investors and analysts shouldn't worry too much about Apple. The last downturn was seven years ago, an eternity in Internet time, and few companies have been able to utilize these lessons of the past to succeed against Apple.