Hidden Dimensions - Apple, The Cluetrain and The Money

by John Martellaro
August 22nd, 2006

"If you want to know what God thinks of money, just look at the people he gave it to."

-- Dorothy Parker

Rolling the Money Upwards

Apple is in an interesting financial position right now, and they're doing what most companies do when they reach a certain level of success -- they roll the money upwards. Here's how it works.

Just about any company can manage to justify the diversion of roughly 0.5% of its revenues to some consensus cause, championed by the C-level managers, without raising a fuss.

When companies are young, the organization is fairly flat, and the founders, flush with cash, don't spend a lot of time worrying about hiring financial people. They're having too much fun, and they like spending some of their new found dollars.

But there isn't all that much of it.

For example, when a new company has annual gross revenues of, say, $1M, one-half percent comes to $5,000. This isn't even enough to buy a motorcycle for the CEO. It's hard to live large on $5K.

Small companies are constrained in their ethics by their revenues.

Moving up the ladder, let's look at company with $100M in annual revenues. One-half percent is $500K. Now we're looking at some decent play money. It's not enough to buy a building, but it is enough to be tempting regarding its use. For a $100M company, no one can resist the idea that it's time for bonuses for the executives. Hardly anyone on the staff will notice this unless they get invited to a big party by the boss and see his new Porsche in the driveway. (But most executives don't party with their staff for precisely that reason.)

Now let's jump up to a really big and exciting company, one in the Fortune top 50. For example, a company with $30B annual revenue and 100,000 employees. One-half percent of that is $150M, and that's serious money. Need a new building? With cushy corner window offices for the senior managers? Want to buy a business jet? Or maybe the top 20 managers can get a guaranteed $7.5M pension passed by a friendly board of directors. That'll pay out $375K a year until they're too old to even marry Anna Nicole.

Carving Out From the Employees

Did you ever notice that just when a company reaches a certain stage in its life, there never seems to be enough money for employees? All of a sudden, training is cut back. Trips to conferences are cancelled. There's never any money for departmental projects. Employees are asked to take on an increased share of their health benefits cost. That's because, at the very moment when a company is doing its best, money is systematically pulled upwards in the organization, not left to linger in the hands of those who need it most to stay imaginative, inspired, competitive, and loyal.

Let's say that one of the divisions in that $30B company I mentioned above is small business sales. They have 100 staff, and they bring in $100M in annual revenue. If the manager of that division were given back his 0.5% discretionary money, (over and above the usual operating expenses) he'd have $500,000 a year. That's $5,000 per employee. He could buy every one of the staff a new notebook computer, pay for all their technical books and journals, and send them to their favorite conference each year. Every one of them. Or, he could engage in just about any project that he thought would benefit his organization and competitive standing.

But that money never comes down. It has become unfashionable to allow mere employees to bask in their success. Money remains firmly seated at the top of the company where the collective sweat of every employee can be aggregated for senior executive use. They do this by diverting all revenues to a central financial organization and doling out highly constrained operating expenses from there.

If a company is buffeted by competition, finds its growth stalled, and has been robbing Peter to pay Paul, it's soon time to "cut back on expenses" by laying off staff. However, in the short term, any company has enough corporate momentum to sustain its revenues despite the carving out of staff. If that fictitious company I mentioned above with 100,000 employees laid off 500 employees (which were front end loaded in the growth phase), the executives could probably hold current revenues and yet pocket about $75M (less severance expenses). How that money is disbursed is the key, and this is the crucial decision point where managers can do the right thing because they believe in the company and its people -- or they can divert some of that money into a golden parachute and sell out.

Apple and Its Money

So how does Apple look in this regard? For starters, Apple doesn't typically have massive layoffs. During Apple's worst years, back in 1995-1997, there were some focused layoffs necessary to manage payroll and cut unprofitable programs. But it wasn't draconian. After the dot com bust and post 9/11 business malaise, Apple elected to innovate out of the business recession. That's because they had confidence in their ability to create value in a market that was dominated by ho-hum commodity PCs. It worked well.

Apple didn't have sustained growth post 1996 until the iPod was released. So Apple learned how to survive without robbing Peter. That was a trick in itself. It meant that any program or product that didn't make money was axed immediately. (Like big hardware discounts for developers. Or the Apple Masters.) Apple learned how to survive within its means.

In terms of rolling the money upwards, Apple in my experience, does this in the sales organization. Each year, sales quotas go up while operating expenses are capped severely. Apple feels that their products are so desirable, they practically sell themselves. While this is generally true in the consumer arena, it's not true at all in those markets where Apple competes with PCs and Microsoft business products.

What does Steve Jobs think of the sales people? You can find some insight in a BusinessWeek interview with Steve Jobs from 2004.

Before Steve came back, sales executives were gutting Apple worse than the Capital One plunderers and rewarding themselves handsomely. (While Michael Spindler was looking to sell out.) None of the sales executives survived when Steve returned, and sales executives were rendered much less powerful. As bizarre as it seems, the sales organization can no longer even do marketing.

These days, Apple has about $10B in the bank. That's the result of years and years of rolling the profits into paying off debt and saving for a rainy day. Excellent. That $10B earns a lot of interest. But one analyst asked a few years ago whether Apple was simply running a credit union. The implication is that that much money either needs to be paid in dividends, which Apple won't do, or be put to good work.

No one knows what Apple has in mind for that kind of money. My theory has been that Apple's board of directors has been accumulating cash for a seriously large merger at the appropriate time. For a while, some thought it was Disney. It'll be something much bigger than a mere $500M for a new campus. Or $50M for a new data center. No, I mean something so big, it'll change the face of computing in America.

All during this time of capital accumulation, I saw many worthwhile projects and initiatives severely underfunded or unfunded. These were projects that would have made Apple more competitive and built a better relationship with enterprise customers. I won't go into details, but as an example, I'll note that the largest computing cluster, available to staff and customers, on the campus of this US$18 billion computer company is only 32 nodes.

Apple can be, at times, pound wise and penny foolish.

To be fair, all Apple employees received a free iPod Shuffle back in 2005 as a Thank You from Steve. There is always plenty of money for travel expenses and sales training. But in general, Apple runs so lean and the employees are so overworked that one is tempted to conclude that this is an intentional technique to avoid money, power, authority, and decision making in the hands of junior executives.

Finally, we get to the Cluetrain effect. Apple appears to be transitioning to a much more consumer electronics focus. Back in the days, pre-iPod, when Apple was in its $6B/year doldrums, it was possible to put up barriers, remain a little arrogant (in order to keep the religious fervor alive), create a fever of endless product surprises, and remain distant from its customers. But as the Cluetrain Manifesto points out, companies that put up barriers, lock themselves behind walls, and refuse to actually talk with their customers get into trouble very quickly.

Apple realized that if they were going to become a consumer electronics company, they needed to have a store front presence on Main Street, USA. They've solved a major part of this "Castle and Moat" complex with the Genius Bar at more than 150 retail sites, well placed with respect to population centers in the U.S. Even so, it's interesting that the people who work in the Apple stores are a different kind of Apple employee, badged differently, and do not have a whole lot of authority. In time, that will have to change.

Apple is a mature company now, both technically and financially. The key to understanding how Apple is going to make this transition -- from a computer company that has a popular electronic gadget, the iPod -- into a company that has a portfolio of popular and useful electronic devices for the 21st century will be to watch where the money goes, up and down the organization. And with that money, authority and responsibility.