Matthew Yglesias, writing for the Slate made some interesting points inn what Apple could do with it’s $147 Billion cash hoard. One thing Apple shouldn’t do, according to Yglesias is to give in to the likes of David Einhorn and Carl Ichan, who are demanding that Apple use this money to buy back shares in the company.
Matthew Yglesias compared their actions as “corporate equivalent of bank robbery”:
Willie Sutton said he robbed banks because that’s where the money was. These days, an awful lot of the money is in Apple’s cash accounts, so it’s become a natural target for corporate raiders: first David Einhorn and now Carl Icahn. Their ideas, while perfectly legal, really are the corporate equivalent of bank robbery. Icahn bought a bunch of Apple shares. Now, using his leverage as an Apple shareholder, he wants Apple to use its cash to buy a bunch of Apple shares. A huge buyback will, mechanically speaking, increase the price of Apple stock. That will let Icahn sell his shares at a profit and move on to the next thing.
But Apple as a firm won’t have gained anything in this process—it will simply have less money. The company, and all its shareholders who don’t cash out in the Icahn party, will just be worse off.
One of the things Matthew Yglesias suggests Apple could do with their cash hoard to cut prices on products:
Last but not least, Apple could always cut prices for the sake of long-term growth. Apple’s marquee products—cutting-edge iPhones and iPads—seem to sell about as fast as they can make them. But Apple’s first-party cables are substantially more expensive than competing products, its accessories are expensive, and Mac computers continue to be a high-margin low-market-share product while the iPhone 5C isn’t the true low-cost smartphone the world’s been waiting for. Meanwhile, does a company that’s already this rich really need to be taking a 30 percent cut from app and music sales through its online stores? Every company is entitled to try to charge what it thinks it can get away with for its products and services. But executives should ask themselves to what end they’re soaking up this money.
I don’t know about you, but I believe Matthew Ygesias has a very valid point here.
Because consumers don’t often pay the full price of the iPhone, it’s especially tricky to understand how a $100 price cut might play out. In the U.S., it would likely mean the 5c becomes free on contract and the iPhone 4s stops being sold. Depending on how carriers reacted to the opportunity, the 5s might or might not become the new $99 product. (It could be the 32GB 5c, for example.) But keep in mind the U.S. is a small part of the overall iPhone story. Elsewhere, the 4s would likely remain available and become the first iPhone readily available under $400.
The lack of subsidies in many emerging markets would doubtless expand the market for iPhones globally. If sales jumped only 10%, however, Apple would lose out on the deal. Instead of $48 billion in gross margin, it would earn closer to $36 billion, even if we assume production costs fell by about $10 per unit. Once volumes rise 20% (and production costs fall about $20 per unit) — a scenario the $100 price cut makes likely — the picture brightens. In fact, the math tells us Apple would net out to almost exactly the same gross margins it earned in fiscal 2013 . But the upside is 40 million more iPhone customers than are currently forecast, who represent a big pool of potential App Store customers, iTunes Radio listeners, and accessory buyers. In other words, things are looking up.
If sales were to rise 30%, Apple almost does as well selling 250 million+ iPhones as it would have selling the 190 million we assume for 2014 with no price cutting. Total margin from the iPhone business is still a bit lower under this high volume scenario, but at $46.5 billion, it’s a solid jump from the prior year total.
None of this is to say Apple needs to price its tablets like the Kindle Fire or its phones like the Moto G. On the contrary, by keeping them priced at a premium, albeit a smaller one, Apple can still garner the lion’s share of industry profits and a bigger share of industry sales. It also positions the company better strategically if everyone is right and premium-priced smartphones are nearing market saturation. If everyone is wrong, Apple gave up a few billion in short-term profits for a significant uptick in market share. It could rationally choose to do this regardless of where the market is headed.
Seems like a good plan to me. Not sure the folks at Apple ail agree though.