Has Apple become IBM in the ‘80s?

Apple’s financial results bear a disturbing similarity to IBM’s near-collapse in the 1980s – which doesn’t bode well for Apple. The shift from growing the customer base to mining existing customers by increasing prices (while lowering value and charging for more and more services) will undoubtedly not end well.

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Kartikey Das (CC0)
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Like many, I was concerned with Apple’s latest poor financial showing. But for me, it recalled a similar trend I saw in IBM back in the 1980s. I joined IBM by accident back in 1984 when it bought ROLM systems. That gave me a front-row seat to what was one of the biggest near-corporate death experiences I’ve ever witnessed. At the time, IBM could do no wrong: they were at the top of their game, massively dominant. They effectively were the technology industry. It was a work-for-life company with great benefits, and a great pension plan.

I was in finance, internal audit, competitive analysis, and finally was part of team designed to spin out the software unit. That gave me a unique insight into what was going on. It wasn’t pretty. To outsiders, it seemed like IBM went from class hero to class clown overnight. Their valuation plummeted, they had to do massive layoffs and the brand value went from massively positive to massively negative.

That last tidbit meant that people were willing to pay more for something that had no brand than they’d pay for something with the IBM brand.

I was one of the folks that flagged the problems in IBM and wrote reports on how to fix the problems…which got me awards and recognition but, sadly, had little impact on the actual problems. And I’m seeing the same trend in Apple’s financials that I flagged early on at IBM.

While I expect no more impact now than I had then, I still think it’s interesting to spotlight in case someone that has the power to fix this is listening. If, as I expect, what happened to IBM is going to happen to Apple, it’s going to be extremely painful for Apple investors, employees and customers much the same way it brutalized those same groups when IBM fell.

IBM’s collapse

What I saw at IBM – and what I’m seeing in Apple’s financials – was a shift away from product sales for growth and a shift toward mining customers for money. Once a company gains monopoly power – and Apple has this power in their own ecosystem (e.g., it’s really hard for Apple customers to switch to another vendor) – they tend to take the customer for granted.

When I pointed this out at IBM, the VP I reported to called it “selling air.” He said IBM customers were tied so tightly to IBM they had to buy what IBM sold and pay anything that IBM billed them. If they didn’t, they’d go out of business. In other words, businesses needed IBM to survive like people need oxygen to live. Hence the term “selling air.”

The internal fiscal trend that predicted the IBM fall was a shift in revenue makeup from the actual sales of products to the services charged to maintain those products. Increasingly, the firm was mining customers for money without giving them any additional benefit. Eventually, the customers revolted and IBM almost died.

Apple’s indicators

Apple remains a hardware company. Not a cloud company or a software company. (The distinction is: what product do they use to measure market share?) A cloud company like Amazon sells to firms that buy hardware from a variety of vendors generally not Amazon. A software company like Microsoft generally buys hardware from firms that generally aren’t Microsoft (granted, Surface is an exception). The two things aren’t tied together. IBM was a hardware company, like Apple, and the hardware defined who the customers were. They’ve since pivoted, and you can buy IBM’s cloud, software and services regardless of whether you buy IBM hardware.

So, for Apple, a decrease in hardware sales coupled with an increase in services just means they are charging their customers more for what they’re providing. They aren’t growing their base and instead are cutting costs, raising prices and increasingly mining their customers for revenue.

Now, as long as the customers see this as a value, there’s no problem. But the issue is with how the firm sees the customer. Sometimes a company sees the customer’s money as their money, and then schemes to get more of it.  Over time, the customer (in the collective mind of the company), stops being a person and becomes a resource. That resource is then increasingly abused until it escapes, resulting in a collapse.

One of the early indicators of that collapse is slowing product sales, because customers do have a choice when it comes to refreshing their products. Another indicator is the lack of market share growth, which indicates external customers are aware they aren’t going to get good value by switching, and avoid the brand. Both are evident in Apple’s numbers.

One final indicator is a lack of innovation or compelling products that would expand the company’s customer base. Both are also evident in Apple. Their most innovative new product is the Apple Watch, which is really just a wearable integrated to its wearer’s iPhone. So, it can’t effectively bring in new customers. In fact, there appears to be very little effort focused on expanding Apple’s customer base at the moment.

The last is people abandoning the brand, which clearly hasn’t occurred yet. This generally requires a trigger, such as a widely read report that customers are being abused, or, in this day and age, something truly negative going viral. The recent FaceTime mistake just isn’t big enough to be a trigger, for instance, but there will likely be something big enough in Apple future.  

The warning signs are loud and clear

The biggest difference between the market back in the 1980s and the market now is that, thanks to the internet, things move far more quickly because information flows far more freely. Also, IBM’s market back then was an enterprise market, which moves glacially compared to the consumer market that Apple once dominated. But that only suggests that Apple’s big fall should happen far more quickly and be far more difficult to mitigate.

Fortunately, Apple has massive capital reserves, which should buy them time. But I’ll bet they won’t even acknowledge there is a problem until it’s too late to fix it.

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