The trouble with investors’ “Jack & the Beanstalk” approach to Apple’s growth

The trouble with investors’ “Jack & the Beanstalk” approach to Apple’s growth

BY NATHANIEL MOTT 
ON OCTOBER 31, 2013

Apple decided long ago that its success would depend on increasing profits instead of market share. The company still considers its computers and tablets and smartphones as luxury goods instead of commodity products, and it prices them accordingly. This has allowed Apple’s competitors to reach more customers by offering cheaper devices. It has also made its retail stores the most popular — as measured by sales per square foot — in the US.News that the number of visitors to its stores is flattening, then, might be seen as a problem. (Never mind that the stores are visited by more people than the approximate populations of the US, Canada, and Australia.) Apple’s investors and customers are infamously difficult to please, and any metric that doesn’t appear to be growing faster than Jack’s magic beanstalk is promptly declared a sign of Apple’s decline.

But this so-called flattening is hardly cause for concern. Horace Dediu, the analyst who noted the retail stores’ slowing growth, points out that Apple’s retail stores became so popular after a “quantum leap” in 2010. This growth could likely be attributed to the iPad, the last Apple device to define and popularize an entire product category. Given Apple CEO Tim Cook’s repeated promises that new products will be coming in the next year, it wouldn’t be a surprise to learn that Apple’s retail stores have become even busier than they are now.

Any concern over the retail stores’ stagnation — as opposed to its decline — is likely rooted in the baffling belief that Apple must continue to grow as quickly as possible. That’s what investors want,what columnists believe, and what the rest of the industry remains so focused on. Apple is being judged for its ability to continue growing and attracting new customers despite all of the evidence showing that the race for market share is a race Apple has not and does not intend to run. An industry captivated by dollar signs simply can’t understand one of the few companies whose sole purpose is to accrue as many as possible.

Or, as Reuters columnist Felix Salmon wrote on Tuesday:

[…]Apple should be run a bit like Bloomberg: as a profitable company which pays well, which concentrates first and foremost on making its product as great as possible, and which doesn’t try to be something it’s not, or allow itself to be distracted with financial engineering. Sometimes its stock will go up, and sometimes its stock will go down. But the company, and its core values, will endure.

So long as Apple continues to release new products and its stores continue to generate more sales per square foot than other retailers — perhaps by becoming a central hub for the Internet of Things — the company will survive. It’s fascinating that this still needs to be said, but Apple isn’t trying to get its products into the hands of as many people as possible. It’s not going to sacrifice profit margins for market share. It’s simply going to continue selling products with the lowest-but-most-profitable price possible from as many stores as possible. There’s a key difference there.

The company isn’t in danger of that. Despite its increasing reliance on free software, the company continues to sell its products for a premium — software is a loss-leader for the company’s hardware, which remains its main focus. And the slowed rate at which its stores are becoming more popular?

Dediu speculates that this is because some of the stores aren’t yet designed to handle more customers and because Apple can’t introduce new stores fast enough. Apple’s retail stores are growing slower than before because they can’t accommodate the sheer number of people who wish to visit them every day.

Is that bad for growth? Certainly. But is that bad for Apple? So long as its main priority is making enough money to continue releasing products, not really.