Steve Jobs was once asked at an Apple [AAPL] shareholder meeting by a shareholder who wanted get some insights into his deepest thinking: “What keeps you awake at night?” Mr. Jobs replied, “Shareholder meetings.”
The wisdom of this insight was borne out last week when Mr. Jobs’s successor at Apple, Tim Cook, was asked at the annual shareholder meeting by the NCPPR, the conservative finance group, to disclose the costs of Apple’s energy sustainability programs, and make a commitment to doing only those things that were profitable.
Mr. Cook replied –with an uncharacteristic display of emotion–that a return on investment (ROI) was not the primary consideration on such issues. “When we work on making our devices accessible by the blind,” he said, “I don’t consider the bloody ROI.” It was the same thing for environmental issues, worker safety, and other areas that don’t have an immediate profit. The company does “a lot of things for reasons besides profit motive. We want to leave the world better than we found it.”
Reportedly looking directly at the NCPPR representative, he said, “If you want me to do things only for ROI reasons, you should get out of this stock.”
The National Center for Public Policy Research (NCPPR) attended the meeting as shareholder. It describes itself as a conservative think tank and was pushing a shareholder proposal that would have required Apple to disclose the costs of its sustainability programs and to be more transparent about its participation in “certain trade associations and business organizations promoting the amorphous concept of environmental sustainability.”
Mr. Cook made clear that Apple would continue with energy sustainability and its other initiatives. Most of the shareholders went along with that: the NCPPR’s proposal received just 2.95 percent of the vote.
How Apple makes money
One can understand Mr. Cook’s emotion, as the CEO of the one of the most profitable companies on the planet, to be attacked for insufficient attention to making money. What the question revealed was a fundamental misunderstanding on the part of the NCPPR as to how and why Apple is so successful in making money.
Many of Apple’s main activities make little or no money. The hugely popular iTunes barely breaks even. The App store, with several hundred thousand developers dreaming up functions to meet every conceivable human need, makes relatively little money for Apple. Apple also provides free upgrades of its software, thereby incurring a loss on that function. Yet overall, Apple is immensely profitable. Why? Because it makes so much money on its hardware.
Now if Apple was run by traditional management, it would not take long before it was charging for software upgrades (like Microsoft [MSFT]), pushing up the prices on items in iTunes and in the App store so as to improve quarterly returns and improve the short-term “bottom line”. And the consequence of that would be that a short-term improvement in profits, while customers became less and less delighted by the Apple ecosystem, and steadily decamped to other cheaper alternatives. Pretty soon, Apple would be back in the ranks of so many other companies in long-term decline.
The point is that Apple makes a lot of money not only because it has a very efficient supply chain but also because it has created a customer ecosystem that, as a whole, delights customers and makes them want to stay as an Apple customer. So long as they are delighted by iTunes and the App store and the free software upgrades and the rest of the Apple ecosystem the customers remain are part of the loyal Apple community and are willing to pay a considerable premium for Apple’s hardware.
What the NCPPR is exemplifying is the 20th Century traditional management mindset that has for decades been chasing short-term profits and destroying the long-term profitability of so many companies. The rates of return on assets and on invested capital of US firms continue on their disastrous decline.
By contrast, the management of Apple, before Steve Jobs and now Tim Cook, has its mind clearly focused on delighting customers in a holistic way. The result? Huge profitability in both the short- and long-term. Apple understands that business is no longer about making money out of better products, and charging for anything it can make a buck out of: it’s about creating a customer ecosystem that continues to delight customers.
Time for NCPPR to learn the fundamentals of 21st Century management and the Creative Economy.
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