Apple has a blip and the world wobbles

It’s that time of year again. Apple has released its results for the fiscal quarter ended 24 September 2016 and we are immediately plunged into “Has Apple peaked?” speculation. How come? Well, the company posted quarterly revenue of $46.9bn and net income of $9bn. Not bad, eh? Ah, yes, but not if you’re a Wall Street analyst, because these numbers compare to revenue of $51.5bn and net income of $11.1bn in the same quarter the year before. And – shock, horror! – the company’s gross margin was only 38% compared to 39.9% a year ago. The numbers are down, in other words.

Cue fevered speculation about the fate of the company. The numbers, burbled one analyst, show “the danger of being a one-trick pony when everyone already owns a pony. The company’s reliance on the smartphone, which is now a mature and saturated market in the developed world, is starting to create a growth problem for Apple. Breaking through will be a challenge, reminding investors Apple’s fundamentals and stock price have peaked.”

Pause for a reality check: Apple has cash reserves of $237.6bn, up $32bn from last year. At $622bn (at 26 October 2016), it is the most valuable company in the world. For comparison, Exxon Mobil is worth a mere $361bn (at 26 October 2016). In the quarter under discussion, Apple sold 45.5m iPhones, 9.3m iPads and 4.9m Mac (desktop and laptop) computers. By any reasonable standard, this is the record of a truly formidable corporation. But because 2016 marks the first full-year revenue decline for Apple since 2001, the Wall Street guys are in a lather.

This neuroticism tells us two useful things. The first is that capitalism is an inherently unstable system: like a Ponzi scheme, it has to keep growing. The pressure for continual growth is particularly fierce on tech companies, because investors have become accustomed to exponential rates of growth in such outfits. Apple gets off a bit lighter than companies such as Google and Facebook because it actually makes real things – phones, tablets, computers – which require vast engineering and manufacturing resources.

Just consider: Apple manufactures about a million iPhones a day, every one of which is sculpted to 10 micron tolerances from a single block of aluminium, as is every Mac, iPad and Apple Watch. This explains why Apple is the world’s largest owner of CNC (computer numerical control) milling machines and swiss-style lathes. It also explains why Apple can’t grow at the rate that Facebook can add users. Scaling up with software is easy – you just add more servers. Scaling up with physical manufacturing is much harder to do.

The other inference to be drawn from the neuroticism about Apple’s results is that there is something about the company that causes perfectly sane people – analysts and investors, as well as customers and tech bloggers – to lose their marbles. There is a whole blogging ecosystem devoted to whispers, rumours and theories about every aspect of Apple’s activities, an ecosystem that provides an army of what Lenin would have called “useful idiots” for the company. An illustration was the prediction that the iPhone 7 was going to be boring. “If early leaks are to be believed,” it raved, “and they’re too numerous and too consistent to not believe a lot of what’s floating around out there, then this year’s iPhone 7 won’t be a major departure from last year’s iPhone 6s.” Then Apple came out with the dual-camera iPhone 7s, which was anything but boring – at least to affluent photographers – thereby exceeding the depressed expectation.

But it’s not just tech bloggers who are in thrall to the Apple brand. So, too, is a sovereign state, namely the Republic of Ireland. Recently, the EU ordered Apple to pay the republic €13bn in back taxes after the European commission ruled that the company had enjoyed illegal tax breaks from the government over many years. For a small country, €13bn is a lot of dosh – it would probably keep the cash-starved Irish health service going for a year. Apple is, naturally, going to appeal against the ruling. But – guess what? – so is the Irish government: it has declared its intention to stand shoulder to shoulder with the company and argue that it doesn’t want the money. It seems that the EU ruling “threatens the integrity of Ireland’s low corporate tax regime and could jeopardise inflows of foreign direct investment”.

So, in the networked world, exercising sovereignty comes down to being nice to Apple. Note to Brexiters: this might be relevant to you.