How Apple deploys its cash

It's often said that Apple is sitting on too large a horde of cash, that if it can't come up with ways to deploy that cash that exceed its own internal rates of return or other such hurdles (to use finance speak), it should return that cash to shareholders.

On Quora, an anonymous account posted an interesting take on why Apple accumulates so much cash and how it deploys that as a strategic weapon.

When new component technologies (touchscreens, chips, LED displays) first come out, they are very expensive to produce, and building a factory that can produce them in mass quantities is even more expensive.  Oftentimes, the upfront capital expenditure can be so huge and the margins are small enough (and shrink over time as the component is rapidly commoditized) that the companies who would build these factories cannot raise sufficient investment capital to cover the costs.

What Apple does is use its cash hoard to pay for the construction cost (or a significant fraction of it) of the factory in exchange for exclusive rights to the output production of the factory for a set period of time (maybe 6 - 36 months), and then for a discounted rate afterwards.  This yields two advantages:

1. Apple has access to new component technology months or years before its rivals.  This allows it to release groundbreaking products that are actually impossible to duplicate.  Remember how for up to a year or so after the introduction of the iPhone, none of the would-be iPhone clones could even get a capacitive touchscreen to work as well as the iPhone's?  It wasn't just the software - Apple simply has access to new components earlier, before anyone else in the world can gain access to it in mass quantities to make a consumer device.  One extraordinary example of this is the aluminum machining technology used to make Apple's laptops - this remains a trade secret that Apple continues to have exclusive access to and allows them to make laptops with (for now) unsurpassed strength and lightness.
2. Eventually its competitors catch up in component production technology, but by then Apple has their arrangement in place whereby it can source those parts at a lower cost due to the discounted rate they have negotiated with the (now) most-experienced and skilled provider of those parts - who has probably also brought his production costs down too.  This discount is also potentially subsidized by its competitors buying those same parts from that provider - the part is now commoditized so the factory is allowed to produce them for all buyers, but Apple gets special pricing.

For me this recalls sushi restaurants. When I first graduated college and finally had enough money to eat sushi regularly, I'd sit at the bar at a sushi restaurant and watch the sushi chef cutting the fish and wonder what was so difficult about what they were doing. After watching a few of them, I felt like I could climb over the counter and assemble a reasonably good piece of sushi myself.

After watching Jiro Dreams of Sushi, I realized that watching a chef prepare a piece of sushi was just the tip of the iceberg, that much of what set one sushi restaurant apart from another was the supply chain, the relationships with the right buyers and suppliers and fishmongers that helped secure the best ingredients.

This strikes me as the same way most people underestimate Apple. They see the aesthetics of the final product, the software or hardware design of an iPhone or a MacBook air, and they don't see any sustainable competitive advantage. All of that can be copied, they think.

Leaving aside the fact that in hardware design if you have to copy someone else in technology you're already one generation behind, what people often fail to see (or can't, given Apple's secrecy) is the massive supply chain edifice below the water's surface. Scaling in software may be less of a problem for David than it once was, but in hardware it pays to be Goliath. 

Logorama

I saw Logorama at Sundance a few years back. Not that short films have much hope of broad distribution anyhow, but this movie was particularly toxic for buyers given its liberal, unauthorized use of corporate logos to hilarious effect.

I'm still surprised to find the movie online anywhere, and every so often I check. It happens to be on Vimeo now, and as always I suggest people give it a viewing in case it gets taken down (maybe at this point if it's still online it's safe?).

This is a short film that was directed by the French animation collective H5, François Alaux, Hervé de Crécy + Ludovic Houplain. It was presented at the Cannes Film Festival 2009. It opened the 2010 Sundance Film Festival and won a 2010 academy award under the category of animated short. In this film there are two pieces of licensed music, in the beginning and in the end. All the other music and sound design are original. The opening track (Dean Martin "Good Morning Life") and closing track (The Ink Spots "I don't want to send the world on fire") songs are licensed pre-existing tracks. All original music and sound design is by, human (www.humanworldwide.com)

Spoiled by the trailer

A good look back at how the trailer for Terminator 2 spoiled a twist the movie went to great pains to set up.

Re-watching Terminator 2: Judgment Day, it’s actually frustrating to see how carefully crafted the first half-hour is, how thoroughly it takes advantage of audience assumptions, all in order to floor them with the big reveal, when Patrick and Schwarzenegger’s Terminators face off over a terrified John Connor, and Schwarzenegger’s is the one who saves John’s life and hustles him to safety. Counting Cameron’s first run at these characters and this basic idea, it took around seven years to build up this fake-out—and just a couple minutes of trailer (and a tagline, “This time he’s back… for good!”) to blow it. It’s one of the dumbest marketing missteps of all time—at least in terms of audience experience.
 

Nowadays I try to avoid trailers for movies I plan to see, for just this reason. This from someone for whom a half hour spent watching trailers online was once a regular occurrence.

I miss some of the sense of anticipation that comes from a well cut movie trailer, especially for a much anticipated blockbuster, but I've long since learned that any pleasure from the movie will come from the movie itself.

Online education can and will be better

The first generation online courses I've taken are still in a very rudimentary form, perhaps because they are quick and dirty ports of real-world classes. They recall some of the first generation mobile apps which were simply wrapped websites. If you were to build a class from scratch for a MOOC, as an experience, you'd make many different choices than if you were trying to just convert a class that was taught in the traditional sense. Just as native apps have come to dominate the mobile phone experience, the next generation of online courses, built from the bottom up to be an online experience, will make today's online courses look primitive. The issues, of course, is that the tools are limited so far, and building such an experience is a high upfront fixed cost.

Companies like Coursera and Udacity need to arm instructors with the tools to build a great experience at a lower investment of time and money. That will come. The benefits come downstream: once constructed, an online course can be spread to a near infinite number of students at a fractional marginal cost. This has always been the chief appeal of online instruction to me, the ability for great instruction to achieve massive leverage and scale.
 

That was an excerpt of a post I wrote in May on MOOC's. Chris Dixon cites an MIT professor's lament about the current state of online education and adds:

Online courses are to offline courses as movies are to plays. The marginal cost of delivering online courses is minimal. The potential audience is everyone with a smartphones and an internet connection – about 1.5 billion people today and growing quickly. There is no reason we shouldn’t be investing as much to produce online courses as we do to produce Hollywood movies.
 

The MIT Professor, Woodie Flowers, is candid about his assessment of MIT's OpenCourseWare.

In the United States, our “education” system is choking to death on a failed training system. Each year, 600,000 first-year college students take calculus; 250,000 fail. At $2000/failed-course, that is half-a-billion dollars. That happens to be the approximate cost of the movie Avatar, a movie that took a thousand people four years to make. Many of those involved in the movie were the best in their field. The present worth of losses of $500 million/year, especially at current discount rates, is an enormous number. I believe even a $100 million investment could cut the calculus failure rate in half.

Why not OpenCourseWare?
I argued that the program that became OpenCourseWare should have focused its original $100 million estimated budget on two topics. I suggested microbiology and electromechanical systems as examples. Had we done that, I believe we would have accelerated changing education. We decided, however, to assume that the world could hardly wait to see our huge pile of PDFs, PowerPoint presentations, classroom locations, teaching assistant lists, and other assorted bits of information about our courses. We now have a large database developing digital rot and becoming increasingly irrelevant. It is unlikely OCW will be systematically Facebooked, or Twittered, or HTML5ed, or deFlashed. It is an expensive and unsustainable “free” system.

We have spent about $40 million over 10 years. Powered by MIT’s incredible brand recognition, OCW has made an impact and been celebrated with awards. About seven years after OCW was launched, Salman Khan, our next graduation speaker, started posting a coherent, concise set of tutorials that were inexpensively produced but backed by a pedagogic philosophy. When I last checked Google Trends, the Khan Academy’s search hits exceeded OCW’s by an order of magnitude. Khan designed a product that teachers and students want and need. His modestly-produced presentations are used by millions. Starting with zero brand recognition, he has matched or exceeded OCW’s impact. What might we have done with $40 million, 10 years, and the most powerful technology education brand on the planet?

George Saunders' recommends short stories

Recently, a friend said to me, "Hey, George, if a space alien beamed you up to his ship and demanded that you explain what being human is like, what would you say?"

"Well," I said, "I'd advise the alien to spend a few days reading short stories." Short stories are the deep, encoded crystallizations of all human knowledge. They are rarefied, dense meaning machines, shedding light on the most pressing of life's dilemmas. By reading a thoughtfully selected set of them, our alien could, in a few hours, learn everything he needs to know about the way we live. Except how it feels to lose one's car in a parking garage and walk around for like three hours, trying to look as if you know where you're going, so the people driving by—who have easily found their cars, having written the location on their wrists or something—don't think badly of you. I don't think there's a short story about that yet.
 

This is George Saunders' list of recommended short stories, and it's worth perusing as it isn't inundated with the same classics you see on every such list.

It feels like short stories are read even less frequently today than when I was younger, if that's possible. Yet when I was an English major taking creative writing classes, fancying myself a budding artist, all we read and wrote were short stories. I remember stumbling upon a collection of short stories by Tobias Wolff at Green Library at Stanford one afternoon while checking out books for another class. I brought it back to my dorm room and ended up devouring the entire collection over a single fevered day of reading.

The demand in a short story for an economy of words brings out the best in most writers. I have not read many short stories the past few years. That's something I plan to rectify the year ahead.