Is Apple Evil? You Betcha!

One of the most common questions, or statements really, back in the 1990s was on whether Microsoft was evil. You could see how folks got there because—at the time—Microsoft was heavy handed, Netscape was claiming (accurately) that Microsoft was misacting (ironically virtually nothing Microsoft did to Netscape actually worked and Netscape instead imploded due to their own mistakes) and both the US and European Governments almost buried the company. In the 1990s Google took Microsoft’s place as the new “evil” company and was recently joined by Facebook as companies that have been accused of doing things that redefined the term “evil”.

But, on the sidelines, was Apple who has aggressively deployed a customer abuse program the industry calls lock-in, is capturing what appears to be excess profits (which is why they can drop into decline in terms of volume sales and still have revenue growth) and have allegedly moved to stealing technology at scale (tracking a debt to Qualcomm in the billions).

I think this qualifies the firm as “evil”. Not the new-age evil we applied to Google and Facebook, though—the more traditional evil we apply to more criminals. Now, I went through this pivot at IBM in the 1980s when that company went from one of the most trusted to one of the most despised with a catastrophic impact on valuation, customer loyalty, and implemented the largest downsizing effort in the firm’s history—forever changing it. Saying that it was incredibly painful is an understatement for those of us that worked there at the time.

I think the same outcome is in Apple’s future. It isn’t a question of “if”, it is simply a question of “when”.

At the heart of this is a general tendency to abuse power, and that it is generally easier to increase revenue short term through power abuse as a monopoly than it is to grow market share through product improvements and better marketing. (I consider raising prices to mine revenue as customer abuse).

Why You May Care

My experience is that this kind of behavior is a progressively downward spiral and it is driven by a lack of consequences for doing things by executives that often are against policy. This has nothing to do with the brand or the company. It has to do with a set of behaviors, and mistakes, that are common in complex organizations. My experience at IBM was that these behaviors seep in and become practices regardless of massive controls, oversight, and even audit because they happen so gradually they become accepted over time largely because no one steps back and looks at the behavior until either the stock declines massively (as it did at IBM) or until a government steps on the firm (like what is happening at Google and Facebook and apparently what is about to happen to Apple).

Now, I went through this as an employee of IBM and I wouldn’t wish that experience on anyone because the amount of pain is significant. But I also worked with a lot of IBM customers and the trauma on them was nearly as great—largely because of the level of integration IBM had inside companies. You’d think a consumer-focused company would be far easier, but increasingly our entire lives are tied to the apps we run on our smartphones and—should we be forced to move—the personal pain could be (and this is speculative) far higher than it was with IBM.

Evidence

The key to the IBM problem from both inside and outside was that IBM’s revenue continued to rise as did their valuation after they saturated the market. Those that covered the company at the time focused on the former and ignored the latter and so they didn’t realize that IBM had shifted from making money on increasingly better products to creatively mining money from customers using the concept of lock-in. Behind the scenes, the Labs (which were still funded) had lost effectiveness and focus, and costs were also drifting up largely to foolish bets (ROLM etc.) that didn’t pay off.

If you look at Apple, they are discontinuing reporting units to largely conceal that their product volume growth has stalled, and that revenue growth is coming from price increases and increasingly mining customers for money. Apple doesn’t really have a lab, but it is clear their innovation capability has dropped, instead of redefining markets like they did with the iPod, iPhone, and iPad their latest offering the HomePod is a weak “me-too” offering and they are underfunding Siri which was once a huge differentiator and now lags both Google and Amazon in execution. They haven’t made the sweeping mistakes that Microsoft made with Yahoo or IBM made with ROLM but, instead, they appear to be abusing their suppliers at scale in order to increase margins by both increasing prices and reducing costs. A new issue I didn’t run into at IBM in the 1980s was intellectual property theft which appears to be an issue with Apple and this is kind of interesting difference between old IBM and old Microsoft and new Apple.

Both Microsoft and IBM focused on controlling standards. But, while they seemed to participate in standards bodies their efforts were more focused on assuring a competitor didn’t gain an advantage. Apple doesn’t seem to do this, they appear to let someone else do the standards work and then use a combination of lock-in and intellectual property theft to overcome the firm that would otherwise be the leader. For instance, on 5G Apple is both expected to be a year late and allegedly pulled the technology from Qualcomm and provided it to Intel who will then supply it late but at a lower price point back to Apple (rumor is Apple is also hiring engineers to execute internally and replace Intel shortly thereafter). I think this is as much about the different dynamic in the cell phone market and the computer market as there was no analog to Qualcomm during the IBM decline and Linux, which is close to a Qualcomm analog, didn’t emerge until late in the Microsoft cycle. So, a different market dynamic resulted in a different mitigation strategy from Apple than what was executed at IBM or Microsoft.

Timing

Now I wrote one of several post mortems in IBM on the IBM collapse and it took almost 20 years from the beginning of the bad behavior till the company took a hit. But IBM had levels of protections that had been put in place by Thomas Watson Jr. including enforced polices, metrics, aggressive audit procedures, and even practices that connected the CEO to line workers all designed to assure customer focus. It took decades for the company to systematically overcome these protections, protections that Apple (and virtually every other company) lack. (I should note that much of this has been reinstated at IBM and due to the pain of lock-in, IBM is massively opposed to this strategy making it unlikely it will reemerge).

At Microsoft the degradation happened far faster, they were in great shape up to the launch of Windows 95 but during the launch they began to degrade, and they got hit before the end of the decade. They too are now aggressively open source (they even support Linux now) and just passed Apple in valuation largely do to the fact they don’t have lock-in which suggests that Microsoft’s valuation should be more sustainable (I should add that Microsoft uses a traditionally more lucrative software/services at internet scale model while Apple is still mostly hardware shifting to services which historically hasn’t been as lucrative).

Apple has already fallen behind Samsung and Huawei in terms of market share and they enjoy margins that are around 3x the industry, suggesting their financial abuse of customers is beginning to reach extremes. They appear to have reduced both marketing spend and placement which tends to reduce demand over time and cause an erosion of customer perception.

Samsung has demonstrated that Apple is vulnerable to focused marketing that makes Apple’s customer abuse and misrepresentations visible, but they couldn’t sustain the high marketing budget for the years it would take to massively shift Apple users to Samsung. In addition, a lot of the competitive migrations ended up going to other Samsung competitors suggesting that, if someone like Google (who could sustain this) could take Apple out if they wanted to sustain a Samsung-like program. (That appears unlikely at the moment because Google, ironically given they are largely funded by advertising, appears unwilling to fund this). In fairness, this last partially may be a problem connected to their model of giving Android for free which means it is a cost center and cost centers tend to not generate marketing dollar budgets.

So, on timing, with a sustained effort, Apple is clearly vulnerable to a massive correction now, but the most likely source of a sustained campaign is Google (Microsoft cares more about Amazon now), Samsung doesn’t appear to be willing to fund a sustained campaign, and Amazon is at least a year out from running at Apple hard. The most likely trigger near-term is a government action from either the EU or US (recently the EU has been far more aggressive than the US in this regard and they seem to have a love for going after high value US tech companies).

Wrapping Up: Yes

Every large company has the potential to become evil. Standard Oil, RCA, Microsoft, Google, Facebook even one of the most aggressively long-term customer focused companies in the world, IBM, once drifted to the dark side. The saying, “Power corrupts; Absolute power corrupts absolutely,” speaks to the dangers of lock-in because lock-in gives a vendor the perception of absolute power over their customer, leading to this abuse. This is why I hate this strategy and will aggressively avoid any company that deploys it even though that kind of control often can initially result in a better customer experience.

One thing I didn’t mention was the use of litigation as a weapon—not to protect intellectual property or mitigate an illegally attacking competitor, but as a way to steal a market position. It is incredibly dangerous largely because it builds case law that can eventually be used against the firm that executes this kind of strategy. For a situational monopoly to use anti-trust as an attack is incredibly dangerous because it focuses regulatory bodies on the topic and Apple is clearly abusing their monopoly power against its customers resulting in massive penalties. This is already at the US Supreme Court and I doubt it will end well. (At the very least, depending on coverage, this will make customers aware that they are being abused by Apple resulting in competitive migrations to other vendors). Offsetting this are concerns about Google and privacy placing the only real alternative under a similar dark cloud.

Given Apple is a huge bellwether suggesting a collapse would have dire consequences for the entire technology segment. I have another final thought to consider before I leave you, in Dan Lyons (Fake Steve Jobs) new book Lab Rats, Apple’s new flying saucer office is highlighted as a productivity and employee moral disaster and that too is likely having an adverse impact on the firm’s ability to execute.