Blain’s Morning Porridge – March 22, 2024: Apple and the Judder Moment in the US

“I may rate Apple a Sell, but I will defend their right to be Apple to my dying breath!”

Apple has been accused of the capital crime of being Apple! Can it survive? Historically.. the state never loses. What did Apple do wrong? Design? Profitability? Competitiveness? Business acumen? It’s yet another case of Capitalism eating itself.

• Apple is not a monopoly supplier of Smartphones.
• Apple does not have a monopoly as an App platform.
• Apple has a Monopoly of being Apple.

A few months ago my Shard Colleague Julian Wheeler warned me the biggest risk to Apple was regulation. He was spot on. Apple is in serious trouble. Last night’s Judder Moment in Washington should be felt around the world – the moment when the prevailing wisdoms about capitalism, entrepreneurship and competition took a punch to the jaw and fell. The world is changed, changed utterly and a terrible new ugliness is born. (Enough cod poetry.)

As I watched the troupe of performing lawyers from the US Justice Department parade into the ring last night… I recalled the defining lesson of Gibbon’s Decline and Fall: Great empires fall not to conquest, but under an inevitable tide of bureaucracy, regulation and inertia that leaves them powerless to meet not only the marauding Huns (and I don’t just mean Rangers supporters), while the monetary and fiscal obligations the over-extended apparatus of state is mortgaged upon cracks and turns to dust.

The Justice troupe of performing lawyers allege Apple is overly powerful. There are multiple reports in the papers and from analysts explaining the charges of predatory pricing, degrading other services, overcharging, and restricting innovation and competition. At its core the charge sheet says Apple has constructed a monopolistic ecosystem for its products that protects it from competition to the detriment of consumers and competitors.

Err… isn’t that the definition of a successful company?

Apple has countered with a very strong statement:

• “This lawsuit threatens who we are and the principles that set Apple products apart in fiercely competitive markets …. It would set a dangerous precedent, empowering government to take a heavy hand in designing people’s technology. We believe this lawsuit is wrong on the facts and the law.”

Strip away the noise, and boil it down to basics – its little different to what China has done to its defenestrated Tech giants. If it wasn’t so serious, Apple, the shining bright example of capitalist success being hauled in front of a Beijng Show-Trial would be genuinely funny. It’s a great example of what can go wrong…

Last week I wrote about Tik Tok and the issues around Congress voting to ban it – although it is largely owned by US institutional investors (ok – hedge fund pirates) and its staff, how it creates significant multiplier effects through how influencers get paid, and how arbitrary the banning seemed to be. It seemed almost a McCarthyite reaction to China’s perceived influence on what Gen Z regard as a primary news source.

Smarter commentators than I pointed out what the US lawmakers were doing was following exactly the China playbook of dealing with overly powerful companies and tech entrepreneurs: the arbitrary exercise of political power over business acumen.

Two weeks ago I took a pop at Apple: Has the Worm Finally Got To Apple. My thesis – that’s is not a growth stock, but a value stock based on the fact it built a leadership as the premium brand in consumer tech as both a supplier and platform (which gave it tremendous income potential), was now under threat from the most important force in Capitalism – the power of competition. There is one force even stronger – the power of regulation.

If anyone can make a better smartphone, and a better ecosystem of linked consumer tech products, which give greater utility and outcompetes Apple… that, my friends, is the dream of capitalism.. In the brief 40 year history of mobile communications we have seen multiple companies rise and disappear without a trace – from Ericsson, Nokia, Crackberry, and multiple others, each successively replaced by something better.

Except, that of course, it doesn’t work that way when a business becomes a mature sector.

First mover advantage works in favour of incumbents. It works even better when they establish absolute dominance over the sector. It will cost billions for a new competitor to enter Apple’s market, invent, innovate, design and introduce new products to an already commoditised sector. Then they need to reap “new-thing” windfall profits, and then protect these earnings…. Impossible you say….

Except, of course, that’s exactly what Tesla did in Autos. Or persuaded us it did.

Ford, GM, Toyota, BMW, Fiat, even VW, were effectively the incumbent oligopoly suppliers of automobiles… until dangerously clever entrepreneur Elon Musk convinced us ICE Cars are bad and you need the new, new, new thing – the Electric Vehicle. It worked rather well – for a while.

Musk must rue the day he made Tesla’s battery and drive IP open-source and free.

I expect Tesla will remain a successful EV manufacturer in a highly competitive EV marketplace. Although the EV market will be increasingly constrained by costs vs ICE and other price issues, Tesla will be a well followed value stock perhaps trading around 10 times earnings… (ie a fraction of what it’s worth today.)  And it will never crack or dominate Automated Self-Driving.

Let’s get back to the US Department of Justice. Their case is Apple has a monopoly in smartphones is not true, they say they thwart innovative apps by over charging for them – Apple say they charge app developers to use the “secure” app platform they created for their tech ecosystem. The lawyers charge they make consumers addicts of Apple’s very expensive ecosystem of products – absolutely true.  We crave them because they are so good and give us such a purchase high! Apple’s bright shinny white things are the Oxy of the Tech world… But it’s my money to spend.

Funnily enough, yesterday a reader sent me a story from the Guardian: Hermes sued in California over claims it only sells Birkins to “worthy” customers. Apparently Hermes stores in California will only sell its $20k bags to customers who buy other stuff first – in breach of anti-trust law tying the sale of one item to another. If you are lucky enough to merit a Birkin Bag, you get ushered into a private room to peruse it. (Hmm, just like my banker mate who bought a new bag in Shanghai recently, she was ushered into a dingy dark back room behind a shop and paid about $10 for a Birkin Bag knockoff she uses to go to the gym….)

Let us not be distracted by the sheer unfairness of the mega-rich not being able to buy the bag they demand because they no doubt deserve it… (retching sounds…)

Back to Apple… Apple consumers like me willing pay for our Apple Tech. My choice to pay £2000 for a laptop that is just as good as a £400 HP probably is. My Choice. I buy Apple because it my right to be stupid. (I am very high on the Apple Stupidity Quotient: Watch, Phone, Tablet, Phone…. But not daft enough to want the pointless headset.)

The bigger problem for capitalism is the Tsunami of bureaucrats, entrenched civil servants, and regulators regulating for the sake of regulation. They are as critical a part of the general Political Incompetency of the Democratic West as are the misguided political buffoons we blame for our broken economies – but we don’t hear enough debate about replacing these mandarins. They will break the West even more effectively than bad politicians.

Sorry for late Porridge this morning, but I’m up in Welsh Wales for my Father-in-Law’s big birthday. Marvellous day, the hills beckon, and the mobile signal is… iffy.

Out of time, and back to the day job…

Bill Blain

Strategist – Author of the Morning Porridge

Wind Shift Capital