Looking back at Stock Options Backdating: A Debate

The following is a mock debate between John Ruskin and Andrew Carnegie over the problem of whether options should be allowed to be backdated.  The arguments are made based on my interpretation of their individual viewpoints from studying their works.  It was originally composed in 2006, but is being republished as we look back on the backdating scandal that occurred in 2006, namely with Apple and Steve Jobs.

A Debate Between Mr. John Ruskin and Mr. Andrew Carnegie

Commentator: Backdating Stock Options, that is the subject of our discussion and debate

today on our program. The business world has been immersed in discussion over the

ethics of this strategy, and whether or not it should be allowed. With me today, I have

two authorities on business to discuss this very issue, Mr. John Ruskin, and Mr. Andrew

Carnegie, both of whom have commented on creating wealth and the best practices for

So, Mr. Ruskin, I will start with you. How do you see this issue?

Ruskin: I won’t go as far as to say that I am surprised by it, nor will I go as far as to say

it is appalling behavior. However, I am one to study the effects of such behaviors on

organizations and society as a whole, and will say that I don’t believe that backdating

options is good for the creation of wealth.

Commentator: How so? Isn’t backdating stock options a way to help executives stay on

top and be competitive?

Ruskin: It comes down to the fact that backdating these options to buy stock is merely

the way that executives can increase their wealth solely for the purpose of mortal

luxury. They are doing this in spite of any concern to investors in the company, and

even sometimes doing so while the industry in which they operate and the market and

profitability of their business is decreasing. These are ill gotten gains obtained most

often at the peril of many.

Carnegie: If I may, I am going to have to disagree with Mr. Ruskin on a few issues.

I argue that the purposes of backdating options are not always solely to benefit these

industrialists with some form of “ill gotten” gains, as my colleague Mr. Ruskin has

stated. These backdating procedures are in place by executives to keep the businesses,

and the directors, as well as the employees a few cases, competing amongst themselves

and the other companies. Let us not forget, Mr. Ruskin, that the Law of Competition is

in play here, which is absolutely central and essential to the advancement of society and

mankind. Individualism is the best and most fertile field, which always produces the best

fruit, and this fosters individualism.

I think also that Mr. Ruskin has not correctly suggested the idea that these procedures are

somehow adrift from the desires and considerations of the stockholders. In most cases,

these modes of increasing the value of the options have been accepted by the voters as a

means for the option to be exercised at its greatest value and return.

Commentator: Then, aren’t there ethical and moral consequences for gaining greater

wealth in this way, or is this something that, as interest was for so long, will eventually be

viewed as not only acceptable but necessary?

Ruskin: I would never hope such a thing would be seen as necessary, or advantageous

for society, business or mankind. I am somewhat surprised at Mr. Carnegie, whom I

respect as a fellow gentleman and colleague in the science of economic thought, because

he forgets that there is at all times present the question of justice. Backdating stock

options puts a negative value to the wealth gained, and therefore draws downward on

the economy. Already, we are seeing this effect in the figures that show the amount

of money that was lost, or misreported, by these programs. Corporations are having to

go back and restate their financial statements to the public, and the majority of those

reissued statements show a correction for hundreds of millions in losses.

Is putting the benefit and favour of one man ahead of another the proper thing, if the rules

and measures by which it is achieved are not justly or nobly stated, or not fully disclosed

to all parties involved? In my view, this is selling the dying man the loaf of bread.

Although there exists no illegality in the least, one is commercially rich and the other is

commercially poor, and without reason, as I have said, due to the fact that in most cases,

the executive never made the company’s stock rise, or ever increased the market share

during that period of time. Let Mr. Carnegie not forget, and society also, that “Many joys

can be given to men which cannot be bought for gold.”

Commentator: Mr. Carnegie, how does one respond to this idea, and is your view one

that sees these practices as becoming acceptable or necessary?

Carnegie: One could argue the point of whether or not these practices are necessary, or

whether or not they are moral or should eventually be made illegal. I won’t pretend to

know the answer, nor will I sit as a judge of that issue. We’ll let time and the overall

markets dictate that, and they will decide whether or not these things are acceptable.

The rudiments of business are such that sometimes can have the appearance of being

immoral or unjust. But I believe that such costs of injustice within the system, many of

which are allowed injustices, are far outweighed by the benefits that can be produced

as the individual is given his right to obtain, and aspire to new heights, “with none to

make afraid.” As such, I don’t believe laws or legislation should be introduced on such

matters. I strongly advocate the free play of economic forces. The laws and fundamental

theories surrounding the governance of Corporations, and the very purpose for a charter

for such from a State or governmental body, has always been to allow for private

governance of internal business affairs. This is part of the legal right the millionaire

has to his money. He has the right to control it. If the shareholders and directors of that

organization have voted such to allow for these actions, and know about their existence,

then they should be allowed to continue, as they have the rights entrusted to them to

govern the trade and rules of their property and issuance of stock. I would argue that this

inequality of environment and concentration of business is helpful to the overall aspects

of society. The wealth of a few is always beneficial to society if the wealthy know how

to use their wealth correctly.

Commentator: Mr. Ruskin, Mr. Carnegie makes the point that the millionaire must

have the right to control his money, and that these corporate boards and shareholders

are merely voting to allow for these programs by way of corporate law which allows for

corporations to govern themselves with articles and bylaws. How then, Mr. Ruskin, can

we take away from these advantages, and take away such opportunity from the rich? I’ll

give you the last word.

Ruskin: Many men of business hardly know the meaning of what it is to be rich, and

frankly cannot govern themselves to make such decisions without help from outside

thought. I have dealt with the likes of Mr. Carnegie’s argument before. Are these so

called stocks really their stocks, just as I argued in my book that the heathen leads forth

to say “These are MY jewels”?

economy. The blood that comes from fever resembles the ill gotten wealth of these

executives. The grounds have already been made known by which we can judge the

great question of justice, and so Mr. Carnegie’s argument of the need for markets to

determine such is not applicable to this argument. What we need is a system that is

made that will help to develop an honest man. One that will deal with these men, and

send the clear message to the others in the arena of business that if they persist in such

things that we as a society will deal with them just as cunningly as they stole from us and

our economy when backdating their options to reap a seemingly better one.

Remember that economic wealth is the blood of that

Stock Options Backdating: A Look Back At Steve Jobs

With Apple Computer stock reaching the historic highs in recent days, it is interesting that I have seen some people mentioning the "options backdating scandal" that caught up with Steve Jobs, former Apple CEO and Co-founder, back in 2006.  It was then a hot-button issue, and some believe should have lead to his conviction and imprisonment.

At the time, I wrote a paper on the subject describing the issues at hand and also what makes it so enticing to backdate options.  Imagine if you could backdate options on Apple that had a $150 strike price that ended in the money but were issue when Apple was at $110, to a back date when the stock price was around $80.  You would make much more profit from holding that option.  Do it a few times over as the stock price rises, as Apple's has over the last decade, and you would build up a small fortune.

Should these companies have been held more accountable for these actions?  Should back dating be illegal, and not just un-ethical?

First, I will republish the original paper from October 14, 2006.  I will also publish a mock debate on the subject between two experts: John Ruskin and Andrew Carnegie, which can be read here.

Stock Option Backdating

Should Stockholders Be Worried?

The stock option, both powerful in its potential, and complicated in its design, has made

some of the richest investors and businessmen of our times. But the manipulation of their price, a

strategy called backdating, has also recently been in the scope of controversy.

Stock options originate from the idea of purchasing the right to by property or securities

without having to buy the property or security upfront, and within a specified time period. This

type of purchasing power has numerous advantages, and was first used in land and real estate

purchases.

Options, whether it is an option on stocks or a real estate option, allows the party

interested in buying the asset to buy at what is called the strike price. This guarantees the owner

of the asset a specific buying price sometime in the future when the option holder exercises the

option. The option buyer pays an option price to purchase the option, which has an expiration

date, by which time the option holder must exercise the option. The option holder has the right to

sell either the option, or the underlying asset.1

This means that if you buy an option on a stock, currently worth $20, for an option price

of $1 per option, and then a few months later, exercise your option when the price of the stock is

$25, you will make $4 on each option. So, if you bought 100 options, you would have paid $100,

and made $400, because the option would have been what is called “in the money’ which means

the stock is above the strike price. From this we can see that a lot of money can be made from a

small buying price, which helps to minimize risk, and makes a convenient way for investors who

wouldn’t have enough money to put down, to still play off their bets. If we wanted to have made

the same $400 on the above hypothetical example by purchasing the actual stock, you would

have to purchase 100 shares of stock at $20, which is a $2000 investment. Remember, however,

that with the option we made the same amount of money by spending only $100. Similarly, if

the stock were do have gone down instead of going up, say to $10 per share, you would have

(Jim Cramer’s Real Money as well as Characteristics and Risks of Standardized Options)

lost $1000. However, with the option, you would have only lost $100 since your option would

become void and worthless, or what is called “out of the money” which means the stock is below

the strike price, and it cannot be exercised.

Options to buy the underlying stock are called “call” options and options to sell the

underlying stock are called “puts”. Puts are different from calls, in that you make money

on the put option as the price of the stock goes down. Jim Cramer explains in his book Real

Money: “Options are quite handy, and most of us have used them; we just haven’t used them to

buy or sell stock. When we speculate in real estate, we often ask for an option to buy something.

We pay for that option even if we end up not buying the land beneath it. When we buy insurance,

we are buying a put. We are putting a little money… 2. Options are also similar to the way in

which movie producers buy the right to produce a movie from a book; however, they are not

obligated to make the movie because they have only purchased an option.3

From our example, it can be seen how stock options are a great way for companies to

offer incentives and benefits to their employees. These types of stock options, called Employee

Stock Options, are the same as call options on the company stock at which the employee works,

except they have more restrictions.4 The company issues the employee a stock option grant,

which is a grant of a certain number of shares. The grant usually has a schedule that determines

how fast the grant will vest, and also has an expiration period. Because of the vesting schedule,

usually over a series of years, options are seen as a way that companies can attract bright,

hardworking employees, and keep them, due to the fact that the employee may feel obligated or

wish to stay at the company until the options can be exercised. The strike price is determined by

taking the stock price at the time of the grant, or sometimes the average price between the price

on first day of the month and the last day of the month in which the grant was issued. There are

also other ways to do this as determined by each individual company.

Jim Cramer’s Real Money Pg. 266

Wikipedia - http://en.wikipedia.org/wiki/Stock_options - Historical uses of options

4 Wikipedia - http://en.wikipedia.org/wiki/Employee_stock_option - Employee stock option

Employee Stock Options also differ from regular call options, in that the employees are

not required to pay for the option. Normally, the grants are part of the companies’ incentive plans

or their benefit plans, and are granted at the time the employee is hired. This makes Employee

Stock Options an added benefit to the employee, since a good amount of money can be made,

without having to expend any funds. Also, because of the nature of options explained above, the

employee suffers no loss if the options become worthless, because nothing was paid, and nothing

becomes due when the option expires or becomes void.

Adding to this, companies will sometimes offer additional grants to employees who have

outperformed their peers, or to top executives for having great successes. Some of these so-called

incentive stock options have the benefit of being charged reduced taxes.5  They sometimes

even make stock options the method of payment. An example is Gil Amelio, who was made the

CEO of Apple, and five-hundred days later was fired. His stock options became worthless: “

AMELIO 6

There were numerous other examples of this, as dot com companies could not afford

to pay high wages, and attempted to compensate the employees with stock options. For some

companies, this worked fantastically, and stories ran the presses about low level employees

making millions. However, many other employees never made a dime from their grants. As their

companies sank into the whirlpool of dot com destruction; as they were laid off from the ailing

companies, or simply ousted, their options grants became worthless paper. They found out the

hard way, just like Amelio.

To counter these potentially large losses, or the potential that an option won’t meet the

specified strike price, some companies have been involved in the backdating strategy. Although

it is questionable whether backdating is illegal, it has ethical and moral ramifications that must

be considered. Among the frontrunner companies to be investigated for such activities are

SmartMoney - http://www.smartmoney.com/tax/capital/index.cfm?story=options_iso - Taxes on Incentive

Stock Options

6 Gil Amelio On the Firing Line: My 500 Days at Apple

Apple Computer, Brocade Communications, and CNET. These are a few out of some 120 other

companies under investigation by the FBI and the SEC. 7 Interestingly, only a few months ago,

no one was worried –or discussing the issue, of options backdating. Adding to that fact, the main

group finding and reporting options backdating issues as requested by the SEC are the tech sector

companies, the same sector of companies that only a few years ago faced tough declines in stock

prices, and suffered the most from the declines in the overall economy and the crashing dot com

The way backdating works is by manipulating the option’s strike price date. If the strike

price was issued at, say, $20, but the stock then falls to $18, the option becomes worthless.

However, what if the option could be backdated a few months when the stock price as $16? Then

the option is no longer worthless, and can be exercised for a profit. SEC Chairman Christopher

Cox stated before congress: “There are many variations on the backdating theme. But here is a

typical example of what some companies did: They granted an "in-the-money" option-that is, an

option with an exercise price lower than that day's market price. They did this by misrepresenting

the date of the option grant, to make it appear that the grant was made on an earlier date when

the market value was lower. That, of course, is what is meant by abusive "backdating" in today's

parlance.”8 This may be considered unethical, but it is not illegal.

What causes the questions and scrutiny, and potential illegality is how options are

supposed to be reported by the companies in their quarterly reports -–as an expense. It is also

questionable due to the fact that someone was sold a stock, or had the likelihood of being sold a

stock, at a value that was less than what was predetermined by the option grant’s strike price.

This is the reason the SEC is investigating these cases. Since the option grants are

supposed to be reported as expenses on the quarterly balance sheets of the companies that offer

them, if the options are backdated, or manipulated in any way to the benefit of the company

CNN.com and AppleInsider.com

SEC - http://www.sec.gov/news/testimony/2006/ts090606cc.htm - Testimony Concerning Options

Backdating

or option holder, the expense report will not be accurate. In fact, it will show that company

expenses were actually less than what they were, making profits seem larger. This has huge

implications, due to the fact that the stock price of a company is largely based on the earnings per

share ratios. The so-named P/E Ratio is a key determinant of how much an investor should be

willing to pay for a particular stock. If the company appears to be earning more money than it

actually is, then the stock price will not reflect the true P/E ratio, and will be higher than it should,

because investors would, theoretically, bid the price up to the false P/E Ratio. The shareholders

of the company are then being cheated because they are putting confidence in a stock and a

company which they think is earning a lot more money than is actually true.

The SEC Chairman stated further: “A few years ago, the SEC began working with

academics to decipher market data that provided the first clues something fishy was going on.

One of the academics with whom the SEC worked was Erik Lie of the University of Iowa, who

subsequently published a paper in 2005 that showed compelling circumstantial evidence of

backdating.

“Dr. Lie's data showed that before 2003, a surprising number of companies seemed to

have had an uncanny ability to choose grant dates that coincided with low stock prices…

“For example, in 2003, the Commission charged Peregrine Systems, Inc. with financial

fraud for failing to record any expense for compensation when it issued incentive stock options.

The SEC's complaint alleged that at each quarterly board meeting, the company's directors would

approve a total number of options for employees. The company would then allocate the options to

the employees during the quarter. But the options wouldn't be priced until the day after the next

quarterly Board meeting. On that day, the company looked back at the market price of its stock

between the two quarterly Board meetings, and picked the lowest price. That turned the options

into in-the-money grants. But even though accounting rules required that they then be recorded as

compensation expense, the company didn't do that. As a result, Peregrine understated its expenses

by approximately $90 million…

“When these stock option practices surfaced, Brocade was required to restate and revise

its financial statements for six fiscal years, from 1999 through 2004. The scheme resulted in the

inflation of Brocade's net income by as much as $1 billion in the year 2000 alone…”9

As can be seen, untold billions of dollars were misreported over the years for companies

who were involved in backdating their stock option grants. It means that the stocks for these

companies may have been overvalued. It means that purchasers of the stock may have had to

purchase at a higher price, much to the elation of cunning executives. This affects employees

who did not know they were being granted backdated options. It affects board members, top

executives, and shareholders, whose companies will now face investigations, and who have

similarly faced a decline in stock value due to the investigations. Some executives have even had

to resign, some have been fined, others convicted. "I'm not an opponent of stock options. They

can be a good incentive tool if used correctly. But they can also be dangerous for companies and

shareholders when they are exploited by executives. I'm not for that,” said Erik Lie, the college

professor whose research has led to this newfound corruption.10

Moreover, this corruption affects the overall economy, as Emerson put it so plainly:

TheStreet.com - http://www.thestreet.com/_tscs/stocks/general/10299710.html and SEC - http://

www.sec.gov/news/testimony/2006/ts090606cc.htm - Testimony Concerning Options Backdating

10 The Salt Lake Tribune - http://www.sltrib.com/search/ci_4387153

Mitt Romney and Paul Ryan: The Next Steps

Today, Mitt Romney formally announced Paul Ryan as his running-mate in the 2012 presidential election. This is an interesting decision on many fronts, underscoring the choice between fiscal change and spending reductions, and Keynesian policies and spending increases from who we choose as President this year.

Actually, before the news leaked last night about Ryan receiving the nod, I would have liked to have seen Marco Rubio get the nomination for Vice President. My feeling is the Republicans need to to a better job at embracing and showing the nation that they want minority figures taking top positions in government. Latinos are going to start making a large part of the voting block, and the Republicans will need their help. I thought about it some more since then, though, and I think leaving Rubio in the Senate is key for many reasons, which may help Republicans take the next steps. Some of those key reasons include:

• Needing Senators there that can finally pass a budget!
• Rubio has some campaign issues he is dealing with that could cause some problems.
• Paul Ryan is from Wisconsin, where the State has shown some guts in passing austerity measures.
• But mostly, and I think Republicans should start mulling this over, Rubio could be made the next Senate Majority Leader if Republicans take the Senate. If they don't, I think they ought to put him in the Minority Leader spot.

By putting Rubio in such a position, I think the Republicans would gain a fair amount by showing they are committed to letting Latinos and other minorities take on key roles, which is important to a large cross-section of American voters.

We will be researching Paul Ryan over the next while, so stay tuned to find out more about this man who's political career got started at a very young age.

The Core Strengths of Apple Computer

April of 2010

The Problem

Apple Computer (AAPL) has had a tremendous growth run over the past decade, during which time it has become a leader in many market segments including music sales, mobile devices, and smart phones. This growth is also reflective in their stock price, where it has gone from around $30 per share in 2000, to above $300 in 2010. With just over 900 million shares available on the market, Apple is currently worth $280 billion in market capitalization, making it the second largest publicly traded company in the world, behind Exxon.
With this amazing return to market dominance from near extinction in the late 1990’s, the question all investors, businesspeople, and others associated with Apple should ask is whether the success can be sustained. Can Apple continue to innovate and create new markets and devices that capture the needs and wants of consumers, and businesses?

Data and Information, and Analysis

Many previous market leaders have been knocked off the pedestal of dominance, including IBM, Microsoft, AOL, Lehman Brothers, MCI, Napster, etcetera, by their competition. In fact, Apple’s new market valuation placed it ahead of Microsoft for the first time since 1995. Arguably one of the major factors that changed Apple’s trajectory of doom was reinstating Steve Jobs to the board of directors in 1996 after a boardroom coup that ousted CEO Gil Amelio. Although Amelio was one of the best CEO’s to ever run Apple, and had scored some major advances for the company, it was Jobs that set Apple on a course of dominance in music and mp3 players – which saved the company. When Napster, and music file trading, became popular in 1999, Jobs foresaw the need for a better way to organize and keep track of music collections on the computer, which Apple followed through on by introducing iTunes. Almost immediately, the need was seen for a portable device that could store and play the music files and integrate with iTunes, and thus the iPod was born. Jobs was savvy enough to know that the iPod, if done right, could start to convert computer users to buying other Apple devices, such as computers.
A few years later, Jobs struck a deal with Intel to use Intel processors in all Apple products. This was the 3rd major advance in product selection that Jobs made which directly affected the sales of Apple computers to once skeptical customers. It made it possible to run both Mac OS software and Windows Software on the same machine, something that cannot be done vice versa.
Only a short time after that, Jobs announced the iPhone. The iPhone is a revolutionary product that has changed everything in the phone industry, both directly through Apple’s own innovation, and from stirring competition from new devices such as Google Android phones. In only a few short years, the way we think about mobile technology has changed rapidly. The internet is available almost anywhere, and phone apps are constantly changing the way we do things.
So far, Apple, with Jobs at the helm, has stayed ahead of the competition and has ensured its own success by creating new ways of doing things and new products that the consumer wants to use and own. And while no one yet has had a formidable answer to iTunes and the iPod, Google’s Android platform poses a serious threat to first the iPhone, and soon will threaten the iPad, the iPod, and iTunes.

SWOT Analysis

Apple’s strengths in the current market are many. Steve Jobs is likely their largest strength, followed by their dominating positions in music sales with iTunes and the iPod, their dominance in smartphones with the iPhone, and their dominance in emerging mobile web devices like the iPad. They are also gaining more and more strength in the computing markets with the Macbook and iMac product lines. Apple is also a key innovator in mobile search and advertising technologies, and in web based TV and DVR technology with their Apple TV product.
Their main weakness is in penetration to business markets. They are not strong in server hardware or software technologies, where companies like Microsoft, Oracle, IBM, and Dell do much better. They are far behind in desktop search and applications, as well as in “cloud-computing” platforms such as web mail and office applications that are hosted on the internet. Microsoft and Google dominate these areas more fully. Something that is always a weakness with Apple products is that, while they are reliable, they are highly controlled. Many device users want to have flexibility and variety in software and application offerings, which Apple many times does not have. Apple has significant opportunities to gain market share in business technology. With many business people using iPods, iPads, and iPhones, Apple could use this as leverage to begin creating and selling other products business people can use to do business and solve problems. This could come from new cloud computing services, or it could come from new ways of completing tasks with computers than we currently do in the business world.
Apple has a significant threat from Google. While Google is not a device maker like Apple, Google operates a highly profitable business in developing search and cloud computing applications that pose the potential of eroding the need for complex devices. Google has also launched a powerful competitor to the iPhone software called Android. The Android software is not limited to one device, and can be used on phones, tablets, and music players. Apple also faces the constant possibility of Entertainment Industry changes that would make the iTunes store and service irrelevant. Changes such as the Comcast purchase of NBC could change how entertainment content is delivered to mobile devices, as companies who own the distribution and internet networks change the way they do business with retailers (or become their own retailer).

Introduction

“…something that feels like magic.”
In the year 2010, Apple became the largest technology company in the world and the second largest company by market capitalization. Apple surpassed Microsoft in both revenue and profit for the first time in more than twenty years. That is a long way to come from near irrelevance which they narrowly escaped in 1997. (Manjoo, 68) Through creativity, innovation, and impeccable foresight and planning, Apple quickly righted their course in 1997 and became a leader in producing and marketing highly ingenious devices that became essential to daily life. This new direction, product quality, and ease of use soon captured the loyalty of their customers who began to want more out of their electronic devices.
Amazingly, Apple was able to continually deliver great products that smashed the competition and jump started uncultivated industries that never let the Apple faithful down. This success since 1997 has generated hundreds of billions of dollars in wealth for the company and its shareholders, has transformed the mobile device world, and has made us rethink the way we transact business, entertainment, and information on the go. It is on a mission to “redefine elegance…[make] the product the hero…we try to capture something that feels like magic.” – Wilhelm Oehl (Manjoo, 69)
Being at the top of the computer world is fleeting, and as with so many before them, Apple computer is now vulnerable to be the next big business to face attack. Those who are now their business partners could quickly become competitors. Loyal customers could start to find their needs better met elsewhere. Apple management or employees could lose focus and alienate their customer base. Steve Jobs could step down, move on, or pass away unexpectedly. What strengths can Apple draw upon, and what weaknesses can they surmount to ensure they are not the next big tech company to topple?

Research Methods

Because business is an art more than a science, success in business comes from many different factions, and almost never comes from one strategy alone. While one great idea or one major blunder can have a large effect on a business, most of the time the success or failure of the organization comes from many things coming together to cause the result. Such is the case with the success of Apple Inc, for which reason, broad analysis and research was used to determine where the successes came from within the organization that caused it to blossom.
The types of information used in the analysis are as follows: business and academic journals, press releases, analyst statements, computer and consumer trend publications, observations, discussions with Mac users, stock market charts and histories, books written by executives, and case studies.
Most research examinations will use academic journals, books, and histories, and it was felt that adding to that information with observations, discussions, press releases, analyst statements, and stock market data would provide other ‘social’ data that may not be written information, but is nonetheless interesting in determining why Apple was successful and how they can remain successful in the future. This data is also highly useful when analyzing an organization to find strengths in their current operations, weaknesses in their strategies, where the opportunities lie ahead, and what threatening storms might come their way.

Summary of Research

Apple has core products, people, philosophies, and ideas that it continues to use which drives its success. Simplicity, reliability, elegance, getting it right, and market power are the company’s key strengths. It is the ability to continue creating, adding to, and reusing these fundamentals that is critical to the future success of the company.
The past success of the company has relied on two major aspects: consumer buzz, and investors. (Manjoo) Steve Jobs himself is the largest investor in the company, along with other Silicon Valley gurus like Larry Ellison of Oracle. Microsoft itself was an investor in 1997 which played a role in keeping Apple alive and returning to profitability, though this was likely our of the need to keep a competitor around to avoid issues with the US Department of Justice than anything else. (Amelio) The success of the stock creates interest in the company, and as more and more become involved in its success as shareholders, the effects of Apple’s product success is magnified In order to maintain the buzz around their products, and keep investors flocking to the markets to buy Apple stock, Apple must continue to wow industry analysts, publicists, and the public in general at events such as Mac World, and in press releases. So far, Apple’s ability to utilize Jobs in this role has been impeccable. Jobs has also become famous for writing philosophical blog entries on the current state of the industry. Whether it’s his “Thoughts on Music”, or his more recent “Thoughts on Flash” article, Jobs keeps himself and his company in the middle of the debate on popular computing, social computing, and technological topics.

Analysis

Thoughts on Apple’s Products and Assets

Mac World

It seems to all start here. Even before Steve Jobs returned to Apple, Mac World was a major event in publicizing Apple’s innovations and launching products. Former Apple CEO Gil Amelio stated “Mac world attendees always expect to hear what’s new and what’s ahead directly from the Apple CEO.” (Amelio)
Steve Jobs is constantly doing Mac World events and press releases, which adds to the hype. It is one of the ways that Apple cultivates a religious fervor. People flock to see Jobs introduce his next gadget. The Apple faithful are so converted that “…for some people it's just like a true religion…" (Martin Lindstrom, Manjoo, 72). These Mac World keynote addresses and product launches reinvigorate the Apple followers, like a general conference or a revival would for other followings.
Such an expectation should not be taken lightly, or for granted, and is nearly unprecedented in the business world as a whole. Yet Apple has used it for decades to drive its products and create a buzz like no other company can. Indeed, the Mac faithful have more than a nation, they have a world.

Steve Jobs

Already mentioned previously, Jobs is a major asset to Apple. Jobs has mastered the art of knowing what the consumer wants and not focusing so much on how to deliver it. The how can always be thought of after you know what to deliver. Gil Amelio writes that before Jobs took over at Apple, they had warehouses “stuffed with $600 million worth of unsellable computers.” And while Amelio faults Jobs for what he calls “narrow perspective as a salesman and marketer extraordinaire,” others have pointed out that such “narrow mindedness” is what keeps Apple in business.
When Apple purchased the technology they needed to make the DVD burning software called iDVD, Operations Manager Mike Evangelist was given the task of putting the software together. Once they thought they had all of the ideas they needed to present to Jobs, he astounded them by walking into the meeting, and changing everything. "He doesn't look at any of our work. He picks up a marker
and goes over to the whiteboard. He draws a rectangle. 'Here's the new application,' he says. 'It's got one window. You drag your video into the window. Then you click the button that says BURN. That's it. That's what we're going to make.'" (Manjoo, 78) Evangelist knew immediately that what Jobs had said was right, and that the idea he had come up with would be much better for the consumer.
The ability to maintain a focus on the long term and on the needs of the customer can only come from someone who has been there, has seen the failures, has seen the wrong products launched, and who has not given up at being the best. Steve Jobs is that man for Apple.

iMac

The iMac holds the prestige of being the major Apple product (other than the switch to Steve Jobs’s NeXT operating system in 1997) that helped Apple to turn the corner and begin the building blocks to an innovative future. The iMac was a kind of throwback to the original Macintosh computer released in 1984, being a monitor and computer housed in the same case. It also featured innovations such as all USB input, no floppy drive, and could easily get to the internet. They say it only took 2 steps. It was also a foreshadowing to Apple’s soon to be renowned symbolic branding and design, which was a refreshing change to the “beige box” computer designs of the day. Apple also redesigned their Apple logo to be a white silhouette Apple, rather than the older “rainbow” Apple of the past. It was all symbolic of the major transformation we would witness from Apple.

iTunes

Apple also created, in the wake of Napster being shutdown in the late 1990’s, what would become a massive media outlet in iTunes, which has now seen billions in revenue. iTunes is unique in that it offers many different kinds of media for download, from movies, to TV series, to music, to radio broadcasts, and independent artist content. As with other Apple businesses, iTunes usually can weigh in heavily enough to control the terms of distribution for the media. That means Apple is in strict control of the revenue stream that iTunes generates, making it a valuable business asset.
iTunes doesn’t stop there, in its promise for Apple, however. iTunes at its core still serves the same function for which it was created. When music downloading became a huge medium for distribution with the advent of Napster, Steve Jobs wanted a way to organize the media efficiently. The iTunes software is now cross-platform and serves as a tool for organizing your collection, whether only a few albums or tens of thousands of albums. And it is not just limited to content which was downloaded from iTunes. This had tremendous effect on the next purpose of iTunes, which was to organize music on mobile devices. The first of these mobile devices was the ever so popular iPod.

iPod

Now in its 4th generation, the iPod changed everything. Before the iPod was released, the ability to carry your downloaded music with you was amateur at best. Clunky mp3 players that used mp3 encoded optical discs, burned cds in CD Walkmans, or primitive hard drive based mp3 players were the only way to do it. The iPod changed that with its sleek design that allowed for large storage amounts, an easily readable screen, and an easy way to scroll through all of your music. At first, the iPod would only work with other Mac computer products. This was intentional and caused many first time buyers who wanted an iPod to also purchase Apple computers. Only down the road, when the trend of getting people hooked on Apple products was solidified, was the iPod released for use with Windows based machines.
Companies that once dominated computer and media devices like Microsoft and Sony, were being left in the dust. Sony Walkmans, a mainstay of mobile music for nearly 20 years, are nowhere to be found today. Sony also tried to create media-centric computers, but their success pales in comparison to that of Apple. Microsoft tried its hand at revamping its media player software on Windows, but even today many Windows users use iTunes, and they were extremely late to the mp3 player market with their Zune device, which for all intents and purposes, has failed to gain any traction versus the iPod. Its just another way Apple is continuing the trend of trumping Microsoft.

iPhone

There are smartphones, and then there’s the iPhone. In retrospect, it is amazing that the mobile phone market leaders like Nokia and Research In Motion didn’t beat Apple to creating a device like the iPhone. The Blackberry, for all of its good features, doesn’t even come close to the functionality, elegance, and “swiss-army-knife” usability of the iPhone. The ads get it right when they say, hey “there’s an app for that.”

iPad

The iPad appears to be a product that is designed to help Apple enter the enterprise world. With specially designed apps, the same OS and many of the same features as the iPhone, as well as easy access to corporate email on the go, the iPad is a great device for salespeople, presenters, and service people on the go.
The iPad as a reading device could also, finally, give rise to digitally delivered print media like newspapers, magazines, and books. Already there are a handful of apps from the likes of the Wall Street Journal, New York Times, and other paid publications that update each day with the content they have published. Steve Jobs may be ushering in the days of real-time newspapers, which is something the laptop has failed to do.

MacBook

The MacBook laptop series has always been the flagship laptop system since it was launched, replacing previous flagship laptops from Apple such as the Powerbook and iBook. Powerful, yet easy to use, the MacBook has penetrated many different creative industries such as music, film, and animation, and has become a hit among college students. With the recent product extentions such as the Air, which is so thin it can fit in a large envelope, the MacBook product line will remain relevant for a very long time, and is a consistent seller at the Apple Store.

The Apple Store

The Apple store, although it is a retail service, is one of the most innovative product lines of Apple Inc. In fact, it has revolutionized retail, and has become one of the most successful retail operations in history. In just 3 short years after its launch, the Apple store had become a billion dollar retailer.
What makes the Apple Store innovative its modern, uncluttered design, and how easy it is to demo, learn about, and purchase a product. You can also take any Apple device, no matter where you bought it, to the Apple store for repair or upgrade, usually for free. It’s a hands on buying experience for electronics in an ever increasingly virtual world. Apple also utilizes a complex marketing channel, with some channel partners, direct sales, retailers, and distributors (At&t), of which the Apple Store is a major component in the retail space. Because of their complex marketing scheme, they can utilize administrative control over their distributors, retailers, and channel partners to ensure that the product message, perception, and price are consistent, making the buying experience for Apple customers that much more efficient. (Kerin, Hartley, and Rudelius, 289)
The timeline below shows the evolution of the Apple product offering over time from 1998 to the current year of 2010. Almost every product released on the timeline has been successful in boosting Apple’s bottom line, and fulfilling the needs of Apple customers. Figure 4.9.a (Apple Products Timeline 1998-2010)

Observations and Conclusions

A New World

Based on the information obtained from the Apple Products Timeline, we can look at the timeline data overlaid on a stock chart of Apple Inc. since 1998. This chart illustrates that these extremely successful products have won the support of investors as well as customers of Apple. Since 1998, the stock price has gone up over 9,000%, meaning that a $10 investment in Apple 12 years ago would be worth nearly $90,000 today.
Figure 5.1.a (AAPL Ticker Chart and Apple Products Timeline) While the iMac, Apple Store, and iPod did not immediately change the trajectory of Apple’s stock trading, their launches coincided with a foundation for the stock value that has never again been tested. Since those early years of the new Apple revolution, the stock has continued to grow, even through two recessions. And yet these trends are not only seen on a stock chart.
Sitting in a coffee shop, library, or on a train or bus, you can see Apple’s success story all around you. It would seem that users of Apple devices have been fully integrated into the vision Steve Jobs had of organizing media and information. People are using their Mac computers to DJ or perform music at live events or concerts. They are seen using Mac’s at coffee shops, doing homework, writing, watching movies or TV, or browsing the ever public internet. You can see them at restaurants with their iPods or iPhones sharing videos or watching online content from YouTube with others at the table. Ride a train or bus, and you will see them conducting business on a Mac laptop or more recently, an iPad, while simultaneously listening to music, gaming, or chatting away on an iPod or iPhone. Businesses are aware of this, and many cafés and shops offer recharging stations and free internet. Many businesses are starting to develop apps for these devices that make doing business with their customers that much easier. Once considered an afterthought in businesses enterprise networks and universities, support for Apple devices is starting to become more prevalent. Much of this trend can be attributed to employees having Apple products at home (Sturdevant, 30), and preferring to use the same devices at work. And employers are catching on that it might be easier to let them use devices they are familiar with rather than train them to use a different platform. Apple products also carry with them a very high reputation for reliability, uptime, and long product lifecycles – something businesses are always concerned with. However, Apple still controls very little in the way of the enterprise market space. According to the Forrester report by Emil Protalinski for July 2009, Macs still only account for 3.6 percent of corporate machines. (As published by Sturdevant, 30).
This data means that integration of Apple products in corporate and organizational networks remains a challenge to businesses and users. This observation is legitimized by Paul Bleicher’s article “The Evolution of the Desktop Computer” where he writes “As desktop computing rapidly grew increasingly complex through more sophisticated programs, operating systems, and networking, the cost of corporate computer system support grew exponentially, and the frustrations of end users followed. These issues, multiplied by thousands of users, have driven corporate IT leaders toward radically different solutions for the desktop computer to control costs, improve the quality of the computer experience for the end user, and increase efficiency in the workforce. The changing nature of the workforce creates evolutionary pressure on the desktop.” (Bleicher 44)
Observations also show where the competition is succeeding. Most of the competition comes from the Android enabled devices such as phones, and soon will come from tablets similar to the iPad. Eventually, we’ll see Android enabled iPods. The success of the Android phones is quite surprising, and exploits some of Apple’s weaknesses in their products, such as a locked down App Store, a finite amount of storage space (Androids can support as many SD cards as you can handle), and limited network partnership with AT&T only. Additionally, many people can be seen streaming movies and content to these devices from providers such as Netflix, which has recently been on a successful tear with their library of streaming content. Streaming the content bypasses the need to download it, which requires a wait time, and leaves more control in the hands of the copyright owners as to the means of distribution. It is also normally less expensive for the distributor, meaning Netflix likely has a better margin of return on the streaming accounts than iTunes has on downloads, making usership the new ownership. Usership of Netflix has expanded astronomically since streaming was first offered, and makes Netflix a prime competitor to iTunes since iTunes is a download store for the most part.
This is illustrates the trend toward cloud-computing as a whole. Cloud computing is the ability to let web based services do the major processing and crunching of data cycles, and then send it quickly through the internet to the end user. Cloud computing puts many ‘traditional’ software, hardware, and information technology creators at risk. Cloud computing is disruptive, and as we’ve seen before with desktop computing and the internet, disruptive ideas tend to make the impossible possible. Storing files to individual computers may soon become obsolete, in exchange for storing them in “the cloud” where they can be accessed from anywhere there is an internet connection, and practically can be accessed from any internet enabled device. The cloud also increasingly offers the ability to work collaboratively on documents, software, and other projects with others simultaneously, with changes to the project reflected in real time.
For companies like Apple, who’s marketing methods center around strict control of their marketing channel, meaning they control the types of software available to their devices, such variety and diversity among the cloud computing services available to internet users means cloud computing isn’t necessarily welcome. Ironically, it was the idea of internet enabled devices that inspired the iMac, which was the first major device offered by Apple that helped turn the company around and is still a product mainstay for Apple.

Recommendations

“The Path Less Traveled By…”

Apple must remain true to that idea of a connected, integrated iLife in order to survive any storms that the cloud computing evolution will throw at it. However, it must do so in a way that no other company is currently doing or will do in the future. As has been shown, Apple has thrived on the ability to look at a problem, and present a solution that no other company has.
They can do so by not worrying about “missing certain boats” like so many other tech companies seem to do. Apple must remain focused on the consumer need, and if it has been filled elsewhere and cannot be provided at a good cost by Apple, they must stay away. As simple as it seems, Apple (or is it Steve Jobs?) seems to see when it is time to draw the line and discontinue support for irrelevant technologies. This first started with the iMac, when Apple released the new computer concept with only USB inputs, and no floppy drive, both of which were unheard of at the time. Today, almost every computer only allows USB or FireWire input, and have no floppy disk drives. Jobs’s abilities to see through needless, or incomplete products will be a true asset here. The risk is that if Apple falls for a business that it cannot sustain, investors may begin to sell the stock, and the hype which usually plays in their favor may turn against them. Apple not only needs the stock to perform well to fund its growth, but also to continue generating buzz about the company, and excitement and interest about its future.
At the same time, they cannot let every whim of shareholder wants and desires to run their company either. A strict balance between market wants and consumer needs must be maintained. This can also include such measures as ensuring that the stock price remains exciting as well as enticing. This can mean offering dividends and stock splits which can be good for current investors and which also help bring new investors to the table. It also means keeping shareholders interested by utilizing Mac World. However difficult it may prove, Mac World must continue to grow and top previous Mac World events. Without the anticipation and expectation of Mac World, the media will not be as friendly to freely promoting Apple product releases. The fact that Apple gets great publicity has helped sell products over the years. And just like anything else, if it fails to remain interesting, the publicity will falter.
People want and are attracted to status symbols. Apple captured this early on with their pricing methods using what is known as Prestige pricing. And they hardly ever run promotions or discounts. This does two things, it keeps many outside looking in and provides a ‘cool’ factor to those who own or use their products, but also generates significant revenues that the company can use to develop advanced products. This aspect of their business is a major part of their success. If they lose their ability to create Ferraris of computer devices, or to maintain their ability to capture Prestige price levels, they will begin to lose their ability to administratively control their market channels, thereby giving dangerous opportunities to their competitors.
One way to protect against competitors is to enter untapped markets, and Apple has plenty of markets in which they are hardly a player at all. To remain successful, Apple must also overcome the troubles in penetrating the enterprise market space. It is interesting to note that even in 1996, Gil Amelio knew that gaining enterprise market share was important, yet still to this day Apple remains largely a consumer tech company. “A key problem that Apple never solved was the company’s inability to break down doors of major corporations,” Gil explains. Perhaps a large reason for little penetration from Apple so far comes because of Larry Ellison’s position on the board.
Ellison runs Oracle, which is a company that does major business in the enterprise computing world. Apple will need to create ways in which they can reduce the amount of issues with using Apple devices in enterprises, especially as their population in the consumer market grows. If they don’t, they would simply be waiting for a major enterprise business, such as Google, to enter the consumer device world, which would be devastating to Apple since they would most likely be the first company to be substituted for when a new competing technology is created. (Amelio)
Many industries are still in need of major overhauls and innovations. The largest of which is the healthcare industry. Apple would be wise to gear up their machines and devices toward integrating all sorts of information of different types together, including health data. It seems that they are already headed in this direction with the iPad. Tablet computing devices could be useful for doctors and clinics who need patients to fill out paperless forms and who need to see up to date information on tests and procedures being performed. These duties could be performed using specialized Apps created by developers and marketed to doctors for use with Apple’s products. This ability to share information readily from business to client, whether in health care or another sector, has the potential of breaking centuries old barriers between product producers, shippers, and customers.
For these mobile platforms to work, one must have a good internet connection. Because Apple is currently exclusive to one carrier which is AT&T for most of its mobile devices, Apple must be sure AT&T is the best partner for them, especially in the wake of AT&T’s network issues, and the Android picking up large buckets of market share. This is especially true if Apple decides to enter the healthcare market. Internet connectivity will be a must when critical functions are being performed, such as analysis of patient history, updating medical records, checking for allergies, etc. In the event that Steve Jobs becomes ill or must step down and retire, Apple should have a plan in place to ensure that the next CEO doesn’t follow the same path that so many Apple CEO’s have, while destroying the value of the company in the process. Even at that point, it is questionable whether anyone could have the impact and success on Apple as a company that Steve Jobs has had.
Last of all, Apple must be prepared to establish itself as an online media outlet. iTunes has already been wildly successful, but Apple must ensure that the iTunes business remains relevant. They are still showing signs that they are on top of their business given the recent announcement to exclusively sell Beatles music on iTunes and online for the first time in history. Yet it remains to be seen how long downloading and owning content will continue to be the popular way of gaining access to media. As internet speeds and availability continue to increase, so does the advantage of remotely storing and accessing data, making the need for downloading a thing of the past.
Apple’s success to this point will likely give the company much needed momentum in the years ahead. If Apple is to remain a key figure in the tech industry and remain successful, they most assuredly must overcome the critics and naysayers who will always say “It can’t be done.” Apple must continue in the vein of Steve Jobs and proclaim “We think we’ve got the goods.” (Quittner, 2)

Annotated Bibliography

Allen, Danny, and Tom Spring. "Apple's Rivals Scramble to Make iPad Challengers." PC World 28.6 (2010): 10-12. Academic Search Premier. EBSCO. Web. 5 Nov. 2010. This article discusses the coming competition to the iPad Amelio, Gil, and Simon William. On the firing line: my 500 days at Apple. 1st Edition. New York: Harperbusiness, 1998. Print. This book talks about the history of Apple, and the transition from CEO Gil Amelio to Steve Jobs in 1996. Bleicher, Paul. "The Evolution of the Desktop Computer." Applied Clinical Trials 17.6 (2008): 44-48. Academic Search Premier. EBSCO. Web. 5 Nov. 2010. This article discusses the history of desktop computing and will provide a background to the growth and history of the computer industry as we know it. Connor, Deni. "Apple in the enterprise? Depends who you ask. (cover story)." Network World 24.22 (2007): 1-12. Computer Source. EBSCO. Web. 5 Nov. 2010. Discusses Apple’s Enterprise computing efforts in the last decade. Manjoo, Farhad. "Apple Nation. (cover story)." Fast Company 147 (2010): 68-112. Computer Source. EBSCO. Web. 5 Nov. 2010. Manjoo discusses the successes and challenges of Apple Pavlus, John. "WALLED GARDENS." Scientific American 303.3 (2010): 71. Academic Search Premier. EBSCO. Web. 5 Nov. 2010. Pavlus discusses the “walled garden” approach to the iOS platform Apple uses, and what it’s advantages and disadvantages are. Quittner, Josh. "Apple's Vision Of the Future." Time 175.5 (2010): 34-35. Academic Search Premier. EBSCO. Web. 5 Nov. 2010. Quittner discusses the new iPad product and the potential it holds for revolutionizing the print and publishing industries. Snell, Jason. "Inside the Intel iMac." Macworld 23.4 (2006): 64-67. Academic Search Premier. EBSCO. Web. 6 Nov. 2010. The inside the Intel iMac article details the switch from IBM processors to Intel processors in Apple Computers. This was a major part in apple computers recent success over the past five years in making headway at increasing the market share of all of their computer platforms. Starr, Alexandra. "Apple CEO Steve Jobs: Reinventing Himself and Our Digital Lives." AARP Live & Learn. 18 Dec 2007: Print. An interview with Steve Jobs STURDEVANT, CAMERON. "Macs in a PC world." eWeek 27.5 (2010): 30. Academic Search Premier. EBSCO. Web. 5 Nov. 2010. This article covers the rise in usage of Macs in the enterprise world, and how a shift in platforms is underway.

Reid v. Romney

A few months ago I stated that I hate the argument that if you don't release something, or don't allow an unwarranted search, that you must be hiding something. 

That was the accusation the Republicans were making at the time vs. Obama in regards to the faster and Furious discussion.

Now Reid & Co. are using the same argument against Romney.

So I propose that Romney make a deal with Obama that he'll release the 10 years of returns if Obama will release the FaF documents.

Since both are equally as interesting to the public and likely somewhat damning to both of the candidates, I think it would be a fair trade.