Quick Thoughts: Shopping with Apple’s 117 Billion Dollar Jackpot Wad

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  • History says Apple won’t make a big acquisition with its cash hoard, but playing the shopping list game helps to clarify strategic weaknesses and what it might take to fix them.
  • Apple is at a big disadvantage on cloud based applications, lacking a delivery infrastructure, and missing the boat on social apps.  It is also behind rivals on payments, non-touch interfaces and original media content.
  • Akamai would give Apple the leading CDN and key IPR, Pinterest is a good match to Apple style, and Square and its Starbucks deal would put Apple in front on payments.
  • Nuance is embedded in Siri, Leap Motion beats Kinect on gesture controls.  Both would anticipate a move beyond touch screens.  Pure fantasy, but buying CBS would be a masterstroke of disruption.

 

Apple has $117B in cash, Microsoft has $63B, and Google has $43B.  That is a lot of coin rolling around for the three leaders in the platform battle atop the tectonic plate shift that is rocking the TMT landscape.  While I’m confident that the opportunities being created by the portable platform/wireless network/cloud application revolution underway will be more than sufficient to feed the ambitions of all three, the fierce rivalry amongst them guarantees that competition will not proceed in an orderly fashion.  For Microsoft and Google, this almost certainly means acquisitions – neither has been shy on the M&A front – and for Apple, which has been historically reticent, the stakes could inspire it to go where Steve had never gone.  Andrew Ross Sorkin’s recent column in the NYT Dealbook has inspired a cottage industry of Apple shopping lists in the blog-o-sphere, and I thought I’d add my two cents as well.  Of course, there is no real evidence that Apple’s big-deal-phobic culture has eased in any meaningful way, but at the very least, the shopping game is a good way to illustrate the areas where even the all-powerful Apple could use a little help.

Apple’s strengths are obvious, but its weaknesses are well hidden.  The biggest of these is Apple’s cloud infrastructure and skills.  Apple’s DNA has always been device-centered, with towering leadership in user interface design and engineering, but it is a relative new comer to the world of distributed data center design and operation.  Chief rival Google has been poaching the leading minds in data center science over the past 15 years, and has 35 major distributed data center locations spread across the planet, with many more cache server racks co-located in public peering and internet service provider sites to maximize user response time and minimize delay as a content delivery network (CDN).  Apple has but two data centers, is breaking ground on a third and relies on partner Akamai for its CDN.  Why not just buy the 93% of Akamai that Apple does not already own?  Apple would gain first dibs on the biggest commercial CDN and an experienced distributed data center operator, potentially gaining a critical performance benefit on streaming media along with the seminal IPR for modern data caching and a brain trust on Internet architecture.  The market cap on the rest of Akamai sits at just under $6B, while a deal price under $10B might be well worth the jump start for Apple’s needed infrastructure build out.

Apple’s second biggest weakness is its rather meager collection of cloud applications, the product of the company’s extreme device focus.  The first iPhones had to synch to a Mac, with Apple goaded into over the air synching only after the rise of Android products touting this capability.  Apple is still without a streaming media product, flogging the file download model years after the rise of services like Spotify.  Apple’s brief foray into social networking, the ill-fated Ping, went out with a whimper.  Unfortunately, the rise of fast mobile data networks is making portable devices ideal conduits to cloud-based applications, where essentially unlimited processing and storage resources wait to be tapped and planet’s worth of potential users wait to be engaged.  Sorkin’s Dealbook column had Apple buying Twitter and Path, but I think the better fit may be Pinterest, and its almost organic interface metaphor.  Pinterest is hot, appeals to the traditional Apple user base, and offers an entrée to both advertising and e-commerce opportunities.  Pinterest’s latest financing pegged its value at $1.5B, but any serious offer would have to be more than double that to get attention.

Payments is another area where Apple has fallen a bit behind, despite its unparalleled cache of 400 million active credit card numbers.  Google recently announced an expansion of its mobile wallet initiative, adding support for all major credit cards to its near field communications (NFC) smartphone based payments service.  Meanwhile, Apple’s commitment to NFC has been lukewarm and it has articulated no formal program to extend its payments capabilities beyond purchases completed on iTunes, the App Store and Newstand.  Sorkin suggests Square, the brainchild of Twitter founder Jack Dorsey, and I concur.  Square handles payments at point of sale via a card swipe peripheral and an iPhone/iPad app, with plans for authentication via NFC, downloaded bar codes and voice recognition in the future, that would eliminate physical card switpes.  Square’s business model was recently validated with a big, splashy contract with Starbucks to handle the latte empire’s in-store credit and debit transactions.  Integrating this capability into iOS and tying it to the trove of iTunes accounts vaults Apple into a leading position as an electronic wallet.  Dorsey has recently pitched Square at a $4B valuation to investors, and it would probably take more than that for Apple to acquire the company in the wake of the Starbucks deal.

Apple’s touch screen interface is obviously the market standard, but those who stand pat in technology usually lose.  Enter Siri, and her speech-based control system for the iPhone 4S.  While the initial impact of Siri has been modest at best, with many complaints as to the accuracy of its speech recognition and the speed of its responses, it is an intriguing direction for Apple and a stab at loosening the company’s reliance on Google’s search.  With Siri, Apple has been dancing with Nuance, which has been a long-time leader in speech recognition with the patents to show for it.  As Sorkin suggests, formalizing the relationship could take the functionality to a further level and give Apple new levers in its extracurricular legal wrangling, while waiting will only give Nuance more leverage.  The current market cap for Nuance is $6.7B and a take-out would likely require an offer well into the 11 digit territory.

Looking beyond speech recognition, the next big thing is likely gesture-based controls that will not require a physical touch to register an interaction with the device, a la Microsoft’s Kinect.  Again, Google has taken up the gauntlet, and is rumored to be ready to offer gesture input via the front facing camera of Android devices.  Apple could leapfrog both with the acquisition of Leap Motion, a buzzy San Francisco start up that has wowed with peripheral device that can track the three dimensional movement of individual fingers to 1/100th of a millimeter within an 2-3 foot range, all in a package smaller than a pack of gum.  Leap Motion has yet to ship a commercial product, but acquiring it would cost a healthy multiple of the $14.5M in financing that it has already raised.

Thinking far, far outside the box, Apple’s other remaining vulnerability remains access to content.  The long rumored iTV remains a rumor, in large part, due to Apple’s inability to secure rights to current TV programming at what it would consider fair rates.  A solution could be to buy a seat at the table.  CBS would cost Apple at least a third of its cash hoard, but it’s a well run, pure play network operator with top rated programming.  While there are smaller TV properties out there, CBS is the sort of premium property that could match Apple’s highly polished brand and it carries no obvious baggage, unlike, say, AMC, which would have to be pried out of the hands of the Dolan family.  An Apple owned Tiffany Network could upset the balance of power in the multichannel universe and hasten the day of unbundling and cord cutting to Apple’s great benefit.

Of course, Apple being Apple, it is highly unlikely that any of the above will ever happen.  Still, in the post-Jobs era, it is theoretically possible that the historically tight M&A purse strings could loosen in Cupertino.  Setting the CBS pipe-dream aside, the first five deals could likely be accomplished for $30-35B, leaving Apple with a still ridiculous $80B in the bank, control of its cloud destiny, a real payments play and unquestioned leadership in the user interface technologies of the future.  At least, that’s my take.

 

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