Understanding Apple: Part 1 – A Brief History

July 28, 2012 by  
Filed under Every thing you Need to Know

by Malcolm Manness – July 18, 2012 | Tickers: AAPL, BRK-A, DELL, HPQ, IBM, MSFT, XRX | 0 Comments

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Understanding Apple: Part 1 – A Brief History

You may love Apple and their products or you may hate Apple to the core and curse the memory of its late leader, but it cannot be denied that in 1997 it was close to bankruptcy, and now it has the highest market cap of any company. To make investment decisions based on your emotions is the height of foolishness – and not the kind that we like!

Warren Buffet famously said “Invest in what you know!” So, for those who are new to Apple or who want a unique perspective on their success, I am starting a series of articles called Understanding Apple, starting with the history of the company, later I will touch on various topics, ranging from specifically financial in nature to more philosophical issues with the intent on presenting a unique perspective on the company.

Apple, inc. – A brief history

Many people already know the outline of Apple (NASDAQ: AAPL) history, but I go over it here for those who may not. if you really are to know your area, then one should have a rough idea of the beginning of it. Especially when it is so unique. 

1976 – 36 years ago – it is the year of the U.S. Bicentennial, the cold War rages on even as America has just left Vietnam, Gerald Ford is president, Mao Tse-tung dies, trade with China is minimal, the films Rocky and one Flew over the Cuckoo’s Nest were released, Godspell opens on Broadway, the Sex Pistols sign with EMI and release single Anarchy in the UK, the Nobel prize for economics awarded to Milton Friedman, and… Apple Computer is formed on April 1.

I think it’s hard for younger people to really appreciate the world before computers. if you were born in 1980, you grew up with them. Life was not really that different. All the real life changing things were already completely part of modern, western civilization: telephone, plumbing, automobile, the Interstate Highway system, TV, antibiotics. Compared to these, computers are just icing on the cake.

In 1976 there just was no such thing as a personal computer. Technology was at a level where they were not yet possible – or just becoming possible. inside your computer (go take a look) are lots of microchips. Each of these contains billions of tiny transistors that create the circuitry for the computer logic, the “brains” that make your PC or smartphone or iPad work its magic. In 1976 the MOS Technology 6502 CPU chip boasted 3,510 transistors. this was the newest technology called LSI (Large Scale Integration – now we use VLIS – Very…) Only then did personal computers become feasible.

Many people were working on making personal computers, and there was a hobbyist movement where people would assemble their own from purchased parts. For many, this was the only way it would be affordable. They would buy a circuit board, plop on some chips, wire them up with a soldering iron and have a toy to play with.

Into this came Steve Wozniak who created the Apple I, to show around at the hobbyist fairs. his friend Steve Jobs, also into technology, saw a potential and encouraged Woz to set up with him a company to sell them. the Apple I was not quite a personal computer in the modern sense as it needed to be assembled with parts not included. still, it did provide a preassembled circuit board making assembly a much easier task. the Apple 2 was the next step, appearing in 1977, and was a complete desktop computer, pretty much as we would recognize today. (The Monitor and floppy drives were separate peripherals.)

While, as mentioned, there were other new desktop computers appearing at the time, the unique contributions by Apple should not be overlooked. it continued to be an important force in the evolution of the personal computer. the introduction of VisiCalc – the first spreadsheet – turned the Apple 2 into a real business tool. As the first PC “killer app,” it started a revolution in business applications. but it was the Apple 2 that made it possible. (I personally learned the Pascal programming language on an Apple 2 in 1981.)

On August 12, 1981, IBM introduced the IBM Personal Computer, running PC-DOS, later MS-DOS by Microsoft Corp. (NASDAQ: MSFT). As I recall the events, the very name of IBM gave such weight to the product, that soon competitors running different operating systems (e.g. CP/M) fell by the wayside and the IBM PC and its clones, all running MS-DOS, became the standard.

Meanwhile, Xerox Corp (NYSE: XRX) had set up its Palo Alto Research Center (PARC) where, among other things, they were developing concepts for a Graphical User Interface (GUI) technology. In 1979, Jobs and others from Apple toured PARC and purchased rights to develop the GUI they saw there. Jobs was convinced that eventually all computers would run a GUI. They then went on to refine it and used its concepts to produce first the expensive flop the Lisa, and then the Macintosh –the Mac.

While the researchers at PARC had created a system with a mouse driven GUI, Steve Jobs and company (especially Jef Raskin) took this expensive technology and improved it and packaged it so that it would be available at a reasonable price. the Mac was truly revolutionary. while earlier some individual programs had some character based windows, aside from a few researchers, no one had seen anything like this, what we all take for granted today, a full graphical based windowing system. In the computer world prior to this, people interacted via command line commands. “CD documents” would Change the current Directory to the one titled “documents.” the command “DIR” would instruct the computer to list the files in the current directory. You would type these in at the command line at the bottom of the screen, and the response would scroll up. Launching a program required typing in the name of the program plus any arguments, such as the file to open. inside of a program, moving in a document, saving and all other functions were initiated via control-key commands. Plastic templates were made to go over the keyboard listing the most common commands. this was a system that required training just to do the simplest of things.

PC DOS 1.10 Screenshot

The Mac revolutionized this. People could pick up a Mac, get a half hour introduction to it, and go off and start using it. Today, of course, few computer users even know what a command line is.

While the Mac was easier to use, and many great programs existed for it (Microsoft Excel was produced first on the Mac), the clout and reputation of IBM, plus the availability of relatively cheap clones pushed the MS-DOS systems into businesses. There they eventually prevailed as Macs and other systems were pushed to the periphery. Macs continued to be strong in the graphic arts community since programs such as PageMaker required the GUI interface. the whole desktop publishing industry was enabled by the Mac OS. [A future article in this Understanding Apple series will cover the demise of Apple Macs vs the WinTel PCs.]

The year 1985 brought a power struggle between Steve Jobs and CEO John Sculley, that ended with Jobs leaving Apple. In this timeframe he purchased Pixar, and he set up NeXT, inc. dedicated to providing a superior computer and OS combination.

Still, as the Mac became more and more isolated, the business faltered, until by 1995 Apple had been through three CEOs, and was hemorrhaging money. Their efforts to create a modern operating system with features such as preemptive multitasking were floundering. Finally, they decided to buy Jobs’ NeXT computing for the OS. Jobs returned to Apple at the end of 1997, and was eventually reinstated as CEO. He continued in that position (aside from medical leaves) until he died last fall. (For all this time, he had a salary of just $1 per year.)

Jobs slowly began to turn the Apple business around. He simplified the product line, and axed the Mac OS clone licensees. on the positive side, teaming up with Apple designer Jonathan Ive, Jobs created the first iMac series in 1998. the popularity of this line helped to bring Apple back. Apple’s distinctive, and well made laptops also led the recovery.

The year 1998 saw a return to profitability, and 1999 & 2000 saw strong revenue growth. As with virtually all companies, the attacks of 9/11 in 2001 and the ensuing downturn set back Apple’s advances. by 2004, however, they were back to pre-2001 revenues.

Digital Hub

At the January 9, 2001 Macworld keynote, Jobs announced the Digital Hug strategy. here he saw the Mac as the center of a “Digital Lifestyle” providing the editing and intercommunications for digital photography, video, music, etc. once again, Apple’s creative thinking led the way with the introduction of quality, built-in media apps – the iLife suite: iMovie, iPhoto, iDVD, Garage Band. the idea here was that the Mac would become the creative center to organize and edit content for the peripherals: music player, TV, etc.

Then, fate stepped in. by 2001 there had already been many digital MP3 players on the market. but they were limited in storage, very slow to load, and the interfaces were terrible. Apple released the iPod with large storage, fast Firewire, ease of music management via iTunes, and a revolutionary, simple interface, the click wheel. it was an instant success, launching a storm of player sales, reaching up 90% market share in the U.S., and 70% world wide.

One of the most important effects of the iPod, however, was its “halo effect.” As millions of people literally fell in love with their iPods, many began to look more closely at the Mac line. For 15 years these had been sold in a kind of cultural backwater of graphic design groups and a relatively miniscule group of fans. now, as many people experienced the iPod and took a new look at Macs, they began to see the reason why their “crazy” friends had always been so enthusiastic for Macs. the ease of use, the stability, and the freedom from malware began to make sense. Mac sales have been increasing ever since, with Apple continuing to report that half the Macs sold at the retail stores are to people buying their very first Mac. (I imagine that many are buying their very first computer, but the others would be “switchers.”)

The rest is more recent history, and most people are familiar with it.

The year 2007 brought the iPhone which rocked the cell phone market. from making 0 phones, Apple has gone in five years to making over 140 Million this year (estimate = 4x Q1 sales]. Currently, they have about 23% of global smartphone sales, and appear to be growing. Before 2007, smartphones were difficult to use devices with keyboard interfaces. the iPhone stepped in with its elegant touch interface. now all high end smartphones resemble the iPhone interface very closely.

The iPad is doing even better. Released in May 2010, it currently holds 72% market share. many researchers see this slipping as competitors join the market. NPD (4 May, 2012) expects them to have 50% in 2017. this, however, would be more than compensated by the growth in the overall tablet market from 82 million units in 2011, to 425 M units in 2017 (again NPD). [I will have another article on tablets in this Understanding Apple series.]

Apple has also initiated the iCloud service (October, 2011) which stores music, photos, applications, contacts, calendars, and documents, and seamlessly synchronizes them to multiple iOS devices, Macs and Windows-based computers. once again, the competition is scrambling to try to match the service. here, however, Apple has an advantage. because they make all the hardware as well as the underlying operating system, they can integrate these services directly into the OS in a way that others cannot.

Growth

Overall, Apple has gone from a loss of over $1 Billion in 1997 with sales of $7.1B, to a profit of almost $26 B on revenue of over $108B in 2011. since recovery from the 2001 recession, it has seen revenue growth of an average of 44% per year – with 2011 seeing growth of 66%.

In this time frame it has become the largest cap stock in the world, and accumulated almost $100 Billion in short and long term cash reserves. Only this year will it begin paying a dividend. “Subject to declaration by the Board of Directors, the Company plans to initiate a quarterly dividend of $2.65 per share sometime in the fourth quarter of its fiscal 2012, which begins on July 1, 2012.” (Apple press release, 3/19/2012). They have also initiated a $10 B share repurchase program.

In the same time frame other tech companies – Dell (NASDAQ: DELL), Microsoft, Hewlett-Packard Company (NYSE: HPQ) – have grown as follows:

Can this growth be sustained? if not what growth will continue? These and other issues will be addressed in future articles in this Understanding Apple series.

Part 2

To truly understand Apple, its success, and its possibilities for the future, I believe it is important to know WHY Apple has had this extraordinary success. what are the factors that allowed this incredible comeback? Join me next time for Understanding Apple – part 2: Success = (O + V) * F.

Jaan Seunnasepp has a Masters of Science degree in Computer Science, and has worked for 14 years in development, technical publications and software quality assurance. He has been investing for 20 years. his short fiction can be found at 50CentFlash.com/.

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