Apple’s Cash-Flow Problem

But, inevitably, the firm’s technologies become standardized and commoditized. New, hotter technologies come along, and the firm no longer attracts the best people to work for it, because, well, it’s no longer the next new thing. New products stall, old products are not as profitable as they once were (because competitors figure out how to make something better), and markets and consumers move on.

Firms that reach that point, and that know themselves, then return more of their cash hoard to their investors, who invest it elsewhere. In the 1980’s and 1990’s, large swaths of American industry – especially the domestic oil industry – faced this problem, described by the economist Michael Jensen as the managerial challenge of handling free cash flow well.

Where is Apple in that company life cycle? Is it still in its youth, cash-starved with more ideas than it can finance? Is it middle-aged, but nimble and able to remake itself, as it did several times during Steve Jobs’ tenure? Does it need $137 billion to engineer and finance a large-scale Apple TV that will be even more successful than iPhones and iPads?

Or has the company peaked? Could the rollout last fall of the inferior Apple Maps, which sent people to the wrong destination – causing severe public embarrassment and leading to a managerial shakeup – foreshadow a time when Apple’s best days are behind it? The company could be at a high plateau and could stay there for years, even decades, but does it really need $137 billion in cash for new investments?

Here is another way of looking at the Apple problem: If Apple continues to succeed, won’t it generate the cash that it needs for innovation from its super-products, like the iPad, the iPhone, and the MacBook? Roughly 70% of Apple’s revenues come from the iPhone and the iPad. Will those products last, or will they be superseded? Were those products’ success the result of a unique Apple asset, namely Steve Jobs, or is the company well positioned to produce the next big thing? Could it be too tempting in the short run to Apple’s management to have that $137 billion in the bank, so that it spends some or all of it on investments that fail to pan out in the long run?

It is at least possible – maybe even likely – that Apple’s best long-term move would be to release a hefty portion of its unused cash to its shareholders, who would then plow it back into the economy. Meanwhile, it can finance its next new thing from the cash that its great products will continue to generate. What is being criticized as short-termism could well be a long-term financial strategy that is just right for Apple.

Mark Roe is a professor at Harvard Law School.

Copyright: Project Syndicate, 2013.

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