The $98B umbrella

After the biggest revenue quarter in the history of the world, and surpassing the old guard in market cap, there’s a lot of speculation on what Apple does with their success and their $98B in cash.

Conventional finance theory says if a publicly traded corporation is sitting on a lot of cash, they should either be paying a dividend or buying back stock. They’re doing neither currently. There’s been talk of a dividend, and it might happen, but I think it’s just to placate the institutions.

What’s happening under the $98B umbrella is unprecedented, and it’s setting the stage for change unlike any ever created. Apple, now the largest buyer of semiconductors in the world, is bringing the entire electronics industry along on their ride.

If somehow you missed the news on 37M iPhones and 15.4M iPads in the quarter …

For years, market share theory held that a mature market would separate into 3 clear leaders: one with 40%, one with 20%, and one with 10%, followed by a group holding the other roughly 1/3 remaining.

Analysts are trained to look for those figures. In round numbers, Apple now has 15% of PCs, 25% of mobile phones, and 75% tablets. A mature market, a maturing market, and a wide open market. That should tell us that market share isn’t absolute anymore. It’s momentum that matters.

It’s momentum that brings investment that creates lasting change. And while it might look like Apple is “sitting” on $98B – I thought that, too, until I stepped back and looked again – they are doing anything but. Where banks have tightened, Apple is providing working capital for the entire electronics industry. Here’s what that umbrella has done in the rain of the recession.

Foxconn has risen from relative obscurity to the world’s largest electronics manufacturer. Labor practices aside, it’s a remarkable relationship. Apple is NOT a manufacturing company, and needed a flexible, creative partner. At any given point in time, Apple has around $12B in supply chain commitments to Foxconn.

Speaking of not a manufacturing company and partnering with companies who are, Apple’s relationships with Intel and Samsung are fascinating, given that both want you to think they’re competing with Apple. Intel’s ability to continue their level of high-end microprocessor investment has been fueled in large part by Apple’s decision to switch over to Intel processors in the Mac family. Samsung’s ability to compete with Apple in smartphones and tablets is a direct result of success in selling processors – the A4, A5 chips currently – and LCD screens to Apple. Co-opetition lives. Picture both firms without the Apple business. Can they compete the same way today?

Smaller companies on the brink also are in the picture. Apple quietly invested in Anobit, a really obscure name in flash memory design but with an innovative technology (shameless self-promo: a company readers of this blog learned about in Dec 2010, and that was because Intel Capital had spotted them). We’ll talk about another smaller, but important Apple supplier in a minute.

ARM has also benefitted from the Apple upswing, and there’s more on the horizon. Apple quietly acquired two little known firms, P. A. Semi and Intrinsity, whose expertise both related to extremely low power, high performance processor design. The success of the A4 and A5 chips, with ARM Cortex-A9 cores inside, is a direct result of that expertise. There’s an rumor that Apple is looking to move the Mac family yet again, with the next move being to ARM’s Cortex-A15 and beyond.

Carriers have also been fueled by Apple’s success. AT&T simply would not have been able to compete if they hadn’t transformed their business around the iPhone. An analyst this week wrote that Verizon really hasn’t profited from iPhones, since they subsidize the hardware so heavily. I’d counter with the thought of picturing Verizon’s position without Apple products today. Sprint got a badly needed boost from the iPhone 4S.

It’s momentum we’re looking for to break out of the economic slump, not share, and not even short-term profits.

Apple is now readying for even bigger pushes. iTV. iCloud. These are going to cause another makeover of the Apple retail channel. Bigger investments coming.

I know. You’re thinking: stop it, gadget boy. This isn’t news. No, I have not become an Apple fan boy. Haven’t bought an Apple product since 2005. Diehard Android user. Haven’t read the Jobs biography.

The momentum I see:

As an embedded designer, the parts you select, and the software you write, will be dictated by what Apple does with their $98B umbrella.

That statement was true for the last 15 years applied to Intel and Microsoft. It’ll now apply to Apple.

Embedded computers are strongly dependent on DRAM – it’s usually the most fragile and hardest to get piece of your supply chain in producing long lifecycle products. If you, as a small buyer, have ever tried to purchase from Samsung, Hynix, or Micron, you know exactly what I’m talking about. Most small buyers end up buying DRAM from Arrow or Avnet or another distributor for those reasons.

How many of you use Elpida parts? They’ve been very friendly to embedded suppliers. They are teetering on the edge of bankruptcy, badly in need of a capital infusion. The rumored company to step in: Apple. They buy enough Elpida parts that a disruption in their supply is too expensive to allow.

Will the embedded world be using Intel processors for a long time? Absolutely. But the decision at the high end could change drastically and quickly if Apple does decide to go ARM, then a couple server suppliers go that direction, then the PC makers continue to struggle. Intel is turning more and more of their attention to Atom and Medfield and deeply embedded and mobile solutions.

As an application developer for mobile devices, iOS is now first choice. Mac OS X and its successor may replace Windows 8 on the horizon. This dynamic is already happening in healthcare, where Apple is creating a powerful brand. I asked one person why: “Because they want stuff that just works.”

If Apple does anything to embrace an embedded protocol, look out. I’ve had folks tell me their support for Bluetooth is pretty unfriendly, but there are security reasons lurking behind that. Apple is not the first company you think of as open and sharing with developers.

That embedded anything may already be in the works. Apple is already got their arms around NFC. Yes, Google and Samsung get all the NFC press. But Apple holds 20+ patents on NFC, and they are looking at a lot more than mobile payments. We’re all but guaranteed to see an Apple NFC product this year.

If Apple figures out how to talk to a big slice of the 50B embedded devices, software designers will be compelled to write into that. The lure of open source is fun, but trust me, the next wave as Apple has demonstrated will be for profit. Developers will go where they can make money. Already in progress. I’ve seen more than a couple friends on LinkedIn start new careers as Apple app developers.

Don’t imagine for one second that embedded folks will be able to resist consumer trends. Embedded was not able to resist Intel and Microsoft, and this move will be much more powerful. Apple has almost single-handedly created the BYOD movement, and it’s gaining traction even in the stodgy defense community. While there are issues peculiar to embedded design, in a connected world where every device talks to a network, the rules are all about to change – in favor of the Apple ecosystem.

There will always be choices to serve niches. There will always be some technology that does a particular job well. Linux will likely be the choice for servers of the future. Android will probably grow into a 30% kind of solution on devices, and Windows 8 will certainly have a place in the mix. There will be room for extremely safety critical software platforms, and very low end microcontroller solutions. These won’t go away.

But for many, the momentum and safety of Apple’s $98B umbrella will be the place to be. A lot will depend on exactly what they do next, and they are the one company with enough capital that can make an impact and spur an economic recovery. I’d like to get your thoughts and opinions.

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