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The secret to Apple’s enduring success

Never underrate their ability to understand what we want before we do

This is Armchair Economics with Hamish McRae, a subscriber-only newsletter from i. If you’d like to get this direct to your inbox, every single week, you can sign up here.

Will artificial intelligence enable Apple to triumph again? The financial markets certainly seem to think so. The announcement that the company will bring generative AI to your iPhone powered the share price up by more than 7 per cent, taking the company’s market value back above $3trn and close to that of its arch-rival Microsoft.

But there have been a string of examples of high-tech companies whose fortunes have faded, and ahead of its annual Worldwide Developers Conference this week, some had wondered whether Apple’s glory days were past.

The genius of its co-founder Steve Jobs was to understand what people wanted from technology before they did themselves, and then create a beautiful product that met those desires. It is still worth watching his launch of the iPhone in 2007, starting with the words: “Every once in a while, a revolutionary product comes along that changes everything…”

It certainly changed Apple from being a computer company worth $78bn at the end of 2006, to the $3.18trn company it is now. Even now the iPhone generates 58 per cent of the company’s total revenue, and is arguably the most important product developed so far this century.

Jobs’ successor Tim Cook has managed to carry on building his legacy, but it is the revenue from the iPhone that drives the business.

Not every company lasts

I’ll come back to Apple’s future in a moment, for there is a wider issue here about the changing fortunes of high-tech enterprises in general: how some manage to retain their primacy, while others fade or, worse, collapse.

Take Vodafone, here in the UK. It is still a huge mobile phone service, worth nearly £19bn, or $25bn. But back in 2000 it was worth over $100bn. By contrast, Apple was worth just $7.5bn in 2001, making it an amazing investment for anyone who bought then and held onto their shares.

The fate of Finland’s Nokia, which dominated mobile phone handsets, is remarkably similar. It still exists, mostly as a maker of network equipment. It is now worth $21bn, much the same as Vodafone, but in 2000, also like Vodafone, it was worth over $100bn.

There are many other examples of apparent commercial success stories that don’t really last. There is the BlackBerry, once dubbed the CrackBerry because it was so addictive. The company is now a cyber security specialist. There was Nokia’s own Communicator, a handset on which you could also do emails.

But the most extreme riches to rags story in the high-tech world, however, was that of Nortel Networks. It was a Canadian telecoms company that at its peak employed more than 90,000 people worldwide and was worth nearly $400bn in Canadian dollars (over $300bn in US ones).

Nortel accounted for more than one-third of all the corporations traded on the Toronto Stock Exchange and was the ninth most valuable company in the world. And it went bankrupt in 2009.

There have been allegations that some of Nortel’s technologies were stolen by the Chinese company Huawei in 2004 – allegations strenuously denied by Huawei – but actually Nortel was already in trouble following the bursting of the dotcom bubble in 2000, before the alleged industrial espionage is said to have occurred.

The world of business is, of course, full of examples of companies that soar and crash – think of the banking collapses of 2007 and 2008 – but that makes the durability of Apple, and in a slightly different way, Microsoft, all the more remarkable. Both raced on from being worth $1trn, to $2trn, on to $3trn, and every time those milestones were passed people wondered how they could keep it up.

They seemed, at least to the outside world, to be struggling to maintain momentum, until ChatGPT burst onto the scene in November 2022. Microsoft was quick to see the potential of AI developments, having invested in ChatGPT’s creator, OpenAI, back in 2019. Apple seemed to be lagging behind and, in their brutal way, the markets downgraded Apple shares and pushed up those of Microsoft which passed it in value.

Apple anticipates what we need

Now, with Apple Intelligence (as it calls its version of generative AI) the two companies are neck and neck. They are joined, at currently just under $3trn, by Nvidia, which produces the kit to help data centres manage the huge computing demands of AI.

That leads to a string of questions that will be crucial to the future growth of Apple. How much computing power can you put into a mobile phone? What can Apple Intelligence do that is better than the competing AI services that will be available on an Android handset? Will Apple be able to make the daily chores of life easier for us all?

Examples of what it might do include prioritising incoming messages, offering suggestions of images to attach to a birthday greeting, tips on how to improve your writing and correct spelling (useful for journalists?), generating your own emoji to attach to a message, helping you search videos, and so on and on.

All this leads to the biggest question of all. Is this what we want? And the answer is that no-one can possibly know, because we don’t know what we want until someone creates the product or service that meets those unknown needs.

We know that generative AI will, in Steve Jobs’ words, “change everything”; we don’t know how.

But the past two decades have taught the global investment community never to underrate Apple’s ability to understand what we want before we do. The surge in the share price of the past two days has reminded them of that lesson.

Need to know

A personal perspective on the rise and fall of great enterprises. One of the privileges of being a financial journalist is that you get a glimpse of companies from the inside – though you always have to be aware that you are seeing what they want you to see. Three such instances have been particularly memorable.

One was directly relevant to telecoms, for I found myself talking to a staff conference of Nortel Networks in Monaco around 2000. It was an extraordinary business. After the conference itself they had hired a circus to celebrate their success in Europe, and we sat around in a tent as the performers did their various acts. Then we had dinner, then dancing in the ring.

I have no idea what it must have cost, but it was the most extravagant corporate celebration I have ever been to. I still have the tie. The message was indeed that it was one of the top 10 most valuable enterprises in the world. There was no suggestion that anything might be wrong.

Indeed all the talk was about how this Canadian company was just at the beginning of its commercial expansion in Europe. You would have thought that I should have picked up some sense of unease, that this was just too over-the-top to last, but I didn’t.

A second was talking to the staff at the Royal Bank of Scotland in Edinburgh in 2005. They were terrific: enthusiastic, committed, humane and, most impressive of all, they were eager to use the clout of the bank in positive ways for society. “We are,” as one said to me, “so huge”.

That was right. For a short period in 2008 they did indeed become indeed the world’s largest bank in assets. Well, we know what happened there, but again I ought to have picked up something – some sense of unease – but I didn’t.

The third example was in South Africa in 2016, talking with Steinhoff International, a holding company that had put together a global empire employing at its peak 130,000 people. Again, a most impressive enterprise, owning among other companies Poundland here in the UK.

It had accounting problems, which became evident in 2017, and it filed for bankruptcy in 2019. Its former chief executive, Markus Jooste, had been notified of an arrest warrant and died from gunshot wounds in March this year. So a terrible story in many ways. And I must confess to picking up no signal of weakness in the business when I was there talking with the executives.

The moral of all this is that it is often very hard to see corporate problems before they reach a climax. The professional investors, despite their huge resources, don’t pick them up. Journalists, with great access but without the resources, can also struggle. And the regulators miss things too.

This is Armchair Economics with Hamish McRae, a subscriber-only newsletter from i. If you’d like to get this direct to your inbox, every single week, you can sign up here.

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