Next-generation iPhones likely to focus on internal improvements.
Apple CEO Tim Cook Speaks at Goldman Sachs Technology Conference
Cook has spoken at the annual conference a number of times (2007, 2008, 2010), but this will be his first time at the event in the role of Apple CEO. While he has not made any major announcements at the venue in the past, he has at times offered an interesting perspective into Apple's business.
Tim Cook is on-stage. Opens with "safe harbor" statement noting that his speech may include "forward-looking statements." Goldman Sachs analyst Bill Shope is conducting the interview.
What should investors know about Apple's relationship with the supply chain and the workers within it?
First thing I would want everyone to know is that Apple takes working conditions very seriously, and we have for a very long time. Whether workers are in Europe or Asia or the United States, we care about every worker. I've spent a lot of time in factories, personally. Not just as an executive. I worked at a paper mill in Alabama and an aluminum plant in Virginia. Many of our top executives visit factories on a regular basis. We have hundreds of employees based there full time.
We are very connected to the process and we understand working conditions at a very granular level. I realize that the supply chain is complex and I'm sure that you realize this. The issues around it are complex. Our commitment is simple: every worker has the right to a fair and safe work environment, free of discrimination, where they can earn competitive wages and they can voice their concerns freely. Apple's suppliers must live up to this to do business with Apple.
We also believe that education is the great equalizer and that if people are provided the skills and knowledge, they can improve their lives. We've put a lot of effort to supplying educational resources to our workers throughout our supply chain. We supply free classes in many place thoroughout our supply chain. More than 60,000 employees have attended these classes, which is pretty amazing when you think about it.
If you take all these employees and move them to one location, it would be larger than Arizona State -- which is the largest college in the United States. This is a powerful stepping stone for workers looking to enhance their careers and their lives.
You can read the details on problems we're looking to fix on our website, but I can tell you that no one in our industry is doing more to improve working conditions than Apple. We are constantly auditing facilities going deep into the supply chain, looking for problems, finding problems and fixing problems. We report everything because we believe transparency is so very important in this area. I am so incredibly proud of the work that our teams are doing in this area. They focus on the most difficult problems and they stay with them until they fix them. They are truly a model for the industry.
We think the use of underaged labor is abhorrent. It's extremely rare in our supply chain, but our top priority is to eliminate it totally. We've done that with our final assembly and we're now working with vendors farther down in the supply chain. If we find a supplier that intentionally hires underage labor, it's a firing offense.
We don't let anyone cut corners on safety. If there is a problem on safety, we seek out the foremost experts and set a new standard and apply that to the entire supply chain. We focus on the details. If there is a fire extinguisher missing from a cafeteria, that facility doesn't pass inspection until that fire extinguisher is in place.
We are continuing to focus on problems endemic to our industry like excessive overtime. Our code of conduct has a cap of 60 hours per workweek. We have consistently found violations of this code over the course of our time, so at the beginning of this year we announced that we are determined to drive widespread change. We have begun to manage working hour at a very micro basis.
In January, we collected weekly data on over a half million workers in our supply chain. We had 84% compliance. This is significantly improved from the past, but we can do better. We're taking the unprecedented step of reporting this monthly on our website, so it's transparent to everyone what we're doing.
The Fair Labor Association began an audit of our final assembly vendors. We started with this last year and in January we were the first technology company to be welcomed into their assembly. Their audit is probably the biggest audit in manufacturing in history. I'm looking forward to seeing the results. We know that people have a very high expectation of Apple. We have an even higher expectation of ourselves. Our customer expect us to lead and we will continue to do so. We are blessed to have the smartest and most innovative people on earth. We put the same kind of effort and energy into supplier responsibility as we do with our new products.
That is what Apple is all about.
37 million units of iPhones shipped. When do we run into the Law of Large Numbers? What are the growth opportunities coming up?
37 million is a big number. It was a decent quarter. It was 17 million more than we'd ever done before. We were pretty happy with that, but let me give you the way I look at the numbers. As I see it, that 37 million for last quarter represented 24% of the smartphone market. There's 3 out of 4 people buying something else. 9 out of 10 phone buyers are buying something else.
Handset market is projected to go from 1.5 to 2 billion units. Take it in the context of these numbers, the truth is that this is a jaw-dropping industry with enormous opportunity. Up against those numbers, the numbers don't seem so large anymore. What seems so large to me is the opportunity.
What we're focusing on is the same thing we've always focused on. Making the world's best products. We think if we stay laser-focused on that, and continue to develop the ecosystem around the iPhone, that we have a pretty good opportunity to take advantage of this enormous market.
The biggest opportunity is the emerging markets. Large portion of that is the prepaid market. Apple has done very well but the wholesale iPhone price point is nowhere near what we would expect in the prepaid market. How do you make it more affordable to those markets?
Those markets are critical. The smartphone market is projected to be 1 billion units in 2015, 3 years from now. 25% of that is projected to come from China and Brazil. Just two of those markets -- 25% -- obviously those are very critical markets, but there are others as well.
We've been very focused on China. We've had incredible success with iPhone -- we've gone from a few hundred million in revenue to last year with $13 billion. We've been really focused on trying to understand there market there and taking those earnings to other markets. As it turns out, not very many people agree with me on this, probably.
What I see is that there is a lot of commonality in what people around the world want. Everyone in every country wants the best product as it turns out. They're not looking for a cheap version of the best product -- they're looking for the best product.
In the emerging markets there are very big differences in go-to-market. In most of the developed market, the carrier owns most of the distribution. In emerging markets, the retailer has most of the distribution. The whole go-to-market has to be changed significantly. Last year, we covered price points in the subsidized markets from $0 on up. That doesn't translate to zero in the prepaid market, but we're covering more price points there.
The paramount thing is the product. It is the focus. Of course distribution, we've recognized the difference there and in purchasing power. Unlike many people, I don't subscribe to the premise that prepay is prepay is prepay. We convinced China Unicom to try postpay. It wasn't big there but they tried it and it's working really well. Postpay is great for everyone because customer gets a cheaper phone and the carrier locks in a customer. It's a different way to look at the issue and it's been successful in China.
When Apple introduced the iPod in 2001, when we launched the iTunes Music Store and launched that on Windows, the iPod created a halo for the Mac. For 23 straight quarters -- 6 years -- we've outgrown the market on the Mac.
The halo that was created by iPod for the Mac, was created in developed markets. It was created in the US, Western Europe, Japan, Australia, Canada. It didn't work nearly to the same level in Eastern Europe, Middle East, Africa, China, Latin America. People were already getting music from their phones. The world changed for us when the iPhone was launched.
The iPhone introduced Apple to millions of people -- our brand -- to people who had never met Apple before. Now, it's interesting to look -- take China as an example -- last year the Macintosh grew more than 100% in China, year-over-year. Not on a big base, but 100% is pretty good. The market grew 10%, so we outgrew the market 10x.
The iPhone is creating a halo for the Macintosh. iPhone has also created a halo for iPad. You can definitely see the synergistic effect of these products, not only in developed markets, but also in emerging markets where Apple wasn't resonant for most of its life.
In 2007 -- we didn't launch the iPhone until 2008. In 2007, the revenue combined from Greater China, several other parts of Asia, India, Latin America, Eastern Europe, Middle East, Africa, was $1.4 billion. Revenue last year for that same group of countries was $22 billion. We're only on the surface. That's how I feel. We focused mainly in China. Last year we began to focus increasingly more in Brazil and Russia.
Shifting to the iPad, it's been around 7 quarters of iPad shipments. You've shipped 55 million units and it's the fastest product ramp for any Apple device in history. What is it about that item that has caused that ramp to occur so quickly and what does that tell you about the tablet market long term?
This 55 million is something no one would have guessed. It took us years to sell iPhones, Macs and iPods. This thing is on a trajectory that's off the charts. The product is incredible, the pace of innovation on the product has been incredible. We went from iPad 1 to iPad 2 in fairly short order. The ecosystem is 170,000 apps that are optimized for iPad.
The reason that it is so large in my view is that the iPad has stood on the shoulders of everything that came before it. The iTunes Store was already in play, the App Store was already in play. People were trained on iPhone. They already knew about multitouch. Lots of things that became intuitive when you used a tablet, came from before. I gave one to my mother and she knew how to use it from watching the commercial.
It's amazing how the product has captured so many people. My mother uses it, my 7-year-old nephew uses it, at Starbucks everyone is using one, in education it's being used, in the enterprise it's being used in big numbers.
From my point of view, it's the fastest adoption across a wide range that I've ever seen before.
You expect it to be larger than the PC market over time.
We started using it at Apple well before it was launched. We had our shades pulled so no one could see us, but it quickly became that 80-90% of my consumption and work was done on the iPad. From the first day it shipped, we thought that the tablet market would become larger than the PC market and it was just a matter of the time it took for that to occur. I feel that stronger today than I did then. As I look out and I see all of these incredible usages for it, I see the incredible rate and pace of innovation, and the developers -- If we had a meeting at this hotel, and we invited everyone doing cool stuff on PC, we wouldn't have anyone here.
If you invited everyone working on iOS or on that other operating system, you wouldn't be able to fit everyone! That's where the innovation is! That doesn't mean the PC is going to die. I love the Mac and it's still growing and I believe it can still grow. But I believe that tablet market can replace the unit sales of the PC market, and it's just a matter of the speed at which that happens. It's too much of a profound change in things for that to not happen. That's just my opinion.
Now, just about every company is launching a tablet. When we look at the competitive landscape, no one really made a dent in Apple's market. We see some innovative models, Amazon for instance. Companies undercutting the iPad. I know it's not all about price, but what do you think about that?
Price is rarely the most important thing. A cheap product might sell some units. Somebody gets it home and they feel great when they pay the money, but then they get it home and use it and the joy is gone. The joy is gone every day that they use it until they aren't using it anymore. You don't keep remembering "I got a good deal!" because you hate it!
What happened last year, everybody that was in the PC industry and everybody in the phone industry decided they had to do a tablet. There was 100 tablets put on the market last year! They aimed at iPad 1 and by the time they came out with something we were on iPad 2. We wound up with 170,000 apps and I'm not sure there is 100 yet on the other platform. At the end of the day, people want the great product. Amazon is a different competitor. They have different strengths. They'll sell a lot of units. They have and they will.
But, the customers that we're designing our products for are not satisfied with limited function types of products. I think the real catalyst of the tablet market will be innovation and pushing the next frontier. Honestly, we'll compete with everybody. I love competition. As long as people invent their own stuff, I love competition.
How cannibalistic are tablets on PCs? We want to figure out how quickly the PC market falls down on tablets. As a company that offers general purpose computers and the iPad, how do you feel about it?
iPad has cannibalized some Mac sales. The way that we view cannibalization is that we prefer to do it to ourselves than let someone else do it. We don't want to hold back one of our teams from doing the greatest thing, even if it takes some sales from another product area. Our high-order bid is "we want to please customers and we want them buying Apple stuff."
I don't predict the demise of the PC, I don't subscribe to that. Given what we've seen, I believe the iPad is cannibalizing some Macs but more PCs. There are more of them to cannibalize than Macs so thats a plus to us. Tablets in general will cannibalize the PC. I think what it will do largely is that when you're competing with someone -- maybe politicians do this, I'm not big in politics -- it forces you to sharpen your message and tell who you are.
It'll be good for the PC industry because there will be this strong competitor and tablets will innovate like crazy and customers will decide which to buy. There will be a strong PC industry but tablets will be stronger in units.
Shifting to your balance sheet, you have just under $98 billion in cash and liquid investments. In the past you've used your cash very sparingly. Why has there been a reluctance to buy back stock and/or to issue a dividend? Do we expect that to change?
I disagree with your use of the word sparingly. We've spent billions in the supply chain. We've spent billions in acquisition including on IP. We've spent billions on retail, the infrastructure of the company, the data centers et cetera.
Yes, we still have a lot. I would say we're judicious and deliberate. We spend our money like it's our last pennies. I think shareholders want us to do that. They don't want us to act like we're rich. We've never felt that way. It may sound bizarre but that's the truth. In terms of our approach to cash, I've said since becoming CEO that I'm not religious about this. I'm not religious about holding it or not holding it. We're in very active discussions at the board level on what we should do.
I think everyone would want us to be deliberate and really think it through. That's what we're doing. We're not going to go have a toga party and do something outlandish. People don't have to worry that it's burning a hole in our pocket.
Have the discussions become more active? The point I'm getting to, is the cash balance is so large, is there a point that it becomes inefficient to carry?
It's not new that we're discussing it. We are discussing it more and in greater detail. The balance has risen to the point you've made and I think it's clear to everyone and I'd be the first to admit that we have more cash than we need to run the business on a daily basis.
I only ask for a bit of patience so we can do this in a deliberate way and make the best decision for the shareholders.
Looking at the living room, you've said Apple TV is still on the hobby stage. What has the challenges been saying it's on the hobby stage or going into the future?
In terms of existing product, we sold just shy of 3 million Apple TVs in the past year. It's very cool product and I can't live without it. We sold 1.4 million last quarter. It's clearly ramping, but the reality -- the reason we call it a hobby -- we don't want to send a message to our shareholders that we think the market for it is the size of our other businesses. The Mac, the iPad, the iPod, the iPhone. We don't want to send a signal that we think the length of that stool is equal to the others. That's why we call it a hobby.
Apple doesn't do hobbies as a general rule. We believe in focus and only working on a few things. So, with Apple TV however, despite the barriers in that market, for those of us who use it, we've always thought there was something there. If we kept following our intuition and kept pulling the string, we might find something that was larger. For those people that have it right now, the customer satisfaction is off the chart. We need something that could go more main-market for it to be a serious category.
If you don't have one, you should get one because it's a really cool product.
Wanted to touch on Siri and iCloud. How important is Siri and iCloud to Apple going forward?
Siri and iCloud are profound. If you take iCloud -- rewind 10 years. Steve announced the strategy for Apple as the hub for someone's digital life. Out of that we developed iLife. You could connect many gadgets off of this and sync all of your music and photos. You can edit photos and movies. The Mac becomes the repository.
iCloud turns that on its head. It recognizes that in the last 2-3 years, we live off multiple devices. It's no longer a great customer experience to have to sync your iPad to your Mac and then your iPhone to your Mac and then resync your iPad to your Mac. This is a hair-pulling exercise. iCloud recognizes the Mac or PC as just another device and now your life is a lot easier. We have 100 million users of iCloud -- we just launched it in October! This is unbelievable.
I view iCloud not as something with a year or two product life -- it's a strategy for the next decade or more. It's truly profound.
Siri... for years if you were a PC or Mac user, you used a physical keyboard and mouse for input. You pretty much did that for a long, long time. There wasn't a great deal of revolution. Evolution, yes. All of a sudden, Apple comes out with Multitouch on the MacBook Pro and then extended that into phones and tablets and has completely changed those industries.
Siri is another profound change in input. All of us wanted this to work, it's sort of having a video call with FaceTime -- AHA! It can work! -- Siri is still a beta product, but now I feel like I can't live without it. They're not something we run P&L's on, we don't believe that. We run the company from the top and don't worry about the iCloud team or Siri team making money. Measuring things at that level wouldn't achieve anything.
Both of these things go in the profound category. They're things that you'll talk to your grandkids about that are profound changes.
Obviously you've stated several times that you want to preserve on Apple's culture and strategy. When we look back at CEO changes, every CEO leaves their mark on strategy and culture. What do you think your leadership will change at Apple? What are you determined to maintain?
The most important is the second part. Apple is this unique culture and unique company. You can't replicate it. I'm not going to witness or permit the slow undoing of it. I believe in it so deeply.
Steve grilled in all of us over many years, the company should revolve around great products. We should stay extremely focused on a few things, rather than try to do so many that we did nothing well. We should only go into markets where we can make a significant contribution to society, not just sell a lot of products. These things, along with keeping excellent as an expectation, these are the things that I focus on.
Those are the things that make Apple this magical place that really smart people want to work in, and do not just their life's work, but their life's best work. I want to look out at an audience and see people using iPhones and see people using iPods at the gym, or going to Starbucks and seeing people use the iPad. These are the things that bring a smile to my face. There is no substitute for that.
We're always focused on the future. We don't sit and think about how great things were yesterday. I love that trait, I think it's the thing that drives us all forward. Those are the things that I'm holding on to and it's a privilege to be a part of it.