November 2011 – Testing

His Magical Thinking: “Steve Jobs” by Walter Isaacson

The NotMakingThisUp Book Review

So how did a guy who was described by one of his closest friends as “reflexively cruel and harmful to some people” and by the mother of his first child as “an enlightened being who was cruel”;

Who honed a “trick of using stares and silences to master other people”;

Who took a bonus meant to be split with his best friend and future co-founder of Apple, Steve Wozniak—which “Woz” had earned for the duo by designing a video game with fewer chips than a preset maximum—and still denied it after he had become a multi-billionaire (Wozniak got paid all of $350 for his efforts);

Who was described as sometimes “abusive” by an early business partner, as “the opposite of loyal…he has to abandon the people he is close to” by a longtime friend and as “frighteningly cold” by another;

Who denied he was the father of his first child and according to the child’s mother “didn’t want to have anything to do with her or with me”;

Who threw a “tantrum” when Apple’s first president gave him employee badge #2 while Wozniak got badge #1, then demanded, and got, badge #0;

Who shouted down strangers at business meetings by yelling “Let’s stop this bullshit!” and wooed engineering prospects by telling them “Everything you’ve ever done in your life is shit, so why don’t you come work for me?”;

Who parked his car in the handicapped spot at the front of his building so frequently that an Apple employee “painted over the handicapped wheelchair symbol with a Mercedes logo”;

Who was described by his first supervisor as “a goddamn hippie with b.o.” and was considered by his first boss at that same company to be “not a great engineer”.…

How, exactly, did Steven P. Jobs become the unstoppable force who, by intelligence, intuition and sheer willpower lead the creation of not one, but two dominant companies of their times, and directly affect the lives of more human beings than any other individual of his generation?

For the answer to that question, read this book.

What it mainly comes down to—and we’re not giving anything away here, because you’ll want to read it all—is that Jobs simply used what Apple veterans called his “reality distortion field” to talk people into doing things they didn’t think they could do.

One of the best—among many—stories along this line occurs when an Apple engineer tries to explain why an early beta of the Mac operating system is taking so long to boot up, too long for Jobs:

…Jobs cut him off. “If it could save a person’s life, would you find a way to shave ten seconds off the boot time?” he asked. Kenyon allowed that he probably could. Jobs went to a whiteboard and showed that if there were five million people using the Mac, and it took ten seconds extra to turn it on every day, that added up to three hundred million or so hours per year that people would save, which was the equivalent of at least one hundred lifetimes saved per year. “Larry was suitably impressed, and a few weeks later he came back and it booted up twenty-eight seconds faster,” Atkinson recalled. “Steve had a way of motivating by looking at the bigger picture.”

And Isaacson tells the story of that bigger picture very, very well—mainly by letting other voices do the talking.

They are the voices of those who were there early in Jobs’ career, when the defining impetus of his life—being given up for adoption—was shaping the personality that would alternately fascinate, disgust, energize and terrorize those who encountered that “reality distortion field.”

They are the voices of those who influenced Jobs along the way (Atari founder Nolan Bushnell’s voice is especially delightful, and the simplicity of his instructions for Atari’s first Star Trek game—…uncomplicated enough that a stoned freshman could figure them out… “1. Insert quarter. 2. Avoid Klingons”—became a guiding principle behind Jobs’ own creations).

They are the voices of those who were there when the Apple II, the Mac, the iMac, the iPod, the iPhone and the iPad were born; when Jobs was creating—and failing with—NeXT; when Jobs returned to Apple somewhat older and somewhat wiser, and still a perfectionist; and when Pixar was saved and nourished into an animation powerhouse by Jobs.

Also they are the voices of those with him when he was dying.

The book flows quickly and it flows without a hitch, because even though the author spent a great deal of time with Jobs in the waning days of his life, he does not interject himself, except when absolutely necessary to tell the story.

Also, it’s not written as a straight chronology: it jumps ahead at times—for example, to explain Jobs’ bond with Jony Ive, Apple’s chief design guru, before going back to the ‘aha’ moments that led to the iPod, the design of which Ive and Jobs shaped together—and always to good effect.

And, as you’ve already figured out, Isaacson sugarcoats very little.

Most important of all, along the way in this great story you’ll learn where Jobs got his love of craftsmanship; how the first product Wozniak and Jobs came up with was in fact illegal; why Apple was named “Apple”; how employees manipulated Jobs to (sometimes) reach the conclusion they thought he should reach; why the first iPod was all-white (even the ear-buds); how Jobs’ work at NeXT and Pixar informed his return to Apple; how Jobs’ exile in Italy after his first Apple career influenced the floors you walk on today in every Apple store; why Jobs wore turtlenecks; what he told Larry Page about how to manage Google, and, more interestingly, what he told the CEO of Corning while successfully persuading him to resurrect a failed Corning glass R&D project into what became the rugged but clear glass screen on your iPhone; and, over and over, how the perfectionist Jobs could obsess over any detail when it came to the design of a product, a hotel room, a business card—even an oxygen mask in the hospital as he lay near death.

Indeed, the word “obsess” appears nine times in this book, the word “tantrum” eight times, and the phrase “Jobs insisted” appears—we are not making this up—28 times in the book.

Jobs’ favorite derogatory term for bad work—“shit”—appears early and often, in various forms (“this is shit” appears four times, “it’s shit” once); while “sucks,” another favored Jobs adjective for bad people or bad things, appears five times, including once when Jobs simply combines the two adjectives into “he’s a shithead who sucks.”

Still, the word that sticks in the mind after reading all of Steve Jobs is neither. In fact, it is in no way negative.

The word is “magical,” and it appears 19 times in the book, including three times when it’s used by Jobs describing a technology or a product.

But the most poignant, and powerful use of the word comes from Jobs’ wife who, in explaining how he at first avoided coming to terms with his initial cancer diagnosis—in a similar fashion to the way he routinely avoided coming to terms with the limitations of fellow human beings, thereby pushing them into making products that literally changed the world—summed up the mindset that nursed Pixar from a struggling graphics design shop into the savior of Disney and, at the same time, pushed Apple onto a path that would make it the most valuable company in the world before he died.

It was, she called it, “his magical thinking.”

So read this book.

If you’re a teenager who “thinks different” and wants to understand how Jobs took that same quality and turned it from a liability to a world-changing asset; if you’re a geek who wants to understand how Jobs identified break-through technologies and made them commercial; if you’re an investor who wants to understand how a company learns less from great success than from failure; if you’re a board member who wants to understand how destructive a creative genius can be, and how to harness that genius without destroying a company; if you’re a CEO who wants to discover what makes a product a flop like Microsoft’s Zune instead of a hit like the iPod; if you’re a design student who doesn’t care about business but wants to understand why the iPad feels so comfortable to pick up (hint: rounded, not square, edges); if you’re an advertiser who wants to understand how two frames can be the difference between a “great” TV commercial and a “shit” commercial; if you don’t care about any of that but just want to understand how all these products came to be…read this book.

It’s great.

Maybe even insanely great.

Jeff Matthews

Author “Secrets in Plain Sight: Business and Investing Secrets of Warren Buffett”

(eBooks on Investing, 2011) Available now at Amazon.com

Apple: For What It’s Worth, Part II

“All I said was I liked the pen…”

—Jerry Seinfeld, “The Astronaut Pen”

We considered naming this follow-up to last month’s “Apple: For What It’s Worth” column after a different song than the Stephen Stills classic—something more current, more relevant and just plain zippier…something, say, by the Arctic Monkeys (which, as long-time readers know, is the adopted house band for this virtual column).

And the Monkeys’ “D is for Dangerous” would have certainly fit, because, as it turned out, we were treading on dangerous turf merely by pointing out one interesting bit of data regarding Apple that was not going—as all things Apple have been going—“up and to the right,” to use one of Wall Street’s Finest favorite expressions.

Specifically, we highlighted the fascinating, abrupt slowdown in last quarter’s sales growth at Apple’s retail stores, along with the (literally unprecedented, for Apple) year-over-year decline in profits from those stores, plus the fact that not one of Wall Street’s Finest asked a question about either of those facts on the subsequent earnings call (no surprise there, really).

Turns out we probably should have stuck with the good stuff—like pointing out that our August 2010 prediction, reported here, that iPad sales could hit 50 million a year shortly (at a time when Wall Street’s Finest were saying 15-20 million for 2012), looks on target: the 2011 calendar year number should be 40 million; 2012 north of 50 million.

But we did not point out the great iPad sales, because, after all, everybody knows how well the iPad is doing—although there’s something interesting in the Amazon.com tablet rankings…well, never mind about that—and the modest blemish of a shortfall in the retail channel seemed far more interesting from an analytic point of view: we’d never seen numbers shift so quickly at a high-quality retailer.

The reaction here was swift and, in most cases, harsh—mainly along the lines of “Everybody knows Apple missed sales because everybody was waiting for the new iPhone and Tim Cook said so and you don’t get it and who are you to say Apple is falling apart…”

The whole thing called to mind the Seinfeld “Astronaut Pen” episode, when Jerry admires his father’s neighbor’s pen, “the kind the astronauts use” so the neighbor gives Jerry the pen but regrets it so much he later claims Jerry stole the pen, which causes a fistfight at a banquet given in Jerry’s father’s honor, and when Jerry is pushed to the microphone by his mother to calm things down, he finally pleads, “All I said was I like the pen…”

And all we said was, “Apple’s retail stores seem to be losing their mojo.” That’s all.

For the record, we’re big fans of the Apple stores—although initially, when the company began rolling them out in 2001, we would have put money on their being doomed to failure. Running a good retailer is a lot harder than it looks, and Dell had already been taking share from brick-and-mortar operators by going the opposite route—selling direct. In those days, the disintermediation of the Best Buys of the world seemed like a forgone conclusion.

But Apple’s retail stores are, in no way, shape or form, comparable to the Best Buys of the world.

Apple zeroed in on the customer experience like no other retailer since Nordstrom (see a really excellent history here), and as the product set grew from Macs to iPods to iPhones, and as Windows users became reacquainted with the Apple brand thanks to those non-computer products, the stores became Apple’s best weapon in shifting computer market share away from Microsoft: they provided fed-up but hesitant Windows PC users the ability to get comfortable with Macs in an environment that offered terrific, low-key help with no sales pressure.

Contrast the experience at an Apple store, where even grey-hairs wander inside to browse, check their emails or ask for help, with the experience at a Best Buy, whose business model has become so dependent on selling extended warrantees that a mildly non-tech-savvy consumer wouldn’t go inside to ask for help if they were being held hostage by a crazed gunman in the parking lot:

Best Buy Sales Salesperson: “Welcome to Best Buy! How may I help you?”

Hostage: “I’m being held hostage by this crazed gunman.” Best Buy Sales Salesperson: “Do you need an extended warranty on anything?”

Hostage: “No, I need you to call the police.”

Best Buy Salesperson: “I can’t help you there, but perhaps that crazed gunman next to you needs an extended warranty on his sawed-off shotgun?”

Crazed Gunman: “You sell extended warrantees on sawed-off shotguns?”

Best Buy Salesperson: “Certainly, it’s all part of our slogan, ‘Customer Centricity’!”

Hostage: “What do warrantees on sawed-off shotguns have to do with ‘Customer Centricity’?”

Best Buy Salesperson: “‘Customer Centricity’ is about carefully listening to the customer’s needs, evaluating the most relevant options to deal with those needs, and then selling him or her an extended warranty.”

Hostage: “I don’t need an extended warranty. I need the police.”

Best Buy Salesperson: “I can’t help you there, but I can explain the fake benefits of our extended shotgun warranty, which covers any make or model shotgun except those that have been fired, handled, pointed, dropped, dismantled, aimed, loaded, touched, looked at, rented, borrowed, purchased—”

Crazed Gunman, turning gun on himself: “I can’t take this anymore.”

Hostage, grabbing the gun: “Me first.”

Not for nothing Apple stores as small as 4,500 square feet of selling space with a handful of young, mild-mannered Apple enthusiasts outsell Best Buy stores with 45,000 square feet of fire-breathing, warranty-selling salespersons on the prowl.

How then to explain the sudden, one-quarter fall-off in sales growth at those stores? There are three reasonable explanations:

For starters, Apple has been warning for some time that extending its iPhone sales to telecom carriers around the world would affect the growth in Apple’s own retail store sales. And indeed, most iPhone users we know bought theirs at Verizon or AT&T, not directly with Apple. However, this channel saturation has been going on for a couple of years and wouldn’t explain the fall-off from a +36% sales gain to a mere 1% sales gain in one quarter’s time.

Second, as readers noted (and as spelled out in this chart-happy piece here), Apple’s sales were coming up against very tough comparisons thanks to the timing of past product launches when the iPhone 4S glitch occurred. While this is a reasonable mathematical explanation for part of the slower sales growth, it does not explain the sudden drop in profits: after all, difficult sales comparisons on their own don’t tend to lead to significant profit declines for retailers.

Third, as we noted in “For What It’s Worth”—and as many readers reminded us—Apple’s iPhone sales were stunted by as much as $1.5 billion last quarter as customers waited for the “iPhone 5” (expected by many to be the first LTE iPhone) which didn’t hit stores until October as the iPhone 4S. Indeed, we know several people who waited, and now own the 4S.

Still the impact on the retail stores from the delay does not alter the picture as much some might have thought. Apple’s retail stores comprise a bit more than 10% of total Apple sales, and it is a good bet that the stores sell a lower mix of iPhones (after all, you can buy an iPhone or iPad at Verizon and AT&T, but not a Mac).

Therefore, of the $1.5 billion in theoretical “lost sales” from consumers holding off for the iPhone 4S, a maximum of $150 million might have come through the stores. Add those deferred 4S sales back to the reported sales, and the meager 0.8% increase in year/year retail store sales becomes a 5% gain—which is, still, a significant fall-off from the 36% of the previous quarter.

Furthermore, the unheard-of 26% decline in store profits in the quarter would have only been reduced to a 15% drop, adjusting for the lost 4S profits. That’s still a record profit decline at the retail stores—even worse than the 12.8% drop during the heart of the financial crisis.

So, yes, we know Apple’s iPhone sales were up against difficult comparisons; yes we know Apple’s stores do volume that any retailer would kill for; yes we know Apple has the biggest share of smartphone gross profits; yes we know Apple is taking market share like you dream about; yes we know the retail stores are a small minority of the company’s overall sales; yes we know Apple is still growing faster than any peer, whatever the @%#@# some lousy #%$##@#@ says. (Indeed, we’ve had fun over the years highlighting Microsoft’s failed efforts to dent the iPhone juggernaut, here.)

But to a retail analyst, any abrupt slowdown—for whatever reason—matters. After all, no retailer—except, maybe, Sears—plans for a decline in profits. And we’d bet the decline in profits—as well as the flattening out of visitors to the Apple stores—was not in the company’s budget.

As for the current quarter, nobody should expect a further year/year slowdown in Apple retail store sales. For one thing, the 4S is making up for the lost sales right now; for another, there was the “buy one for Steve” mantra of many Apple faithful—including Apple co-founder Steve Wozniak, who was first in line at his local Apple store to buy a 4S as a show of support following Jobs’ October 5th death.

Furthermore, Apple just opened two more stores in China, and those are among the most productive retail stores in the world, for any retailer (estimates run well north of a quarter-billion in sales each, annually).

And if Apple, as expected, adds China Telecom to the mix…well, the retail store numbers should pick up, and pick up a lot.

So expect nothing but positive updates on Apple in these virtual pages, like the fact that in the last week of October of 2011, the iPad held 2 of the Top 10 tablet spots at Amazon.com, compared with 6 of the Top 10 tablet spots in the last week of October 2010.

Oh, wait a minute—that’s not actually positive, is it?

Nevermind…

Author “Secrets in Plain Sight: Business and Investing Secrets of Warren Buffett”

(eBooks on Investing, 2011) Available now at Amazon.com

The content contained in this blog represents only the opinions of Mr. Matthews. Mr. Matthews also acts as an advisor and clients advised by Mr. Matthews may hold either long or short positions in securities of various companies discussed in the blog based upon Mr. Matthews’ recommendations. This commentary in no way constitutes investment advice, and should never be relied on in making an investment decision, ever. Also, this blog is not a solicitation of business by Mr. Matthews: all inquiries will be ignored. The content herein is intended solely for the entertainment of the reader, and the author.

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