How Apple Keeps Bucking Bad News, and Why That Should Worry Investors

How Apple Keeps Bucking Bad News,Apple (AAPL) has become many things in the last decade: a standard bearer for innovation, a cultural phenomenon and -- as of this month -- the biggest tech company in terms of market value.

But success is making Apple something else: a paradox. Maybe even a conundrum. Because the company seems to be succeeding even as it faces an unprecedented series of missteps, snafus, setbacks and just plain bad luck.

Take the iPhone 4 launch: The new smartphone is enough of an improvement over the previous model to keep Apple at the leading edge of the mobile phone industry. But the launch itself was a messy affair, starting with the leak of a prototype to a tech blog. CEO Steve Jobs suffered technical glitches when he unveiled the device, and there were problems with pre-orders as well as privacy issues even before consumers got their hands on the device. Once they did, they discovered it dropped phone calls if they held it the wrong way.

But the iPhone 4 has been a stunning success. Apple sold 1.4 million units through the weekend, most of them to people who already owned earlier generations of iPhones. That's quite a bit of loyalty. Especially since most of those earlier phones received a hefty software upgrade last week to the same iOS that powers the iPhone 4.

But Apple's recent misfires haven't been limited to the iPhone. The company censored two apps – both of them graphic novels based on classic works of literature whose authors, James Joyce and Oscar Wilde, have battled censorship in the past. Apple ate some public crow to show that it knew it had messed up, but this wasn't Apple's first Hayes Code moment: The company censored a political cartoon a few months earlier. Elsewhere, Apple drew the attention of furrowed-browed regulators, as the FTC said it would investigate its approach to the iPhone's mobile ads.

The New Teflon Company


Apple hasn't needed any assistance in generating negative headlines, but it has received some from its iPhone network of choice, AT&T (T), and that company's knack for ill-conceived, consumer-unfriendly strategies. AT&T made the email addresses of some iPad buyers hacker-ready, introduced data usage caps that angered owners of 3G iPads, and botched the pre-order system for the iPhone 4.

All of these blunders have taken place just in the past month. A lot of large companies have suffered a similar number of brush fires and PR embarrassments but few have done so in such a short time span. Moreover, companies that do face a rash of bad news often find it difficult to bounce back: The drumbeat of criticism and jokes telegraphs a message of incompetence.

But not Apple – no, Apple is emerging shinier, stronger, more valuable than ever. It's the new Teflon company, the DuPont (DD) of the 21st century.

Investors not only shrugged off all the bad news, they celebrated enough to ratchet the stock up to a record high. Its market cap, currently $245 billion surpassed Microsoft's (MSFT) $213 billion, one of those technical factoids that ends up speaking volumes about an industry, in this case Silicon Valley and its bitter, decades-long rivalries.

Some might be tempted to argue that all of this shows Apple's resilience to the vicissitudes of the business of technology. But I wouldn't. To me, it's a worrying sign that Apple is focusing on near-term growth while maintaining a cavalier approach to its long-term prospects.

A Bad Case of Next-Quarteritis


Much of Apple's recent rally is tied to optimism about the current quarter. The launch of the iPad, which has sold more than 3 million units since April 3, and the release of the iPhone 4, are causing analysts to revise their estimates for the quarter and the rest of the year upward. And it's hard to argue with that optimism, at least in the near term.

But there are just too many questions facing Apple's future. How will the iPhone fare now that Android is finally starting to eat into its market share? What will happen to iPad sales as new tablets -- driven by Android, Chrome, WebOS or other operating systems -- offer challenges?

And what's the follow-up act to the iPad? The iPhone emerged out of the seed of an idea that Jobs had about the iPad -- something he may have been been stewing over ever since the failure of the Newton. Apple had a wonderful three-act play with the iPod, iPhone and iPad. What's the fourth act?

There is an aura of invincibility surrounding Apple that is drawing out the contrarians. No company is truly invincible, of course, and there are investors who are sniffing around for one that appears to be invulnerable.

And so we're starting to see opinions on Wall Street that suggest, with a lick of bearish lips, that Apple is too big to succeed, as Bloomberg recently put it. Or a series of scenarios that spell out things that could go wrong for Apple, causing the stock to retreat enough that Microsoft regains the market-cap crown.

Bernstein Research analyst Toni Sacconaghi compiled such a list – ranging from Apple's inability to transition from underdog to top dog, the new regulatory scrutiny, and the threat of margin pressure. That last one is the poison that can exterminate investor enthusiasm, as eBay (EBAY) and Yahoo (YHOO) have learned the hard way.

Maybe this recent series of missteps is a one-time problem for Apple. If so, Apple will recover quickly enough. If not, Apple may be coasting along on the momentum of its longtime strengths in innovation and marketing. But those strengths can't last forever, and once they start to weaken, investors will stop shrugging off the negative news.

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Rebecca Hurst

There are so many different knock offs of the Ipad and many other Apple products now. I have an acer iconia dual screen touchpad from http://madatchina.com that works fantastic. You can get the same kinds of products from other companies without having to pay for the brand name.

August 15 2011 at 1:35 PM Report abuse rate up rate down Reply