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When Apple announced last week that it will soon replace Intel processors with its own, I had a flashback to 1993. Morgan Stanley\u2019s technology investment banker Frank Quattrone called me in New York: \u201cJohn Sculley\u201d\u2014CEO of Apple\u2014\u201cwants to meet with you Friday,\u201d he said. It was Thursday morning. \u201cAbout what?\u201d I asked. \u201cI don\u2019t know, do your virtual thing.\u201d I booked the 9 p.m. to San Francisco and the redeye home.<\/p>\n\n\n\n
Meanwhile, I was on the phone all day with the banking team to help create \u201cthe book.\u201d No investment banker worth his salt shows up without a spiral-bound pitch book put together by lowly associates pulling all-nighters, with strategy ideas and suggested transactions (investment bankers\u2019 payday!) to solve the company\u2019s future problems.<\/p>\n\n\n\n
Back then I was intrigued by companies organized in horizontal layers attacking vertical behemoths. IBM was a vertical giant and did everything from soup to nuts: chips, hardware, operating system, software, applications, services. They had 50% of the computer industry\u2019s revenue but 90% of its profits. They used FUD\u2014fear, uncertainty and doubt\u2014to freeze out competitors.<\/p>\n\n\n\n
But IBM was vulnerable. A loose horizontal confederation threatened its power: Intel processors, Microsoft\u2019s operating system, Western Digital hard drives and Compaq hardware, along with Lotus, Adobe and Microsoft applications, added up to a \u201cVirtual IBM\u201d and eventually toppled the giant. The same thing happened in the late 1990s with AT&T. A horizontal internet of network equipment, browsers and websites created a Virtual AT&T and toppled the vertically integrated telecom.<\/p>\n\n\n\n
The team met with Mr. Sculley, his chief financial officer and general counsel, and I got to make the pitch. I recently dug up my dusty copy of that pitch book to remember what I said. Apple had \u201csuperior software and ergonomic hardware design\u201d but needed to \u201cfocus on mobility as a natural offspring of smaller form-factor computing.\u201d Not bad, in hindsight, though a decade early.<\/p>\n\n\n\n
But Apple\u2019s stock, at 14 times earnings, was valued like commodity PC maker Compaq instead of software and platform company Microsoft with its 26-times multiple. So the strategy was to create\u2014you guessed it\u2014a \u201cVirtual Microsoft.\u201d I advised the execs to \u201cneutralize Microsoft\u2019s strengths\u201d but then attack new markets, \u201cmobile, digital media, TV, education and entertainment,\u201d by joining with\u2014or, better yet, acquiring\u2014companies in the horizontal layers. That included Cisco, Novell, Oracle, WordPerfect, Borland, Adobe, Autodesk, Silicon Graphics, AOL. Remember, most of these were pretty small companies back then.<\/p>\n\n\n\n
Mr. Sculley politely let me finish and then asked, \u201cWhy doesn\u2019t AT&T buy us?\u201d before launching into a diatribe about how awful the PC business was, saying he entered every quarter not knowing how many machines would ship, pricing was awful, and margins were worse. Tim Cook would join five years later to clean up this logistics mess. Mr. Sculley was clearly looking for an exit\u2014he left six months later. I flew home disappointed.<\/p>\n\n\n\n
Apple was worth $7 billion back then, and now it\u2019s $1.5 trillion, with close to a quarter trillion in sales and maybe $70 billion in operating profits. Not quite half of industry revenues or 90% of profits, but powerful nonetheless. Apple\u2019s FUD is fanboys\u2019 universal desires.<\/p>\n\n\n\n
Well, what goes around comes around. At last week\u2019s Worldwide Developer Conference, Apple announced Apple Silicon, its own line of processors. With that, Apple finally closed the loop. It already makes its own graphics chips, operating system, applications, app store (with a 15% to 30% cut), cloud storage, Siri voice interface, maps, even mediocre TV shows\u2014soup to nuts. Its phones, tablets and Macs are world class compared with, say, Google Maps, Spotify music streaming, TikTok video clips, or Dropbox cloud storage. Apple has become IBM, it\u2019s become AT&T\u2014a vertical giant waiting for a future David to come along with a horizontal slingshot.<\/p>\n\n\n\n
If I were an investment banker today (Lord help me) I\u2019d be running around pitching a Virtual Apple. Neutralize its strengths and then attack new markets. Apple is showing that it\u2019s vulnerable by selling an iPhone SE for $399, not $999. Unit sales of iPhones and iPad peaked years ago. As the company runs out of new customers, growth is coming from adjacent markets like watches and earbuds, and from online services. And now the Justice Department is investigating its app store for abuse.<\/p>\n\n\n\n
Will a Virtual Apple put together a collection of cloud services that capture the imagination of consumers? Or a robust social-media market\u2014outside Facebook and Twitter there are scores, from Fortnite to Nextdoor. Will the next-gen consumer platform be speech, augmented reality, home automation? I\u2019d bet on a cloud-based intelligent service that simply knows what we want and does it.<\/p>\n\n\n\n
Remember, IBM didn\u2019t fail overnight\u2014it took decades. But its growth rolled over and the stock market eventually figured that out and cut off access to cheap capital. Apple is a machine. Its devices are sleek. But new phone features\u2014like \u201cWind Down Mode\u201d to help you get to sleep on time, and a watch that scolds you if you don\u2019t wash your hands long enough\u2014leave me underwhelmed. A Virtual Apple might beat it at its own game.<\/p>\n\n\n\n