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How Apple should spend its $90 billion in cash

Apple, with a market capitalization of over $416 billion, its stock trading at around $445 a share, and swimming in over $90 billion in cash, needs to figure out how to spend its money. I’ve got a few suggestions.
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Topic: Finance
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1 of 6 Jason Perlow/ZDNet

As I write this, AAPL is now trading at over $447.00 a share. For the company's 1st quarter, Apple posted $13 billion of profit on record revenue of over $47 billion from its sales of the iPhone, the iPad, and the Mac. Apple now has a market capitalization of over $416 billion and has amassed a huge cash war chest exceeding $90 billion.

Yes, say that again, but with a Doctor Evil voice. NINETY BILLION DOLLARS! Muhahahahahahahah!

Apple could just sit on all that cash, and CEO Tim Cook has said that the company is in no rush to spend it. But the logical thing to do with it would be to make some strategic purchases or expand its infrastructure in order to maintain that growth. 

I’ve been thinking about this for a while and I’ve come up with a few suggestions. And no, “Sharks with frickin’ lasers” did not make the list. So without further ado…
 

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2 of 6 Jason Perlow/ZDNet

Anyone who uses an iPhone or an iPad with 3G and GPS capabilities will tell you that much of the functionality that you get from some of the best apps for these devices come from geolocation and mapping services. However, at the moment Apple currently depends on Google Maps, Google Earth, and Google’s GeoEye-1 satellite to provide this data.


With the strained and cantankerous relationship that Apple and Steve Jobs has now put itself in with Google, it would behoove them to become as independent as possible when it comes to the key services that it needs to offer the core functionality that makes “The Apps for That” actually work.

That includes not only Search capabilities — which it should probably consider building its own engine or perhaps partnering with — GASP! — Microsoft and its Bing! service, but Apple should also consider launching its very own mapping satellite in partnership with one of the major geospatial companies, such as GeoEye, DigitalGlobe and Spot Image, and a major Aerospace company such as Orbital Sciences, Boeing Space and Intelligence or Lockheed-Martin Space Systems.

What does it cost to launch and operate one of these things?

Well, a lot of money. In fact it costs so much that the US government actually financed about half the cost of GeoEye-1, which was over $500 Million in 2008, so Google only gets to use it partially. Apple actually has enough cash that it could easily launch its very own bird and form its own geospatial services firm if it wanted.

It should also be noted that the GeoEye company (GEOY) that provides the mapping services in partnership with Google and the United States government currently has a market capitalization of about $486M right now (about half of what the company was worth two years ago) so the company might not be a bad acquisition target for Apple either.

The iSat-1. Has a nice ring to it, doesn't it?

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3 of 6 Jason Perlow/ZDNet

If Apple’s soaring profits on the iPods and iPad and the recent sell-outs of the new Apple TV are of any indication, much of the company’s future with these devices is going to rely on the sales and distribution of content and applications on the App Store and on iTunes.

As the company grows, it’s going to need to expand its content distribution infrastructure. That means in order to get things like huge, bandwidth-hungry HD movies downloaded to iTunes or even streamed directly to Apple TVs and iPads, it is going to have to get that content in close proximity to the ISPs that provide broadband service to consumers as well to the Tier 1 providers that provide backhaul services to wireless carriers that sell the iPhone and iPad 3G worldwide.

Apple has invested lots of money in new datacenters to house servers and storage that power its back-end infrastructure — its most recent infrastructure expansion project was building a huge, One-Billion dollar 500,000 square foot facility located in North Carolina in order to house the iCloud infrastructure.  

Rumor has it that Apple is looking into possibly doubling its size.

However, having huge centralized datacenters isn’t enough. It won’t solve latency issues globally, Apple will need to spend a considerable amount of money connecting these datacenters to the ISPs with high-speed links and possibly even replicate some of that data globally so that the most popular or in-demand content doesn’t overload the centralized infrastructure.

Content Distribution Networks, or CDNs, can solve these problems. Apple could build its own global CDN, or it could purchase an existing CDN, such as Limelight Networks (LLNW) or even Akamai (AKAM). Limelight is currently capitalized at about $347M and Akamai, which is considered the leader in the space, is hovering around a whopping $5.64B.

Both of which should be considered a bargain since that's about half of what they were capitalized at two years ago.

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4 of 6 Jason Perlow/ZDNet

A lot has changed in the wireless landscape in the last two years for the iPhone and and the iPad. In the United States, AT&T lost its exclusive on the iPhone, and Verizon and Sprint joined in on the fun. But each carrier has had their own set of problems accommodating the devices and huge amounts of data demand from iPhone and iPad users.

Despite the phenomenal device growth on all the US carriers combined, It hasn't been as smooth a ride as everyone has wanted. Apple is an extremely customer service oriented company and having to leave the network support to the carriers is probably not something the company will ever admit to be happy about.

In order for Apple to not have to deal with carrier mishegas in the US anymore, it probably makes sense for it to become a carrier itself. Obviously, there would be significant regulatory issues that the company would have to overcome, but it wouldn’t be impossible for Apple to do.

In terms of actual infrastructure costs of what would be needed to build a 4G network, the company would be looking at anywhere between 5 and 10 billion dollars to pull it off, depending on whether or not they needed to build new towers, could piggyback their transceivers on existing ones, what backhaul services they would need to buy, network operations centers needed, et cetera.

Of course, Apple could just go and buy a carrier that already does business in the US. The logical choice would be Sprint/Nextel (S), which is currently capitalized at approximately $6.4B and already has a significant customer base.

The other carriers are way too big for the company to swallow. The next smallest would be T-Mobile USA, which is actually a subsidiary of Deutsche Telekom AG (DTEGY.PK) a German-owned company. 

Apple could certainly offer to take the US subsidiary off the company’s hands, and it may still even be attractive for Deutsche Telekom to dump the asset, as it tried and failed to do in its aborted $39B acquisition with AT&T, but given how painful it is to buy a telecom company of any substantial size without going through a huge regulatory approval ordeal, it’s unlikely Apple could complete the transaction, even though it could easily finance it all by itself.

But you never know.
 

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5 of 6 Jason Perlow/ZDNet

FaceBook. Uhhhhh, yeah. FaceBook.

As much as it drives me crazy, FaceBook is the hottest company right now next to Apple itself. And with over 800 million users sharing data and communicating, it makes it among the most desirable, if not the most desirable audience for Apple to integrate its products with.

This has become something of a hassle of late, as in 2010 Apple tried to launch its own pseudo-social network with iTunes version 10 in the form of Ping, which was supposed to have FaceBook connectivity at launch date but issues with last-minute negotiations apparently caused Apple to have to pull that feature from the software. 

Apple also tried to get Facebook integrated into the last iOS 5 release that debuted with the iPhone 4S, but the companies failed to friend each other. As it happened, Apple chose to go with Twitter instead. There is some evidence to support that that iOS 5.1 will have Facebook integration, but we can only wait and see.

The problem of course is that FaceBook isn’t (yet) a publically-traded company and its market valuation depending on who you talk to is estimated between $50B and $100B.

That’s a huge chunk of change for Apple to blow even with its massive war chest for what is essentially a freakin’ web site, so the chances of the Fruit Loop and company completely sucking up Zuck and Friends is pretty close to nil.

For Apple to have a private controlling share it would probably have to cough up anywhere between 10 and 20 billion dollars in order to have a 20 to 30 percent stake in the company. Whether that would be actually enough for Zuckerberg and friends to seal the deal is unknown.

If the companies couldn’t come to some sort of agreement, Apple could certainly go head to head with FaceBook, by hiring away its top talent, and built an Apple Social Network, which I’m tentatively calling “iFriends”.

Also Read:FaceBook for Grownups — Can Apple, Microsoft or Google Build One? (May 2010)

I actually proposed this earlier in a piece I wrote about the maturity and questionable ethics of FaceBook and its founders, because I believe Apple does indeed have the skills and talent to produce a high quality and secure, family-friendly Social Network. But iFriends would have to be something of a Manhattan Project for the company, and it would likely eat up at least a billion dollars in development and infrastructure, if not more.

If not FaceBook, perhaps Apple should consider going the professional network route, and throw some cash at LinkedIn, which in 2008 was valued at about $1B. Apple could probably snatch up the whole thing for around twice that today, if not significantly less. And unlike a fresh Social Network that Apple would have to build from scratch, it already comes with a strong user base.

That might actually allow the company to make some serious inroads with the enterprise and business crowd, which may still have reasons to be tied to their uncool BlackBerries and may see a business networking advantage integrated into their smartphones and tablets as a reason to switch to Apple’s platform.

And then of course, there's Twitter, which like LinkedIn is still a private company that Apple could make a huge land grab on.

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6 of 6 Jason Perlow/ZDNet

For the entire mobile and consumer device industry, an Apple purchase of ARM Holdings (ARMH) would be an absolute nightmare. For Apple, it would allow them to have exclusive rights to the company’s technology roadmap and control the licensing of a key embedded systems technology that sits at the core of many consumer electronics products.

Once the licensee terms ran out, Apple could easily terminate the architectual licenses of companies it views as its competitive enemies, and then the major mobile players like Google, Microsoft, Samsung, HTC, LG, RIM, Texas Instruments, Freescale, Marvell, nVidia, Qualcomm and dozens of others would be out in the cold if Tim Cook decided he wanted any of them to go away.

And we all know that his predecessor, Steve Jobs, made no bones about wanting to "Go Thermonuclear" on anyone who made Android handsets and tablets.

This is all assuming, of course, if any of these players didn’t have perpetual license agreements in play, in which case Apple would be obligated to permit those players to continue to manufacture ARM-based chips, depending on the IP of which chip architectures they had access to.

Still, the architectural platform which powers the core of just about every smartphone device and SOHO routers and numerous other consumer electronics products would be under Apple’s total control.

This could cause any number of players using the ARM platform to go scrambling for alternative embedded technologies, such as low-power x86, MIPS, or even the PowerPC architecture which powers the Sony Playstation, the XBOX 360 and the Nintendo Wii.

Of course, with any large purchase of this type — and the British company is capitalized at about $12.54B at the moment and would likely sell for no less than 15 to 20 billion dollars — it would be subject to serious government scrutiny in the US, the EU and Asia and Apple would very likely find itself hard pressed to “go medieval” on ARM licensees like a flock of Angry Birds.

But it could definitely make life difficult for Apple's competitors if the sale went through.
 

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