So that's what Apple does with its money!

There's a very interesting article by Brian Caulfield over at Forbes, examining what Apple Computer does with its immense cash stash. Here's an excerpt.

As of the end of March, Apple had more than $65.8 billion in liquid assets. It probably has more now. So why does Apple need all that money? To build a time machine, of course.

It’s not as crazy as it sounds — at least not the way it was spelled out over the weekend by an anonymous poster on Quora.

“If it feels like new Apple products appear futuristic, it is because Apple really is sending back technology from the future,” the poster writes.

None of this, of course, is breaking news. Apple has acknowledged that it has been using its balance sheet to secure long-term component deals.

The Cupertino, California-based company, however, has never detailed what that means: because Apple can offer the companies building cutting-edge parts capital they can get nowhere else, Apple can offer its customers products no one else can.

That explains, for example, Apple’s huge head start with its iPad tablet computer. Competitors such as HP are only now now starting to catch up to what Apple can do, in terms of features and price.

. . .

When new component technologies (touchscreens, chips, LED displays) first come out, they are very expensive to produce, and building a factory that can produce them in mass quantities is even more expensive. Oftentimes, the upfront capital expenditure can be so huge and the margins are small enough (and shrink over time as the component is rapidly commoditized) that the companies who would build these factories cannot raise sufficient investment capital to cover the costs.

What Apple does is use its cash hoard to pay for the construction cost (or a significant fraction of it) of the factory in exchange for exclusive rights to the output production of the factory for a set period of time (maybe 6 – 36 months), and then for a discounted rate afterwards.

. . .

Apple is not just crushing its rivals through superiority in design, Steve Jobs‘s deep experience in hardware mass production (early Apple, NeXT) has been brought to bear in creating an unrivaled exclusive supply chain of advanced technology literally years ahead of anyone else on the planet. If it feels like new Apple products appear futuristic, it is because Apple really is sending back technology from the future.

Once those technologies (or more accurately, their mass production techniques) become sufficiently commoditized, Apple is then able to compete effectively on cost and undercut rivals. It’s a myth that Apple only makes premium products – it makes them all right, but that is because they are literally more advanced than anything else (i.e. the price premium is not just for design), and once the product line is no longer premium, they are produced more cheaply than competitor equivalents, yielding higher margins, more cash, which results in more ability to continue the cycle.

There's more at the link. Very interesting reading.

I'm no Apple fanboi - any company that won't allow me to even change the battery on my device, much less install anything I like on it in the way of software, isn't going to get my business, thank you very much. Nevertheless, if this article is correct, I've got to hand it to Steve Jobs and his management team. That's a very efficient way of protecting your market share and blocking others from moving in on it.

Peter