The stories behind Apple and Amazon

If you’re not into Apple or investing, you may not have known this, but Apple shares fell in price recently, from an all-time high of over $700, to under $450, following the company’s quarterly earnings report. Another well-known company, Amazon, saw the opposite happen, when its shares rose following its earnings report.

So far, so boring, you say. Companies produce a bad earnings report, their shares go down. Or they do well, and their shares go up. This is news? Next you’ll be telling me the Pope is Catholic.

Here’s the thing, though. Apple’s earnings report wasn’t bad. Yet its shares went down. And Amazon’s earnings report wasn’t very good. But the shares went up.

Why should this happen? Ask a dozen share analysts and you’ll get more than a dozen answers, most of them very technical, and every one demonstrating that 20:20 hindsight that analysts are so famous for. The fact is that no-one really knows what moves markets, apart from the collective actions of millions of investors, and those investors are not the rational actors of traditional economic theory. Investors are first and foremost people like you and me and are therefore subject to all the quirks and foibles, irrationalities and emotional responses of humans everywhere.

And one of the most enduring, most basic, and most powerful human response is the story response. Humans love stories. We need stories, we hunger for stories, and we look for and find them almost everywhere, regardless of logic and evidence and all that other left-brain stuff. A good story trumps almost everything.

This, to my story-obsessed brain, is the reason why Amazon shares continue to defy gravity, and why Apple shares continue to struggle, despite the company’s mind-blowing financial success.

First, let’s look at Amazon. One of the few dot-com era survivors, Amazon at first glance seems to be doing very well. It’s constantly expanding into new markets, it dominates the ebook market with its Kindle e-reader, and its online offering is almost the default choice for millions of people when they are looking to buy something.

Jeff Bezos, the founder and CEO of Amazon, has an almost instinctive feel for story, particularly the story that plays well on Wall Street. This is because he’s an ex-investment banker. When he founded Amazon at the beginning of the dot-com boom, he was very careful to craft the Amazon founding myth. He drove across country to Seattle because he knew his dot-com had to have a West Coast location. When he was looking for a house to rent, there was one particular requirement - a garage. This was so that he could say that Amazon was started in a garage.

Step by step he built up his founding myth. Take the “doors as desks” story. In the early days Amazon used doors mounted on wooden four-by-four posts as desks, supposedly as a cost-cutting, down-to-brass-tacks symbol of the start-up culture. In fact, they were expensive and impractical. But that didn’t matter as long as the myth was built.

As Bezos built the company, he carefully and continuously added to the myth, building up the perception of Amazon as a relentless and invincible force that grinds down all its competitors in true, gritty, underdog style. The myth is carefully managed. Amazon releases as little hard information as possible. For example, while Samsung announces the number of smartphones it sells from time to time, and Apple breaks down its sales of all of its products by quantity for every quarter, Amazon has never released sales figures for its Kindle devices.

Instead Bezos relentlessly pursues the market-share ideology, accepting low or no profitability in a continuing pursuit of more and more revenue, more and more market share. The theory is that once Amazon has driven all of its competitors out of business, by endlessly undercutting them on price, it will be able to raise prices at will and rake in the profits. The problem is that Amazon seems to be constantly expanding its universe of competitors. Starting out in books, Bezos moved into more general consumer goods long before Amazon had a chance to dominate the book industry. And each time a new market starts to fall under Amazon’s sway, Bezos shifts the goalposts again, and stakes out a claim on a new territory.

So despite the fact that Amazon’s profitability is pitiful for its size, Bezos is constantly luring investors on with the promise of outsize profits in the future, a future which is always delayed with the next new market, but of course each new market expands on the theoretical size of the eventual payoff, so the promise gets ever-larger even as it recedes further off into the future.

Apple once had a compelling story as well, a very familiar one. The perennial underdog against Microsoft despite being the company that created the computer revolution, Apple seemed destined to fail. Then the prodigal son, founder Steve Jobs, who had been pushed out by the managerial caste that had taken over Apple, returned as interim CEO, and set about rebuilding his company. In the process he would revolutionise four industries (music, movies, mobile phones, and of course computers- again- with the release of the iPad) and at the time of his death leave Apple as the largest and most profitable company in the history of the world, and his movie company Pixar having just effectively taken over the venerable Walt Disney Company.

But the untimely death of Steve left Apple vulnerable to another story, one not as favourable. We can summarise this story as “what goes up, must come down”, and it is the seemingly inevitable narrative of the fall from grace, the imperative decline following a peak, the idea that Apple has achieved all that it can, and must thus face a future of fading glory, now bereft of its guiding spirit.

The power of this narrative can be seen in the obsessive focus on essentially irrelevant details, such as Apple’s teething problems with its map application. While Steve was alive, such problems, like the so-called Antennagate issue with the iPhone 4, were easily brushed aside; but now every hiccup is a portent of doom. This despite Apple’s continuing growth in sales, profit, and cash mountain. Nobody seems willing to let the facts get in the way of a good story. (There is a good article in Time about this: Apple’s Reality Distortion Field)

Apple is also falling victim to another underdog story. Having invented the touch-screen smartphone and “tablet” markets, it dominated both for years. But Samsung, using Android, has recently begun to experience some market success, meaning a falling market share for Apple (but not falling sales, as the market continues to grow overall). This again, becomes the story of how Android, the underdog, will dethrone Apple.

Again, it is without logic. Apple has never had a large share of mobile phone market in general (i.e. including non-smart phones). And while it once had close to 100% of the “tablet” market (which was really just the iPad market at that stage), this was due to there being no other “tablets” in existence. Despite never selling more than a small percentage of all mobile phones, Apple has consistently captured a majority of the profit of the mobile phone market. There is no reason to suppose that Apple will not continue to make the most profit out of the “tablet” market even when it doesn’t have most of the market, especially considering that Amazon’s tablets are reckoned to be sold at or even below cost.

So there are a few reasons why the stories around Apple have begun to work against it in the minds of investors. And Amazon’s Bezos has skilfully played on the power of stories to maintain Amazon’s darling status with investors. But I think that Bezos’s greatest trick is the “jam-tomorrow” promise of future glory, which trumps an existing reality, no matter how golden. Apple’s problem, in the end, is that they are hugely profitable now, not promising to be fantastically profitable at some undefined point in the future. Greedy investors seem to prefer the latter.
blog comments powered by Disqus