Henry Blodget: Apple Won't Be the Next Porsche
Henry Blodget publishes Business Insider. Blodget is a former managing director of Merrill Lynch who rose to fame in the late 1990s on his timely and correct prediction that Amazon stock would reach $400, then lost his $12 million/year job following the burst of the dot.com bubble, and then was permanently barred by the Securities and Exchange Commission over fraud allegations*. Blodget still has outstanding sources and contacts within the tech sector. In a post at his website, Blodget discusses the current excitement about tech companies like Google and Apple exploring automotive ventures, which some say are aiming at becoming the next Dr. Ing. h.c. F. Porsche AG. Not only does he say that the tech sector is cyclical, that the current bubble will also eventually burst and that Apple’s outsized success with their smartphones has been anomalous even for that now routinely successful firm, he makes some sound arguments the next Porsche AG is not likely to come from the Silicon Valley.
Blodget’s post is based around a Twitter exchange he had with what he refers to as Silicon Valley Bigwigs, and he says that they’re illustrative of the irrational exuberance in the tech industry. Some choice excerpts from Blodget’s post follow, but I’m pushing the limit on fair use so, as the good professor says, please throw Business Insider a click and read the whole thing.
The other night, on Twitter, I waded into a debate about the rumored Apple car.
Specifically, I tweeted a skeptical remark about it.
And I immediately found myself on the receiving end of a tone and attitude I remember vividly from the end of the 1990s.
As I recall, the Twitter exchange went something like this:
ME: Making cars is a tough, low-margin business.
VALLEY BIGWIG: Porsche has a 50% profit margin.
Well, that shut me up.
Porsche has a 50% profit margin? Wow. No wonder everyone was so excited about the Apple car. Apparently there is indeed good money to be made in the high end of the car business.
While I nursed my Twitter smackdown, out of curiosity I checked out Porsche’s annual report. And I was startled to discover that the information I found there didn’t exactly jibe with the bigwig’s tweet.
Porsche, I discovered, does not have a “50% profit margin.”
Porsche has about a 15% profit margin….
So I did some more Googling and math. And I learned the following.
Porsche sold about 165,000 cars worldwide in 2013. This brought in $14.3 billion of revenue, and about $2 billion of profit.
Apple already generates ~$60 billion of annual profit, because unlike cars, Apple’s iPhone is the most spectacularly profitable product the world has ever seen.
If Apple grew a car business the size of Porsche’s overnight, Apple’s profit would grow by … a relatively puny 5%.
I tweeted some of these findings back at the bigwig. His response was instantaneous.
VALLEY BIGWIG: Apple targets markets of 20mm-100mm per year…
Apple, the bigwig was saying, was going to aim to sell 20 million to 100 million cars per year.
I again turned to Google and learned that the global car market — the number of cars sold per year worldwide — is currently 88 million. So Apple’s ambition, the bigwig was saying, was to capture somewhere between 25% and 110% of the entire global car market.
I suggested to the bigwig that this assumption might be a bit heroic. This time, the bigwig did not respond. I then asked the bigwig how much money he thought Apple would make in its car business.
VALLEY BIGWIG: $40 billion, initially.
I pointed out that Porsche makes only $2 billion from its car business. The bigwig then qualified his prior statement:
VALLEY BIGWIG: $40 billion revenue, $20 billion profit
Well, $20 billion was less than $40 billion, but it was still 10 times as big as Porsche’s profit of $2 billion and twice as big as BMW’s profit of ~$10 billion. And we were back at that “50% profit margin” assumption again.
At this point, as I recall, another Valley bigwig chimed in on the Twitter stream. This whole conversation was sort of silly, the second Valley bigwig implied. Apple wasn’t going to build a normal car business, like that of Porsche, GM, Tesla, or even BMW. Apple would not bother to enter the car business if it were going to build just a normal car business. Apple was going to reinvent the car business.
Ah. Apple was going to reinvent the car business.
How, exactly, was Apple going to reinvent the car business?
Some remarks from several participants followed about design, software, autonomous-driving, platforms, and “the new big screen — the dashboard.” Someone explained that, when we’re all riding around in self-driving cars, we’ll have lots of time to listen to music, watch movies, play games, and work, and that Apple will coin money because it will own the whole platform.
In other words, I gathered, Apple will reinvent the car business by transforming cars into gigantic wireless iPhone docks, making them beautiful — Apple’s designers are apparently appalled by the ugly crap we ride around in these days — and selling 20 million to 100 million of them per year. Apple will also reinvent the car business by doubling the prices people will pay for cars or halving what it costs to make them (if it’s going to earn even a 30% profit margin on the cars, let alone a 50% margin, it will have to do one or the other).
I expressed some skepticism about this…
In fact, a clear-eyed observer of the iPhone phenomenon will quickly note that it is an anomaly even within its own company. Apple has been making computers for 30 years, for example, and it has not done anything in the computer business that is remotely like what it has done in the phone business. Apple did invent the tablet market, but that doesn’t look anything like the iPhone business either. Part of what makes the iPhone business so remarkable, after all, is something that does not exist in most other markets, including the car market: Subsidies that reduce the price of a $600 product to $200 or even free. It seems unlikely that wireless carriers are going to offer to pick up $40,000 of the price of a $60,000 Apple car. Or give the $40,000 model away for free (with a contract).
But that’s a different story.
The important story here is that some of the smartest minds in Silicon Valley appear to have stopped thinking critically.
*Blodget was never convicted of saying one thing to Merrill Lynch customers and assessing companies completely differently in private company emails. However, after those emails were published by now scandal tainted former NY governor and then New York state attorney general Eliot Spitzer, Blodget signed a consent agreement with the SEC that permanently barred him from the securities industry, fined him $2 million and made him pay another $2 million in restitution to Merrill Lynch customers.
Ronnie Schreiber edits Cars In Depth, a realistic perspective on cars & car culture and the original 3D car site. If you found this post worthwhile, you can get a parallax view at Cars In Depth. If the 3D thing freaks you out, don’t worry, all the photo and video players in use at the site have mono options. Thanks for reading – RJS
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Some interesting and insightful remarks from commenters here. But it's important to remember that the felon Blodget, (and the sad, always-wrong-about-AAPL Dvorak) make money using apple-bashing headlines as link bait, consistently, over the years. They can't be taken seriously, even if they write something positive about Apple. They'll say anything. Like most media and Wall St. Analysts and pundits, they don't seem to understand or appreciate how Apple makes money. Even though Apple has made it very clear about why and how they operate. Market share is not important to Apple. They are regarded as apostates in this. Making customers happy is the end-all and be-all of Apple. That's hard for us modern cynics to appreciate. But that's always been the trail to follow. Apple didn't invent the PC, music player, smartphone, tablet, smartwatch, or anything like that. They disrupt established products with something drastically different/better, by focusing on the customer, something everyone says they do, but actually don't. Everyone says they innovate, but few really do. Whatever they're thinking of with the automotive space (which NO ONE yet knows outside of Apple), one of the things they'll be disrupting is journalistic coverage of automobiles. That part has already begun. And so, beware who you turn to for opinion regarding anything Apple.