Saturday, June 11, 2011

Apple's Edifice Complex

One of the first heckles on this blog was aimed at the company where I once worked and at RadioShack.

September 16, 2007
Edifice Complex

For what it is worth, things went downhill at the company where I once worked when plans were announced that we'd be moving into a new, more luxurious, and much more spacious building. I suspect it is not entirely a coincidence. It was very odd to be talking about the new space one day and see people being laid off the next (many rounds of layoffs followed and a few years after I left the doors were closed entirely). At some point it became a joke. There weren't going to be nearly enough people left to fill the new space.

Then there's the RadioShack story. I could not understand why a struggling business (in my opinion) would be building itself a new corporate shrine. "Shrine" is also my opinion. Take a look at the pictures and description. Decide for yourself.

RadioShack Riverfront Campus

It was completed in May, 2005. Have you increased your purchases at their stores since its completion? Do you think that money could have been better spent upgrading the look of their actual retail stores instead?


RadioShack's stock price was $23.66 on September 16, 2007. It is now $12.66. That's a 46% loss.

This brings me to Apple.

June 9, 2011
Apple designs new space-age campus

The company has asked the city of Cupertino, Calif., for approval to build an office complex that looks like it's ready for outer space.

Is building a new corporate "shrine" really the best use of Apple shareholder money? The stock is down 10% from its all time high. Some might call it a bargain. I tend to see things a bit differently. At a market cap of $302 billion and a global population of 6.78 billion, the market thinks Apple is worth roughly $45 for every man, woman, and child on this planet.

That said, perhaps Apple isn't actually priced for this planet though.

"The Mothership has landed in Cupertino."

Perhaps the Mothership has a warp drive.

And lastly, here are two observations about the edifice complex from the Urban Dictionary that might amuse you. I think they very much apply here.

22 comments:

getyourselfconnected said...

The top is in on Apple for sure. $24k for your class, education is already too expensive!

Stagflationary Mark said...

GYSC,

Don't think of it is $24k. Think of it as 24 carat!

It's pure. It's pristine. It's undiluted. It's forever. It's industrial!

getyourselfconnected said...

Ah yes, diamonds are forever!

Stagflationary Mark said...

They are all I need to please me!

Of course, that's assuming I didn't hoard industrial diamonds after watching that James Bond movie in 1971.

What was $8,100 per pound in 1971 was just $540 per pound in 2009 (not adjusted for inflation). Buried cash was a MUCH better store of value even with 40 years of inflation (including the 1970s!). Go figure.

I've got to stop saying stuff like this or I will never be the Chief Economist at De Beers. ;)

getyourselfconnected said...

Mark, you may be too smart for the internets....

BadTux said...

Repeat after me: Stock prices have nothing to do with the viability of a business. Profits do. And Apple could pay the entire $2B cost of their new edifice with a little over one (1) month of their current profits of $6B per quarter. Yes. $6 billion PROFIT per quarter. So much money they can't figure out what to do with it all, so much money that they're dumping money into short-term U.S. Treasuries at *NEGATIVE* interest trying to find something, anything, to do with all this filthy lucre they're raking in.

The core issue is that Apple's business plan has nothing in it that requires large amounts of additional capital. Apple's business plan is to make a small number of insanely great products and each product has a relatively small team of very good developers working on it. Their business plan doesn't call for scaling up those teams, because large teams don't produce insanely great products, large teams produce muddled messes (see: Microsoft, HP). Their business plan doesn't call for adding a large number of additional products either, putting together these small teams of very good people needed to create insanely great products is difficult and the process of doing so doesn't scale well, meaning that they're stuck with their current strategy of introducing at most one new product per year (this appears to be the year of the iCloud).

At this point you may ask, "why don't they distribute the cash as a dividend to shareholders?" Well, I suppose because of the ****'ed up state of corporate governance and tax law here in the USA, where profits distributed as dividends to shareholders are double-taxed (once as corporate profit, once as individual income) and where corporate executives have in essence used lax corporate governance laws to turn corporate office into their own private grifting operations to grift as much filthy lucre as possible into their own pockets at the expense of shareholders.

So anyhow, Apple's new edifice peeves me for personal reasons that I cannot discuss here (let us just say that some of the tenants of the buildings Apple bought to create this complex had plans that Apple is stomping on with hob-nailed boots), but the notion that they can't afford this complex or that it's going to affect stock price in any way is ridiculous. Steve's Jobs's health, not this edifice, is the core issue with Apple's future, because Steve is the final decider of whether a product is insanely great or not and thus fits into Apple's business plan. Whether Steve can be replaced is, in the end, an open question that has not yet been answered...

Stagflationary Mark said...

BadTux,

Repeat after me: Stock prices have nothing to do with the viability of a business. Profits do.

I did not say that stock prices have anything to do with the viability of a business, nor did I imply it. I did imply that stock prices are important to shareholders though.

So much money they can't figure out what to do with it all...

Indeed. Apple has generated so much profit that they can't decide what to do with it. I take this edifice to be a symptom of that.

At this point you may ask, "why don't they distribute the cash as a dividend to shareholders?"

I would definitely ask that question. "Shrines" offer little value to their shareholders. Surely distributing cash would be better for shareholders than using cash to build "shrines", regardless of tax laws.

...and where corporate executives have in essence used lax corporate governance laws to turn corporate office into their own private grifting operations to grift as much filthy lucre as possible into their own pockets at the expense of shareholders.

I can't argue with that. I do see this edifice being created at the expense of the shareholders.

...the notion that they can't afford this complex or that it's going to affect stock price in any way is ridiculous.

I did not imply that Apple cannot afford it nor am I saying that the building of this edifice will directly affect the price of Apple stock. It wasn't like I said, "OMG! Short RadioShack! They are building a shrine and the cost of that shrine will ruin them!" I implied that the "shrine" was simply a symptom. That's all I am implying with Apple too.

Everything has worked to near perfection for Apple over the past decade. If you think that the trend will continue then by all means invest in the stock. If you think Apple is worth $45 for every man, woman, and child on this planet and that Apple's impressive profit growth can be extrapolated well into the distant future then who am I to argue? You could be right.

As a side note, I was a lead software engineer in the 1990s. We had to develop products for both Apple and PC. I used Apple for primary development and had to continually defend my decision to upper management. They wanted me to use the PC and port it over. I refused.

That said, I'm typing this on my computer with a Microsoft operating system and have never personally owned an Apple product. Go figure. Maybe I'm just too cheap but I have a hard time buying any product when I know that the company selling it to me is making enormous profits at my expense.

I see the biggest risk to Apple's shareholders being the next downturn in the global economy. As you imply, edifices would simply be a weak and feeble side show if I am right to think this way.

Stagflationary Mark said...

GSYC,

To nearly quote Satchel Paige...

Sometimes I blogs and thinks, and sometimes I just blogs. ;)

mab said...

"Edifice complex" and "mother" ship! Easy as pie but punny nonetheless.

Not quite as easy as all the Rep. Weiner jokes though.

Who needs fiction anymore?

Wisdom Seeker said...

Maybe Apple really is an example of why corporate profits per U.S. employee shot the moon in 2004 and have been held up since? If you outsource the bulk of the labor, or if you financialize your economy so you hardly have any labor anyway, you can do that...

(Mark, I also commented on the profits/employee thread, with a more substantial comment.)

BTW, I refuse to own Apple stock. It has cost me in foregone paper profits, but I think the corporate risk is too high. And what's the value added to the economy if I buy someone else's shares now? Apple's not going to issue new shares and they're not going to send me back my money, with interest, as dividends. So trading Apple is just a zero-sum game of exchanging pieces of paper.

I don't agree that the double taxation is that big of an issue. On the one hand, the effective tax rate on large U.S. corporations is a lot lower than the rate they all whine about, since there are so many givebacks credits and loopholes. And on the other hand, the dividend income tax rate isn't that high. Try working and paying the 14% effective payroll taxes on top of the income tax! Besides, there are many many ways to obtain dividend income without much taxation (IRAs being the easiest)... corporate America should be ashamed for not trickling the profits back to the investors.

We should be encouraging long-term investment instead of short term trend-chasing malinvestment, so I think we need to up the capital gains tax rate, trim the dividend rate a little, and then put in a 0.01% trading tax to discourage portfolio churning...

Stagflationary Mark said...

mab,

Easy as pie but punny nonetheless.

Indeed!

Tech employment relies on small Apple turnovers.

Stagflationary Mark said...

Wisdom Seeker,

If you outsource the bulk of the labor, or if you financialize your economy so you hardly have any labor anyway, you can do that...

The Onion: Many U.S. Parents Outsourcing Child Care Overseas

BadTux said...

what's the value added to the economy if I buy [Apple] shares now?

Indeed, that's the core question that baffled me when I first studied the Great Depression in grade school. Why would a stock market crash cause a depression? After all, buying and selling already-existing stocks generates no capital for companies, generates no new inventions for companies, in essence is just moving pieces of paper around without creating any real wealth. Remember, real wealth is actual goods and services, not pieces of fancy toilet paper.

But of course the deal is that the stock market serves as a store of value as well as a worthless gambling emporium, and when a major store of value declines in value, it has the same real consequences associated with monetary deflation in general -- the interaction with debt being the most important one, and the real cause of the Great Depression. So I suppose the answer to the question of, "why buy Apple stock?" is, "you help maintain the stock market as a store of value." Whether having a large portion of the effective money supply tied up basically in circulating around under a mattress rather than creating or purchasing actual goods and services is a good thing is an exercise left for a future post on my own blog (prognosis: Mixed).

- Badtux the Monetary Penguin

Stagflationary Mark said...

BadTux,

But of course the deal is that the stock market serves as a store of value as well as a worthless gambling emporium...

You could even drop "stock" from that quote and it would still work. Many markets have done that in recent years.

Note that the housing market also served as a store of value and as a worthless gambling emporium.

At some point, the "sure thing" falls apart and the gambling system fails though. Sigh.

Charles Kiting said...

I read last week, probably in a Chicago paper, that the corporate campus was becoming a dinosaur - they cost too much and it's harder to attract workers to them. With all the telecommuting there isn't even a need for all the space and there are empty campuses around town that real estate companies are having a hard time putting to alternative uses. .

BadTux said...

I suppose it depends on whether you can easily telecommute or not. Here in the Silicon Valley amongst software engineers, telecommuting is, oddly enough, quite rare. As someone who has managed a team via telepresence, I can see why. Turnaround on monitoring what they were doing was ridiculously high, if I needed to make sure that engineer A had module X ready so that engineer B could use the real thing in module Y rather than the mock-up, it was send an email and wait (telephone is not an option, engineers don't do telephones). Whereas in my current location I just walk over and ask. The result is that a team the same size as at my previous job is getting twice as much done, despite having the same basic talent level.

That's the sort of thing that gets noticed here in the Silicon Valley. There's lots of Pets.com nonsense and fad management, of course. But when you get basically twice as much productivity by having everybody in the same office complex, people take notice.

Now, if you're talking about something like insurance processing or customer support where it doesn't matter where you're physically located, well... yeah. But making the various bits and pieces of a business communicate with each other still doesn't seem to work via telepresence anywhere near as efficiently as via physical presence. Which, BTW, is why outsourcing proved to be about as useful as pets.com sock puppets, and companies are increasingly moving away from the Napoleonic tactics of outsourcing (throw a wall of cannon fodder at a problem) to the Apple model of small teams of superior engineers... the results simply work better and appear faster.

All of which we old-timers knew since 1975 when Fred Brooks released The Mythical Man Month, but it seems every generation of fresh young managers thinks technology has rendered obsolete the management knowledge of the previous generation.... sigh!

Stagflationary Mark said...

Charles Kiting and BadTux,

As a former lead software engineer, I will back BadTux's point that physical proximity can be a huge time saver in a team development environment.

At least 5% of my day was spent giving/getting quick answers to quick questions. Slow answers to quick questions would have been a serious problem.

I have to look at that shape of the Apple's Mothership and wonder. The office building is the shape it is for a reason. A box tends to put everyone close together. A donut? Not so much.

That said, as long as individual teams are together then it wouldn't matter as much. There were times when I'd want to discuss things with people on other teams though and the thought of navigating a donut to get to them doesn't sound all that efficient.

Perhaps there is part of the donut design that I'm just not getting though.

BadTux said...

One issue is that fire codes dictate that any given point of a building has to be within X number of yards from a fire exit. What that means is that you can't just build a big cube, because the inside part would be too far from a fire exit. You have to build either a number of separate buildings, or a big building with a hole in the middle (the hole that would be where the offices would be that are too far from the fire exit). Building one big building with a hole in the middle is more space-efficient (puts more people into the same space and thus physically closer together) than building multiple buildings (which, BTW, is what's there now -- multiple late 70's/early 80's vintage buildings, the old HP campus to be vacated as soon as HP finishes their new campus, and the buildings of the former Tandem campus that is rented to various odds and ends companies).

So if you think "fire code, fire escapes, maximum people in a given space", a donut makes more sense. But then, so does a pentagon or hexagon with a hole in the middle, and a pentagon or hexagon has the advantage that standard building materials can be used to build it (a circular building, on the other hand, needs very expensive custom curved glass). Which is why the Pentagon, which is the same basic size, is, err, a pentagon :). But I suppose a pentagon would have been too war-like for Chairman Steve...

Stagflationary Mark said...

BadTux,

Great points.

I had a triangle shaped office once and a lot of the space was wasted. Most office furniture is rectangular and it just didn't fit that well.

It was my favorite office though, since it had great views. The windows were two of the three walls (and one faced a lake).

But I suppose a pentagon would have been too war-like for Chairman Steve...

And then there's the octagon, but perhaps that might even be worse, lol.

If winning overshadows everything, why didn't you teach one of us to lose? - Scott (Chuck Norris), The Octagon (1980)

Charles Kiting said...

Stag & Tux,

I've had the exact opposite experience in my software company. So many g-d unproductive meetings, so many unproductive conversations. Our phone system is such that anyone telecommuting gets a phone they bring home that is routed through the office phone system. I have not seen my boss in 10 years (he telecommutes, I rarely do).

My gf telecommutes 4 days a week. One day a week she is required to go into the office - says that is the day she gets the least amount of work done.

It depends on the mix of people, and the stage of the production. I will say that in the design phase physical proximity helps when you have a group of people who are unfamiliar with each other. The more experience, the less important proximity becomes.

BadTux said...

Unproductive meetings are a management problem, not a location problem, and are a symptom of a manager who wants to feel important, not a symptom of a problem with physical location. Note that physical location has nothing to do with meetings -- you can hold unproductive meetings via Skype teleconferences just as easily as you can hold them in a local conference room. At a Major Fortune 500 Company of my direct knowledge, that's a major problem -- they do allow telecommuting, but there's so many teleconference meetings that it's as bad as being at corporate HQ.

What I'm talking about is all things being equal (i.e., the development team manager being *ME*), I find that the team gets more done if we're physically in close proximity. We communicate by email more than by meetings -- no need to get developers out of their "zone" for things that can wait until he or she comes up for breath -- but occasionally there simply isn't a good substitute for close physical proximity and quick feedback. Popping your head around the corner of a cube and asking a quick question that has a one-sentence answer takes far less time and much less turnaround than any other way of doing things, and sometimes that's important.

As for phones -- two words: Phone tag. Enough said. Young developers in particular view phones the same way they'd view a horse and buggy -- as an archaism useful only because it allows them to IM each other. Talk on it? How quaint! Their lackadaisical attitude towards answering phone calls might infuriate old codgers raised back in the day when you talked on phones, but it is what it is.

Stagflationary Mark said...

"Unproductive meetings are a management problem, not a location problem, and are a symptom of a manager who wants to feel important, not a symptom of a problem with physical location."

I hear that!

We made games. I can't even begin to guess how many man-hours were lost as the entire team debated the tiniest of details. The most impressive case of this was a team member on another team telling me that 10 people just spent an hour debating the shape of elf ears. 10 man-hours down the drain.