Tim Cook's Big Problem

I don't envy Tim Cook.

That's not a slight. Cook strikes me as a smart, engaging guy who handled himself very well during Apple's (Nasdaq: AAPL  ) recent earnings call. Who cares if he lacks Steve Jobs' legendary gregariousness? He's obviously in control, and that's what the iEmpire needs right now: a steady hand. Mostly, anyway.

Getting to the core issue
But Apple also needs innovation. A big idea. Soon.

Netbooks are the problem. Apple shouldn't rush to create one, but eventually, it will need an alternative to what Dell (Nasdaq: DELL  ) , Hewlett-Packard (NYSE: HPQ  ) , Intel (Nasdaq: INTC  ) , and others are creating; netbooks are the next great format for innovation. As Computerworld's Mike Elgan wrote recently, "Desktop PCs are the least innovative areas of consumer technology."

You might argue that Apple has done wonders for the desktop, and I'd agree. The iMac, by itself, has reshaped what we've come to know as the desktop form factor. The MacBook line has also won acclaim and, in the process, market share for Apple.

Even so, with Adobe (Nasdaq: ADBE  ) , Google (Nasdaq: GOOG  ) , Microsoft (Nasdaq: MSFT  ) , and, yes, Apple beefing up their consumer-facing cloud computing offerings, netbooks don't need the storage capacity or horsepower of your average laptop. That's a huge selling point for both consumers and business users. Researcher Gartner says that netbook unit shipments rose to 4.4 million in the third-quarter. Analysts there predict that total netbook sales will double in 2009.

But, again, Apple needn't hurry to build a netbook of its own. A recent survey from Biz360 shows that "net advocacy" for netbooks was 40% lower than that for traditional laptops. Users prefer a full-featured system.

My fear is that Cook and team will interpret customer data like this to mean that users don't want a lower-cost alternative to a MacBook. Cook came just short of saying exactly that during the earnings call:

We're watching that space. But, right now from our point of view the products in there are principally based on hardware that's much less powerful than we think customers want. Software technology that is not good, cramped keyboards, small displays ... And so, we don't think that people are going to be pleased with those types of products. But we'll see.

Biz360 supports Cook's assertion, but as the comments on this article show, users believe that Apple is preparing to reinvent the category, as it did with the iPhone and the iPod before it.

"Apple's experience with the touchscreen and accelerometer technology in the iPhone and iPod Touch could easily be implemented into a NetMac allowing for tablet style iPhone input," wrote Fool reader lewsreviews. "For these reasons I think that Apple could and will make a great product for the netbook market, and would do very well against the $500ish netbooks even if the Apple product was priced slightly higher."

What if Cook disagrees? What if he believes it's smarter to avoid the category altogether? Color me worried.

A time of maximum opportunity
Not because netbooks are The Next Big Thing, but because thanks to the disruptive nature of netbooks, someone is going to invent The Next Big Thing. Something that solves the problems Cook spoke of during the earnings call:

  • Underpowered hardware
  • Limited software
  • Cramped keyboards
  • Miserly displays

Jobs' Apple would see this as an opportunity. Will Cook's? I hope so. So do most investors, I suspect.

With due respect to my Foolish colleague, Anders Bylund, Apple shareholders aren't all that interested in maturity. They want a rebel and expect a disrupter. They remember how Jobs flew a pirate flag over the headquarters of the Macintosh division in Apple's earlier days. They see netbooks, visualize that flag, and long for something Insanely Great.

That's why the pre-Macworld rumor reports buzzed with hope for an iPhone nano, a smartphone equivalent to the envelope-sized MacBook Air that Jobs unveiled last year.

Perhaps we should all take our cue from Apple co-founder Steve Wozniak. He recently appeared on CNBC to reassure investors that Apple's bench is deep and that its existing product lineup will carry through Jobs' six-month medical leave. Wozniak also said that an extended rest for Jobs might help him to dream up new, breakthrough products.

I hope so, Woz. We've just celebrated the Mac's 25th anniversary -- a reminder of what can be when Apple seizes a moment of maximum opportunity. A moment like right now.

Show us your rebellious side, Mr. Cook.

Apple is a Stock Advisor selection. Dell, Intel, and Microsoft are Inside Value picks. Google is a Rule Breakers recommendation. The Fool owns shares and covered calls of Intel. Try either of these Foolish services free for 30 days. There's no obligation to subscribe.

Fool contributor Tim Beyers is a member of the Rule Breakers stock-picking team and had stock and options positions in Apple and Google at the time of publication.

Check out Tim's portfolio holdings and Foolish writings, or connect with him on Twitter as @milehighfool. The Motley Fool is also on Twitter as @TheMotleyFool. Its disclosure policy agrees with Jobs. It is better to be a pirate than to be in the Navy.


Read/Post Comments (11) | Recommend This Article (5)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On January 27, 2009, at 9:37 PM, joeldm wrote:

    Netbooks? What do you think the MacBook Air is? It's a netbook that has a usable screen. I've used the little EE and it's too tiny to do anything substantial on. For tiny time I use my iPhone, but if I was a real candidate for a netbook I'd use the Air. It's thinner than almost anything else out there and I think Apple decided that thin was more important than short because short means no screen real estate. What would you rather type on, email and surf on, 7" or 13.3"?

  • Report this Comment On January 27, 2009, at 9:47 PM, BMWTwisty wrote:

    So, based on your extensive R&D and marketing background, you and all the other sideline bloggers and prognosticators have determined what Apple's pitifully talentless pool of employees have been unable to. Perhaps you should offer your services to Apple for a percentage of the most certainly huge profits your guidance and products would generate. Just a thought.

  • Report this Comment On January 27, 2009, at 9:59 PM, TMFMileHigh wrote:

    Hello BMWTwisty,

    Thanks for writing -- I do appreciate the comments -- but I think you've missed the point of the article. I'm not pretending to be Apple R&D; I'm raising a legit concern as an investor.

    joeldm -- Calling the Air a netbook is like calling BMW's Z4 a subcompact. The comparison doesn't work. The Air retails for $1,799, at minimum.

    FWIW and Foolish best,

    Tim (TMFMileHigh and @milehighfool on Twitter)

  • Report this Comment On January 27, 2009, at 10:15 PM, TMFTomGardner wrote:

    BMW, I don't have a strong opinion on how challenging things will get if Steve Jobs is unable to return in June. But I do think it's fair to ask these questions. Unless I'm mistaken, virtually every dollar of market capitalization for Apple was created during the CEO leadership of Steve Jobs. Arguably, there was a lot of value destruction during the period of Jobs' departure. During that period, there were a huge number of very talented people working at Apple. And yet, market value was destroyed during that period. Therefore, I think it's a very fair question for investors to ask. If Jobs can't return, why would this time be different? Obviously, the balance sheet is much, much stronger. And Apple has a lot of momentum behind it. But what of this is about Jobs' leadership. . and what is foundational to the company? I'm glad Tim asked the question. Fool on, Tom

  • Report this Comment On January 27, 2009, at 10:18 PM, Dboy66 wrote:

    * Underpowered hardware

    * Limited software

    * Cramped keyboards

    * Miserly displays

    A better way to solve these problems is to stop using crappy apple gear. It looks pretty but ultimately it sucks. Even the iPhone sucks. The reason I KNOW it sucks is because so many people who dont know anything about technology love apple products. That's the proof. The mainstream ALWAYS sucks. Always has, always will.

  • Report this Comment On January 28, 2009, at 2:52 AM, jameskatt wrote:

    The Macbook Air IS APPLE's Netbook.

    The problem of most fools' definition of Netbook is that all it means is "very cheap laptop".

    Thus fools who question why Apple isn't creating a Netbook argue vehemently that the Macbook Air isn't a Netbook.

    Cheap laptop means you have to skimp on many things. This includes having decent power to run software when you are not on the net - which many times is OFTEN, having limited software to run, having cramped keyboards which do not allow touch typing, and cheap small displays.

    If you look at Sony's version of the netbook - the 1.3 GHz series P laptops - you see very high quality. But this means they are costly - from $900 to $1500. And it is STILL underpowered.

    The biggest problem of using "The Cloud" is that it actually means you need fast hardware. The modern browsers use lots of resources and CPU speed. Just look at how much CPU power the Flash requires. Just look at how much memory a browser needs (200-600 MB of RAM for caching, runtime engines, etc.). A weak-kneed though top of the line Sony P laptop is crap for web-browsing compared to a faster laptop.,

    Building a quality device costs money.

    The crapbooks out there are built with slim margins.

    The actual non-subsidized price of an iPhone is about $650.

    Why should an Apple Netbook - which would be much more complex and costly to build than the iPhone cost less than an iPhone?

    Apple continues to innovate. Tim Cook will lead the charge. Realize that Steve Jobs doesn't do all of the inventing and innovation at Apple. He did not create the iPhone. Apple's engineers did. He helped with the interface. Apple is much bigger than Steve Jobs.

    You are so impatient. Few companies have the absolute hits that Apple has had.

    Apple continues to make money - tons of it. It has now close to $30 billion dollars. That buys a LOT of innovation.

    But Apple doesn't do crap innovation. It does it with class, craftsmanship. These things take time. I patiently wait for it since it is worth it.

  • Report this Comment On January 28, 2009, at 2:57 AM, jameskatt wrote:

    Mac ARE THE BMW's of the computing world. That has been the analogy for decades.

    Thus Macbook Air is to netbook, as the BMW Z4 is to a subcompact.

    That is a COMPLETELY perfect analogy. I would call the BMW Z4 a subcompact because it is.

    If you want the BMW of netbooks, get a Macbook Air.

    Again, CHEAP and LOW MARGIN are not in Apple's blood. Apple creates high quality products that make lots of profit.

  • Report this Comment On January 28, 2009, at 5:21 AM, mlindl wrote:

    I use a MacBook Air. It is my business laptop (Exchange, Office, etc.) To complete retire my Dell I may ask them to install Windows on it. An MBA doesn't qualify as a netbook.

    Apple will redefine the netbook category, have no doubts. And I believe it will be a fully robust larger iPhone version with touch-screen keyboard and apps chooser where the keyboard is now and a beautiful screen for surfing, watching DVD's etc. AND it will be Mac OS X complete with limited connectivity. It will sell like hotcakes and I imagine v1 will be out this spring and v2 ready for Christmas. And, unlike PC companies, Apple will make money on it. For the moment, Microsoft HATES the netbook craze. They can't seem to make money on it. Anyway, that's what ZDNet.com reported recently.

  • Report this Comment On January 29, 2009, at 1:32 PM, asiafish wrote:

    Part of the public perception of what makes a NetBook is a low price, with the others being small size (not just thickness), light weight and the accepted trade-off being limited capabilities.

    Apple does not offer anything in that market, just as they don't offer mid-range desktops or dockable laptops. Apple chooses its market segments carefully, doesn't compete where it believes it shouldn't, and generally offers a very limited choice of very high-quality products.

    The Air is not a NetBook. In addition to costing too much to be shopped against the EE and the Wind, it is also just too big. While very thin and fairly light, the Air takes the same amount of space on a desk or airplane tray table as a regular MacBook. The Air is aimed at executives and frequent (hopefully business-class) travelers, and for that niche it is an amazing machine.

    If anything, the MacBook White is Apple's answer to the NetBook market. Of course, it is too big and too heavy to be a NetBook, but it is the cheapest laptop Apple is capable of selling right now that is good enough for the Apple brand and both powerful and versatile enough to offer the Apple experience.

    I'd love a $699 NetMacBook and would buy one in a heartbeat. It should have an 11" or smaller screen, weigh 3lbs or less and be capable of running OS X. It should be smaller than current MacBooks, less powerful, though powerful enough, and can get bye with many cheaper components.

    How about a 1.83GHz CoreSolo, 2GB of RAM and a choice of a 32GB SSD or a range of cheap 5400 RPM hard drives. Wifi is essential, Bluetooth and iSight too, but leave out the optical drive, the expensive unibody enclosure and the fancy glass TrackPad. If a full Core2Duo 13" MacBook White with DVDRW and a 120GB hard drive can be sold for $999, a smaller, slower, DVD-less model with a smaller screen, half the processor cores and similar construction can likely be sold for $300 less.

  • Report this Comment On January 30, 2009, at 7:05 AM, Babble100 wrote:

    An iTablet is what's needed. Just take the lid off the aluminum MacBook, thicken it just a bit to accommodate a modest processor and hard drive and battery and wireless, and run OSX on it with all the great finger-stroke features of iPhone...

    Integrate it with iTunes and add an e-bookstore to the current music, video offerings... a natural growth market... books.

    Apple makes what users want. They want a thin light thing that's big like a 8.5 x 11 inch paper tablet. That they can use with their fingers. That synchs with their bigger horsepower desktops and the cloud services (gmail etc)

    Apple owns all the elements it needs to blow away the netbook and Kindle competitors. Just put it together and juice it up. Make it nice. Sell it for $1500 or so.

  • Report this Comment On January 31, 2009, at 9:09 AM, daveshouston wrote:

    Crap is not cheap. Crap is expensive at any price. Apple spent years building a reputation as the one company with the very best products in the industry. Why would they want to put their name on crap?

    Being able to buy a minimal computer for $300 to $600 that can do basic tasks like web surfing, word processing, and email does seem alluring. Buying a new car for under $5000 would be equally alluring. But remember what became of the Yugo and why!

    Even if you have a dirt cheap computer you will need an internet connection. Want to pay Comcast $50 a month to connect your crappy netbook? That makes no sense? Want to go back to a dial-up connection? That's more crap.

    Why am I calling netbooks crap? Because it is what it is. A little tiny screen and cramped keyboard is fine for my iPhone but inappropriate for serious work like writing a college paper or preparing a complex spreadsheet.

    Video is coming to your computer in a big way now. Check out Hulu.com for a sample. That trend will continue and expand. For the best experience you want a large bright rich screen, fast internet connection, and a huge disk drive. Now that disk drives are getting to be incredibly inexpensive (per gigabyte) why would you want to get rid of yours?

    Netbooks are a fad. They're cute but they're crap.

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