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A Cautionary Tale for Apple Investors

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There's a company that defined the future for a generation. It pioneered new innovations in a range of technologies, and its brilliant co-founder forged a brand admired around the world. But without that leader, the company has struggled and ceded its leadership to upstart competitors.

If you think I'm talking about Apple (NASDAQ: AAPL  ) and Steve Jobs, I'm not.

The company I'm describing is Sony (NYSE: SNE  ) , which redefined and reinvented the electronics industry for 30 years. Beginning with the transistor radio in the '50s, Sony pioneered dozens of innovations in the '60s, '70s, and '80s that pushed technology forward and changed the way we were entertained. Led by visionary co-founder Akio Morita, the company invented or popularized ubiquitous standards such as the Walkman, the compact disc, the 3.5-inch floppy disc, and the camcorder. Sony ensured its own profits and success by producing high-quality products that commanded higher prices than the competition, much like the iPhone-maker that would follow in its footsteps.

Like Steve Jobs, Morita knew how to create a brand identity and had a knack for marketing and recruiting talent. On a trip to the U.S. in the '50s, he noticed that American workers were much more mobile than their Japanese counterparts, and when he returned to Japan he began encouraging talented employees at other companies to join Sony. Like Apple, Sony was also known for developing its own in-house standards and technologies, and even its failures, such as the Betamax video system, were considered technically superior to rivals such as JVC's VHS system.

After Morita left the company in 1989, Sony embarked on a string of acquisitions, including CBS Records and Columbia Pictures, and began to reinvent itself as a media conglomerate rather than a technology innovator.

But without Morita, Sony never recaptured the magic it had with its run of groundbreaking inventions and cultural touchstones such as the Walkman, and now it seems to be just one of a million electronics and media companies. Sony recently sold off its trademark U.S. headquarters in New York for $1.1 billion, and it's looking to sell one of its Tokyo buildings for a similar amount. Nearly 25 years after Morita's departure, Sony shares are worth nearly the same as their 1989 value today, while the S&P 500 has gained nearly 400%.

Is Apple the next Sony?
No one knows what Apple's future holds, but the hit parade over the past 10 years that's included the iPod, iPhone, and iPad seems to be coming to a close. As we saw in its latest quarterly report, Apple's gross margins are shrinking and profits have stalled, evidence that their products no longer command the premium they once did. The halo is fading.

With new products that simply seem to be stripped-down iterations of old ones, such as the iPad Mini and an expected cheaper iPhone, the company seems to have to switched to a harvest strategy, trying to maximize the value of old products, instead of creating the kinds of products that consumers don't know they want, as Steve Jobs famously said.

Rumors continue to swirl about an Apple TV, which was once thought to be coming in the fall of 2012, but talk of a smart TV continues to be just rumors for now. Though that market figures to be rich with potential for a company with Apple's brand loyalty and tech savvy, it's up to the kids in Cupertino to make it happen.

Considering its 12-digit cash pile on its balance sheet, an acquisition or two is easily foreseeable. Apple could branch out into an up-and-coming new technology such as 3-D printing, snatching up a company such as industry leader 3D Systems (NYSE: DDD  ) , worth $3.3 billion. It would barely know the money was gone. With Apple's marketing muscle and brand awareness, it could surely hasten the day when 3-D printers become a household item. Perhaps it's fitting that one of the most popular 3-D-printed items is iPhone cases.

Foolish bottom line
Plenty of ink has been spilled on the genius of Steve Jobs and what his passing means to the company he created. That debate is sure to endure, but Sony's example may offer the best cautionary tale for Apple and its investors. What was once a beacon of innovation has become a commoditized electronics producer and a bumbling media giant, largely because of the departure of its visionary leader.

Apple needs to learn from Sony's mistakes. It must keep innovating or it will follow in the same path to mediocrity. As shareholders saw in the stock's recent fall, the market seems to already have written the obituary on its halcyon years. With consumers quickly shifting their tastes, it's up to Tim Cook and company to write a new chapter before the market closes the book on them for good.

There's no doubt that Apple is at the center of technology's largest revolution ever and that longtime shareholders have been handsomely rewarded, with more than 1,000% gains. However, there is a debate raging as to whether Apple remains a buy. The Motley Fool's senior technology analyst and managing bureau chief, Eric Bleeker, is prepared to fill you in on both reasons to buy and reasons to sell Apple and what opportunities are left for the company (and, more importantly, your portfolio) going forward. To get instant access to his latest thinking on Apple, simply click here now.

Read/Post Comments (12) | Recommend This Article (10)

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 February 04, 2013, at 8:24 PM, mitchellgdm wrote:

    Did you know Sony made a 3d Printer but it failed.

  • Report this Comment On February 04, 2013, at 8:30 PM, neocolonialist wrote:

    > gross margins are shrinking and profits have stalled

    Okay, the first point is obvious, but profits have stalled? I didn't see that in the financials. They are still minting money best I can see. And I grant you that Sony fell and the same could happen to AAPL, but how long did that take? At the current share price I think there is plenty of upside, and very little downside to Apple's stock at the moment. Time will tell.

  • Report this Comment On February 04, 2013, at 9:00 PM, pwready wrote:

    Research firm Strategy Analytics has come out with a report showing that Apple has overtaken Samsung as the top phone maker in the all-important U.S. market. The Cupertino, Calif.-based firm sold 17.7 million smartphones during the fourth quarter, taking 34 percent of the market. Samsung sold 16.8 million units, capturing 32.3 percent of the market.

  • Report this Comment On February 04, 2013, at 9:16 PM, TimKnows wrote:

    Apple is a bust for 2013, they don't have anything to offer now.

  • Report this Comment On February 04, 2013, at 9:58 PM, singaporenick wrote:

    This is either a very ignorant article,or an article written with a hidden agenda in mind,presumably trying to short the stock.

    Profits are not actually stalling,they are at record highs.

    Margins were down last quarter because of all the new product offerings-there is a long history at Apple of margins being lower for new products,then increasing as that product stays in the market.Maybe this writer needs to do some research before pumping put this nonsense.

  • Report this Comment On February 04, 2013, at 10:44 PM, Drew9944 wrote:

    You're wrong alot you say about SONY. They didn't pioneer transistor radios... GE and others made them in USA before SONY CHEAP YEN in 1960s made cheaper ones. Transistor invented in USA 1947. Nor did they invent CDs and DVDs, RCA invented the Video-disc and also Color TV. SONY invented very little. Plus what really ails SONY is their high labor and pension cost of Japanese workers... APPLE never has this problem as China is much cheaper labor than Japan, plus Apple is not responsible for any pensions for its 1 million contract production workers in China.

  • Report this Comment On February 04, 2013, at 10:46 PM, bbrriilliiaanntt wrote:

    Sony was never a vertically integrated software / hardware manufacturer. Sony never had an eco-system, barring Mini Disk <;)

    You bring up a great thesis, but AAPL is not in the same business universe as Sony, Dell, Blackberry, Acer, Lenovo, Samsung, etc. They are interchangeable hardware manufacturers - You buy a Dell one year --> You buy Lenovo the next - There is zero incentive to buy another Dell.

    The lock-in for the average Apple iPhone owner is $150 just in Apps alone…

    Build a model for the lock-in for the rest of the ecosystem off top of my head below, and compare to Sony's ecosystem, thank you for your article:

    • ‘Mac OS X’ integrated with iOS

    • Apple TV integrated with iOS / Mac OS X – All my media available on any TV in house real-time

    • iCloud – Email/Contacts/Reminders/Notes – Synced across all iDevices/Macs In real-time

    • iTunes Match – All my music, TV shows, Apps, Movies available on all my iDevices, Mac, Apple TV – available real-time - FOREVER

    • Apps

    o The best app store (quality of apps)

    o 300K Apps designed specifically for the iPad

    o Most apps are now ‘Universal’ – Pay 1X for a custom experience depending on if you are on your iPhone or iPad

    • iTunes – The best Media / iDevice Management / Music_Books_Movie Discovery application available – By a lot…

    • Siri – Alarms, Sending Texts / Emails while driving, Play artists/playlists while driving, Turn by Turn Nav, Sports Scores, MOVIE TICKETS…

    • Airplay –

    o From iPad / iPhone to TV

    o From iPad/iPhone/Mac to ‘Airplay Speakers’

    • Find My iPhone / Find My iPad

    • iMessage

    • 3rd-party products – By far the largest selection for any product category in history

    o LifeProof Case – Completely waterproof for running, on a boat, glacier mountain climbing

    o iCade

    o B&O Airplay speakers – Awesome!

    o Truck / Car / Kitchen / Etc. docks – For iPhone/iPad

    o Etc., Etc. Etc.

    • Apple Store – To see products, fix products, have fun

    • iBookstore

    • Game Center

    • Time Machine – Backups just happen vs. all the suffering involved with ensuring a proper Windows backup, jeez, and I am an IT professional

    • Design, Design, Design

    o You know Apple will always have epically designed hardware going forward – They have a 3 decade history!

    o You know Apple will always have epically designed software/Mac OS/iOS – They have a 3 decade history!

    • Apple History – My 1st computer was an Apple IIe back in 1986. I have 3 decades with Apple, and its always been about the products!

    • Lastly, and VERY IMPORTANT – I can work on my ‘Fortune 500’ clients, who are ‘Windows-based’, all from my Mac without ANY compatibility issues

    o Have to say it, GRRRR – Microsoft Office for Mac (With all documents having a xml extension to be compatible with corporate Microsoft Office – e.g. .docx)

  • Report this Comment On February 05, 2013, at 2:27 AM, TechnoHistorian wrote:

    Today Apple's ability to innovate seems tame ONLY IF we exaggerate the innovativeness of an earlier era:

    This article, like many others nowadays, chides Apple for not wowing us with a constant stream of major innovations: products like the iPod Mini for example "seem to be stripped-down iterations of old ones, such as the iPad Mini," according to Jeremy Bowman in this article.

    But let's keep in mind:

    1) In roughly 15 years at Apple after his return Steve Jobs gave us three disrupter products: the iPod, iPhone, and iPad. These were not monthly or even yearly break-throughs.

    2) In the interim he gave us "iterations" of these devices. I recall some of his presentations where he displayed multi-colored iPods or smaller and smaller iPods.

    3) He also introduced products that went no where, such as the Mac G4 Cube (I liked it) and Apple speakers (I own two).

    We haven't seen a new, disruptive product from Apple recently, but again, they were never annual events. In the mean time those incremental improvements at Apple are terrific: my new 15-Inch Mac with retina display, for example is an amazing computer, nothing like what you could buy a couple of years ago. And the iPhone 5 with Siri gets better and better.

    That said, I wish we could measure innovativeness more accurately -- my sense is that Apple today is just an innovative as any other tech company in the world, and much more so than most!

  • Report this Comment On February 05, 2013, at 11:56 AM, somethingnew wrote:

    "I have 3 decades with Apple, and its always been about the products!"

    It was not always about the products in the last 3 decades. When Sculley took over in the 80's it became about the sales and the products were put on the back shelf until Jobs came back.

  • Report this Comment On February 05, 2013, at 12:39 PM, StopPrintinMoney wrote:

    AAPL has delivered it's iBubble already. BOOM

  • Report this Comment On February 05, 2013, at 1:06 PM, Realexpectations wrote:

    The NUMBER 1 thing ANY company could and SHOULD do to make a come back

    Listen to CUSTOMERS!

    Something Stevie never did, and that only goes so far.

    But what do I know

    I'm just a consumer that only buys the best products.

  • Report this Comment On February 06, 2013, at 9:02 AM, mateonelson wrote:

    Kudos drew944, motley fool writers can not even do simple fact checking. You are right, sony did not invent any of these products the obtuse writer at motley fool claims. I look at motley fool as entertainment, like Jim Cramer, and can not bellieve that anyone would take any of their recommendations seriously. Do they make their stock recommendations using the same reasoning as this author used in writing this article?

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