How Would You Beat Apple Part 2: Getting to $3 Trillion | Jobs-to-be-Done

Jay Haynes  0:00  

Thanks for coming back to How Would You Beat. Today we're going to do something I don't think we've done before, which is revisit a company, How Would You Beat Apple? The reason to do that is Apple this week hit a $3 trillion market cap, the most valuable company in the world currently. And the most valuable to have ever existed. I'm pretty sure I have that right that no other company has ever hit $3 trillion in valuation. We talked about this back in 2014, where we tried to analyze Apple using Jobs-to-be-Done theory and basic company valuation methods to figure out how much Apple was worth in 2014.

Jared Ranere  0:44  

Yes, it was interesting back in 2014, when you're at the post Jay, Apple's market cap was $452 billion. And at the time, you thought that it ought to be worth $3.2 trillion.  I'll add that this wasn't really your opinion, you just walk through an analysis, combining Jobs-to-be-Done market disruption theory and Warren Buffett's Intrinsic Value Model. What's interesting is that there is an article on Yahoo News that talks about how Carl Icahn sold too early. He got out of Apple in 2016, long before its valuation was $3 trillion. So, how did your model work? Jay, how did you do that analysis? And how can that help investors and companies figure out how much an investment is likely to be worth over time?

Jay Haynes  1:43  

Yeah, and the interesting thing I think about this is this method, even though we were valuing a public company, and its publicly traded equity. This actually is the same analysis that product teams should be doing. Because at the end of the day, they're making an investment to say, we're gonna invest $100 Million in this roadmap, what's our return on that investment going to be? Meaning what revenue and profitability can you generate? So part of the analysis is just a basic spreadsheet. If anybody wants the valuation model email us, we'll send you the spreadsheet. It's really straightforward. It's kind of MBA 101, which is that your series of cash flows over time has an inherent value today, because you discounted back. Technically Buffett uses the 30 year treasury, I believe, as the discount rate.  So you're just trying to say, if someone paid you $100, every year for 10 years, how much is that worth? Well, it's not $1,000, because you got a discount back $100 In year 10 is not the same as $100 in year one. So pretty basic stuff. The key then is you have to figure out how much profitability the company has. And that's not hard to do. If you can read basic financial statements. You're really looking at free cash flow. How much cash is available to what Buffett calls the Owner's Equity. So 100% of the company's owned by 100% of the shareholders after they pay off the debt and interest rates and stuff, but then that cash is technically owned by the shareholders. So they could distribute it all except that companies reinvest it and grow. And so you're looking at that owner's earning number, as Buffett calls it. And that's basically your profitability model.  It's your profits in simple terms. 

Then, you have to look at two different innovation theories. One is market disruption, where companies are able to grow, but then a competitor enters the market with a product that gets the job done worse, technically, and then takes over market share. So there's some disruption theory there. But the key really is, do you believe the company is in big enough markets to grow? And remember, back in 2014, being a $450 billion company was ginormous. I mean, Apple was already huge. And this to your point about Carl Icahn, this is why big investors got out there like it can't keep growing. You can't be more than a trillion dollar company. It would never happen. You'd never make three times your money. If you invested in Apple at a trillion dollar valuation.

Jared Ranere  4:20  

Even at the time it was jockeying with Exxon for the most valuable company in the world.

Jay Haynes  4:25  

Yeah. My favorite story about the day that they became the most valuable company in the world was the day my dad finally got off of all of his Windows products. He'd been a DOS and Windows User forever. Which was a sign that Apple is getting some jobs done.

Jared Ranere  4:40  

So to back a second. You mentioned that you can calculate the profits and understand the cash flow and that gives you an understanding of how much the company should be valued today. And then the second key piece is do you believe those profits will grow over time or at least be maintained?

Jay Haynes  5:00  

That's right. And you know, as you and I say, and we tell the companies we work with all the time, how do you know that the roadmap isn't Blackberry? That it's actually the iPhone. That is the unknown mystery. The key in all of this analysis is the growth rate. Because obviously, in BlackBerry's growth case, the growth went negative. When your growth goes negative, you go from an $80 billion market cap like BlackBerry to 0 effectively. The growth rate is everything. 

Buffett said this too, he says growth and value are tied to the hip. Because when you're discounting back those cash flows, you're looking at how much those cash flows are going to grow. And if they're going to shrink, then you should short the stock. So that's the analysis that says, what is behind that growth rate? And there is nothing better at doing this type of thinking and analysis than Jobs-to-be-Done. In our opinion, obviously.  It's not that it's hard to do. It's just a different type of thinking about what companies that are building products. It's thinking differently about why are those products valuable to people in their lives. That's the key question. And what it turns out, if companies are very good at thinking of themselves, as living in their customers shoes. That they really are empathizing with the struggles and the problems of their customers, and they're trying to make things simpler. That is an indication that they're likely really going to succeed. Because at the end of the day, it's about customers. It is about customer value, it's about helping people in their lives. 

You could look at Apple in 2014, and say, they just took a different approach to everybody else, they took a different approach to go, especially in the technology world, they took an approach to go right to the end consumer. And that is true, there are only consumer markets and business markets in medical markets. At the end of the day, every market is a group of people. So they decided IT managers were not the people. That wasn't like a real human thing to be an IT manager. It was this brief period when technology was very complicated, as we would say, and the consumption jobs were very complicated. But you had to have these job executors. It went with the theory very well, because it said we're going to go to the patient. We're going to write to the person who has the problem. And we're going to solve it for them and try to eliminate all these other barriers to solving these problems for them. That's why there's an app that was so successful, because the iphone is a small supercomputer that can get a lot of jobs done.

Jared Ranere  7:45  

So I think what you're raising, brings up a couple of interesting questions. So one is you talked about how you're trying to figure out if your roadmap is going to generate growth. And I think when you're thinking about a one to three year investment time horizon, then you can do that, right, you can evaluate what is the company planning to build? And think about, Is that going to get the job done better in our language? Or in much simpler language? Is it going to generate any value for the customers or not? And is it going to be competitors? What's interesting about this apple growth story over the past is it's an eight year time horizon that we're talking about. So from 2014 to 2022, essentially stretching a much longer time horizon. Apple didn't know what it was going to launch in 2021, back in 2014. And we didn't either.  You did mention that you're betting on the company's process, as well. And I think that's an interesting distinction to make is that there's the roadmap, and then there's how the roadmap is generated, and what the follow on ideas are going to be and how the company is approaching doing that. So how does that play into an analysis? Like you did with Apple?

Jay Haynes  9:01  

Yeah, I think that's right. It's really that team coordination on the roadmap. Do you feel that the team is really aligned around the customer? Roadmapping is an ongoing, never ending process, you're constantly trying to figure out what the path is to continue to innovate. I think that having that process where you're answering every one of those questions, which is what are we doing for our customers? How much value are we creating? What should we prioritize? What should we be focused on? What should we not do? Right? Why should we not stop doing what we're currently doing?  Steve Jobs was famous for this, too. He said he was proud of all the things they said no to as he was of all the products actually ended up ship shipping. This is true of great thinkers. 

I was just thinking about this the other day. I was talking to my daughter about it. People think that Jimi Hendrix was a great guitar player, of course he was amazing!  He had these incredible three albums that he put out, but he also had a huge library that he didn't put out. And people thought they'd found the Hendrix archive. And they were going to launch all this great stuff. But all the archives were all the things that he said no to.  He was like, "I don't like that song. I know I'm Jimi Hendrix, but not everything I do is great."  Knowing what to say no to is incredibly important as well.

Jared Ranere  10:18  

There's a section in the Walter Isaacson book about that, where Steve Jobs would get up in front of the company in Hawaii once a year and write down the top 10 ideas and then cross off 7.  No matter how good the 10 ideas were, 7 of them were going to go away because he thought they could only do 3 things every year.

Jay Haynes  10:39  

That doubles your chance of success. That's so hard to do. Because everybody wants to do everything, everyone wants to be everything to everybody. So to answer your question about process too.  The key is that there's two parts of the mindset. One is, you're not building a product, so your customers will use it. The ideal scenario is they never use your product, they just get the job done. So that's the most important thing. Unless you really are in the creative arts. People want to watch television shows and movies. They want to read books. They want to get immersed in music. Those are called immersive jobs.

Many markets, people do not want to use your product, they want to achieve their goal, which is to get the job done. So that's the first mindset. The second thing against that is everything should be measured for speed and accuracy. Those are the only two metrics you really need. If you are getting something done faster and more accurately than your competitors, you're going to get the job done better for your customer. And you're going to take share over time. If you think about what Apple did, just across its history, you could measure speed and accuracy. Right? I remember, my dad was a DOS Windows guy and I was an Apple guy. I was an Apple II guy and then the iMac came. My dad thought it was a toy. He was like, it smiles at you when it starts up. It's got this pointy thing. He literally described as a toy. And I couldn't articulate why it was better. But as a kid, I knew this thing is so much better than this green blinking screen where I have to type in text. This is cool. I can draw images. I can play music. And it was that the Mac, especially the OS level, just at the OS level, got everything done faster, more accurately. You could drag things into folders, files went into folders, instead of like c dash colon director.  It was always faster and more accurate. That was their mission. That has been true if you look across their entire history. So in this analysis, it wasn't hard to see that Apple had already put in place the combination of disruption. They disrupted themselves. They destroyed the iPod before anybody else could. Unlike Sony, who hung on to the Walkman for way too long, and just lost share. Remember, the Sony Walkman was the iPod of the day.

Jared Ranere  13:21  

I think what is interesting is you can send signals in that culture. So if you're thinking about there's two characteristics you talked about, which are making sure that you're not trying to get the company, the customers to use the product all the time, and you're focused on speed and accuracy. How quickly and accurately can you get something important done for the customer? Help them achieve a goal quickly and accurately. You can see signals in the way that Apple develops and launches products that they're not afraid of. The obvious one is the iPhone, beating the iPod, basically making the iPod extinct, extra extinct. If you read about that, you'll find that there was a lot of turmoil around that decision. And they had to sequester the team. And they ended up following a lot of Clay Christensen's advice about how you disrupt yourself.  Isolate a team, make sure they have a different set of goals and different incentives than the core business and then you have a chance to disrupt yourself. I think the other thing you can see is in a little way.

Jay Haynes  14:25  

Yes. I do want to come back to that too. Let's not forget that because that isolated team thinking differently is so crucial.

Jared Ranere  14:31  

Yeah. So you can see it in little ways with Apple too. I couldn't imagine Facebook, launching something that said, here's how much time you spent on Facebook this month. Try spending less time, right? Apple has now right. My iPhone every week tells me here's how much time you spent and if I spent less time they don't go "ut oh!" They don't bombard me with notifications,  “Try to spend more time.” They sort of quietly celebrate it. You would be incredibly afraid to do that if you had the culture that Facebook has where they measure your success based on usage and time spent with the product. I think you can see in the culture that they have the customer's well being in mind. 

One other thing we talked about --we've got cash flow, we've got process. And those are really important things that help you value a company or to determine if they have a roadmap that's going to help them grow through their process that's going to drive growth. I think the other interesting thing when you said, “that's why there's an app that” was so powerful is the platform. You can think about how the App Store platform plus the iPhone, plus the other products,. Every now and then you'll see my watch and the screen work together to help customers get more jobs done. You can look at the extensibility of that platform and its ability to expand beyond its current value for the customer. And think through if they build the right applications on top of that, and the right feature set and they make the right deals, are they likely to generate growth or not? Right, if they're going to get more jobs done, they're very likely to generate growth, and they have a distinct platform that enables them to do that. So I think that's another key piece. Whereas if you looked at the Blackberry, they didn't have an app store. They weren't very extensible. They had apps that  didn't really do much beyond messaging. And so it was hard to see how they were going to grow beyond the core jobs that they were good at.

Jay Haynes  16:40  

That's exactly right. The platform question is such an interesting one. And this is how I think people underestimate the size of the markets that Apple is going after. Because it's not the market for phones. There is no market for phones. There's no market for iPods. Yes, people are technically purchasing a thing called an iPhone, but they're hiring it to get so many jobs done in their lives. That is the idea behind Marc Andreessen, Why Software is Eating The World, which I think is a silly phrase. But what it implies or what it's really about is software can get so many jobs done better than humans. Better than some manual process they're using. If you want to stay healthy, it's easier to have an app that tells you this is what I need to exercise you today. This is your watch to tell you what your activity level is, etc. We know, because Phil Schiller has talked about this publicly. Apple asks themselves, what job is the watch getting done? And what jobs can the iPhone get done? What jobs can the iPad get done? What jobs do the MacBook and then iMac Pro? That is a great way to build that multi-platform, multi-job, unbelievably defensible moat. 

Back to Buffett, one of his premises is, do you have a defensible moat as a business?  Are you selling wheat, which is a pure commodity, and your wheat is not different from my wheat. My pound of sugar is a pound of sugar. It is pure, undifferentiated with no moat. Now, maybe a distribution or business model, but in innovation moats, you want to have multiple jobs that you're getting done for the customer. You want to make sure you understand each of the products that you're building and what their capabilities are against the job. Because you're never going to mix a multitrack recording session on a watch. Maybe someday but currently not today. So that's how you make these platform decisions when you're looking at your customer's job. You say, Okay, well, can the technology do it today?  And you want to take almost no risk. This is what I think teams also really should adopt from the Apple lesson. Apple actually takes very, very little risk. Because what they're doing today is optimizing around what customers are doing today. And then looking forward to what the next capability is going to be able to do. They don't have a VR system yet. They don't have a talking robot that shows up in your living room. They don't even have a self-driving car. Because they want to be at that moment that the technology actually can get the job done much faster and more accurately. And if it isn't there, that was the era of the Newton. I owned a bunch of Newton's so I was a sucker. It was a bad product. It was way too early. You couldn't do the type of touch recognition that you can do with faster processors. So it did fail, right? It wasn't a great product because they got out of sync but Apple doesn't miss that now.Right?

Jared Ranere  19:56  

Right. They've famously launched products second but they get the job done well, first, right?  Which a lot of startups forget.  They think the first mover's advantage is going to be everything. But it's really the first mover is, who moves to get the job done incredibly well. Not who launches a technology or product first and Apple understands that.

Jay Haynes  20:20  

You could tell that they were using Jobs-to-be-Done type thinking. they were thinking about disruption and they were generating a ton of cash. They had all of the elements of a high valuation company. And the other thing is they were valued at a lower multiple than Google, and yet they were this incredible machine. 

Jared Ranere  20:37  

So to talk about that market size, I think that's a really interesting point to lean into for a second, because you said if you were sizing the phone market, you would have gotten it all wrong. And it's almost counterintuitive, right? Because you think, well, if we're sizing Apple apples market opportunity in 2014, we're going to look at how much are they charging for phones and computers. How many people have the willingness to pay or the wherewithal to pay that much for a phone or a computer. And if you said, Well, we're gonna max out when we fully penetrate that segment that can afford to spend this much on these phones and computers. You would have been way off on their opportunity to generate revenue, because you would have completely missed the billions of dollars in services they're making today. Apple's very good at saying we're not selling this product yet. But we believe we can get a certain job done, we believe we can get jobs done in health. And then we can sell something that's going to generate revenue, once we start getting that job done really well. Whether it's the hardware, we're going to sell in the case of the watch getting health jobs, the selling of hardware into it, or subscriptions in services or a platform and taking a cut of the revenue generated by developers. There's a lot of ways they're making money today that are extensions of the cost of the phone.

Jay Haynes  22:02  

That's right. And I mean, this goes back to the famous Steve Ballmer moment, with the iPhone launch when he was said, "$600 for a phone. No one's gonna pay that!"  That is an almost beautifully perfect Jobs-to-be-Done example. Because as the theory shows, Steve Ballmer is right, no one would pay $600 for a phone. They weren't buying the iPhone to be a phone. That's the whole point. Yes, Steve it has a phone in the name. But that's not what it's doing. It's a tiny supercomputer. The fact that he couldn't see that, it's just, it's incredible for a pioneer in the technology industry. It's not even about the phone.  I sincerely hope there's a day in the future when I never pick up a phone, a brick thing like that and spend too many hours in the day on it. I think Apple's recognizing that there are some serious societal problems with people using apps. Not Apple apps.  I agree that Apple doesn't have social networks with divisive algorithms amplifying everybody's hatred around the world like some of their fellow Silicon Valley companies. So, there's a lot of benefit to that. I also, frankly, think Apple can just do so much more for communities of people. Maybe that's asking too much of them, but why not?  They're the most valuable company in the world. We need help. Humans are a bit unhealthy, certainly the United States. They're literally physically unhealthy. We're financially unhealthy. We have jobs and career problems, education problems. There's no shortage of problems to solve. Thinking outside of the box to use a cliche, obviously, but outside of the phone, those problems are enormous markets. They're going to be digitally connected to something that's going to help improve in all those different markets. So Apple's market opportunities are enormous. 

Jared Ranere  24:24  

I'm an extremely minor shareholder in Apple, but I will not sell that stock until they start saying no to giant markets. Right now they're saying yes to health, they're saying yes to other really large, complex jobs iff you were a phone company you wouldn't get intp. Apple says, "let's take it on. Maybe it's not a phone that is the best thing to solve that problem for you. We'll figure out what it is." That is a hallmark of a company that is going to have a lot of growth potential.

Jay Haynes  25:00  

Yes.  Not to just use social networks as our big competitor today, but why not? Right? Apple has never done well on social networks. They've never done anything socially very well, except for music. Now, I will caveat that they create a creative market. I do believe that that's still a core part of their DNA is helping artists. Musicians, writers, filmmakers, producers, creative artists, designers, architects. The creative community is still highly Apple focused, which is so wonderful. And that creates a lot of markets, right? Music is entirely different today and completely outside of the stranglehold of 5 music companies. The combination, obviously, the internet, but plus Apple, for $190, you could have an entire recording studio is 1000 times better than whatever the Beatles recorded on and then push a button and distribute it all over the world.  Apple's a huge enabler of this which is obviously incredible.

Jared Ranere  26:03  

I would say that though they haven't really gotten into the social network game, right? They haven't built that product. They are enabling connections a million times a day, every day.  A million is a vast understatement. But there's at least a million times in my own life, right? Between messages, FaceTime, and the actual phone.  I'm connecting with people getting that job done way more with Apple than I am with Facebook.

Jay Haynes  26:31  

Yeah, and I think  that's right. And I'm also not a social network person, for just a lot of reasons. I have my friend and  my family social network, and that's all done on Apple devices. So there is this kind of, I don't know what you call it , private but it's not public. So there is that social connection that is great. I do think it's really interesting. Everybody talks about how great it would be for Apple to make an autonomous car. That can be interesting. I think we've talked about Tesla. Tesla's doing an amazing job. All cars should get better and be electric and automated and safe. All great stuff, whether or not Apple could do that I wouldn't prioritize cars for Apple.  I would prioritize much more meaningful markets. Health is definitely one of them. But I would extend health into mental health and physical health and social health and emotional well being an educational health and career advancement. Those big areas, I think, are so much more interesting for innovation that fundamentally revolves around software. And Apple makes great hardware. But of course, there's some great Steve Jobs phrase of,  "Anybody who wants to make great software has to make their own hardware." But at the end of the day, he recognized it was software.  No one wants a brick of glass and CPU, right? They want it to do something. And that, I think, is still an extraordinary opportunity. Now, whether they do it, I don't know.  There's no, we can get a look inside their roadmaps and say, what is their strategy with autonomous cars? 

I think that the reason the 2014 prediction worked well is that Jobs-to-be-Done is very accurate. If you analyze Apple against its competitors' thinking, are they more Jobs-to-be-Done focused than their competitors? The answer is 100%. Yes. And that is a key differentiation. If you look at Google, a great company, a lot of stuff, but some crazy other issues, obviously, but they're an ad driven company. That's where all the revenue comes from. So it is a different relationship to getting jobs done because they're getting jobs done that get you information. Now to their credit too the beauty of search is that you get exactly what you want. 

Jared Ranere  29:02  

For businesses trying to acquire customers, it gets that job done very useful compared to the other solutions out

Jay Haynes  29:09  

It totally did change advertising for businesses. You can track how much instead of the crazy 50% of advertising works.You just don't know 50% –the cliche. Now you know 100% that your advertisement is working.  That's very efficient.

I do think Apple, in its position as helping the consumer, its privacy initiatives are fantastic.  I think those are bigger opportunities than cars, which cars is a huge market. So, that's true, but I'd really rather see them make a difference in more meaningful jobs. Great questions. Tons to talk about Apple always. 

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