Apple Won’t Always Rule. Just Look at IBM.
APRIL 25, 2015
By JEFF SOMMER
Apple can’t grow like this forever. No company can.
In a few short years, Apple has become the biggest company on the planet by market value — so big that it dwarfs every other one on the stock market. It dominates the Standard & Poor’s 500-stock index as no other company has in 30 years.
Apple’s market capitalization — the value of all of the shares of its stock — is more than $758 billion, greater than any other company’s. Yet the Wall Street consensus is that Apple is still having a growth spurt. In fact, if Apple’s watches, phones, laptops and other gadgets and services keep generating favorable publicity — and if its quarterly earnings report on Monday is as strong as the market expects it to be — there’s a reasonable chance that Apple’s value will keep swelling. Not far down the road, it might even reach the $1 trillion level that some hedge funds predict.
But even if Apple still has some room to run, there are some early warning signs. After all, the company has already crossed a significant threshold. In February, it grew to twice the size of the next biggest company in the S.&P. 500, a rare feat of financial dominance, and one that hasn’t happened since Ronald Reagan was president.
I checked the numbers with Howard Silverblatt, senior index analyst at S.&P. Dow Jones Indices. He found that the last market colossus to tower over its competitors by a two-to-one ratio was IBM, which did it in three successive years: 1983, 1984 and 1985. “That was when PCs were new,” he said, “and just about everyone thought IBM would rule the world.”
Now it’s Apple’s world. Apple is the most widely held stock in American mutual fund portfolios. IBM, the former undisputed heavyweight champion, isn’t even in the running anymore. It ranks 62nd, according to a Morningstar analysis performed at my request. IBM is still an important company, but it is struggling. Investors judge it to be worth less than one-quarter of Apple’s market value today. What happened to IBM — how it became this small, in comparison with Apple — is worth remembering.
Market Gains, Now and Then
Apple’s market value is now roughly twice the size of the next biggest company’s in the Standard & Poor’s 500-stock index.
A company had not been in that position since 1985. But while Apple is now bigger than IBM was then, as a proportion of the index IBM was more dominant.
I had forgotten how imposing IBM once was. By some measures, it was vastly more important than Apple is today. Measured by market cap, for example, IBM accounted for a staggering 6.4 percent of the S.&.P. 500 in 1985, IBM’s peak year — making it 2.35 times the size of the second-biggest company of its day, Exxon. Now Microsoft is the second biggest and Exxon Mobil is third, both roughly one-half the size of Apple. Exxon Mobil is followed in market cap by Google and Johnson & Johnson. (On this 45th anniversary year of Earth Day, the staying power of Exxon, from its Standard Oil days to the present, is also worth remembering.)
Apple has an outsize influence today: After the market close on Friday, its share of the S.&.P. 500 was 4.1 percent, a formidable percentage and a huge increase from Dec. 31, when it was 3.35 percent. But its weight in the market is nothing like IBM’s in the 1980s, when IBM finished seven calendar years with a market weight above 4 percent — a showing that Apple has not yet met, the data shows. At IBM’s 1985 peak, its share of the S.&P. 500 was more than one and half times the size of Apple’s today.
IBM operated in a different league than Apple does now. A business machine company at its roots, IBM never aspired to pop-culture coolness, but its prestige was extraordinary. You can’t measure prestige easily with numbers, but consider that in 1987, two IBM scientists based in Zurich won the Nobel Prize in Physics for a breakthrough in superconductivity. It was the second consecutive year that IBM scientists won the prize; in 1986, two of them won it for inventing an instrument known as the scanning tunneling electron microscope. All of those scientists did deep, basic research of which IBM was justly proud. Apple’s research today is impressive, but it has generally been product-driven, not the kind of fundamental work that IBM did.
With hindsight, it’s clear that IBM’s Olympian status was part of its problem. In the 1980s, at the height of its powers, it continued to come up with scientific breakthroughs and ultrafast computers, but its focus on its own product lines and customer service flagged. IBM “naïvely” handed over crucial parts of the computer business to companies like Microsoft and Intel, while its own profit margins began to erode, D. Quinn Mills, a professor at the Harvard Business School, has written.
For the most part, investors minimized those problems, if they were even aware of them. In those days of hulking mainframes, IBM was the quintessential computer company and its hegemony in the stock market seemed unstoppable.
It’s no wonder that a young Steve Jobs, the co-founder of the upstart Apple Computer company, took direct aim at IBM in a speech in San Francisco in the fall of 1983, deriding IBM as arrogant and shortsighted and predicting that it would soon be humbled. At that meeting, he unveiled a remarkable ad that would run on television during the 1984 Super Bowl. Created by the director of “Blade Runner,” Ridley Scott, it showed a young hammer-wielding athlete running through a vast grim room populated by serfs. She hurled her hammer at a screen on which an Orwellian Big Brother was intoning propaganda and shattered it.
A man read the words on-screen: “On January 24th, Apple Computer will introduce Macintosh. And you’ll see why 1984 won’t be like ‘1984.’ ” Apple didn’t mention IBM, but its target was clear. And soon after the Super Bowl, when Jobs actually introduced the first Macintosh to a rapt audience, the little personal computer continued the assault on IBM. In a cute synthesized voice, it spoke these words, which also appeared on its diminutive screen: “Unaccustomed as I am to public speaking, I’d like share with you a maxim I thought of the first time I met an IBM mainframe: NEVER TRUST A COMPUTER YOU CAN’T LIFT.”
IBM thrived for years afterward, but just as Jobs had predicted, it turned out to be vulnerable to disruptive change, as all big companies are. For decades now, IBM has engaged in a sometimes painful transition, and as it revealed in its quarterly earnings report last week, it is still hurting: Its revenues have declined and it has endured wrenching business shifts. My colleague Steve Lohr wrote last week that IBM has been getting out of slow-growing old businesses, like personal computers, disk drives, low-end server computers and chip manufacturing — but its new initiatives in fields like data analytics, cloud computing and mobile apps for corporate customers haven’t entirely succeeded yet.
In a turnabout, IBM’s mobile app strategy relies on a partnership with the current giant, its old nemesis Apple. IBM is leveraging its prowess with supercomputers and artificial intelligence with a new initiative, Watson Health, that includes Apple. That alliance could help both companies grow — in Apple’s case, by ensuring that its products work more seamlessly in corporate environments where IBM is deeply entrenched.
Rapid growth, after all, isn’t a sure thing, especially when you’re already the biggest company in the world. IBM has proved that. Sooner or later, Apple investors will have to take that lesson to heart.
A version of this article appears in print on April 26, 2015, on page BU4 of the New York edition with the headline: Apple Won’t Always Rule. Just Look at IBM.