Apple 2.0

Covering the business that Steve Jobs built

Live: Apple Inc. CEO Tim Cook speaks at Goldman Sachs

February 12, 2013: 10:22 AM ET

Dismisses shareholder suit as silly sideshow; says visits to Apple Store are like Prozac

Cook and Shope. Photo: Camillo Miller

Cook and Shope and some empty seats.

FORTUNE -- Apple (AAPL) is streaming Tim Cook's remarks live on its website here.

We invite you follow along with us.

Goldman CEO Lloyd Blankfein did the introduction. The questions will be posed by Bill Shope, Goldman Sachs' chief Apple watcher.

Q: Starts with a question about distributing Apple's cash to shareholders.

A: "Apple doesn't have a depression era mentality," in answer to David Einhorn's characterization of Apple's cash management strategy. Points to how much money Apple invests in CapEx and the stock buybacks and dividends it has already paid out.

"Now we do have some cash," he says, to laughs. "It's a privilege to be in this position." Repeats last week's promise that the board is considering how to give the shareholders more.

Characterizes Einhorn's preferred stock idea as "creative." (The stock just popped a bit on that word.)

Q: Asked about the lawsuit on the proxy's Proposition 2 filed by Einhorn.

A: Cook characterizes it as a shareholders rights issue. The "blank check" thing means if Apple wants to issue preferred shares it needs shareholder approval. Characterizes it as "bizarre" that Apple would be sued for doing something good for shareholders. Calls Einhorn's legal action "A silly sideshow" and "a waste of shareholder money." Tough words. Pretty much shuts down further dialog with Einhorn.

"The serious issue it hand is the return of cash -- how to do it, how much to return."

Q: Asked about Apple's acquisition strategy. Is there something in Apple's DNA that turns you against large acquisitions?

A: Apple has averaged an acquisition every other month. Looking for either smart people or intellectual property. Offers PA Semi as an example. Taking talent and moving them to a task Apple needs addressed.

"We really like to control the primary technology behind the product."

Apple has looked at buying large companies, but they never "passed our test." Will look again. But we're disciplined and thoughtful and don't feel pressure to just go out and acquire revenue. Repeats that Apple just want to make great products and if a large company helps them do that they will consider it.

Q: Switching to products. How do we think of Apple's culture of innovation?

A: It's never been stronger, Cook claims. Deeply embedded. In DNA of company. There's no better place for innovation, he says. But there's no formula. Talks about skills and leadership. Apple has skills in hardware, software and services. The old modular model of the PC industry isn't working, he says. Claims the magic happens at the intersection of all three spheres, i.e. with integrated hardware, software and services.

For many years, vertical integration was out of favor. Apple kept at it. People are now trying to catch up to Apple and finding it's not so easy to do.

Praises his people. Starts naming names. Ive. Marshall. Williams. Schiller. Dan. Craig.

I've never been more bullish on innovation at Apple. (Stock is now down $6 for the day.)

Q: Asked about law of large numbers (sic) and loss of market share in smartphones. Has the iPhone's share reached upward limit?

A: We don't have upward limit in Apple vocabulary. When look at smartphone market, sees market expected to double over the next four years. In long-term, all phones will be smart. I see a market that may be one of the best markets of all time. Apple has enormous momentum. Got 500 million in five years, but over 40% happened last year. Mentions ecosystem, money being paid developers. Compares to the app market in the PC industry. I see momentum, ecosystem, what Apple has done in China. Hard to say it's not impressive. Tons of opportunity in emerging market. "I see a wide-open field." (No mention of Samsung, the elephant in the room.)

Q: Asked about affordable phone for emerging market.

A: Our North Star is always great products. That said, look at how Apple lowered the price of iPhone 4 and 4S . Last quarter, didn't have enough supply of iPhone 4. The level of demand surprised us. If you look at iPod, gone from $399 to $49. We asked how can we make a great product that's cheaper. People also asked why can't you make a $500 Mac? We looked at it and decided we couldn't do it. So what did we do? We made iPad.

Q: Asked about larger screen sizes for iPhones.

A: Don't interpret anything I say as what we will or won't do. Some people focused on size of display. May not be the most important thing. Mentions Retina display. What Apple does is sweat every detail. We want the best display. Won't comment on future, "because that releases the magic" (That strikes me as a weird way to put it.)

"The only thing we will never do is make a crappy product."

Q: Asked about the iPad...

Oops, I've lost the Quicktime feed...

... back now. He's talking about the iPad ecosystem in terms of number of apps. "I have no idea of market share because we're the only company that reports units. (That's what I've been saying!) Mentions ways of measuring usage -- in particular an IBM survey that showed way more iPads than Android devices being used on Black Friday (BTW that we found out later that IBM didn't really measure Android usage.)

Brags about iPad being sold in every market -- Fortune 500, education, consumer. Says it shows that the customers want integration.

Q: Asked about iPad mini and impact on gross margins. Is that the trade off in the future going after market share?

A: The first time I was asked about cannibalization was the iBook. People worried that the iPad would kill the Mac. Trots out the old saw: If we don't cannibalize, someone else will. Says there's a lot more market to grab in the Windows PC market. "If a company starts worrying about cannibalization it's the beginning of the end."

50% of people in China and Brazil who are buying an iPad don't own an Apple product (a new stat!)

Describes the tablet market as "the mother of all markets."

Q: Asked about gross margins longer term.

A: Ducks question. But you can always accept a lower margin for a strategic reason -- maybe an entry into a new area. In the background we always know that the halo effect plays. We're confident we can get the supply chain to get prices down. Because we're not a hardware company, we have other ways to make money and reward shareholders. Last quarter if you look at our services and software, it was $3.7 billion -- that's an incredible amount of revenue! There are things we do and could do to make profits flow.

"We don't look at the sale of a product as our last relationship with a customer. It's the first."

We're managing Apple for the long term. I know people care about quarters, and we care. But the decisions we make are not for the 90-day clock.

Q: How does platform work in emerging markets where they can't buy songs or movies?

A: App store now operating in 150 countries. iTunes in 100. iCloud in every country. Messages in every country that we can. Only one major country where we're not selling movies. Our intention is to have all our ecosystem everywhere.

Q: Asked about retail plans.

A: No better place to find out about Apple product. The store acts as a gathering place in the community. It's the face of Apple. People love them. Last quarter we welcomed 120 million people in our stores. This is huge. So huge that some of our stores are too small. This is like the issue about cash. It's a privilege to have this kind of problem. First store in Turkey coming. Four stores in China last quarter.

"I don't think we would have been nearly as successful with iPad if it weren't for our stores." No one wanted the heavy tablet that the Hertz guy used. Stores that welcomed 10 million people in a week gave people a place to try the iPad out.

We're going to continue to invest heavily in stores. (No question about putting someone in charge of retail after the last guy was fired?)

If I ever have a down day, I go into a store. It's like a Prozac. It's a feeling like no other.

Q: In closing. What most proud of in first year as CEO.

A: Most proud of our employees. People there to make the best products. To do the best work of their lives. I'm incredibly proud of our products. We have the best phone, best tablet, best PC, best music player in the market. I'm very proud that we're out front, have a spine on supplier responsibility. We don't care if people are lobbying grenades from the sideline. Proud of environmental record. Solar energy, etc. I don't mean to gush, but that's how I feel.

Thanks Goldman, and for flexibility in changing schedule (so he could go to the White House tonight.)

And that's a wrap. Cook didn't do Apple's share price any favors. The stock closed down $12.03 (2.51%) for the day.

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About This Author
Philip Elmer-Dewitt
Philip Elmer-DeWitt
Editor, Apple 2.0, Fortune

Philip Elmer-DeWitt has been following Apple since 1982, first for Time Magazine, and now on the Web for Fortune.com.

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