Haunted Empire: Apple After Steve Jobs

by Yukari Iwatani Kane

Despite Jobs’s vows never to make a smaller iPad, Apple finally unveiled a 7.9-inch iPad mini in October 2012 along with an incrementally improved next-generation iPad. But instead of leading its rivals in disrupting the market, the company had waited until after many of its competitors had already captured much of the demand. By then Samsung had been selling the smaller format for two full years. When Samsung had first unveiled its seven-inch Galaxy Tab in 2010, Jobs had derided it as a “tweener”—too big to compete with a smartphone and too small to compete with an iPad. But Samsung, Amazon, and others had proved Jobs wrong. Consumers liked the portability. By introducing an iPad of a similar size, Apple was effectively conceding that Jobs had been wrong. The iPad mini drew attention to the fact that Apple was now chasing the competition rather than leading it.

  When the iPad mini went on sale in early November, some of Apple’s biggest stores in New York, Tokyo, and Seoul still commanded lines. But in Amsterdam, business returned to normal just two hours after opening. In Hong Kong, staff outnumbered the customers. Apple sold three million iPads and iPad minis in the first three days, but the excitement had waned considerably.

  In numerous interviews and other public appearances, Cook promised great things to come.

  “The boldness, the ambition, the belief that there are no limits. The desire among our people to not just make good products, but to make the very best products in the world—it’s as strong as ever,” he told the audience at the 2013 Goldman Sachs conference in February. “Our North Star is great product.”

  But his oft-repeated line was sounding tired. Rumors swirled about Apple’s plans for a television, an Internet-connected watch, and a cheaper, smaller iPhone. But there were no announcements to prove his declaration. When Jobs had died, he had supposedly left behind a product road map for the next few years. But the iPhone 5 had been the last model in which he had provided detailed input, and the market was changing fast.

  In the April earnings call, Cook told analysts that new hardware, software, and services would be forthcoming in the fall of 2013 and throughout 2014. But that was a long time away, especially when Samsung and other rivals were flooding the market with new models. A chorus of questions was being raised about Apple’s ability to keep innovating.

  Inside the company, morale had dipped. Employee compensation was tied enough to Apple’s stock that moods tended to rise and fall with the fluctuations in share price. But the lack of new products was making the troops restless, too. Many people worked at Apple because they wanted to change the world. After inventing the iPhone and iPad, making the latest iteration of an already existing device just wasn’t that exciting. Longtime employees began leaving or retiring. Under Jobs they had worked themselves to the bone, and over the years they had been rewarded with stock options. The current price levels were still higher than they had ever envisioned. They didn’t need to work as hard anymore, especially if they couldn’t see a further upside. Newer employees also had less incentive to stay because they had joined too late to benefit from the huge run-up in stock price over the last few years before the decline started. They had a better chance of seeking their fortune elsewhere, at a company that was still on an upward trajectory.

  Even the employees who stayed were less hungry. Whereas Jobs used to recall his executives from vacations so frequently that they wondered if he did it on purpose, Cook respected his people’s personal time. With more flexibility, people began taking vacations more freely. Executives bought vacation homes and expensive new cars. Eddy Cue—an avid Ferrari fan—joined the board of the Italian sports car maker. After Monterey Car Week—an internationally renowned car show for racing enthusiasts—the legendary Christian von Koenigsegg himself stopped by Apple’s campus to show off a Koenigsegg Agera R, a $2.5 million beauty that could accelerate from a standstill to 186 miles per hour in 14.5 seconds.

  Ive was seen more often in London, where he went to the Olympics, attended arts events, and was photographed at the Burberry Spring Summer 2013 Womenswear show. He also took on a side project, agreeing to design a single limited-edition camera for Leica for charity. In February he was spotted at the St. Regis hotel lounge showing off sketches of the camera design that he had in mind. The designer also appeared on the BBC’s iconic Blue Peter children’s program, where the host presented him with a gold Blue Peter Badge, and he in turn presented the host with a larger badge made of solid aluminum with the lab’s CNC automated milling machine. His industrial designers were enjoying themselves more as well, investing in restaurants and taking exclusive trips. In early 2013, a few of them went to Baldface in British Columbia, where they went skiing and snowboarding via snowcats and helicopters.

  What they gained in happiness, they lost in intensity. Just as Gautam Mukunda had predicted in his theory about business physics, forces were dragging Apple to the mean. The trappings of success were weighing the company down. Without Jobs’s larger-than-life personality to referee the tensions, rivalries had intensified. Cook’s reign set off a new round of jockeying. Some observers wondered if the CEO was purposely allowing conflict to see who bubbled up. The firings of Forstall and Browett only upped the stakes.

  With Forstall gone, power was flowing toward Ive. In the BloombergBusinessweek interview, Cook couldn’t say enough about his chief designer.

  “I don’t think there’s anybody in the world that has a better taste than he does. So I think he’s very special. He’s an original,” Cook said. “I love Jony.”

  Now that Ive had control over software designs, he had more responsibility than ever for the company’s success or failure. But that also meant risking a breakdown in the equilibrium in product development that Jobs had so carefully calibrated.

  “There is more to designing products than just what the product looks like. You have to think about the product holistically, about what’s inside and what’s outside,” said Jon Rubinstein, Apple’s former hardware executive. “Only when the right balance is achieved do you get truly spectacular products.”

  If Apple became even more driven by design than function, its products might look good but work poorly. Problems such as the iPhone 4 antenna fiasco were almost certain to repeat themselves. Industrial design was about surface beauty. Software design was about functionality. The disciplines actually required different ways of thinking. This was why it was rare for a designer to be good at both industrial design and user interface. Ive could be a brilliant exception that understood that balance, but some people who had worked with him weren’t so sure.

  When Apple was working on the remote control for the Apple TV digital media receiver several years before, Ive and his designers had insisted that the controller have just six buttons: up, down, left, right, enter, and menu. Engineers argued that the remote should have at least a play button and universal volume buttons, so users could adjust the volume on their televisions while watching a show. Without those features, they would inevitably switch to another remote control. But industrial design won the argument. Though Apple later added a play/pause button, the first generation of Apple TV remotes shipped without either function. Because of the insistence on a minimalist design, users’ interaction with Apple TV was made more difficult, not less.

  The only way to prove the skeptics wrong was to come out with a ground-changing product. As Ive got serious about proving himself, he read his designers the riot act. No more playing. It was time to get back to work.

  On a cold afternoon in March, reporters lined up for hours in New York City to attend Samsung’s launch event for its latest Galaxy device. Five hundred thousand people tuned in to YouTube to watch remotely. Samsung was mounting a glitzy show, produced by Broadway veterans, at Radio City Music Hall.

  The invitation to the launch did not reveal what kind of device Samsung was launching. “Come and meet the next Galaxy,” was all Samsung had said in white print on a black card. Like Apple, the company didn’t name the next device but teased the audience with the words, “Ready 4 the Show.” Since th
e previous Galaxy was an SIII, this one was expected to be an S4. The blogosphere eagerly speculated on whether the next Galaxy might include eye tracking, a first-of-a-kind technology that would allow users to scroll through pages with eye movements.

  “It’s usually Apple, not Samsung, that gets this kind of attention,” the All Things Digital blog noted. All of the attention had gotten rivals so nervous that LG took out a billboard on Times Square that played off the “4” in Samsung’s ad right underneath it.

  “It’ll take more than 4 to equal one LG Optimus G.”

  HTC, meanwhile, crashed the party. Standing outside of the event hall, company staff demoed its new HTC One phone to those who had arrived early.

  Apple wasn’t above such ploys. Usually the company avoided media attention, turning away press requests with a blanket insistence that it never granted interviews. But on the eve of Samsung’s launch, the public relations department was contacting reporters and offering up phone interviews with marketing chief Phil Schiller even though he had no new product to talk about. In the past Apple had provided a sneak preview of its next operating system in mid-March, but this year the company wasn’t ready to even do that.

  “We’re in uncharted territory,” a spokeswoman admitted.

  Hustling one of its top executives was a feeble attempt to steal Samsung’s thunder. Even though Schiller had nothing in particular to talk about, he did what he could. In an interview with the Wall Street Journal, he played down the competition and listed all the ways Android-based phones like the Galaxy were inferior to the iPhone.

  “Android is often given as a free replacement for a feature phone, and the experience isn’t as good as an iPhone,” he told two Journal reporters. “When you take an Android device out of the box, you have to sign up to nine accounts with different vendors to get the experience iOS comes with. They don’t work seamlessly together.”

  Schiller also presented Apple’s own research showing that four times as many iPhone users switched from an Android phone than the other way around.

  “The most important thing to Apple,” he said, “is that people love our products.”

  The reporters wanted to return to Schiller’s claim about how much consumers preferred iPhones to Android phones. If that was true, one asked, why was Samsung gaining market share?

  “I don’t think market share is the best measure,” Schiller said. Though he was clearly trying to avoid mentioning Samsung, he seemed unable to help himself. Off the record, he suggested that Samsung and Android were picking up sales from the low-end market. “It’s not coming at our expense as much as it was at other people’s expense.”

  The reporters pressed. Why, they asked, was growth flat?

  Schiller didn’t want to answer.

  “That’s a question for our earnings call.”

  When was the next iPhone coming out?

  Again, Schiller deflected, but this time with a whopper.

  “Most customers are interested in the newest products and the products we’ve announced over the last few months,” he insisted. “I think most people in the world aren’t worried about what’s coming.”

  The desperation of that statement was so naked that it took the breath away. Here was a company that had staked its fortunes upon its matchless ability to make the world stand in line for whatever jaw-dropping machine it invented next. Now that Apple’s wellspring of innovation appeared dry, its marketing chief was reduced to claiming that the world didn’t care.

  18

  Holy Grail

  In the end, Apple needn’t have worried about Samsung hogging all the attention.

  Despite the buzz, the Galaxy S4 launch proved to be a colossal bust. The one-hour extravaganza, complete with a live orchestra, was a disaster. The show opened with a video of a little boy dressed in a bow tie as he tap-danced from his home into a Rolls-Royce to deliver the new phone up to the stage. From start to finish, the production felt strangely out of touch. Samsung was trying both too hard and not hard enough. The master of ceremonies, Broadway star Will Chase, looked like he wanted to flee the stage as his jokes and banter fell flat before the dumbstruck audience. J. K. Shin, the executive who headed Samsung’s mobile communication division, strolled into the spotlight, triumphantly holding out his arms and inviting adoration as though he thought he was Elvis or Steve Jobs. But when Shin opened his mouth to brag about the new phone, he sounded stiff and awkward.

  What had led Samsung to believe that stilted Broadway skits, featuring hackneyed characters and tone-deaf dialogue, would help sell their new product? Though a Tony-winning director was listed in the credits, Samsung executives in Seoul had micromanaged even the tiniest details of the production, down to the socks worn by the actors. Their misreading of modern American culture was staggering, especially in a skit near the end where several women at a bachelorette party—all of them holding a Galaxy—were shown worrying about their nail polish drying, joking about marrying a doctor, and ogling a shirtless gardener.

  “Okay,” said Chase, ushering them offstage. “I think you girls are done.”

  The launch hadn’t even ended before Samsung fell under attack. Many decried the company’s retrograde take on women.

  “Samsung weird,” declared a headline on the Verge site. “How a phone launch went from Broadway glitz to sexist mess.”

  “I don’t get offended very often,” wrote tech blogger Molly Wood. “But Samsung’s long parade of ’50s-era female stereotypes, in the midst of an entirely long parade of bad stereotypes, just put me over the edge. Oh, they announced a phone? You’d barely know it.”

  For all the headway that Samsung had made in its TV commercials, the launch showed how the company still had a long way to go before it could hope to usurp Apple’s iconic status. But as embarrassing as the event was, in the end it made no difference. The Galaxy S4 sold almost twice as fast as the previous model. Sales in the first month hit ten million, putting Apple on the defensive.

  With no new product to compete with Samsung’s latest device, Apple responded in the only way it could, claiming superiority through a marketing slogan.

  “There’s iPhone. And then there’s everything else.”

  Apple’s woes were deepening. Despite Tim Cook’s prime seat at the State of the Union address, doubts were being raised about the company’s patriotism. The year before, when the New York Times published its iEconomy series about Apple’s effect on the U.S. economy, the newspaper had blamed Apple for moving manufacturing jobs out of the country and squeezing the middle class. One of the quotes in the article had garnered much attention because it was so smug.

  “We don’t have an obligation to solve America’s problems,” an unnamed executive had told the reporters. “Our only obligation is making the best product possible.”

  The article created such a furor that the company felt compelled to commission a study quantifying the number of American jobs that the company had helped create as a result of its success. According to its findings, Apple had created or supported more than five hundred thousand jobs, more than ten times the number of people it directly employed.

  The New York Times’s dissection of Apple had been unrelenting. A few months later the newspaper published another powerful exposé focusing on how the company was sidestepping taxes by setting up shell offices in Nevada and overseas, where tax rates were much lower than in California. Describing an accounting technique called “Double Irish with a Dutch Sandwich,” the newspaper detailed how Apple routed profits through Irish subsidiaries and the Netherlands and then to the Caribbean. Without such tactics, Apple would have had to pay $2.4 billion more than the $3.3 billion it paid in 2011. At a time when the government’s cash was running short and federal programs were being cut, the notion that large corporations were avoiding taxes was unforgivable.

  By the time the articles won a Pulitzer Prize in April 2013, the idea that Apple was skirting billions of dollars in taxes—and was contributing to the nation’s economic dow
nturn in other ways—had been firmly planted in the national conversation. In an interview with BloombergBusinessweek, Cook was asked about Apple’s obligation to the country.

  “I do feel we have a responsibility to create jobs,” said the CEO. “I think we have a responsibility to give back to the communities, to pick ways that we can do that . . . and not just in the U.S., but abroad as well. I think we have the responsibility to make great products that we can recycle and that are environmentally friendly. I think we have a responsibility to make products that have a greater good in them.”

  Inspiring as that answer sounded, Cook’s assertion of Apple’s higher purpose was not so easily squared with the revelations of the company’s tax avoidance schemes. How exactly did the Double Irish with a Dutch Sandwich serve the greater good?

  Cook was about to be asked the question again, this time in front of Congress. For years, the Senate Permanent Subcommittee on Investigations had been trying to nail technology companies that were taking advantage of the country’s outdated tax code to pay little to no taxes. After skewering Microsoft and Hewlett-Packard over their accounting tactics the previous fall, the committee was now turning its attention to Apple.

  At issue were the lengths to which Apple went to squirrel away its profits overseas. Of about $145 billion in cash, cash equivalents, and marketable securities, $102 billion was being kept outside the United States, untaxed by the company’s home country.

  Until then, Apple had kept a low profile in Washington in part because Steve Jobs had never had patience for dealing with the government. Among the tech giants, its spending on lobbying efforts was one of the lowest for the company’s size—$9.05 million since 2008, compared with $38 million for Microsoft and $38.2 million for Google, according to the Center for Responsive Politics. But as Apple’s profits grew, dealing with the government had become unavoidable. Its movements were followed and appraised more closely.