Apple's cash hoard: Begging for a 'windfall tax'?

It's almost a truism that while Microsoft struggles to do anything right (in the media's eyes), Apple can pretty much do no wrong.

This is as true of Apple's cash position, which BusinessWeek recently noted may soon surpass that of Microsoft's, as it is of Apple's product portfolio and business strategy.

It's the cash that I find particularly surprising. Apple is swimming in cash, more than $20 billion of it. The company adds more than $1 billion in cash to its stockpile each quarter. Today we give Apple a free pass on its iTunes/iPod lock-in, which delivers much of the Apple profits, because we can still happily apply such adjectives as "cool" and "innovative" to Apple.

The U.S. Congress is fixated on taxing the oil and gas companies for their "windfall profits" today, while Apple's profit margins as a percentage of sales are actually higher than Exxon's and those of the other bogeymen of Congress.

There was a time that we said similar things about Microsoft and happily bought into the lock-in that we'd eventually come to mistrust and seek to escape. Few are saying this now of Microsoft. And its cash hoard of roughly $23.7 billion has simultaneously become a cause for envy and concern: what will the convicted monopolist do with that pile of money? Can it possibly be in our interest?

I suspect that even ardent Apple fans like myself will someday be asking similar questions of Apple. As we buy our way deeper into the Apple ecosystem by adding various pieces of Apple hardware to our homes and offices, Apple will eventually accelerate our dependence on its technology by adding more software offerings (e.g., MobileMe) that make it easier for us to keep this sea of hardware connected and productive.

At that point, we'll start looking for a new savior and wonder when we allowed ourselves to become so dependent on Apple, just as we once asked of Microsoft. For the moment, I think the giddiness of having a real choice sends us from Microsoft to Apple, Google, and others.

It won't last. We're a fickle lot. I can't buy Apple's hardware fast enough today. I'm guessing I'll regret it tomorrow.

[dascha1]

Music-on-demand and Internet Radio are the fusion model. As a friend of mine from VA Tech told me recently he doesn't have time to look-around for things as he gets older. but he likes a lot of flexible programming choices that he's willing to pay a modest subscription fee. Then again, I still have my gray T-Shirt with the Apple logo on it from the ICTW Apple contest in 1992 for submitting the application Accessible Music Network, go figure!

[areyoukidding26]

Couldn't find anything to write about today, huh?
Well, the big difference is that Apple makes its money by innovating and by reducing the cost of its products. Big oil has been anything but innovative and even makes record profits when the price of its raw materials go up...while doing nothing for global warming or the establishment of renewable energy.

[chabig83]

I'm sorry. This story is really dumb on so many levels.

First, there is no iTunes/iPod lock-in. iTunes music plays on any Windows or Mac computer, in addition to iPods, has DRM that can be easily removed, and the DRM was imposed upon Apple by the music cartels, not the other way around. iPod can play music in any digital source except Microsoft's proprietary sources and a few obscure ones.

Second, the government taxes profit, not assets. You don't pay taxes on the cash sitting in your own bank account. You paid taxes when you earned the money. Apple is the same.

[catch23]

Since they started selling on iTunes, Indy artists asked Apple to sell their music DRM free. Apple refused.
Just who is imposing DRM? Why is it Apple won't license FairPlay?
Its funny; people claim the only reason IE is so popular is folks always follow the path of least resistance, so MS is locking people in by bundling IE. Nice that argument doesn't apply to Apple

[rschreit]

Corporate profits do indeed seem hideous at times, however, I think there's a distinction that is worth considering when comparing Apple and Exxon in the same paragraph. Apple's portfolio of products and services is elastic in nature. Although many of us are loyal to Apple, there are substitutes. Furthermore, no one HAS TO buy Apple products to get to work each day and feed a family. Unfortunately, gasoline is virtually inelastic -- in the near term, there are no substitutes. People HAVE TO buy gas to get to work and feed their families. On top of that, our frail economy is being tortured by petroleum prices that rose insanely fast to unprecedented levels. Without trying to sound socialistic, it would be nice if the oil companies would "take one for the team" and sacrifice a few billion in profits until we could all collectively catch our breaths and become better prepared for the inevitably high prices.

[abetterprodigy]

There is an itunes ipod lock in, its not on the itunes side, its on the ipod side. People don't buy ipods to use itunes, they use itunes to buy ipods.... and it is extremely difficult to use anything but itunes with your ipod.
I think you make a good point about profits, although i don't think anyone should be punished for making money.
Apple did innovate and continues to. But so do a lot of other companies. I agree with this post, as I continue to buy Apple products (they're so awesome) I get more and more weary of my addiction to the ecosystem everyday. I trust Google to do the right thing because of their dedication to open source. I don't trust Apple one bit.

Great post

[baconstang]

"Extremely difficult to use anything but itunes with your ipod" ???? Really? Of the 9K or so songs I have for my iPod, only about 500 came from the ITMS. The rest came from many sources and they transferred and play just fine. What's so difficult?

[chrisbenton]

You and the op-ed you link to are ignoring the fact that Apple's profits will never choke the economy like oil companies. They aren't being targeted because they make for nice villians (although they do) but because their profits have an effect on the cost of shipping EVERYTHING in this country...not just the price you pay at the pump, but the price you pay for food, other retail items...everything.

[craiggorsuch]

So tell the members of Government that aren't allowing a up/down vote for oil exploration to: allow the vote to take place; then don't blame US "big oil" for the effects if the vote is "no".

[pjhenry1216]

It's nice to hear from someone who uses Apple products and is actually wary of a growing dependency on Apple. All too often you hear from Apple users that wish they could have Apple run every facet of their life. I've never really had a problem with Apple products, just most of their users. You at least remind me that there are normal people who use Apple products and made me feel a bit less guilty about planning on buying an iPhone.

[Perry_Clease]

" People don't buy ipods to use itunes, they use itunes to buy ipods"

Yes, but you don't need to buy iTunes, it is free. Also you don't need an iPod to use iTunes.

[rapier1]

Someday, someone, somehow will explain to you what vertical integration and market lock in means.

[Penguinisto]

err, lock-in only works if you allow it to. That was Perry's point.

Cases in point: gtkpod works just fine with my iPod as well as iTunes (which lets me use it on multiple machines), and I can use iTunes on the Mac without having ever bought a single song or video from iTMS.

Integration MSFT-style works (for MSFT) because they don't let you have an alternative.

Integration Apple-Style works (for the rest of us) because it only provides a convenience... nobody is locked into it if they do not want to be.

[freehuguenot]

So far I gotta agree with all the responses to this article...
If I knew how little you need to know to write for CNET I would have become a writer along time ago.
In this country the majority of the people do not have access to mass transit, they need cars and cars need gas to go from point A to B. People need other basic essentials such as food, water and shelter. People do not need the iPods, computers, software, etc. that Apple sells in the marketplace, they do need those basics, which gasoline is one. So to compare the profits big oil is making vs. the big profits Apple is supposed to be making is ignorant.
Matt, have you ever written about the profits Microsoft has pulled in over the years?, the monopoly that they have?
Also the U.S. government is not providing the tax loopholes, subsidies, giveaways, etc. to Apple that they give to big oil.

[craiggorsuch]

Tax loopholes to "big oil"? at least $1.00 of every gallon on gas you buy is Federal and State taxes.

Liberal Government has refused "big oil" to: explore, drill, refine, and transport (via new pipelines) any of the oil in the OSC and/or ANWR and/or the Barnett Shale. The supply of oil has been curtailed by OPEC and US "big oil" gets the blame...

Liberal Government (an oxymoron if I ever heard) wants 100% control of the domestic energy supply so they can use it for their interests, tax anyone else into oblivion, and leave us fighting over the scraps to obfuscate their laughing all the way tot he bank.

[odubtaig]

at least $1.00 of every gallon on gas you buy is Federal and State taxes.

...and what proportion of that is paid by the oil companies themselves? None.

Top logic, as to be expected from someone who actually uses the term 'liberal government'.

[jestead]

People who write about the activities of the doers of this world are often jealous of success.

[Gorbag]

You're right, Exxon is a bogeyman, whose profits are really not unreasonable as a percentage of sales and whose markup is actually small compared with other industries. Congress is clearly in a "do something" mode, rather than actually thinking about economics, incentives (and disincentives) to productivity, all in the name of being a nanny state to keep people from having to think for themselves. I mean it's not as though we've never seen this happen before, that nobody for the last 40 years hasn't mentioned that oil is not an infinite resource, etc. But no, the sky falls on our watch and suddenly it's time to blame the folks who are providing the resource as a service.

Still, I'm not sure of the connection to Apple, which would be better lumped with luxury goods companies like LVMH than companies that refine raw materials into commodity products, no? Nobody goes after art dealers for "excessive profits," and I hardly think music let alone a particular delivery method has, yet, achieved the status of food, energy and atmosphere despite the fond hopes of local arts councils and those that would pander to them for votes.

[Gojira2750]

There is a difference between the oil companies and apple. Like others have said people do not have to use apple products, while everyone is forced to use oil products. But I wonder if people really realize how entrenched petroleum are in modern society. Oil products and bi-products are in everything from fertilizer to the pills that we take daily. It is in the glue that holds our furniture and cars together. It comprises %30 of most HDTV's, and it allows the microchip industry to flourish. i am by no means cheerleading "Big Oil" but I think it is important to realize exactly what oil has given to society before we talk about punishing them for being successful. I believe that the oil companies could and should do a lot more to lower prices but they have share holders to answer to, just like apple. There are many retired police and fire fighters and teachers that have their pensions tied up in oil stock as well, so messing with evil oil messes with what could be argued ans modern day heroes.

[The_Decider]

That is why critical industries, especial oil, should not be based on profit. They should be non-profit companies.

Who is more important: stockholders or the entire world economy?

When the price of your raw materials skyrocket, and you are making record profits even when demand is significantly lower, you know they are price gouging. The $12 billion Exxon made in profits last quarter is excessive, would they be in worse shape if that had priced properly and only made $5 billion in profit?

[William Schnippert]

A windfall tax? Yes, just like the one Microsoft paid when they abused their monopoly power to force Netscape out of the browser market.

The apple bashers are crawling out of the woodwork.

[FS1982!]

This article is extremely cynical and has assumptions about Apple that may be questionable. Let's look at Windows Media Player vs iTunes. Why is iTunes the leading music distributor right now? Windows Media Player was around years before iTunes. The answer is innovation. iTunes was continually updated and worked on to become a beast of desired media. It has truly become a reliable, desired, smart, innovative, one stop shop. Where is Windows Media Player or Zune software for that matter? This comparison is but a microcosm (not sure of the spelling there) of the competitive advantage Apple has. By the way don't even get me started on Zune vs. iPod/iPhone comparison and the ridiculous failure of the Zune which had all the potential in the world to be a competitor. And iTunes is just one piece of Apple. The question of Apples reputation in the eyes of customers will be determined by Apples dedication to R&D and innovation not by media. On a separate note is it just me or does the media overestimate its affect on people? Just because the media bashes Vista doesn't mean that is truly the view by people. Vista is fine in my opinion and I have not had any issues with it. Personally however I do prefer Leopard but that is from my personal experience and not the "all knowing" (hah!) media.

[rapier1]

Actually, the Zune software is easier to use than iTunes and looks a whole lot better. Its weird and I didn't expect it either.

[raulmot]

What does the fact that they have a lot of cash on hand have to do with windfall profits tax? The windfall profits tax has to do with "profits". Yes Apple is very profitable, but many companies report higher quarterly profits. Sure Apple's margins are higher, but the point is that Exxon made $12 Billion in just three months. They're on track for $45 Billion for the year. On tap of that, the government gives them tax credits for oil exploration, which if discover more oil, would only add to their earnings. How can you give them tax credits to look for something to make even more money. They have more than enough to fund their own exploration.

Any way, my point was that Apple's cash hoard is accumulated over time, and not a windfall profit.

[Timothy Bandy]

Yeah, If only Microsoft had been taxed when it had $40 billion in the bank, maybe that money would have gone to something more useful than the black holes of the X-Box, WinCE, Surface, Plays-4-Sure, Janus, Microsoft Music store, Zune and Vista.

Now poor MS only has about as much as Apple in the bank.

[regulator1956]

Microsoft gave its shareholders $30B in a one-time dividend a couple years back. MS gains 2 to 5 times more in cash every quarter than Apple does.

[unsellator]

At least the oil companies don't screw their employee's pay wise like Apple. Executive greed on Apples part is very high. Retail started as being treated as part of Corporate Apple. Over the years, they cut pay and 3 years ago, cut bonus except for managers. That was a $6000 dollar a year pay cut for me during start of Apple's most profitable period. The more money they made the more greedy Apple became. Apple does not provide sufficient break areas for employees or evening proper heating and cooling in GRs. So instead of investing in retail employee's and their work environment they create sweat shops, No joke GR was never under 80 degrees with air on high. I worked in retail for over 5 years and saw the company go from caring about retail employee's to they are disposable. Ever hear Apple brag about retention? Not since early days when turn over was low but is now very high. Why executive greed. Apple is worse than oil companies in the sense that Oil companies at least pay their employee's well.

[Xtoo]

Welcome to corporate America. You don't like it, don't work for them. That's why I work for myself.

[~Neo~]

I don't own a single piece of Apple technology, don't use itunes, don't use quicktime, and Apple is by far not a monopoly. You do have choices, and it's my choice not to buy into the hype of the "Apple Marketing Machine" There are alternatives you just have to open your eyes.

[Xtoo]

What a WASTE of an article and my time reading it. "Thank you" for the enlightenment of the day. Sometimes these CNET writers deserve a foot up their but.

[Perry_Clease]

"Actually, the Zune software is easier to use than iTunes and looks a whole lot better. Its weird and I didn't expect it either."

Yes, people use Zune software to buy Zunes

[blueskyrocket]

Yes, but not many people, generally those that don't want to buy into Apples iDevice.