
Capitalism the Apple Way vs. Capitalism the Google Way (2017) - lawrenceyan
https://www.theatlantic.com/business/archive/2017/07/apple-google-capitalism/532995/
======
netcan
Fairly interesting read. It's about their accumulated piles of cash, what
investors think about it and founder-investor dynamics.

The main comparison point and conclusion is interestingly straightforward:
Google gets to keep their pile o' cash because founders still control voting
rights. The economic analysis is traditional (principal-agent issues) but I
think it undersells the differences from theory.

Eg, investors are still happily buying "founder controlled" shares like Google
and Tesla even though the principal-agent problem is huge on paper. Reminds me
of musk said: spaceX can't have public investors because going to mars doesn't
give you the best risk adjusted returns. Investors will want to launch
satellites for cash, not risk everything to go to mars where there are no
customers.

The hitch is that these investors will still buy the shares even if the
mission is "mars." They'll campaign for a more lucrative mission and
eventually win.

Perhaps these "founder control" arrangements are a way of creating kinds of
"investment doctrines." Either way, their existence (beyond founders that
simply own lots of shares) suggests that public shares _create_ governance
problems that aren't explainable via principal-agent or some other traditional
economic explanation.

~~~
rsj_hn
_Either way, their existence (beyond founders that simply own lots of shares)
suggests that public shares create governance problems that aren 't
explainable via principal-agent or some other traditional economic
explanation._

I'm not sure I'd phrase it this way. Suppose option A earns you 5% and option
B earns you 6%. But you, as a founder, really prefer option A to option B.
Then you better not take your company public, because your personal preference
doesn't match the market preference.

In your example, going to Mars earns less money than selling the satellites,
and Musk really wants to go to Mars. I don't see this as a governance problem
-- Musk's pleasure in going to Mars plus the returns from doing that exceed
the public's pleasure from the returns only. So since this is a bit of a
vanity project, it can't be publicly controlled and remain a Musk vanity
project. That's not a governance problem, it's how governance is supposed to
work.

But then you say that investors are happily buying these shares? Well, it's an
expected income stream, so the shares are being priced. Happiness has nothing
to do with it. A 5% return is still worth something, even if the share price
would go up should the strategy change. In no model would the price of the
suboptimal income stream be _zero_.

The _real_ question here is what happens to the visionary iconoclast who
_knows_ that going to Mars will result in a higher return. For them, it's not
a vanity project but some kind of private belief that is more accurate than
the market belief. In that case, non-voting shares will outperform in the long
run. We can say that Steve Jobs was such a visionary and maybe Musk is, too.
But how much do you want to bet on that? And is that really an argument for
one type of structure over another? That your average company is run by some
visionary genius that is smarter than the market? Is that a governance
problem? No, not at all.

~~~
netcan
I'd say the tension between your first paragraph and your last gives us the
grey area that I was talking about.

Ultimately, the big difference between whiteboard and reality in the "A or B"
scenarios is that the rates of return are not known. You can represent the
scenario such that an investor has some working risk-weighted estimate but...
Idk. I think a rocket company just doesn't lend to that type analysis, in
practice.

The long term comes down to belief in one way or another.

Personally, I suspect that the reason for these arrangements in the face of
traditional economic rationale is kinda meta.

We already have a lot of large companies under traditional, often
institutional shareholder control. This tends to yield a uniformity and leaves
certain opportunities on the table, whichever strategies get reliably vetoed
by a generic, institutional shareholder elected board.

~~~
rsj_hn
But my point is that public ownership generally calls for public beliefs about
returns to drive the show. The gap of the visionaries can usually be handled
by private ownership. Let the visionary obtain funding elsewhere if they
cannot convince the public their plans are better. I don't see this as a
governance problem but as kinda the definition of public versus private
ownership.

~~~
netcan
_if they cannot convince the public their plans are better_

I don't think we're very far apart. I just think that statement leaves some
room that is (possibly) being filled by these "founder controlled" agreements.
For one thing, they _can_ convince investors. They do. Elon et al are great at
getting people to invest. There's just no "enterprise grade" way of actually
making that deal with the public.

In any case, why can you sell shares that don't vote but not shares where you
still go to mars, never pay dividends or whatever. If investors buy them, who
loses?

I wonder what would happen to Google's share price if founder control was
suddenly ceded. Theoretically, it should go up, no? But, I suspect it
mightn't. Market rationality is a relative term.

~~~
rsj_hn
In theory, I don't see a problem with this type of share structure and don't
believe an investor would lose anything by buying this stock at an appropriate
price. Shares with fewer rights will sell at a discount to shares with more
rights.

In practice however, there are good reasons why the exchanges and others want
to discourage these types of corporate structures. It is difficult to price
the risk of a CEO going off the reservation, so to speak, and investors will
be unable to pressure the CEO or replace the board in case the CEO ends up not
being a good steward of investor funds. There are always principle agent
problems, and having the CEO on a longer leash means that pricing the stock
becomes a lot harder, and you will end up with a lot of mispriced assets,
certainly ex-post and probably ex-ante. This is true even if the average of
all such assets is properly priced. That is a welfare destroying thing. E.g if
the universe contains two stocks that should each be priced at $1, and one is
priced at $2 and the other at 50 cents, then this is welfare destroying. So
anything that adds opacity to long run returns is bad for the market -- you
can't just say that investors will properly discount the opacity. This is why
we have disclosure regulations rather than letting firms not disclose
financial information and letting the market price that.

IMP it would be much better for Musk or someone else to create a charity with
the goal of going to Mars and endow it with ownership of stock of for profit
firms like SpaceX. This is cleaner than having a for profit firm adopt a
pseudo charitable role.

You also have to think of what will happen to these super voting shares after
the CEO/founders are gone. Will their kids share the same vision and
foresight? Having these types of structures creates a lot of practical
problems even though in a simple theoretical model there is nothing wrong with
doing it.

------
mcv
The article discusses which group of stakeholders should have the most control
over the company: upper management, or investors.

But companies have not just two, but at least 4 groups of stakeholders.
Investors and management, but also employees, who also depend on the long-term
health of the company, and customers, who want the company to be a reliable
partner that's healthy enough to continue to support their products.

I'd like to see a control structure that balances all these stakeholders,
rather than choosing one that has all the power.

All power in one place is certainly easier, but also more open to abuse,
whether it's hedge funds looting the company, or Enron-style upper management
looting the company. A company is not doing a good job unless all 4 groups of
stakeholders are happy. (I suppose you could consider society a 5th
stakeholder that doesn't want the company to pollute or create other harmful
side effects.)

~~~
repsilat
Someone once told me that "exit is more powerful than voice". I think they
meant that the market is a better democracy than voting.

Capitalism traditionally gives power to customers through their ability to
choose not to buy the company's products. Works better for Apple than for
Google, though we pass laws to mitigate some externalities (privacy).

Workers get a say in a similar way. If a company isn't worth working for, they
won't work there. This is truer for companies like Google and Apple than most
(even though they are enormous) because the labour market is so tight. Again,
though, we pass laws like allowing labour unions (which are a price-fixing
mechanism) to address imbalances of power.

Funnily enough, this is kind of on-topic for the article. Ownership in a
company usually gives you "voice" _and_ "exit", and these fancy share classes
effectively take away voice and just leave the average shareholder with exit
-- "If you don't like how we run the company, invest in someone else."

I think the reasonableness of it is a question of effectiveness rather than
morality or logic, to be honest, but I do like the idea that Zuckerberg's
board proposed to him when considering an additional share class+split that
would have entrenched his power: "Your shares will become regular stock when
you stop personally being CEO." They wanted him to run the company how he
wanted to run it, but didn't want him to hand-pick a successor.

Still, a bit perverse that negotiation. Technically Zuck had the votes, so I
guess (?) the legal mechanism of that action was "We won't sue you for not
representing our interests if we do it this way." (Voting stock or no,
shareholders always have some _legal_ voice.)

~~~
mcv
Voting with your dollars doesn't work in all cases. Possibly not even in most
cases. Markets aren't that transparent, and more importantly, you buy based on
the company's past behaviour, whereas if your product requires support, it's
their future behaviour that matters to you. You buy based on past product
quality, but current product quality is what matters.

You may buy a product from a great company with excellent support, and then a
hedge fund comes along and fucks up that company for some quick profit, and
you're screwed.

On top of that: vendor lock-in. Switching to a different platform can be hard
and expensive, no matter how much you want to.

Of course most smart companies with long-term vision listen to their
customers, but plenty of companies don't. Many great companies have been
ruined for short-term profit for either their executives or their investors.

And the same is true for employees: a lot of people can't afford to leave
their job. They've got mouths to feed. And besides, in their next job, they
might be just as powerless.

Ultimately, the skewed division of power is not always good for companies, and
it enables the people holding that power to enrich themselves at the cost of
other stakeholders.

~~~
repsilat
I totally agree that market solutions aren't perfect. I alluded to some legal
fixes in place, but there are of course many others, some of which address
concerns you raised -- fitness for purpose, abuse of market power, varying
levels of employee protection and representation depending on jurisdiction.

These things are clearly patches, though. The logic of the system is that
companies operate on the behalf of their owners, with some sharp edges filed
off to handle perverse incentives. I guess this organisation wasn't chosen for
its competitive advantage (probably rather just a legal&historical accident)
but it seems to be doing better than anything else we've tried -- worker co-
ops, non-profits etc.

------
partingshots
From taking a look at the author’s title on the site, the person who wrote
this, Mihir Desai, is an economics professor at Harvard University.

I wonder if he has any updated thoughts on this subject matter. Does anyone
know of any more recent links to articles or writings he’s made?

~~~
edaemon
He did write "Why Apple Is the Future of Capitalism" in August 2018, which
seems pretty relevant: [https://www.nytimes.com/2018/08/06/opinion/apple-
trillion-ma...](https://www.nytimes.com/2018/08/06/opinion/apple-trillion-
market-cap.html)

Here's his list of publications: [http://www.mihirdesai.org/publications-and-
media/](http://www.mihirdesai.org/publications-and-media/)

~~~
cageface
That Times article seems a lot less convincing in the light of Apple's recent
stock crash.

~~~
coldtea
The future of capitalism includes tons of stock crashes anyway...

And I don't think his argument was "Apple is infallible", but "Apple's model
will prevail (or is good) for the future of capitalism". Not that Apple or any
company following the model is guaranteed to always have increased stock value
forever.

------
lawrenceyan
It's always interesting to take a look back on articles like these and see how
the opinions / predictions of the author pan out. There has always seemed to
be what is in my opinion a largely narrow minded short term oriented
negativity directed towards the Google method of moonshots / bets. In
hindsight now in 2019, it's clear with signs of growing stagnation on Apple's
side and continued successful innovation and growth of Alphabet companies
within vastly diverse industries (Verily, Waymo, Malta, etc.) which of the two
methodologies was the better choice.

I wonder what the future will hold? Culture seems like the strongest indicator
for whether changes can be made. Without the sort of long term vision Jobs had
to guide the company from the top down, successful pivoting depends on if
internal company culture can support a bottom up revitalization I think.

~~~
nthuser
You have got to be joking. Looking at the revenue numbers, it's clear that
Apple is more diversified than Google. The declining iPhone sales are a short
term problem. People are just keeping the devices for longer, not abandoning
the ecosystem. Their services and wearables are seeing an impressive growth. I
think the watch will grow even faster once Apple makes it a completely
independent device.

The difference between these two companies is that one publicizes the stuff
it's working on and rushes it to market, while the other keeps it all secret
until it's ready.

Also, Apple is working on AR glasses(rumored to be announced next year), self-
driving car and are making a big push into digital health.

Apple is far from doomed, they still have a lot of room for growth.

~~~
partingshots
Alphabet is doing all of these things and more though no? With much more
success too from what I can garner.

Waymo is the defacto number one leader in self-driving, whereas Apple’s self
driving unit is having huge issues internally. Similarly, didn’t Verily just
receive a $1 billion dollar investment a few days ago with Silver Lake as the
primary backer for it’s various life science hardware/digital technologies
it’s working on like LiftWare [1], Project Baseline [2], etc?

[1] Liftware - [https://youtu.be/cFHwoOkSj7w](https://youtu.be/cFHwoOkSj7w)

[2] Baseline Study -
[https://projectbaseline.com](https://projectbaseline.com)

~~~
nthuser
> Alphabet is doing all of these things and more though no? With more much
> success too from what I can garner.

Apple has more diversified revenue than Alphabet. Why would you say Alphabet
is more successful?. All this tells me is that Apple thinks long and hard
before publicizing what it's working on, they won't show us prototypes.

> Waymo is the defacto number one leader in self-driving, whereas Apple’s self
> driving unit is having huge issues internally with getting anything done.

ALL of Apple's reported problems had to do with the MAKING of a car, not
autonomous systems. People just don't get this distinction. We will know how
far their system is at the end of this month when the DMV releases their
disengagement report. By the way, recent developments indicate that Apple is
back to building an electric self-driving car instead of a self-driving
platform.

~~~
partingshots
So far I’ve listed Waymo and Verily.

What about,

Loon - [https://loon.co/](https://loon.co/)

Dandelion - [https://dandelionenergy.com/](https://dandelionenergy.com/)

Wing - [https://x.company/wing/](https://x.company/wing/)

Chronicle - [https://chronicle.security/](https://chronicle.security/)

Malta - [https://blog.x.company/introducing-
malta-81bceb559061](https://blog.x.company/introducing-malta-81bceb559061)

Apple is almost 100% definitively not working on a molten salt energy storage
solution I can promise you. And the reason is because it’s just not in it’s
corporate structure or culture. Far too constrained / trapped in it’s niche to
expand outwards into such a vastly different market.

~~~
scarface74
And none of these are profitable.

A “successful” product for a profit making company is one that makes
money.....

Google hasn’t shown an ability to ptofitably sell anything but ads.

According to numbers that came out during the Oracle lawsuit, even Android has
only made Google $31 Billion since its inception.

~~~
whatshisface
> _Google hasn’t shown an ability to ptofitably sell anything but ads._

The $31B revenue would be _huge_ for almost any company. The magnitude of
Google's largest cash cow, a glowing golden cow towering over the farm house,
makes their normal-sized livestock look small. Because everything is so
insignificant compared to advertisements, Google has killed projects that
could be the entire product of a sustainable smaller company.

~~~
scarface74
$31 billion revenue of 8 years? To put that in context, that’s about the same
amount of revenue from Apple’s non iPhone business in one quarter.

[https://sixcolors.com/post/2018/11/reminder-apple-
financial-...](https://sixcolors.com/post/2018/11/reminder-apple-financial-
results-released-today/)

And that’s $31 billion in _revenue_ not _profit_.

The profit over 8 years is only $21 billion.

[https://www.theverge.com/2016/1/21/10810834/android-
generate...](https://www.theverge.com/2016/1/21/10810834/android-
generated-31-billion-revenue-google-oracle)

~~~
whatshisface
How many companies make 2.6B/year in profit? Rather, how many startups sell
for over 1B? Comparing it to another gigantic business is missing the point in
the same way that comparing it against ads is. Google has had many giant
successes that only appear small when juxtaposed against unimaginably enormous
successes.

~~~
scarface74
So besides Android, what other profitable product have they had? Rumors are
that YouTube is still break even.

------
SqwRock
An interesting article. One thing I like is that there's no "trickle-down"
economics BS here, for decades it has been preached that tax cuts will
increase the profits which will be reinvested for the benefit of larger social
groups. When in fact we've seen an increase in corruption and social
inequality. Here we have two models that are being compared not by who makes
more, but who is more competent to actually reinvest and sustain long-term
goals. As utopistic as it may sound, I would add the workers into the circle,
an educated workforce is the only solid unit that can remain active in a
recession caused by bad managers or greedy investors.

------
chooseaname
> Even as corporations have brought in enormous profits, there has been a
> shortage of lucrative opportunities for investment and growth, creating
> surpluses of cash. This imbalance has resulted in the pileup of $2 trillion
> on corporate balance sheets. As companies continue to generate more profits
> than they need to fund their own growth, the question becomes: Who will
> decide what to do with all those profits—managers or investors?

And will they decide to pay their employees?

~~~
rorykoehler
> there has been a shortage of lucrative opportunities for investment and
> growth

History has proven this to be false. There is only a shortage of creativity.
There was a Micorsoft talk Ballmer gave where he rightly pointed out that it
is rare for even successful companies to have more than one cash cow idea.
Using their existing cash to create two or more is the main challenge facing
companies like Microsoft, Google and Apple.

------
bsbechtel
The analyses in the comments and in the article all assume shareholders are
one large, homogeneous group with identical or very similar goals regarding
investment strategies. This is far from the truth, and realizing there are
differing investors with different risk and time adjusted financial goals
changes this debate drastically, and (imho) makes it largely irrelevant.

~~~
muraiki
From the article:

> Proponents of the managerial model embodied by Google worry about a
> different principal-agent problem. Rather than being concerned about
> managers ignoring investors, they are concerned that investors won’t serve
> the people who would benefit from the long-term success of the company.
> Those professional investors are both the principals for the CEOs but also
> the agents of many other shareholders. The hedge funds that pressured Apple
> are the dreaded “short-term” investors who are interested only in quick wins
> and don’t serve their longer-term beneficiaries, such as pension funds, that
> allocate capital to them in the first place. As investors, hedge funds are
> impatient, and, the argument goes, ruining the economy by shortening time
> horizons.

------
anm89
Business. Business is the word they were looking for.

Apple and Google don't engage in capitalism, they engage in business.
Capitalism is a socio economical political system that they are actors in and
have no say over(besides attempts to lobby which are real but not the focus
here).

This may sound like semantics but I think this subtle and intentional shift in
language is dangerous. You constantly slip the strawman into everyday language
until the average person has heard it enough times to have a deeply negative
view of capitalism because they equate capitalism to companies they don't
like(we are already past this point)

These days, being deeply anti capitalist is a main stream viewpoint but if you
ask people what they mean by it, many of them aren't usually looking for
economic system reform, they are looking for Companies that they feel are
doing business unethically to be constrained or policed. They end up fighting
the wrong thing based on a faulty definition which is highly unlikely to
produce the results they want.

------
mcrad
Well in one sense "managers capitalism" isn't capitalism at all. It's the
principal-agent problem in the extreme. The basic point of capitalism is to
distribute power and decision making as much as possible. That's called a
market. Those who argue that Google has the better strategy don't really
understand the ethics of business and its role in society. Sure, if you're
trying to "win the game" be more like Google. If you're trying to make
capitalism proud, be Apple. Probably a socialist anyway!

------
jhack
> The paths taken by Apple and Google manifest alternative answers to one of
> the main questions facing capitalism today: What should public companies do
> with all of the money that they’re making? Even as corporations have brought
> in enormous profits, there has been a shortage of lucrative opportunities
> for investment and growth, creating surpluses of cash. This imbalance has
> resulted in the pileup of $2 trillion on corporate balance sheets.

Pay your employees.

~~~
albertop
Lobby for a sane tax system that encourages re-investment.

------
giorgioz
I don't see them as two ways but rather the same way at different times.
Founders of Apple lost majority many decades ago. If Steve Jobs was alive and
had a majority in Apple's stocks would have behaved like Google's founders
Larry Page and Sergey Brin.

------
sonnyblarney
This is not an existential issue vis-a-vis Apple, Google, or even about
capitalism.

It's really a CFO's problem, financial engineering.

Companies that sit on massive cash all have this problem.

The difference is not one of culture, it's the fact that Google is still
controlled by powerful founders who _can_ act in different way, i.e. 'maintain
hard power' through share voting 10x's ... or even via 'soft power' just by
being founders.

Apple has more of a regular CEO.

There are a variety of interesting things about this, but it's mostly on the
financial side, and won't make a spec of difference in the rest of the
company.

Neither Apple nor G will be operationally hindered, M&A and other activities
will be just the same.

As founders move away from Alphabet, I bet they take a few fewer moonshots
though ...

~~~
shusson
> This is not an existential issue vis-a-vis Apple, Google, or even about
> capitalism.

> It's really a CFO's problem, financial engineering.

I'm not sure how you distinguish this from capitalism.

~~~
sonnyblarney
To pay or not pay dividends is economically a net neutral exercise. This is a
matter of investor relations, and an issue mostly for the CFO of the company
and has little material relationship to the nature of the company.

It's not really a fundamental issue of control, it's just one of the many
issues that pops up in the day to day of organizations that are cash flush
relative to their income.

------
robertAngst
How to spend profits was interesting, was surprised they didn't talk about
Apple's Anti-Consumer and Anti-Developer model that forces one time users into
their ecosystem.

Wanted to see how google was doing similar.

------
profalseidol
It should be the laborers that decide what to with the profit. Not those who
sit on their assess looking at Fibonacci traces.

~~~
simonh
The reason that fails is that in practice the labourers generally decide to
spend the money now, rather than invest it in growth, so businesses run that
way tend to fail.

There are very, very few counter-examples in narrow low-growth specialised
markets, but the general rule has been shown to occur countless times across
economies as small as communes to as big as a superpower.

The reason capitalism works is that capital generally flows to people with a
track record of making efficient, effective, growth (and therefore jobs)
generating investments. Which is what you want. There is some wastage of
course, but far less than in planned economies (at least all of them so far)
and capitalism tends to be very efficient at recycling that wasted capital
back into productive enterprises.

~~~
dragonwriter
> The reason that fails is that in practice the labourers generally decide to
> spend the money now, rather than invest it in growth, so businesses run that
> way tend to fail.

AFAIK, there is no evidence that labor coops fail at a greater rate than
conventionally structured businesses. If you have such evidence, I’d love to
see it.

~~~
simonh
There's huge swathes of evidence. Read any decent economic history of the
Soviet Union, or Maoist China. Or the analysis of the effect of handing power
to workers councils in Yugoslavia, which I provided in answer to another such
request. It was so common I even have family that watched it happen. My wife
is Chinese, from Hohhot. Her father worked at a boiler factory and her mother
at a textiles mill, both of which were run by worker councils and were badly
mismanaged. They suffered appallingly under Maoism. This is one of the reasons
this issue triggers me a bit.

~~~
dragonwriter
> There's huge swathes of evidence.

I'm still waiting to see any on point.

> Read any decent economic history of the Soviet Union, or Maoist China.

Which would be relevant if I was asking for evidence that Leninist vanguardism
and it's derivatives were adequate systems to overcome the disadvantages
poorly developed economies engaging in large scale geopolitical conflicts with
advanced industrial powers face. Or if I was asking about evidence about the
utility of top-down state central planning.

But labor cooperatives don't require a state featuring Leninist vanguardism or
top-down central planning, and in fact are a well-known practice in modern
Western mixed economies like those in North America and Western Europe, and
there are a lot of well-established observed differences between labor coops
and classical capital-rents-labor firms within such systems, but I can't see
any evidence that a higher failure rate for coops is one of them.

~~~
simonh
Read my comment above again, referencing the example I cited across thread of
the effects on the Yugoslav economy. I'll make it easier this time[0].
Yugoslavia is a perfect example actually because it wasn’t subject to Leninist
Vanguardism, didn’t have the same competitive issues with the West,
furthermore the worker councils weren’t subject to anywhere near as
restrictive central planning constraints seen in most Marxist states, so it
pretty much ticks all your boxes.

Put it the way. What are the conditions in western democracies that are
hostile to the success of workers cooperatives? We enjoy pretty egalitarian,
fair legal and regulatory environments that aren't obviously hostile to them.
Even if they were, many European countries have frequently had explicitly
socialist governments and have had plenty of time to establish legal
frameworks compatible with voluntary collectivism. Why hasn’t it worked?

[0] [https://capx.co/do-workers-need-capitalists-new-lessons-
from...](https://capx.co/do-workers-need-capitalists-new-lessons-from-
yugoslavias-socialist-experiment/)

------
yellowbuilding
I want neither

