“The inevitable commoditization of the iPod will drive Apple lower”

That was the title of a report I almost published 20 years ago. Luckily, as I began to build out my thesis over several months of research, I realized it was dead wrong. So the report, when finally published, became a wildly bullish thesis on Apple and the iPod.

My entire framework for thinking about the tech sector began to change dramatically (and it continues to evolve). I also gained a healthy dose of intellectual humility. But why did I almost publish a boneheaded bear case on Apple at the beginning of what was to be a multi-decade, many-fold share price surge?

I was a young analyst at JP Morgan, and my primary framework for the hardware sector was that hardware is always commoditized (usually by Wintel). Then Dell comes in with its direct distribution model and cleans up the space. If you used that framework to pick stocks in the sector from 1990-2004, you would have been a very happy investor. But Steve Jobs and the Apple team weren’t listening to the pundits of the era.

So was this just a story of stubborn youth? Sort of, but for me it was a more classic case of nearly missing a paradigm shift.

Yes, we now understand that Apple’s tight coupling of software and hardware design would define much of the technology industry in the first two decades of this century. But back then, I changed my thesis for two far simpler reasons: 1) DRM-protected iTunes tracks meant that every song purchase increased switching costs for the budding iPod installed base; and 2) one of the largest segments of iPod COGS was storage, and the related component prices were declining at 50-70pct a year. The first led to pricing power and the second led to natural margin expansion. Combine the two and you have rocket fuel for a stock. Simple for a short term Wall Street call, but certainly not profound.

At the time, I didn’t know the iPod would soon become one of the greatest selling consumer products of the era. Nor did I realize Apple would link and leverage this momentum into the iPhone, eventually changing the entire nature of compute and software distribution.

But I avoided the lazy bear case because I took the time to build a thesis, and that careful process pushed me toward the opposite of my original hypothesis.

My first boss and mentor (the amazing Charlie Wolf, RIP) was an academic first and an analyst second, so my report-writing was almost always an extensive process. Had I been able to publish my initial hunch as a tweet instead, I probably would have instantly short-circuited my analyst career.

Instead, I began a wild ride that I cherish to this day. I was right sometimes, and I was wrong sometimes. But I always attempted to be thoughtful about my critiques.

Sometimes you stumble upon the profound by following a trail of small data crumbs. Life is a funny thing.

Happy holidays!

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