Scrutiny and Lawsuits Nibble Away at Apple

Scrutiny and Lawsuits Nibble Away at Apple


It’s almost impossible to take a bite out of Apple’s (AAPL) success right now – nothing seems able to stop iPhone sales or quench the insatiable demand for the new iPads. That said, there’s a lot of nibbling around the edges, and while none of the salvos being fired are likely to do serious damage to the Apple brand name or franchise, there is, on the margins, the risk that Apple’s management might take their eye off the ball as they dash around trying to quench small fires.

The latest of these is yesterday’s news that the U.S. Justice department has sued Apple and five of the biggest publishing firms in the United States, alleging that they conspired together to drive up the prices of electronic books above what one senior publisher apparently referred to as “the wretched $9.99 price point.” Three of the publishers have already settled the case, no doubt to the jubilation of both avid e-book buyers and Amazon (AMZN), whose Kindle sales growth rates have undoubtedly been curbed as e-book prices jumped from $10 to $13 and even $15 and boycott movements were launched. Apple has denied any wrongdoing.

The news gave Amazon’s shares a 99-cent boost yesterday to just under $188, and put an even smaller dent in Apple’s stock price, which fell less than half a percentage point to $626. Barnes & Noble (BKS) shares lost far more ground, dropping 1.6 percent to $11.63. The Nook-maker is likely to be hardest-hit by this apparent victory for archrival Amazon.

Even if the Justice Department makes its case, or prods Apple into a settlement, the penalties are likely to be small on a relative basis, given Apple’s fortress-like balance sheet and its mountain of cash.

Similarly, if the profit margin on Apple’s sales of e-books to iPad owners falls a few – or even several – percentage points, that isn’t going to move the dial nearly as much as would a problem in one of its core businesses. When it comes to e-books, Apple’s goal is certainly to maximize its own revenues, but however unpleasant a forced reduction in those might be, it’s not going to threaten the company’s future earnings prospects dramatically.

The same can likely be said for Apple’s efforts to improve conditions for workers in China. Mike Daisey, the monologist who aired his take on Apple’s factories on the radio show "This American Life," may have had to confess that he was lying when he claimed to have witnessed abuses such as the use of underage workers. But the truth remains that Apple’s main contract manufacturer, Foxconn, isn’t as pure as the driven snow when it comes to labor practices. That’s why it pledged to crack down on excessive amounts of worker overtime, to upgrade their housing and hire new workers to ensure that they can meet demand without requiring extreme working conditions. But higher wages for a larger number of Foxconn workers, again, is not going to deliver a major blow to Apple’s ability to generate gargantuan earnings and cash flow.

The steady drumbeat of issues does present a larger threat, though. When you’re the star of the show – like Apple unquestionably is these days – the scrutiny doesn’t let up. Apple’s managers will have to both deal with these issues and, at the same time, prevent them from growing into serious distractions. At some point something is bound to go wrong. Maybe one of those problems becomes a real threat to Apple’s core businesses.

What almost certainly will happen is that Apple will gradually or suddenly cede its place as market darling to some other company, in the same way that Sony and Microsoft gave way to Apple and Google. Perhaps there will be no self-evident cause for this. But an investor – or an Apple risk manager – who ascribes too much importance to these tentative nibbles and is distracted as a result form trying to identify those more substantive threats will be making a grave error.