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Cook: The only thing Apple won't do is release a lousy product

Apple CEO Tim Cook took the stage Tuesday at the Goldman Sachs Technology and Internet conference. Though—unsurprisingly—he spilled no Apple secrets, Cook did manage to leave room wide open for Apple to introduce a lower-priced iPhone, and reiterated some common company tropes about its focus and goals.

The future of the iPhone

Cook didn’t address rumors about Apple prepping an inexpensive iPhone directly. What he did say was: “The only thing we’ll never do is make a crappy product. … That’s the only religion that we have. We must do something great, something bold, something ambitious.” Cook said that Apple has tried “to appeal to people that are more price sensitive with iPhone,” pointing to the lowered prices for the iPhone 4 and iPhone 4S (which are free and $99, respectively, with two-year contracts). “In the December quarter … we didn’t have enough supply of iPhone 4 after we cut the price.” That level of demand, Cook said, “surprised us… So we are making moves, or have made moves, to make things more affordable.”

He then pointed to Apple’s product and pricing history. “If you take something like an iPod, the first one was $399; today you can go out and buy an iPod shuffle for $49.” But, Cook said, “Instead of saying, ‘How can we cheapen this iPod?’, we said, ‘How can we do a great product’” and get a lower price point.

Cook also looked to the common cry for Apple to make a cheaper Mac. “For years, people said, ‘Why don’t you have a Mac that’s less than $500 or less than $1000? … Frankly, we worked on this, but we concluded we couldn’t do a great product, so we didn’t.” Instead, Cook said, “We invented iPad. So now all of a sudden have an incredible [computing] experience, and it starts at $329.”

Screen plays

Cook spent some time discussing the question of whether the iPhone’s screen size might get larger to match its competitors. He pointed out that the PC industry used to compete on two things: product specs and price. But when PC vendors touted who had the largest drive or the fastest processor, Cook said, they missed the point: “People want an Aha! moment,” Cook said—a notion that can’t be a bullet item on a spec sheet.

He said that while some competitors are focused on display size, Apple’s focusing on many elements that are important for a display. He pointed to the OLED displays some vendors use, which Cook said offer “awful color saturation” which can make users unhappy.

“Apple sweats every detail,” Cook said. “We want the best display. I think we’ve got it, I feel great about it… I’m not going to comment about what we’re going to do in the future, because that releases the magic.” In the end though, Cook said, customers care about “more than a simpler number” like inches in a screen’s size.

Market share and share alike

Cook dismissed fears that Apple could be reaching its limit on iPhone market growth. “The people I work with don’t view that there are limits,” he said. Apple makes products that “people didn’t know they wanted, and now can’t live without.”

He said that the smartphone market is projected to double in the next four years, from around $700 million to $1.4 billion. “On a longer term basis,” Cook said, “all phones will be smartphones, and there’s a lot of people in the world—and people love to update their phones fairly regularly.” He added that the iPhone is currently still only available to about half of the world’s potential smartphone customers.

“I see a market that is incredible to be in—maybe one of the best markets of all time,” Cook said. “Apple has enormous momentum.”

Taking stock

Addressing critics who complain about Apple’s massive cash stockpile, “Apple doesn’t have a Depression-era mentality” with its cash hoard, Cook said. Rather, the company “makes bold and ambitious bets on products, and we’re conservative financially.”

Cook said Apple uses its cash to invest in retail and acquire companies. He added, “We invest in product innovation, in R&D, and in new products.” And he pointed to the $45 million Apple’s returning to shareholders via dividends and buybacks. “I don’t know how a company with a Depression-era mindset would have done all those things.”

In the talk’s biggest understatement, Cook said: “Now, we do have some cash. But it’s a privilege to be in this position.”

He addressed the ongoing Greenlight Capital issues, describing that group’s current proposal regarding Apple’s stock as “creative.” Said Cook: “We welcome all ideas from all of our shareholders, including Greenlight. And we’re going to thoroughly consider it.”

That said, he thinks investor concerns about how Apple spends its cash are off the mark. “I wish everyone involved would take the money” they’re spending on the ongoing shareholder legal wranglings, and “put it towards a worthy cause,” Cook said. But he promised: “You’re not going to see us do a campaign mailing. You’re not going to see a ‘Yes on 2’ sign in my backyard.”

Acquisition decisions

“If you look at the last three years, we’ve averaged about an acquisition every other month,” Cook said. “The kind of companies that we’ve purchased have been companies where they have really smart people, and/or [intellectual property].”

As to why Apple hasn’t moved to acquire more large companies with its cash on hand, Cook said that Apple’s willing to make such an acquisition, but that no potential target has yet been able to “pass our test, for various reasons. And we’ve looked at more than one.”

And, Cook said, Apple will surely keep looking. “But we’re disciplined and thoughtful, and we don’t feel a pressure to just go out and acquire revenue. We want to make great products, and that’s what we’re about. So if a large company could help us do that even better, then that would be of interest.” That said: “The cash is not burning a hole in our pocket.”

Innovation

Cook said that Apple’s culture of innovation has “never been stronger. Innovation is so deeply embedded in Apple’s culture.” As he’s said before, Cook stressed that Apple’s goal is “to not just make good products, but make the very best products in the world.”

He described Apple’s position as “unique” and “unrivaled,” because “Apple has skills in software, in hardware, and in services.” Cook argued that the PC industry’s approach of specialization, relying for example on others for the software or the services, is “not working for what customers want today.” Apple’s all-in-one approach, Cook said, offers an “elegant experience where technology kind of flows to the background,” with the customer at the center.

“This isn’t something that you can just go write a check for.”

On the iPad

“I think the tablet market will be huge. It’s a huge opportunity for Apple,” Cook said. He said that Apple sold more iPads than HP sold of all its computers in a comparable timeframe. “The tablet is attracting people who’ve never owned a PC, or people who owned them and weren’t great at” using them, he said. And “we have a significant lead” in the market.

Of course, Cook added, “I have no idea what market share is, because we’re the only company that reports how many units we sell.”

But for usage statistics, Cook referenced an IBM study from Black Friday. “The product that there was the most shopping done on, of any mobile device, was iPad,” he said. “iPad was twice as much as the total of every Android device—every one of them! Every phone, every tablet.” And Cook says the credit goes to the iPad’s ability to offer “an incredible experience… Customers want integration, and Apple can do that better than anyone.”

Fine young cannibalization

Cook said he isn’t worried about the iPad mini cannibalizing iPad sales. He said that Apple’s faced cannibalization questions since the introduction of the original iBook, which some worried would cannibalize PowerBook sales. “And portables went on to be three-quarters of all Mac sales,” Cook said.

“People worried about the iPad killing the Mac,” which didn’t happen. But Apple’s perspective is simply that “if we don’t cannibalize, someone else will,” Cook said. On the plus side, “the Windows PC market is huge, and there’s a lot more there to cannibalize,” he added.

“It seems perfectly reasonably to me to have an iPad and an iPad mini,” Cook said. “This is going to be the mother of all markets. I think we did the right thing, and of course are customers are voting and they’re buying.” And, he said, Apple is still struggling to meet iPad mini demand.

He also said that he doesn’t fret over Apple’s lower average sales price per iPad with the cheaper iPad mini in the mix. “You can accept a lower margin on any product at any given time, for a strategic reason.” He referenced Apple’s beloved “halo effect,” that customers discover the joy of using one Apple product, and soon buy into the ecosystem even more.

Plus, “We have confidence in our ability to execute the supply chain and work down the cost curve. In the area of tablets, we think the market is huge, and it makes sense to have another product there, because people wanted a full iPad experience, but in something smaller and lighter.”

In stores

Cook also said that he remains “bullish” on Apple’s retail stores. He said that the Genius Bars serve “an important role in the community,” and that they help users get more out of their Apple products.

Cook said Apple’s relocating 20 stores to find them bigger spaces this year, and adding 30 new stores as well, “disproportionately outside the U.S.” And because Apple only has stores in 13 countries, Cook sees a lot of opportunity.

He also credits Apple Stores with boosting the company’s success with new product categories like the iPad. When people thought of tablets before the iPad, Cook said, they were thinking of “the heavy thing that the Hertz guy was holding. Nobody wants one of those!” But the store lets people put their hands on the iPad. “I don’t think that the launch would have been nearly as successful without the stores,” he said. It gives Apple “an incredible competitive advantage.” And he said that competitors are finding that the Apple Store is “not so easy to replicate.”

The Apple Store provides a more personal benefit to Cook, too: “If I feel I’m dropping down a level, I go into the store… It’s like a Prozac or something!”

What he’s proud of

Last year at the same conference, Cook promised Apple would improve working conditions in China, a promise the company has worked to keep with its closer observation of, and public reports about, the overseas companies involved in its supply chain. Cook cited such improvements as one of the things he’s proud of at Apple during his short tenure as CEO thus far.

But, he said, “I’m most proud of our employees.” He pointed to other keys too—Apple’s products, its creation of the world’s larget solar farm, and its overall strategy—as sources of pride as well.

Cook’s Tuesday will remain in the spotlight; he reportedly will be in Washington, DC as First Lady Michelle Obama’s guest for the State of the Union.

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