On cash balances

Apple doesn't have a Depression-era mentality. Apple makes bold and ambitious bets on products, and we're conservative financially. But if you really look at what we've done in terms of investments...Last year we invested $10 billion in CapEx, we think we're going to do a similar amount this year. We're investing in retail stores and distribution around the world. Most importantly we're investing in product innovation, in R&D, in new products; we're investing in the supply chain. We're acquiring some companies. And so I think it's hard--or at least my definition of Depression-era mentality wouldn't include a company that's investing this much over two years. And when you add that to the fact that we announced just over a year ago that we're returning $45 billion to shareholders through a combination of dividends and stock buyback, and we've already completed $10 billion of that, I don't know how a company with a Depression-era mindset would've done all of those things.

And so now, we do have some cash, but it's a privilege to be in this position. You know, last quarter alone, the cash flow from operations from Apple was over $23 billion. And so it's an incredible privilege for us to be in a position that we can seriously consider returning additional cash toward shareholders. The management team and the board are in very active discussions, and we will do so deliberately and thoughtfully, we'll evaluate a series of alternatives. I think that's what our shareholders want and that's what we're going to do.

SEE: What should Apple do with its $137b cash?

On the Greenlight proposal

Well, I think it's creative, and we are going to thoroughly evaluate their current proposal. We welcome all ideas from all of our shareholders, including Greenlight, and we're going to thoroughly consider it.

SEE: Apple v Greenlight: $137b-case gets green light for early hearing

On the proxy lawsuit

I don't think this is well-understood. The disagreement centers around a proposal on Apple's proxy, which we filed our preliminary proxy back in December. It's called Prop 2, and what this proposal is about, it's about the rights of shareholders. Specifically, I want to be very clear on this: It's not about whether Apple returns additional cash to shareholders, it's not about how much cash to return to shareholders, it's not about the mechanism to return it, it's not about any of those things. It's about the rights of shareholders.

Some time ago, early in 2012, we were looking at what things we could do to improve our governance further. And as a part of that review, one of the items that came out of that was that we thought we should eliminate a "blank check preferred" [clause] from Apple's charter. And what that means is not that Apple could not release common shares, or release preferred shares, it just says that if Apple decided to do it, we'd need to go to our common shareholders to get their approval.

And so frankly, I find it bizarre that we would find ourselves being sued for doing something that's good for shareholders. But this is the position that we're in. I think it's a silly sideshow, honestly. My preference would be that everyone on both sides of the issue would take the money they're spending on this and donate it to a worthy cause. I think that would be a lot better use of funds. But what we're going to do--you're not going to see us do a campaign mailing. We're not doing it. You're not going to see a "Yes on 2" sign in my front yard.

This is a waste of shareholder money, and it's a distraction, it's not a seminal issue for Apple. And that said, I support it, Prop 2, I'm personally going to vote for it. I believe it's the right thing for shareholders to have the right on this particular topic, I encourage others to vote for it, but it's not something we're going to spend cycles on. The serious issue at hand is the return of cash--how to do it, how much to do--it's that and we're very serious about that. But this Prop 2 thing is a silly sideshow.

On acquisitions

If you look at the last three years, we've averaged about an acquisition every other month. The kind of companies that we've purchased have been companies where they have really smart people and/or IP [intellectual property]. Generally speaking, we've in many cases taken something that they're working on and moved the skills to work on something else. Great example: We bought a company called PA Semi back two years ago, and we were in the process of building our capability to make the engines--to design the engines that are in today's, all of today's iPhones and iPads and iPod touches. And so this was an incredibly skilled group of guys and they could supplement an incredible group of folks that were already in Apple. They were working on PowerPC at the time, and so we didn't have an interest in that, so we moved skills to work on our iPhone and iPad and iOS device engines.

That's a great example of what we've done. And we've done many many others that are similar in nature to that. We will do more of those, and we're constantly looking in the market for things to do. We really like to control the primary technology behind the products that we're in, and so we're constantly looking at that.

In terms of large acquisitions, we have looked at large companies. In each case thus far, it didn't pass our test. It didn't pass our test for various reasons, and we've looked at more than one. Would we look again? I'm sure we will. Is there a reason why we couldn't do that? No. I think we have the management talent and depth to do it. 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. And so if a large company could help us do that even better, than that would be of interest. But again, deliberate, thoughtful is our mantra. The cash is not burning a hole in our pocket.

On innovation, skills, and leadership at Apple

It's never been stronger. The innovation is so deeply embedded in Apple's culture: the boldness, the ambition, the belief that there aren't limits, the desire among our people to not just make good products but make the very best products in the world, it's as strong as ever, it's deeply embedded, it's in the values, it's in the DNA of the company.

And so I feel fantastic about it. There's no better place for innovation. Apple is the center of innovation. Now, if you look at some essentials for innovation, there's no formula; if there was a formula, there would be a lot of companies that have a lot of money that would have gone out and bought the ability to innovate. But some of the essentials, without releasing all the magic, for us are skills and leadership. Let's talk about those for a little bit.

If you look at skills, Apple is in a very unique and in my view unrivaled position, because Apple has skills in software, in hardware, and in services, and the reality is that the model that grew the PC industry, where companies specialized in a thing, and then somebody did some integration towards the end, that model's not working for what consumers want today. Consumers want this elegant experience, where the technology kind of floats to the background and the customer is at the center of that experience. Arguably, where you can innovate in hardware, you can innovate in software and you can innovate in services. The real magic happens at the intersection of these. And Apple has the ability on all three of these spheres to innovate like crazy and really cause magic.

And you know, the iPad's very magical, and it's exactly because a company was doing all of those things. And so, for many years, this idea--some people call this vertical integration, I really don't care what it's called, in some ways--but it was out of favor. People thought it was kind of crazy. And we never did. And so through all of those years, we continued to build, and these skills--this isn't something you can just go write a check for. This is something that you work decades for, building this experience.

And so, I think we bring that, I think we're unique in that, I think we're unrivaled in that, I think there are people trying desperately to catch up in that, and I think they're finding it not so easy to do.

Now, in terms of leadership, when I look around the executive team table, I see superstars. I see people that are at the very top of their game, I see people like Jony Ive who I think has the best taste in the world, who's the best designer in the world. He's now bringing his talents to our software as well, I'm just ecstatic about this. I see people like Bob Mansfield, who I think is the top silicon expert in the world. I see people like Jeff Williams, who, there's nobody better in operations, anywhere. And I see Phil, and I see Dan, and I see Craig--I see all of these guys that are so focused on product, and are at the very top of their game, and it's a privilege to be a part of that.

So I look at Apple and I see culture, deeply embedded; I see this incredible blend of skills that's unprecedented, unrivaled, that can deliver these magical moments; and I see the leadership to pull it off. And I've never been more bullish on innovation at Apple.

On marketshare limits

Well, there's that word "limit." We don't have that word in the Apple vocabulary.

In all seriousness, the people I work with don't view that there are limits. And it's because of that that Apple has been able to do so many things for so many years and done things that people didn't know they ever wanted, and now can't live without. And so, we don't really think of the world as limits.

When I sort of zoom out and look at the smartphone market in particular, what I see is a market that last year was around 700 million [units], plus or minus. It's projected to double in the next four years to 1.4 billion--this is a huge market. I believe that more on a longer-term basis, all phones will be smartphones, and there's a lot more people in the world than 1.4 billion, and people love to upgrade their phones fairly regularly.

And so I see a market that is incredible to be in, maybe one of the best markets of all time. Apple has enormous momentum. The 500 million that you referenced--that 500 million was done over the course from 2007 until the end of last year [2012], we flipped over 500 million. However, over 40 percent of that happened last year. And so there's incredible momentum there, and across that period of time, we've built an ecosystem that is the best in customer experience on the planet.

In addition, it's fueling an incredible economic gain for developers. And so we've already gone over paying $8 billion now to developers. If you look back at the app economy of the PC market, or look at it today, there's money flowing to two or three people, but you don't see a large number of people doing PC apps. I mean, I challenge you to find any, except the usual suspects now; the money's all moved--the innovation has all moved to tablets and smartphones. And so I see momentum, I see an ecosystem.

When I look at what Apple's done in China, I think it's hard for anybody to evaluate this and say it's not impressive. The company's gone from a few hundred million in revenue one year to $3 billion plus the next, to $13 billion plus the next, to $23 billion plus last year, and so the last two years were adding over $10 billion a year. And I also see in markets where we haven't done as well, and I view that as opportunity, not the glass half-empty.

And so when I string together all of these things--from the momentum, to the market that we're in, to the ecosystem, to the incredible opportunities we have in emerging markets--and I consider that today, this may surprise you, but iPhone is really only available to about 50 percent of the subscribers in the world.

And so there's tons of opportunity to continue expanding that as well. Frankly speaking, I see a wide open field and that's the way I look at it. I don't think about that word "limit."

On a more affordable iPhone

This is a popular question. It's important to understand: To understand Apple, our North Star is great products. When everyone comes to work every day, and leaves work, they're thinking about that, front and center. We wouldn't do anything that we consider not a great product, it's just not in us to do it, it's not why we're on this Earth. There are other companies that do that; that's just not who we are.

That said, if you look at what we've done to try to appeal to people who are more price-sensitive, with iPhone specifically, we lowered the price of iPhone 4, we lowered the price of iPhone 4S, we did that in September of last year, and in the December quarter, the most recent that we reported, we didn't have enough supply of iPhone 4 after we cut the price. It surprised us as to the level of demand that we had for it, and so we are making moves--have made moves--to make things more affordable.

Also, if you look back at Apple's history, what you would see is, you take something like an iPod. When we came out with iPod, it was $399. Where's iPod today? Today you can go out and buy an iPod shuffle for $49. And so instead of saying "How can we cheapen this iPod to get it lower?", we said "How can we do a great product?", and we were able to do that at a cost that enabled us to sell it at a very low price of $49 and appeal to a lot more people.

The same thing, but in a different concept in some ways, is for years, people said "Why don't you have a Mac that's less than $500?" or less than $1000 or whatever. Many, many people asked that. And frankly, we worked on this. We concluded we couldn't do a great product, and so we didn't. But what did we do? We invented iPad. And now all of a sudden we have an incredible experience, and it starts at $329.

And so sometimes, you can take the issue, if you will, or the way that you might look at it as an issue, and you can solve it in different ways. But the North Star for us is always great product, not "How do we hit a price point?". And that has served us well. I think it will continue to serve us well. I think on this one we really have a track record to show it.

SEE: Research leaves analyst "confident" that Apple will launch cheaper iPhone as early as June

On smartphones and bigger screens

I don't want to say what we will do or won't do, and so don't interpret anything I say along those lines. Let me go back and compare it to the PC industry for a minute. The PC industry over the years, the way that companies competed were two things: specs and price. And so people would want to say, "I've got the largest drive," or, "I've got the fastest processor," or in the camera business people began to say, "I've got the most megapixels."

The truth is, customers want a great experience, and they want quality. They want that "Aha!" moment each time that they use the product. And that's rarely a function of any of those things. These are things that technology companies invent because they can't have a great experience, and so they talk about the spec of something.

Do you know the speed of an AX processor [Apple's chip processor for the iPhone and iPad]? You probably don't. Does it matter? I mean, does it really matter at the end of the day? You want a fabulous experience when you open it, and when you use the product.

If you look at displays--if you kind of contrast this to displays--some people are focused on size. There's a few other things about the display that are important. Some people use displays--like OLED displays, the color saturation is awful. If you ever buy anything online, and you want to really know what the color is, as many people do, you should really think twice before you depend on the color of the OLED display.

The Retina display is twice as bright as an OLED display. And so I only bring these points up to say there are many attributes of a display, and what Apple does is sweat every detail. We care about all of them, and we want the best display. And 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 our magic, and I'm not going to do that. But, you know, the customer experience is always broader than that which can be defined by a simple number.

SEE: iPhone 5S and 'iPhablet' could help Apple shares recover, say analysts

On what Apple will and won't do

The only thing we'll never do is make a crappy product. We're going to make a great product. That's the only religion that we have. We must do something great, something bold, something ambitious. We want the customer to be the center of it. We want to enrich people's lives. And all of this other stuff, we sweat the details on those, in hopes that we've proven over the years that this is something we can do.

On the future of the iPad

I think the tablet market will be huge. It is a huge opportunity for Apple. It's one of those areas that show what I mentioned earlier, of software, hardware, and services being integrated, and creating an experience that's jaw-dropping. I think it's huge.

To put the 23 million [iPads sold in the last quarter] in some context, HP, who is the world's largest PC seller, in that same quarter, sold 15 million PCs. So 50+ percent more iPads were sold in that quarter than PCs, and in fact if you look at the full year last year, there were more iPads sold than HP sold of their entire PC lineup. And so there has been a sea change here, but I think we're in the early innings of this game.

The tablet market last year, the projections that I've seen would indicate there was about 120 million tablets sold last year. The projection is that this is going to triple--triple!--in four years. And so when you think about that--I think the actual number's 375 [million]--that's more [than] PCs that are being sold today around the world. And the PC growth rate, as you know, is actually contracting, not growing.

The tablet is attracting people who've never owned a PC, and people who have owned them, but aren't greatly experienced. And Apple is at the forefront. The iPad is absolutely the poster child of the post-PC revolution. If you look at what we bring there, we've worked really hard on our ecosystem. There are over 300,000 apps that have been custom-made to take advantage of the big beautiful canvas that iPad has. The other guys have a few hundred. We have a significant lead in this area.

Also, I think the tablet, as I mentioned before, you can see the whole of Apple coming out here. If you look at--I have no idea what [our] market share is, because we're the only company that really reports how many units we sell--but if you look at usage, there are companies out there that have very, very good metrics in usage.

And so, if you look at IBM, as an example, [it] did a study on Black Friday. And this was shocking--it was shocking to even us. On Black Friday, the product that there was the most shopping done on, of any mobile device, was iPad. And I don't mean iPad as compared to a single brand somewhere, I mean iPad was twice as much as the total of every Android device. Every one of them! Every phone! Every tablet! Twice as much.

And so, why is this? It's because it's an incredible experience. By the way, iPhone in that same survey was almost twice as much as all Android devices. And so, we really sweat the details and so we have a greater customer experience, and the data is very clear that customers use them a lot more.

They clearly use them to a much higher degree than whatever our share might be. I'm not sure what people are doing with these other tablets. But that's what we care about. We want people to love our products, and use our products. Not just buy them. Our relationship starts there, it doesn't end there.

The other thing that's so profound about iPad is that in this short period of time, it's moving and being sold in a large way in all the key markets. So we find ourselves in virtually every Fortune 500 company, in almost every Global 500 company. We find ourselves in education, and we've put a lot of energy into that area, [into] making it easy for people to do fantastic textbooks that are incredibly engaging, and of course we find ourselves in consumers' [hands], but usually it takes a long time for products to engage all of these markets. We've kind of already done that.

But I still think we're in the initial innings of this, and so this is very exciting, it's very profound for the industry. I think it once again shows that the age-old model of everyone doing a sliver of something and hoping it comes together in a product that has a great experience--customers aren't buying it, they don't like it, they want integration. And Apple can do that better than anyone.

New iPad 5 release date, rumours and leaked images

On cannibalization

The truth is, in different ways I've been asked this question for many years. I think the first time I got asked about cannibalization was when Apple came out with the iBook. And people were definitely worried that it would cannibalize the PowerBook. And portables went on to be three quarters or more percentage of the Macs [75 percent plus], and Macs hit an all-time record last year. If you look at when we came out with iPad, what did people worry about? They worried, "Oh my god, you're going to kill the Mac, what have you done, you're stupid!"

And so the cannibalization question raises its head a lot. The truth is, we don't really think about it that much. Because our basic belief is that if we don't cannibalize, someone else will. And in the case of iPad in particular, I would argue that the Windows PC market is huge, and there's a lot more to cannibalize than there is of Mac--or of iPad, as far as that goes, relative to iPad mini.

I think if a company ever begins to use cannibalization as their primary or even a major factor in their decision-making in what products to go into, it's the beginning of the end. Because there will always be somebody else.

And so here's the way I see us on iPad mini: When we looked at iPad, what you would find if you looked at some data, you would find that over 50 percent of the people in countries like China and Brazil that are buying an iPad don't own an Apple product. This is a huge thing for us, to go out and show people what Apple is, to introduce them to the company.

And as you probably know, through the years, we've found a very clear correlation between people getting in and being introduced to Apple and buying their first Apple product, and some percentage of them buying other Apple products. We saw that with iPod, creating a halo for the Mac, we've seen that with iPhone, creating a halo for iPad, we've seen that with iPad, creating a halo for iPhone. All of these things have synergies and stuff. It's not about just selling a point product, it's about looking at the total, and as you can probably tell from my response on the tablet question, I think this is a huge opportunity.

It seems perfectly reasonable to me to have an iPad and an iPad mini. I would argue it probably wouldn't be smart not to. I mean, I think this is going to be the mother of all markets. And so I think we did the right thing. Of course, our customers are voting and they're buying; we had a difficult time last quarter with satisfying everyone, but we're working really hard on that.

On revenues vs gross margins

I don't want to get into projecting margins beyond what we do in conference calls and those sorts of things. But here's kind of the way we look at it. You can always--and we've done this many times--you can go in and accept a lower margin on any product at any given time for a strategic reason, and that strategic reason may be it's our entry into that area, or it may be other things, but in the background, we always know that this halo effect plays. We have confidence in our ability to execute the supply chain and work down cost curves.

In the area of tablets, we think that the market is huge, and that it makes sense to have another product there because people wanted a full iPad experience but in something smaller and lighter.

Because we're not [just] a hardware company, we have other ways to make money and reward shareholders. This doesn't get noticed very much for some reason, but last quarter, if you looked at our services and software revenues, it was $3.7 billion. And so I know some people look at that and say "Well, that's 3.7 divided by 54-something," but if you look at that versus software and services companies, that's an incredible amount of revenue!

Because we're not a hardware company, there are other things that we're doing, and could do to have revenues and profits flow. We don't look at the sales of a product as our last part of the relationship with the customer; it's the first. Our stores do a fantastic job of helping people along their journey getting the most out of their product. We are very focused on that, and we're focused on that because it's great for the customer. But of course there's also financial benefit in doing so, though our focus is on the customer.

So, being larger than a hardware company affords us the ability to not worry about so much in the very short term. We're managing Apple for the long term. I know people care about quarters, and so forth, and we care, but the decisions we make--the profound decisions we make--are for Apple's long-term health, not for the short-term 90-day clock.

On emerging markets

That's a good question. Last year, we put enormous energy in expanding our ecosystem geographically. If you now look, our App Store is operating in 152 countries; our iTunes Store is operating in over 100 countries; free iBooks are in over 100 countries, paid iBooks are in over 50 countries. If you look at services like iCloud--iCloud operates in virtually every country. Messages operates in every country that we can--there are some government restrictions there. There are government restrictions in some countries around Apple's sale of movies. But there's only really one major country where we're not selling movies.

And so, I really feel like we advanced significantly last year in getting our infrastructure around the world at a different level. We've got further to go in some places, but we really advanced the ball, and our intention is to have a great ecosystem everywhere, and have all our ecosystem everywhere, not just portions of it.

In some cases, we're prevented from doing so, but since we don't believe in limits we keep knocking at the door, and trying to convince people that we conduct ourselves well and I think we'll eventually--maybe we'll eventually get in there. But versus last year this time when we were talking, there's a dramatic difference in our ecosystem in emerging markets than now.

On Apple's retail stores and strategy

There's no better place to discover, explore, and learn about our products than in retail. Our team members there are the most amazing, awesome, incredible people on earth. It's the best retail experience. It's a retail experience where you walk in and you instantly realize the store is not here for the purpose of selling--it's here for the purpose of serving.

The Genius Bar helps you not only with an issue, but it helps you get more out of your Apple products over the life of them. The store acts as a gathering place, as a community--it's a place that has an important role in the community. And so if you look at an agenda on an Apple store for any given day, you might find that there's a youth program going on where the kids from a local elementary school are coming into the store as a part of their field trip. You might find that there's a local musician that's entertaining people in that store, on that night, it's incredibly exciting what these stores do.

I'm not even sure "store" is the right word anymore. They've taken on a role much broader than that. They are the face of Apple for almost all of our customers. People don't think about the Cupertino headquarters, they think about the local Apple Store. And because we've focused on these things, people love them. Last quarter, we welcomed 120 million people at our stores, and we only have a little over 400. And so that's almost 10 million people a week. Last year, we welcomed 370 million into the stores, and so this is huge, and in fact, it's so huge, that some of our stores aren't big enough.

But this is sort of like the issue around cash: it's a privilege to have this kind of issue. So what are we doing? We're closing 20 of our stores and moving them and making them larger. And in addition to that 20, we're adding 30 more. Those 30 will be disproportionately outside the U.S.; we're going to place our first store in Turkey this year, we're super-excited about that. That gets us in 13 countries; we've got a long way to go, there's a lot more countries in the world, and we'll never be in every one of them, but we'll certainly be in more. We added four stores in greater China last quarter, and so we're really on our way there. We're going to add lots more, there's incredible opportunity there and we want to serve our customers there.

One of the things that's probably not understood well about the stores is--and this is my opinion--I don't think we would have been nearly as successful with iPad, as an example, if it weren't for our stores. Because here's a product coming out, it's different. People's view of a tablet, the tablet that was ingrained in their mind, was this heavy thing that the Hertz guy was holding that no one wanted. Nobody would want one of those! You know, a few hundred thousand sold a year or something.

But our store is a place to go and explore and discover and try it out and see what it will do, and I don't think that the launch would have been nearly as successful without stores that welcomed people in--at 10 million a week--and showed it. I think it gives Apple an incredible competitive advantage to have these stores, [because] I think everybody that's tried it has found out it's not so easy to replicate in order to launch these products and really educate people about a new category.

So I'm incredibly bullish on the stores. We're going to continue to invest like crazy in them, and our team members are the best in the world. And the financial results are great: The average store last year was over $50 million in revenue. Who would have thought a store could do that? I think there's no place quite like it.

I was talking to some employees the other day. I don't have many bad days--I'm very fortunate from that point of view--but if I ever feel I'm dropping down from an excited level, I go in a store. And it instantly changes, it's like Prozac or something, I don't know. It's unbelievable, the energy in our stores, and to talk to our team members and our customers. It's a feeling like no other. We're continuing to invest here.

On his first year as CEO

I'm incredibly proud over a lot of things. I'm most proud of our employees. I have the privilege every day of working with people who want to make the very best products in the world, and they're there, to do not only great work, but the best work in their lives, and they're there to do it without limits, they're the most creative people on earth. It's the privilege of a lifetime for me, to be at Apple in this point in time and work with all these people.

I'm incredibly proud of the products that we have. We have the best smartphone on the market; we have the best tablet on the market; we have the best PC on the market; we have the best digital music player on the market. For those things that we've elected to do, and we continue to focus on a few, they're really great. And I'm incredibly bullish about the future and what Apple can do and more contributions it can make to the world.

I'm very proud that we're out front--that we have a spine on supplier responsibility. I'm incredibly happy that we're changing people's lives, that we don't care if people are lobbing grenades from the sidelines, that we're going to do what's right and just and moving the ball forward.

I'm incredibly proud that we are doing heavy lifting with the environment; that we've designed our products with the environment in mind; that we've done that better than everyone else; that we've eliminated toxics. I'm proud that we have the largest private solar farm ever, of anywhere, that we can run our data centers on 100 percent renewable energy.

I'm really proud over all these things, and I don't mean to gush, but it's how I feel. And, you know, it's both the privilege of a lifetime, and humbling to work with the people I get to work with.

It's pretty incredible.

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