Asymetric Episode 137 — E is Our Friend

Horace speaks carefully and with knowledge about opinions, facts and fantasies, and shares what he thinks John Ternus’s most important job is.

Topics include:

• Is a crash coming? 
• The CapEx problem
• AI and Apple
• Convergence vs. fragmentation
• Ternus and Apple's culture

Now in Beta for asymco one subscribers

Listen to Asymetric in your favorite podcast app.

Audio Recording

[asymco_podcast slug="asymetric" id="asy-137"]

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Transcript

Judd • 00:00
Tim Cook got to go to China on Air Force One. Horace gets to talk to me. This is Asymmetric, Horace. There's a lot to talk about. You recently wrote that something terrible might be coming. I do not normally think of you as Chicken Little, but is in fact the sky falling, Horace? Are we about to see a crash?
Horace • 00:23
I didn't suggest it was happening, but I said, are we facing a crash? "Is there a crash coming", I think was the title. And this is a topic that's just been a worry for a long time, because we've seen the surge in the market value of so many companies.

But as I said many months ago, on a PE basis, it doesn't look so bad. But then we should ask, is that basis not valid? We should be looking at another basis, perhaps, because the PE ratio is not the whole picture. And so I'm putting out a series of posts. Because you see, the problem is this. There are some topics that are, let's say, not simple, and you feel like you should dive in, but you feel like you might leave the audience behind. And my struggle is to make it simple so that everybody can follow along, but without making it simplistic.
Judd • 01:32
Heavy lies the crown.
Horace • 01:34
Well, it's not that hard. It's just that sometimes you need to do five steps instead of just one. And you see this process online, where people are trying to fit everything into one tweet, or even now a thread of tweets — and there's a lot of long-form stuff actually going on social media nowadays. But I don't think this topic requires a very long single post. I think it just requires a few baby steps strung together. So I don't want to necessarily — well, we could dive into it right now, but I'll summarize at least.
So the problem with the PE is that it doesn't, first of all — remember, E is our friend. E is earnings. But it's also true that earnings are an opinion. Remember the old adage: earnings are an opinion, cash flow is a fact. And arguably I added to that by saying a share price is a fantasy. Literally, I mean it is a dream. Maybe I should say dream, not fantasy, because it could be a bad dream as well. But the fact is that earnings fundamentally are an opinion. They are a result of an accounting practice, an accounting convention — the so-called generally accepted accounting practice, GAAP.
And what it means is you don't put into earnings things like capital expenditures, you don't put into earnings the fact that you have a huge amount of cash. So things to do with cash flow don't go there, and things to do with balance sheet don't go there. And both are important in evaluating the value of a company. E comes from the income statement, and it does not cover issues that are outside the income statement.
And this is why a better measure — again, not a complete measure, but a better measure — is free cash flow, or FCF. And this is why years and years ago I said, because at the time the problem was people weren't valuing what was on the balance sheet of Apple, which was cash, huge amounts of cash — and so for that reason, even then, I suggested don't use PE, use free cash flow. Which, by the way, is the denominator, where the numerator is EV, or enterprise value, which includes debt and cash, or rather balances those out. So you divide — instead of doing the P over E, which is market capitalization over the earnings per share, you do it with the top being the EV or enterprise value, where you cancel out the debt, and then divide it by free cash flow. So that's as if you took not the market divided by the income statement, but you take the balance sheet divided by the cash flow statement, which is very interesting from an accounting point of view.
So anyway, I don't want to belabor this, but what I'm going to do is explain in writing, and using examples — especially the so-called Mag 7, or even expanded to the top ten most valuable companies.
Judd • 04:51
I look forward to that. My question for you right now, since we're here together chatting, is: you've long held that a PE of thirty-five is pretty much where Apple should be. It's fine. So in terms of free cash flow, what should that ratio be? What should that number be?
Horace • 05:13
Well, they should be roughly the same. So here's the beauty of this: the EV over FCF —
Judd • 05:17
So EV over FCF is 35.
Horace • 05:20
If they're the same, so — I put it this way: if P over E equals EV over FCF, it means that there's no weird stuff on the balance sheet, there's no weird stuff going on with the cash flow. It's all pretty much — the income statement is the best measure of the business. And in those situations you're not playing games elsewhere. Or — well, not that they're games. It's just that there's nothing invisible to you when you're looking at the income statement. And that's a nice way of analyzing a company.
The problem is today, with all the hugest companies in the world, which make up a disproportionate portion of the S&P 500 and a disproportionate part of the US economy and the growth and everything that's indexed to that — those few companies are out of whack. Their PEs are not at all equal to EV over FCF. In other words, there's stuff either on the balance sheet, or there's stuff going on in cash flow, which makes that PE ratio irrelevant. And this is what I have to expose. With Apple in the middle of it, showing how Apple actually conforms more or less to, let's say, an income-statement-driven view of its value, whereas the others are much more skewed, because so much of the money that's coming in is being spent on capex. Which means they are no longer — here's the catchphrase — they are no longer considered software or services companies. We're talking Microsoft, Google, Meta, Amazon. These are intellectual machines. They deal in software, they deal in non-tangible items. They deal with data. And yet they're investing today as if they're chimneys, boilers, forges, hammers, and our industrial-might giants, which require huge capex. There's nothing wrong with that. Sorry — there's a motorcycle. So the problem is —
Judd • 07:40
But haven't Google and Facebook for a really long time — I mean, they've had their own data centers, they've spent a lot of money. This is much more than it's been, but this is not entirely new.
Horace • 07:51
Well, it isn't, but the thing is it's way, way bigger than anyone anticipated. We're talking, on a combined level, at least half a trillion dollars being spent. It's moving the needle on everything in the whole economy. Caterpillar is having an amazing year. Energy companies are having an amazing year. We're bringing back nuclear reactors. We're bringing back water issues and energy issues, because these data centers are monsters.
So what I'm saying is that if these companies that historically have been seen as income-statement businesses are now suddenly balance-sheet and cash-flow businesses, we cannot evaluate them strictly on the PE basis. Apple is the outlier. So Apple is the exception that proves the rule. Apple is still extremely consistent with respect to all these ratios, how it used to be. But all the others have gone way off.
And by the way — I wrote a short note, a note of Bennett, which said basically that Google's cash flow is going to zero. Well, so is everyone else's. And what happens when they don't have even more cash flow is they're going to start borrowing. Which means not only are they destroying their cash flow, but they're going to be destroying their balance sheet as well, by putting a lot of debt in, in order to pay for these infinite data centers. So there's an interesting dynamic.
I would say we're in uncharted waters, but we have to then put a little bit more effort into trying to figure out whether we're in a bubble or not, because this is the thing: all of that could be supported by enormous growth in revenue, enormous growth in profitability — and there is growth, tremendous growth. It's 50, 60, 70, 90% growth. But their investments are growing even faster. So this is why some people are grasping for ways to detect it. I've seen half a dozen indicators out there — everything from the Warren Buffett indicator, this or that, that things are out of whack. But all these indicators were dependent on the ratios of the past. We are in a situation — it's not like the dot-com era, it's not like the Great Recession, it's not like the Great Depression, it's not like all these previous bubbles and crashes. If you applied those metrics, many of them may be true today, but then you have other things that are actually even more important. So that's what the series is all about: we're going to try to get to the bottom of it. And I will propose at the end, this is the best way to think about a business.
Judd • 10:35
What's your best guess right now?
Horace • 10:37
So the way to look at it is: given the growth projected forward, how many years will it take you, as an investor, to get your money back? If you put down a hundred bucks on a share, or a portion of a share — let's say. I don't think anything's a hundred bucks anymore. So you buy a share in Google and —
Judd • 10:56
How long's it gonna take?
Horace • 10:59
Sorry?
Judd • 10:59
A pair of pants is a hundred bucks.
Horace • 11:01
Oh, well, you've gotta get your Dockers. But a hundred bucks invested today has a payback period based on cash flow and growth. So those are the two most important metrics. And the problem with the growth is: are you going to look at the last quarter and project it for the next five years? Are you going to look at the last year and project it for the next three years? So the whole thing depends on how much of that growth is sustainable. So all of this comes down to — okay, well, we don't know for sure, but let's play with some scenarios. And then you get a good idea: am I going to wait five years, ten years, twenty years?
And in the case of Tesla, by the way, which is also among this group — it's an outlier. Its PE is 400. Even if it grew at 70%, it's not going to get back. And of course the sad truth of Tesla is it's actually contracting as a business. So it's actually the only one that is going negative in growth. And yet it's also the only one that's accelerating in PE. And so there's a huge anomaly. There's a huge elephant in the room — we talk about theory, and then it demonstrates — yeah, well, there's a robotic elephant. Or space robots. There's so much mystery, because that demonstrates also how sentiment, optimism, euphoria, and memes all play a part. So anyway — sorry, this is a bit, as they say, in the weeds. But I feel it needs to be done.
Judd • 12:47
Yeah, well, let's put a pin in this. We look forward to seeing what you come up with. Please, as always, show your work. And we'll be paying close attention to your follow-ups to this. It's hard to not talk about AI. Would it be fair to say that services — which is becoming more and more the centerpiece of Apple's business — would it be fair to say that services is the most vulnerable part of Apple to AI, in the sense of — because services boils down to —
Horace • 13:32
The US? Yeah, I get your question. Well, it's a great question, because I think there are a lot of hypotheses out there about how Apple could be disrupted by AI — and I use that term carefully and with knowledge. The scenarios which are disruptive to Apple would be not just for services but also the hardware itself: that the business would move away from what the user interfaces today for the consumer.
But you don't actually think that. I do not. In fact, I think I can set that out. The underlying thesis is that we are visual machines, or visual animals. And as long as vision is involved, I think Apple's going to do very well. If you say, well, it's audio in the future, or something that is much more in the background, not the foreground — it's ambient. Computing becomes ambient, then there's no interface. If there's no interface, Apple has a hard time. But I just don't believe that future is likely.
And we — I think we mentioned this before — the services aspect: now people are starting to wake up and say, wait a minute, actually services could get a big sustaining boost from AI. Just days ago there's been an idea put forward that Apple could launch an agent store. The way there's an app store, there could be an agent store. And what an agent is, as you would imagine, is like an entity that you hire to do things for you. And it's very possible that Apple could embody or integrate agents into its services, and that the discovery of agents, payments — all of the things that are related to the economics of AI — would go through Apple. And people are finally realizing that, yeah, as I've been saying for three years, distribution is just as important in the age of AI as it was in the age of software, as it was in the age of computers, or any other pieces of equipment that we have ever bought.
So agents are possibly the embodiment of AI that are actually consumer-oriented. I hate to go back and forth on this, but the fact is the AI business is still mostly, right now, very few professionals are using it, and quite a few businesses are using it. But it's not yet consumer-driven. Maybe chatbots are, or entertainment, maybe companionship — but as I see it, no one's quite gotten the killer app. And that will probably be discovered through introduction via an iPhone. That's the platform for discovery and everything else.
So I think many people now are starting to write — and by many I mean the analysts on Wall Street are starting to write reports suggesting, wow, AI could actually be very sustaining to Apple, to the point where it's going to ride the wave and be the one capturing a significant portion of the profits. I would even say it may even capture the majority of the profits, because it's at the intersection of the consumer and the device. And that's not going to change. And I think the attacks by OpenAI, to try to replace that device with whatever wearable Johnny Ive and company come up with, will fail. And I quote Johnny on this matter. Johnny Ive said, "I'm nothing outside Apple." He, and every other person who's left Apple who's smart enough, has said the same thing. And yet here we are with this idea that, oh, I'm just going to sell my services to an AI company. Anyway.
Judd • 17:48
And what it feels like he might be doing is something that — I mean, it's touch-based, it's voice-based, and all those things are much slower than a visual interface. You also recently wrote about using the Apple Vision Pro outdoors, which I'm skeptical of, at least for me personally. I would not want to do that. Maybe I'll have no choice. But it's not something that is —
Horace • 18:20
It's not going to be the device as you see it today. So the puzzle for me is — we have rumors now that Apple is doing glasses. Generally I don't comment on rumors, but it's obvious to me that there would be a wearable. What about a monocle? Yeah. Or — what is it called? A pince-nez? Yeah. But the problem with these devices is that maybe they're mostly — what I would say is — input devices, like cameras or other sensors reading things. There are also rumors of AirPods having cameras. The view of the future I have is that there will be wearables which have augmented reality and you could wear them all the time. That's not the case of the Vision Pro today. But I think if I were to imagine a future, theoretically it's possible to do that, and that would be fantastic.
Anyway, back to the threats at hand. I think AI, for me — at least the version we have, which is not yet AGI — it's a nice extension. It helps with a lot of tasks, it improves some productivity, decreases other things. But it isn't disruptive yet. It might be disruptive to some type of work out there. So it's disruptive to people. But none of the players — okay, I take it back. There's a couple of companies out there that might feel it, and are being punished right now because of AI. One is Adobe; another would be so-called SaaS, or Software as a Service. You have companies essentially that are providing tools or tool chains, and those might be very easily replaced with the person who does those things but happens to be an artificial person. So if there's not that much value added with those technologies, then yes, they would be disrupted. But even they, I think, will bounce back.
One of the issues is — especially with software — and I don't see a lot of conversation about this — people talk about vibe coding, and writing code very quickly and being very productive with programming tasks, but that doesn't take into consideration the maintenance of that. And the maintenance, as anyone who does software engineering knows, is not so much about how much code you write, it's how well that code can be managed, maintained, upgraded, and everything else. And that's the engineering part of software engineering. When something other than you writes something — even if it's a person — you're going to have to deal with that.
This was a big problem when I was a student: you were told, comment your code for your own sake, so that when you go back to it you know what you did. But also, if you have to hand it off to somebody, it's more self-explanatory. And it was a very bad practice — almost an antisocial practice — to have cryptic code that nobody can read, therefore nobody can maintain, and you're just doing it to preserve your own job, so nobody can fire you, because nobody can fix whatever you wrote. That's just not considered good practice. And now do we have the equivalent of machines writing code, and they don't even know what they're doing? I mean, they're just basically copy-pasting a lot of things. And so they become spaghetti code, it becomes intractable. You can't understand what they did. And so it becomes unsupportable, unmaintainable, and that might cost you even more to rectify than if you had a human write it in the first place. So either machines get far better at creating code that is inherently supportable and they can explain themselves — but there's so many things wrong with this picture as far as the long-term things, right?
Somebody wrote, saying, yeah, it may look cheap to write code, but you're going to get the invoice on maintenance years down the road, and you'll realize it wasn't cheap at all. So there's a lot of things about that, that I don't see disruption happening here. But there are some things. A lot of work, like legal, tax, or accounting — a lot of that — I've used it in these instances where it's a better search. A lot better to search with Gemini, for example, than it was with plain old Google. And I'm learning a lot of things. Although I'm a little bit cautious, because sometimes, as it says as a disclaimer at the bottom of every page, this is not always accurate — which is a worry sometimes. So anyway.
Judd • 23:38
You know, Google wasn't always accurate either. So in all cases, buyer beware. You were saying something a minute ago in terms of having an agent store, and I'm not sure if you are a reader of Neal Stephenson, as I am. I don't know if I'm current — in fact, I know I'm not current — but a few years back he wrote a book called Fall, which was a follow-up to a book called Reamde. Fall takes place in an age where AI is very common, and this is the thrust of the story. But it's very common, and every family, if not every individual member of that family, has their own agent — to do things, process information, give them answers, tell them what to do, et cetera. Which to me leads to the ultimate form of reality being fragmented. So everyone is living in a completely different world based on their agent. Should there be a required agent? Like, if you live in Helsinki, should everyone have at least the Helsinki agent, so they know just the basics — so there's a basic frame of reference?
Horace • 25:01
Yeah, but it's a huge problem, because we don't have a lot of shared experiences anymore, right? Even within the same family, people are not consuming the same content. It used to be at least there was one newspaper in the house, there's one TV set, and more or less everybody watched the same TV. And we ended up with a situation where, even when there's a common space, where people live together, people are looking at their own screens, and they're looking at a different reality. And then if that is intermediated by an agent who is essentially, let's say — rather than calling it an agent, I would say, let's say it was a personal assistant. And the personal assistant is like a gatekeeper. Chief of staff, whatever. And they are intervening even in the question of whom you meet, and what you choose to do. They kind of act on your behalf. So there's a lot of problems with that, because it's not just what you consume, it's also acting on your behalf in all aspects of life. It's kind of a little scary, if I'm honest.
But let me put it through a different perspective, which is that already there's a lot of difference between people from different countries. It's fascinating to me, having lived in many countries, how different the perspectives are on very basic things. In many ways, by the way, we are also getting together more. And let me explain what I mean. The globalization phenomenon has meant that people are more aware of, let's say — Americans are more aware of the World Cup, for example, soccer, which was something nobody cared about. Europeans are more aware of American football, and they're sort of kind of aware of baseball. And at the same time, you have shared devices like Apple, the iPhone, you have shared brands — everybody knows about Nike. Americans will know about European cars, and vice versa. So at the commercial level, because businesses have grown to be global, products and brands have kind of become uniform. It used to be that you went to a different country and you couldn't see on the shelf anything you could recognize. They ate totally different foods, they had totally different tastes. But now you can kind of agree that, as far as packaged goods are concerned, there's commonality. And that has a lot to do with the globalization of business, right? The fact that I can get a banana in the middle of Finland — even though it's a tropical fruit — and the banana I get is as fresh as it is in Costa Rica. That's an incredible story.
Judd • 28:24
Pretty close.
Horace • 28:25
Well, it's green. I think — and by the way, all these bananas are genetically identical, because they're all clones, because they're all made from the same exact genetic material. And if that gets wiped out, then we have to reinvent bananas, if you will. So there's a lot of funny things that happen because we have these modes of transport — these ships and airplanes around the world that constantly tie us together. So we have that. That's a positive. But on the information side of things —
Judd • 29:01
So we've got the same bananas, but completely different sources of news and information.
Horace • 29:05
Right — the same bananas, but at the same time — oh, I'll give you another stupid example. Americans have baseball caps. Well, baseball caps are global now. But I can tell you, when I grew up in the 70s and 80s, nobody outside the United States wore baseball caps. Maybe Japan, because Japan, weirdly, was colonized by baseball. And yet this style of headwear was never seen. Everybody had different hats, different styles. You had berets, and you had fedoras, or bowler hats. And yet now there's so many things that are uniform — in some ways, boring as a result. We all kind of wear sneakers. We all look the same. We all dress the same. Probably the music is also very common.
And the other thing — I'll give an example. Rap music. American music back in the 70s, 80s was well known because there was a global music industry. But people in Europe did not necessarily make a French version or German version of what would be a pop song. Let me put it the other way. ABBA was European. And ABBA wasn't all that resonant in the US — although it was enjoyed, it wasn't like our thing. People were much more into either rock and roll, or rhythm and blues, or Motown — American.
Judd • 30:49
Well, America had a disco phase.
Horace • 30:52
Sure, sure, but — there was, and it mostly came from Europe. But you also had indigenous American music that was enjoyed in Europe, but it wasn't felt that it was something that they produced themselves in the same way. You can do Motown in Europe, okay. So the thing is, though, today rap is universal, and it's from the Philippines to South Africa to Japan. That genre has caught on with everybody.
Judd • 31:23
Who is your favorite Filipino rap group these days, Horace?
Horace • 31:25
I have none, I'm sorry. I'm not aware of the individual acts. But what I'm saying is, I was observing it with youth behaviors — that they're acting very American here in Finland. At the same time, though, they don't understand a lot of American decision-making. They have no perception of student debt here. It's such a strange idea. Or medical bankruptcy.
Judd • 31:54
Yeah.
Horace • 31:56
The bottom line on this is that we can hear these stories about fragmentation, disassociation — but at the same time, there's a lot going on with unification of experiences. And most of all, think about your iPhone. Everybody in the world speaks iPhone. Everybody in the world recognizes and interacts with a computer the same way. And even before the iPhone, that was the case for computers in general, whether it was Microsoft or Mac. We — the Americans — invented how to compute effectively. And everything else in the world just completely disappeared. It wasn't that they didn't have it, they just disappeared. The French way of doing things, or even the Soviet Union had its own computers. But it's one of those things that we don't pay attention to very much, because — well, it's —
Judd • 32:49
It's too obvious. What exactly do you mean by that when you say the American way to compute? Do you mean — because Apple and Microsoft dominate personal computing and they're American companies — or is there something —
Horace • 33:02
First of all, the American computer is based on — I'll give you a very simple example — the byte. The byte is eight bits. Eight bits is enough to encode ASCII, which is the code for characters, and then you have the alphabet and the numerals. And the problem is, if Japan — let's have an alternate history. Japan wins World War II — Japan and China, maybe. Imagine that Japan and China together, with their kanji alphabet, would have come to dominate Asia, and then more and more of the world. Or Russia with Cyrillic — but Cyrillic is still a limited character set. The problem is you have fifty thousand kanji characters. You wouldn't be able to fit them in one byte. You would have to have a computer architecture that was bigger words, as they say. The layout on screen also — what happened with American characters on a screen is that you have eighty characters on the original terminals, eighty characters on an IBM punch card, and that was a line. And from that came the screen as we know it. Now, the form factor of the screen, the page layouts, the metaphors of Microsoft when it copied Xerox, and the Macintosh, the file folders — everything to do with layout on the screen was what an office looked like. All these things are, if not American, Western-centric. And the American keyboard is not the same, by the way. French keyboards are different. So you have all these weird things that were introduced by —
Judd • 34:56
There's a croissant button.
Horace • 35:00
The fact you have all these accents. But the thing is, the world adapted and internationalized what was effectively an American worldview, or compute view. And now, by the way, in AI it's the same thing, although it's English-led. The techniques can work in any language. But the leadership that comes from the United States, as far as AI is concerned, is — more or less people aren't questioning it. Who knows how it would have been different had it come from somewhere else? But I think the aspect of unified compute is not necessarily a counterpoint to the disunified cultures. In many ways we are much more alike culturally than we used to be. The Arabs in Syria — oh, to give you another example. If you go to Saudi Arabia — a friend of mine went there recently; I haven't been. I've been to Dubai, but I'm embarrassed to say I haven't been to Saudi Arabia. But if you go to places in the Middle East, it's burger joints. It's chicken joints. It's fries. It's ketchup. These are not what Bedouins ate. And probably there are restaurants that still serve indigenous cuisine, but they are one in a thousand, literally. So it's amazing to me how that American culture is everywhere. Maybe the Middle East is more skewed than, let's say, India. But still, the Indians know America very, very well indeed.
Judd • 36:50
Not that I wouldn't love a traditional Bedouin feast, but a hamburger joint works pretty well.
Horace • 37:00
It's exactly right. The economic models that scale, and that are replicable because of their inherent efficiencies and demonstrated value, are quickly adopted. What seems to be divisive, I would say, runs not on cultural lines, it runs much more on human nature being roughly divisible into several personality types. And then those divisions are amplified by the media you consume, and possibly by the agents in the future. And so you might be predisposed to lean one way or another politically — which, by the way, I think is one of these unspoken truths, that somehow there is a genetic component to political affiliation. And it's very difficult to actually get people to switch. Once they establish their — of course, there are the independents who claim that they switch, and probably independents are the majority — but nonetheless, there is — I think what algorithms discover, because they offer you things, and you react to things, and they offer you more of the things that you tend to dwell on — they immediately are able to characterize you based on your consumption. And then they create a dysfunction, because they then feed you things that exclude what other people see, and you become radicalized.
And you can do this on very basic things, like cats and dogs. Cat lovers never see dog pictures, and then they grow up and say, oh, I hate all dogs. I'm exaggerating, but I think this idea of, we end up being divided — we're unified with the fact that we use the same computers, the same interfaces, possibly even speak the same language. A lot of people speak English. But then you divide yourselves — you divide into cat people and dog people. And the more you consume, the more you are the radicalized cat person. But do we want to talk about John Ternus at all?
Judd • 39:25
Horace, who would win in a fight at their primes: Steve Ballmer on stage at a developers conference, or John Ternus preparing for a WWDC demo video, in a skin-tight t-shirt?
Horace • 39:42
Easy. Ternus is going to completely crush Ballmer. Let me — oh, yeah. Look, Ternus was —
Judd • 39:52
Ballmer is hyped up on all those sales figures and the developers —
Horace • 39:55
All that — pulls a muscle, screaming, "Developers, developers, developers." He pulled a muscle on stage. Ternus — was he what, varsity in college? Swimming? The guy can take his team off and do hikes in the mountains. Swimming — I did swimming in high school. And swimming was —
Judd • 40:17
That might help you if you're being surrounded by salmon, but —
Horace • 40:22
We're talking about dolphins. No, dolphins can be very powerful. But look, swimmers — come on. Well, if anything, he can run away from him.
Judd • 40:38
He'll need to run. I mean, he might have more endurance — that would be the thing. So I would say Ballmer has more brute strength, and Ternus has more stamina. So if he can evade for a little bit —
Horace • 40:56
Could he do one of those kick turns in the water? I don't know. I'm a lover, not a fighter. I don't know how to evaluate fighting ability.
Judd • 41:09
But I will say this about Ternus — I don't know if you're aware of this, but the company he worked at before Apple, which is, I guess, thirty-some years ago at this point, was a VR company.
Horace • 41:21
Yeah. But that was his first job, and he was there only a couple of years. And I've read —
Judd • 41:26
Isn't that exciting for all of you Apple Vision Pro aficionados?
Horace • 41:29
Yeah, yeah. No, I think he knows that. He's got ideas there. He did something in grad school or undergrad to do with helping people who had some sort of disability — assistance, robotics or something, I forget. And then he went to a VR company, and that would have been like 25, 30 years ago, like you said. And then he went to Apple and has been there since. I think the first product he worked on was a cinema display, of which I have one, by the way — or had one, anyway. Tremendous product.
But the thing I said about him is that I use the word engineer. He's like a real engineer, and he's an engineer who can connect with non-engineers — but "engineers" is too broad a topic. You can say, well, he's product, or he's R&D — but he's all of those things. I think it's important to get a person like that to retain talent. It's not just motivational. There's a big problem, I think, Apple has of turnover. Now, it's no bigger than any other company. But in the case of Apple, they need to keep people more than other companies. They need to have that loyalty, because things take a long time. So if the project you're on isn't going to see the light of day for seven years, it would be a pity if you have to switch over the team three times during those seven years. There's going to be big problems with continuity if there's turnover in product teams that are committed to long-term projects. So that's an issue that Apple has to contend with.
And the way Steve dealt with it — I think this is where the questions of culture come in — I think Steve offered to his greatest people the chance to do their best work, and not to be distracted by politics, by management which has turf wars, or has an agenda. Managers have personal agendas, empire builders. And once that work is hopefully finished, then millions of people will use your product. I think these are the motivations of the engineer, of the creative and analytical type. And by the way, you could argue the same thing for someone who makes a movie. If you say to somebody, hey, come and work on my project, here's a bunch of money — but if you're working with this great team, and we have a great project, a great script, a great director, that movie could end up being seen by a billion people — you might say, you know, I'm going to give it my best. And forevermore I can reflect on that. And whatever I do in the future, the glory of that product will shine upon me forever. And that doesn't mean necessarily you get paid a lot because of it — probably not; probably you'll get a little bit of residual value from it. But you'll have that on your resume. And believe me, people are going to come out from everywhere asking to work with you, simply because you're glowing from the glory of that project.
So I think — now, that sounds vain, but it's more than that, because I think the engineer devotes so much of their time, their life, early in their career, their education, their learning, and everything else — it's brutal. It's quite a challenging program to get through. And at the end you feel like, hey, I'm not going to use 10% of that capability — I hope not, otherwise I wasted all this effort. Secondly, I hope that I can make an impact, not just make money. And you can argue the same for a doctor. A doctor probably feels great if they get a nice job — maybe they're a lobbyist, maybe they work in compliance, maybe they end up in something else with their medical degree. But if you're a practitioner, and you end up saving people's lives — or, in the case of our friend Dr. Tommy Korn, he saved 23,000 patients' eyesight — I can't imagine how satisfying that is. Same thing for the creators of the Macintosh, right? And they say that's why he had them sign the inside of the case. You guys really made a miracle, and those people can be proud.
So that's why I think Ternus — or JT, let's call him JT — I think he will offer this to the people working there, as did Steve, and as did Tim. But in the case of Tim, it was a secondary thing — no, that's the wrong word. It was through other people that he inspired, right? He would say, well, we have good people, and they'll inspire you. So I think that's the directness of JT's connection with the teams — that he was in the trenches with them, working on the same things, that he stuck it through 25 years, and now, as a result, he really made it big. Not that they're all going to be wanting to climb the ladder — that's also not necessary. But anyway, motivation and retention.
Remember, we talk about satisfaction a lot. The satisfied customer is number one priority. Well, the satisfied employee is probably the number two priority. Satisfied employees at Apple are a really, really high priority. And I remember being asked years ago, what do you think keeps Tim Cook up at night? And I said: employee retention. It was true then, it's true now, and I think it's going to be true for JT as well.
Judd • 48:10
So Steve Ballmer is six-five. I could not find a published height for Ternus, but he looks to be about the same height as Tim Cook, who's about six feet. So I think one-on-one, if it was like a bar fight, I think one-on-one Ballmer would have an advantage. But basically what you're saying is, more people in the bar would back up JT than Ballmer. Is that —
Horace • 48:39
Well, yeah. And I think JT's going to —
Judd • 48:41
He would inspire more people.
Horace • 48:43
He's never going to be within reach. If Ballmer's got the reach, with the height, I think JT's going to dance around him and get him with a lateral move, whatever the term is.
Judd • 49:04
A hook. Sure. Yeah. Horace, this has been fun. Thank you for taking the time. Thank you to everybody listening. We will be back again very soon on Asymmetric.