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Apple's Two Biggest Risks

The computing giant's future could be affected by Steve Jobs health and the risk of staying a closed system.

I have been a big proponent of


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for the last several months. There is a lot of good news to be excited about.

When the iPad was announced at the start of the year, most of the first-day reaction to the device centered on its name. Many people cracked jokes about it. Steve Jobs shrugged his shoulders and said the jokes would stop in a matter of days, as the new name of the device entered part of our regular device vocabulary. Guess what? He was right and the jokesters were wrong.

Pre-launch, I expressed here that what was so important about iPad for Apple stockholders was that Apple was creating a completely new device that it could sell to every current owner of an iPod, iPhone or iMac, as well as the rest of the population.

For a company with nearly a quarter-of-a-trillion-dollar market capitalization at the time, you need to find big opportunities to drive increased revenue. Apple did that with iPad. They created a whole new product category which people didn't realize they needed until they saw it, held it, and started playing with it.

Skeptics thought iPad would be a Newton. They saw what


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had done to date with their tablets and thought Apple would achieve only marginal improvements over that. They were wrong.

I remember many Apple analysts projecting pre-US launch that Apple would sell 1 million iPads in 2010. We just found out that Apple has sold 2 million in two months.

So, there's a lot to be excited about if you are an Apple long holder. That's fine. But I want to express the two areas which worry me as a long-holder of the stock. These are the two concerns which keep me awake at night and they are the areas in which I hope the company is spending enough time on to ensure they are adequately addressed.

My two worries are Steve Jobs' health and balancing the benefits of being open vs. the optimal experience and product lock in from a walled garden.

Steve Jobs is now really operating at a mythical level compared to anyone else in business -- probably past or present. He is the ultimate pitchman. The success of iPad is just yet another feather in his cap.

Yet, when I talk about him or the company with other long holders, the topic of his health comes up a lot. The media of course focused a lot on his health at the time he took a leave of absence from the company. Jobs got quite upset with many reporters who began to speculate on his health or his weight, calling it a personal matter. Now that he's returned to work and with the success of iPad, his health has largely been forgotten again.

I obviously want nothing but the best for Jobs and his family. I hope that he continues to work at the company for another three decades. Yet, I thought it was appropriate for reporters and analysts to ask for information about his health when he did step away from the company, and I think it's fair to continue to get updates even now.

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Jobs' health and his prognosis are obviously material risks facing investors. Tim Cook, by all accounts, did a great job leading Apple in Jobs absence. There's no reason not to expect he could do so again or that there's not a strong team in place. However, I would like to see the company start to emphasize others on the management team in public appearances beyond Steve.

Internally, there obviously needs to be contingency/succession plans in place. One would expect this has happened, after Jobs' decision to temporarily leave the company to tend to his health. However, Apple's governance has been criticized before for being too deferential to Jobs. Remember the stock option back-dating scandal of a few years ago? It's clear that Steve runs the show and has for a long time. And, let's face it, that approach has worked.

However, there are many examples of highly successful companies with very dominant and respected CEOs, who suddenly stumble. Enron had a dominant leader in Jeff Skilling. An Wang led Wang Labs with ultimate control. I'm not saying that Apple is heading for a fall like those companies.

But I'm saying that success buys you credibility as a boss. You don't have to answer to as much, compared to bosses who are struggling. You're given more autonomy. Sometimes, if the leader doesn't develop a strong bench underneath him (or her) or if he takes the company is some new direction that doesn't pan out, that autonomy can cause the company to stumble (or even fail as happened at Enron).

There's no indication that Apple is veering off track but I hope that Jobs is doing a good enough job getting the next generation of leaders ready at the company.

In terms of open vs. closed, it's obvious that Apple fundamentally wants the user to have an optimal experience. That's initially what attracted people to the Macintosh vs. MS-DOS. Over time, it's continued to "optimize" a user's experience by linking new product innovations like iTunes across their computers and phones.

More recently, we've seen Apple take the stand of not supporting flash (from


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on their products, presumably because it doesn't think it helps the user experience.

To this point, users have clearly spoken out that they like the choices which the company has made in favor of an optimal user experience. However,


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-- which is aiming to make a significant dint into iPhone's success in the mobile space -- will be trying to demonstrate that its approach in more "open" than Apple's. It will paint this as a critical factor that users should consider.

Google will point out how



once had a "walled garden" approach that seemed to help users, until that approach limited user choice that was offered elsewhere.

If Apple can sufficiently focus on these two risks and protect against them, it can stay ahead of the competition for a long time. If it doesn't, it could be setting themselves up for an uncomfortable surprise down the road.

At the time of publication, Jackson was long Apple, Google.

Eric Jackson is founder and president of Ironfire Capital and the general partner and investment manager of Ironfire Capital US Fund LP and Ironfire Capital International Fund, Ltd. You can follow Jackson on Twitter at or @ericjackson