Carl Icahn has the worst idea for what Apple should do with its cash

The biggest question looming over Apple's future this week isn't what kind of new iPads the company will announce at Thursday's event. It's how CEO Tim Cook will respond to activist investor Carl Icahn's demand last week that the company engage in yet more share buybacks, an approach to corporate financial management that's increasingly popular on Wall Street but strangling the American economy. A buyback is when a profitable company like Apple takes some of its money and instead of investing it in the future of the enterprise, it invests it in buying shares of its own stock. Right now, Apple is already doing enough of this sort of thing that it's no longer adding to its massive $120 billion cash stockpile, but Icahn wants them to pick up the pace and fully disgorge all that cash.

The buyback problem

That produces some cash for the folks who choose to sell. It also, by reducing the number of shares outstanding, tends to increase the value of everyone else's shares.

teaming up with Elon Musk to plaster the world with self-driving electric cars. Or maybe trying to crush him in head-to-head competition

This is all well and good, and it's certainly not crazy for Icahn to think that the best way to make Carl Icahn even richer is to treat Apple's iPhone profits as his personal piggy-bank, with the cash flushed out as fast as possible for as long as the franchise can stand. But if you're more a user of technology products — or just a fan of human progress — than you are a billionaire shareholder, then this kind of unimaginative use of Apple's vast financial wealth should be seen as deeply regrettable. Surely one of the world's most dynamic and innovative companies should be using its money to blaze new trails, revolutionize new markets, and devise new products rather than simply kicking money out to the Icahns of the world.

What Apple should spend its money on

What should Apple do with the money rather than hand it over? Well, there's a reason Apple hasn't put me in charge of product development and I'm not going to pretend to tell them what to do. But even though it's really hard to know what the best possible use of the cash would be, it's not really hard at all to think of a better use than giving it to Icahn and company.

the textbook market is an expensive nightmare ripe for disruption

I like to daydream about Cupertino teaming up with Elon Musk to plaster the world with self-driving electric cars. Or maybe trying to crush him in head-to-head competition. People have been daydreaming about an Apple television set for years now. But the sky's the limit, really. Maybe their team could come up with a great idea for wind farms or bionic legs. Apple has dabbled in the textbook market before, but it remains an egregiously expensive dysfunctional nightmare ripe for disruption. Closer to Apple's existing core businesses, both mobile phone operators and fixed-line broadband providers are cozy oligopolies featuring fat margins and terrible customer service. A company with billions in the bank is ideally situated to challenge them with new infrastructure or new pricing schemes.

(Horace Dediu)

If none of those ideas are feasible and nobody has any better ones, there are some even simpler things a well-off company can do with its cash.

A visit to the Apple Store isn't quite the magical experience that it once was, and really hasn't been for years. Opening more, larger stores with better-paid staff would bring some of the pizzaz back. Or they could just cut prices. Apple regularly sells new iPhones just about as fast — or at times faster — as the factories can crank them out. But Macs and iPads are not supply-constrained in the same way. Accepting lower profit margins on these devices would delight consumers.

The PC industry is no longer sexy or growing, but Apple's share of it actually is growing. Meanwhile, the average Windows PC features less than $15 of profit for its maker. If Apple were to enact substantial price cuts on its MacBooks and iMacs, the competition would be completely incapable of matching. And while its margins would be lower, they would still be clearly positive.

It would also strengthen the overall position of the brand, as consumers who use other Apple products are likely to stay loyal to the ultra-lucrative iPhone franchise.

But fundamentally, Tim Cook doesn't need a bunch of pundits telling him what to do. What he does need to do is recognize that he has to do something with Apple's enormous stockpile of cash. Steve Jobs seemed to delight in building up the war chest for no particular reason, and his unique stature in the business world led him get away with it. But separated from its charismatic founder, Apple either needs to spend its cash or else face shareholder demands for ever-higher buyouts.

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