What to Do with Apple's Cash

Launching a venture capital fund would allow Apple to fund its vision for the future without making awkward acquisitions

by Arik Hesseldahl

What would you do with $12 billion?

You might have two ideas in mind, neither of which is necessarily exclusive of the other: First, do some good; and second, make sure that money keeps growing.

It's the kind of question that the financial minds over at Apple (AAPL) have to consider, for that is about the amount of cash the company had on its balance sheet the last time it reported earnings on Jan 17.

If the last year is any judge, Apple's cash position—the combination of its cash on hand and short-term investments that can quickly be converted to cash—is growing at a rate of about a billion and change per quarter. It's high time Apple spread some of that cash around, and I think one good way to start would be to launch a venture capital fund.

Big Acquisitions Don't Work

Opinions will vary about what Apple should do with all that cash. At other companies, the urge to grow by acquisition is hard to resist. But history shows that large acquisitions in techdom generally don't work well. And as I look around the digital landscape, I don't see a company that Apple has any compelling reason to acquire. A few names that have come up in the past several years are Tivo (TIVO); Roxio, now part of Sonic Solutions (SNIC); YouTube, now part of Google (GOOG); Connectix, a software outfit now part of Microsoft (MSFT); and Universal Music, part of Vivendi Universal (V).

But Apple's not that kind of company. When Apple makes acquisitions, they tend to be focused on small companies that can be integrated into projects that are already developing internally. In 2002, Apple acquired EMagic, the small German company behind the professional music software Logic. That acquisition helped begat a popular Mac software program called Garage Band. Several of the applications built into what we now call iLife were cobbled together from the acquisition of a few small, smart, software outfits. So acquisitions—at least big ones—don't seem to be a priority.

In other cases, Apple has used its considerable cash reserves to ensure a solid supply of components, like the time it bought up a big slice of the NAND flash memory manufacturing capacity around the world from companies like Samsung and Hynix (see BusinessWeek.com, 8/26/05, "A Memorable Deal for Apple and Samsung").

And sure, Apple could make investor-friendly gestures like buying back some of its stock, or paying dividends like it did during the period from 1987 to 1995. And perhaps it will.

Seeding the Software

But think of what might happen with an Apple-backed venture capital arm, funded at say, an even $1 billion, parsed out over five years. Consider this: The market share for the Macintosh is back on the rise, and Mac OS X has more buzz around it than anything coming from that little company outside Seattle. The iPod is clearly the biggest thing in consumer electronics in a decade, and the iTunes Store is the one single force to contend with in the still-nascent age of digital media distribution (see BW Online, 2/25/07, "Apple's International iTunes Controversy"). The iPhone may prove to be even bigger than the iPod, and may make iTunes even more important. Apple TV, though late (see BusinessWeek.com, 2/27/07, "Apple's TV Revolution Delayed") will round out an ever more exciting product portfolio around which an ecosystem will no doubt spring up—and to a large extent already has. But why not encourage it further?