Is Brick the Next Cube?

That's the weekend buzz, following a compelling report by 9to5Mac. Supposedly, Apple is ready to unveil a fantastic and revolutionary fabrication process for notebooks. It's the mother of all Apple rumors, and not one easily believed.

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Reporter Seth Weintraub described the new process as "one of the biggest Apple innovations in a decade." Oh? Really, now. He blogged yesterday:

The MacBook manufacturing process up to this point has been outsourced to Chinese or Taiwanese manufacturers like Foxconn. Now Apple is in charge. The company has spent the last few years building an entirely new manufacturing process that uses lasers and jets of water to carve the MacBooks out of a brick of aluminum.

Bricks? "Yes, this sounded a bit crazy to us as well," Seth acknowledged. "But our source is adamant so bear with us. He says Apple has built a manufacturing process that would make Henry Ford proud."

The production process would start with bricks of aluminum, which could be more easily molded into more intriguing designs and seamless encasings. I ask again: Bricks?

What is it with Apple CEO Steve Jobs and rectangular shapes? The first Macintosh and NeXT computers were rectangularish. Then there was the ill-fated Power Mac G4 Cube, whose poor sales sent Apple's share price tumbling 50 percent eight years ago. Now comes brick manufacturing?

The new fab—and from it trendy, new notebooks—certainly could explain why Apple warned that fiscal 2009 margins would drop nearly 5 points to 30 percent. Fiscal 2008 ended on Sept. 30.

Few people care about fab facilities. Intel has had great fabs for years. So what? Digital cameras are a great example of how little this kind of self-development matters to most people. Canon makes its own camera sensors, while nearly all other digicam makers outsource from Sony. Canon produces great sensors, but who regards—or even knows—that's a differentiator from competing products?

I can't see investors getting excited about a costly but cool Apple fab when Asian outsourcing is cheap and efficient. If brick is for real, I predict it will be another Cube, in terms of how it's perceived. Apple's bigger problem is timing, which is terrible, and there's something eerily cyclical here. In summer 2000, Apple released the trendy Cube, which looked great but was ill-timed. During the second half of 2000, recession sapped PC sales, pushing up channel inventories, and forcing Apple and Windows OEMs to issue profit warnings. Apple's Sept. 28, 2000, profit warning sent the stock tumbling, from $53.50 to around $28 in early trading the next day.

Apple history looks ready to repeat. Last week, eight years to the day of the last Apple stock price crisis, shares fell almost 18 percent, or $22.98 to $105.26. But matters went from bad to worse at the close of trading on Friday, with Apple's share price at $97.07. On Aug. 13, when Apple's market capitalization briefly passed Google's, valuation was $158.84 billion. At the close of business on Friday, Apple's market cap was $85.99 billion.

Given economic uncertainties and another recession descending on the technology industry, Apple's timing wouldn't be good. Investors probably won't look favorably on a new fabrication process that saps margins during an economic crisis and while Apple shares free-fall. Tech sales-wise, holiday 2008 is shaping up like holiday 2000—and that's not good.

Apple was riding high when it released the Cube eight years ago. The company's shares traded well, profits were solid, and there was generally good investor and public perception. Apple's situation was similar heading into last week's double blows to the head—the Dow's 777-point plunge and two financial analysts lowering share target estimates.

Still, brick is tough to believe. Maybe it's a false rumor, and that would be good for Apple. It's an easy rumor to dismiss; how the hell do you a hide a fabrication facility? That said, Seth has a good enough track record to make the odd report believable. He acknowledges there's some stretch to credibility: "We realize that a lot of people will be skeptical, but bear with us for a few weeks. ... We are putting a lot on the line here for this mother of all rumors ... wish us luck :D."

Was that a pun—"a lot on the line," as in production line?

[Please send your tips or rumors to watchtips at live.com.]

Posted by Joe Wilcox on October 5, 2008 11:55 AM