Thursday, April 22, 2010

Apple as a Counterexample

When President Barack Obama seized on the Apple story yesterday as an example of the purpose of capital markets in supporting innovation, he was responding to the excitement on Wall Street over Apple’s impressive earnings report, released the previous evening. Yet Apple is a telling example, and perhaps was meant as a subtle counterexample to the importance of Wall Street.

Unlike most big U.S. companies, Apple has been funded almost entirely by its customers. It never got a multi-billion-dollar check from Wall Street. Instead, Wall Street has poured billions of dollars into Apple’s competitors — companies that often did little more than copy Apple’s ideas and designs, including more than a few companies that are largely forgotten now.

The reason this example matters now is that one of the defenses of Wall Street, as it seeks to fight off some much-needed regulation, is that it provides a “capital market” that “fosters innovation.” Yet for every example of this, you can find a counterexample. For every Google or FaceBook, created with Wall Street money, there is a MySpace or Twitter, created without it.

In an era where “capital” is spent mainly on advertising for brand recognition, capital markets don’t have that much to do with innovation. To Wall Street, an innovation in advertising is as good as an innovation in circumventing securities laws, but this is not the kind of innovation that the public is looking for. In the history of Wall Street, the company that has drawn the most praise for innovation is Enron — yet its only innovation, we found out later, was the way the company lied about its business model.

There are arguments to be made against some of the new rules being considered for Wall Street, but innovation — that is not one of them. If the iPhone is an example of what can be made when Wall Street is kept out of the picture, most people are likely to say, “We should keep Wall Street out of the picture more often!”