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Apple Payments – If You Build It, They Will Come

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When the Wall Street Journal published an article last Friday about Apple pushing deeper in mobile payments, I was intrigued.  While it’s not the first time the idea has been discussed, recent events suggest the Cupertino giant is more serious about it than ever.  Let’s run down recent events around payments for Apple and then make some predictions on if/when they enter the mobile payments space and exactly how it’s done.

First, Passbook was released for iOS as a built-in app. Since then, it is a leading mobile wallet provider, with strong success in boarding passes, gift cards, coupons, loyalty cards, and ticket redemption.  Then this past December, iBeacon was released, which allows users to be alerted of deals, specials, pickup an order they’ve placed, etc. through the use of two-way transmitters as they walk through stores (currently being tested in over 250 US retail stores). Next, earlier this month, there was the patent Apple filed covering a secure touchless payment system.  Then it was reported by WSJ that they moved Jennifer Bailey, a longtime executive, from the online stores section to build the payments group.

As further evidence, fast forward to yesterday’s earnings call, when CEO Tim Cook indicated new product categories will be introduced in 2014, and regarding mobile payments,

“We’re seeing people are loving to be able to buy content, whether it’s music or movies or books from the iPhones using Touch ID. It’s incredibly simple and easy and elegant. And it’s clear that there’s a lot of opportunity there. The mobile payments area in general is one that we’ve been intrigued with and that was one of the thoughts behind the Touch ID. But we’re not limiting ourselves just to that. So I don’t have anything specific to announce today, but you can tell by looking at the demographics of our customers, and the amount of commerce that goes through iOS devices versus the competition, that it’s a big opportunity on the platform.”

Finally, in a letter to Apple shareholders last week, Carl Icahn says,

“Indeed, we believe any new software service that offers new functionality to this customer base becomes a large opportunity for Apple to introduce as a revolutionary and disruptive bolt-on to the ecosystem. As just one of many possible examples of this phenomenon, Apple could introduce a next generation payments solution.”

Now, to be clear, I do not believe the letter from Icahn will do much to actually influence Apple’s executives or Board on this matter, but it’s another indication that a lot of people think Apple should enter payments.  Hey, Maybe Icahn will get off Tim Cook’s back if/when they do launch a payments product.

As I mentioned at the start, we’ve seen reports like this in the past.  The Journal reported in 2012 that Apple was looking into payments, working on a “wallet app,” before deciding that the risk of customers blaming Apple for a bad experience with a merchant was too high and efforts were scaled back.  In April 2013, Cook also told investors that mobile-payment technology was “in its infancy.”  So are things any different today? Personally, I think the real reason Apple hasn’t made a big splash in payments has less to do with potential bad customer feedback than that Apple typically adopts a “go slow” approach in entering new markets and product categories (the much rumored Apple television is another good example).  Besides, the AppStore is doing just fine, and no one complains to Apple when an app crashes or is just terrible.  I wouldn’t be worried about getting blamed if it’s bad, I’d be worried that no one wants to use it if it’s bad.

There is no doubt that the payments landscape is changing quickly and developments are moving fast.  Apple certainly is aware of all that’s happening.  For example, Google Wallet is making some good product changes and headway in the space.  Square raised $200MM at a $3.25Bn valuation back in September 2012, though is now rumored at $5Bn as of January 2014. Braintree/Venmo was bought by PayPal/eBay for $800MM in September 2013.  And Stripe just announced an $80MM round at a $1.75Bn valuation (BuyTechSell article here) last week.

So with all the activity in mobile payments, where is Apple today?  They already have hundreds of millions of credit cards through iTunes and can handle payments for movies, books, and music.  However, users aren’t allowed to pay for physical goods and services, such as clothing or Lyft, using an iTunes account.  Apple is currently acting more like a retailer than a payment processor, who handle the billions of app purchases via credit and debit cards.  But with credit card information linked to specific mobile devices, not to mention phone numbers, email addresses, and now fingerprint ID (though that stays on the device and not with Apple), they have all the verification data they need to build out a mobile payments ecosystem.

So what’s their next move?

I believe that Apple will decide to make a much more aggressive push into the mobile payments space possibly as early as this year.  Unlike the Apple television, there aren’t the entrenched cable providers standing in the way.  And when that happens, I expect it to do very well.  However, I do not believe they will make a big acquisition, a la PayPal/Braintree, with Stripe or Square.  Kevin Fitchard at Gigaom has a great article on the strategic rationales for an Apple purchase of Stripe and Square, and they are both fantastic companies in their own right. But if history is any indication, I don’t see it happening more from a corporate culture and history standpoint, not because there isn’t strategic reasoning for it.

As an overview, Stripe is attempting to build a platform that surrounds payments on the web and mobile, and affect the payment landscape in the same way Amazon Web Services (AWS) influenced how websites were built, according to CEO John Collison.  They have been very successful by making it easy for developers to add payment capabilities to websites/apps and allowing merchants to control the experience.  Apple has made great strides in building its developer community, and while a Stripe acquisition would certainly enhance that, it would be a hefty price to pay, and not one I think they’d be willing to make.

Meanwhile, Square is approaching the mobile payments problem by creating a robust platform that is easy to use by the merchants, using sleek point-of-sale hardware and software.  It has gotten great traction from small and medium-sized businesses. Yes, Square also already uses the iPad as the in-store point-of-sale terminal, and both have a strong design focus, but when was the last time Apple bought a company for its strong product design aesthetic?  Never. They do it very well themselves already.

If we take a look at Apple’s M&A history, we will find that it has not been a very acquisitive company relatively speaking.  According to CrunchBase (and disclosed deal values), the Company made 2 acquisitions in 2009 for $80MM, 6 in 2010 for $425MM, 1 in 2011 for $450MM, and 3 in 2012 for $356MM.  It wasn’t until last year, 2013, that Apple really stepped up it’s corporate development activity and acquired 10 companies for at least $600MM.  Also, as you probably already guessed, Apple has never made a single acquisition greater than $500MM (the largest being Anobit Technologies, the fabless semiconductor company acquired in 2011).  They have a build vs. buy mentality, especially when it comes to potentially large deals.  That’s not to say there may not be some mobile payment purchases made, but these will likely be bolt-on acquisitions, not the headline grabbing news a Stripe or Square acquisition would bring.  For comparison, Google has bought ~85 companies since 2009, the largest being Motorola Mobility for $12.5Bn.

I think the likelier path will be to roll out a new, internally developed, mobile payments product that coincides with the announcement of some select, big retail partners.  It will leverage Passbook, iBeacon, existing customer information, and hopefully provide a touchless payment system.  This path doesn’t have the risk of integration failures, culturally or technically, and is very much consistent with the “go slow” approach.  But hey, it will be very exciting if anyone buys Square or Stripe and I’ve been wrong before.

Christopher Chiou

Bay Area based for 12 years and originally from the NYC area. My career has been spent as a technology dealmaker, advising clients on M&A and capital raising, and as a principal investor backing great companies and teams. I'm passionate about technology trends, traveling, sports, politics, Knowledge, and Duke basketball.

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