Asymco

It is a common mistake to think that the 30% is profit. If I were to do what Apple does for me for 30%, it would cost me more than 30%. But many people think servers and credit card processing and customer service are free somehow.

I think I was reading more of me into your article. I will be more careful next time.

I agree, the infrastructure, business processes, scale, etc. imply a potentially new business area for Apple beyond hardware or support to hardware sales. That is, could, would, or should Apple make another business leap like it did from computers to media players to mobile. It certainly seems to have that potential including its experience and skills in Retail Stores [albeit narrow product domain]. Apple has an international presence that few companies including Amazon and Google can match.

I agree the analysis to begin to look at the broader iTunes economy as a business/profit center is important (though it’s still small — at least relative to other product segments — and the analysis difficult), because I think Apple is telling us it’s important by having taken the step (now) to reorganize the product categories in its summary data schedule to present this revenue as a single line item, gathering and including amounts that were previously spread across and therefor hidden in other items.

A commenter elsewhere suggested that “Apps and software … COULD be allocated across their hardware lines…, obliterating the store’s visibility entirely, to very little loss of clarity about how Apple succeeds with customers.” Not sure I agree with the part about clarity, but I do find it meaningful that Apple in fact has moved in the OPPOSITE direction, to add more clarity and focus on the “iTunes, software and services” product category, … and to strip out even “related service and accessory revenue” from iPhone, iPad, Mac and iPod sales to be included in this new iTunes category.

Personally, I understand this as Apple highlighting the value of its iOS installed base, beyond generating repeat/replacement unit device sales.

“Music” includes Apps, books and video, even as historically presented.

In the spirit of continuing to pull on this analysis string, I tried to take a look at the reconciliations between the old product presentation and the new, to see if it shows anything interesting (see attached — welcome, in fact appreciate, double checking). Still not sure that it shows anything significant, except perhaps:

— iOS software, services and content sales do not seem to grow 1:1 with iOS device sales (on revenue or device basis, even including iPods), but rather slower

— iOS services and software (ex APP Store) seem very, very small at this point (some assumptions were necessary to get this, mainly that iPod accessories are deminimis .

— Main point of the product regrouping seems to focus attention on, by aggregating, revenues from content, software and services delivered thru Apple’s eStores.

I offer this up in case anyone else is interested to see if they see something interesting.

I think it’s a strong positive that the strong and steady growth of this revenue segment is NOT closely correlated with device unit sales growth, but instead reflects:

(a) as Walter Milliken points out, the broader installed iOS base (not just new device sales) and

(b) Apple’s efforts to develop and strengthen its software and services offerings (which, again, I see as a big opportunity with areas for improvement).

The point is, hopefully, this is much less susceptible to the growth issues from maturing device markets. Perhaps it even benefits, e.g., from increasing transition in many markets from 2G to 3G to 4G.

There’s a less obvious, but important, advantage Apple also has here — secure systems generally require physical security of the authentication device. The iPhone is a bit weak here by true security standards (which require anti-tamper for really high security), but the requirement that all applications be signed by Apple to be allowed to execute makes it much more difficult to tamper with the authentication infrastructure and, say, just override the fingerprint sensor API to indicate that the check has passed.

On Android, I’m not sure this kind of authentication spoofing can be easily prevented, since the app security model is much weaker due to the support for side-loading and ease of rooting the device. I’m not sure what jail breaking does to iPhones here, though apparently there are some ways of detecting a jailbroken device in a running app.

Apple would probably have to spend some more effort tightening up security to make the device truly secure as an authenticator, but even as is, it’s *far* better than the current credit card system.

The discussion implies that Apple is now about able to attack the financial services industry. I agree.
And that might actually help explain two recent conundrums:
1. Apple’s cash hoarding. They need to be independent of the banking sector in order to make it all the way without being strapped for cash
2. The depressed valuation of AAPL. The financial sector sees the threat and is fighting back.

Am I making sense?

“I don’t think the general financial sector is at all threatened by Apple…”

I disagree. There is plenty of evidence that claimchowder’s assertion about the financial sector pushing-back against Apple is real.

The financial sector is at war with the government, and the whole country. The war won’t end until they get what they want. For some reason I don’t understand, they see Apple high up on an enemies list.

I wouldn’t expect Apple will want to get into the loan business, which is where the banks, as you point out, get their profits from credit cards. I would only expect them to cut out the intermediaries, since those are the ones that make it difficult to actually buy things.

I see Apple’s motivation in providing a transaction platform as mostly to make it simpler and safer to buy things and services (using iDevices, of course) than to go through all the pain of dragging out a credit card and signing stuff.

The biggest drawback I can see to this is that Apple would have to settle for transaction fees in the same ballpark as the credit card services, which are in the 1% neighborhood. That’s a lot lower than the 30% cut they get for facilitating transactions now (though they also provide hosting services for that cut). And that would require them to bypass credit card charging and go straight to the bank accounts via the clearinghouse, which is something they don’t do now (though PayPal does).

Assuming the legal regs can be handled, do we have any reason to believe Apple would be any good at extending credit? That’s just a different way to invest its cash (in consumer loans or equipment financing instruments). Why would that give investors any great comfort?

Sorry, I may have misunderstood and perhaps been overly focused on the reference to GE Capital, which is in the business of extending credit, as with its rough counterparts in the auto finance arms of the automakers, which got in pretty big trouble in the Great Recession. eBay’s is primarily in the business of payments facilitation, not extending credit, but I believe it’s getting into that too — carefully. It’s mainly in the latter where the bank regs come in.