Apple Pay: How Apple Has Trojan-Horsed The Payments Ecosystem

Oct 23, 2014

A couple years ago we were working with a client who was creating a new, innovative (and, in my opinion, kind of awesome) product. We were helping to define the product with them and were working through the business model as we talked about the various moving parts. It was an ambitious project with a lot of pieces but at its core was a simple business model - selling something to the users that they wanted. At least, that was how we saw it. Then their CEO said something that caught me short: "Instead of driving to transactions, wouldn't it be better to just get lots of users and then know lots about them?"

This was in the thick of the social media party - Facebook and Twitter were heading towards IPOs. It was pre-acquisition of Instagram and SnapChat but both spaces were hot and headed towards big exits or IPOs. Everyone was jockeying for users and it was an all out race for marketshare. First to a billion wins...

The problem is that the social growth strategy is like threading a series of needles one after another and getting the right outcome at every turn. The odds of flipping a coin and getting heads once is 1/2 - doing it 10 times in a row? That's 1/1,024. That's really, really hard.

First, you have to finance the race and that means relying on round after round of financing. Next it means getting users by the bucket which you either do organically or you have to buy them. Lastly, once you have those users and have won, you have to figure out how to make money off of them and the only serious way to do that is to make your users the product and start shoveling ads - and the more you know about your users the more high value the ads you shovel. And yet none of those companies are the biggest fish in the land. That's somebody else - Apple. And why? Because they sell a *thing* with big defined margins. And users pay for that thing. And they put lots of content on that thing which they also pay for. With credit cards.

And there we have the crux of the matter: those credit cards. You know what Google doesn't have? Your credit card (unless you are one of the very small number of Google Wallet users). Nor does Facebook or Twitter. And they would *love* to have it. The only other big player who has large numbers of cards is Amazon and look how hard they're trying to get into Apple's business of hardware and content.

Horace Dediu over at Asymco made the following observation a little under a year ago:

The bottom line is that in the last 12 months the average iOS user contributed  about $48/yr to the ecosystem via Apple’s own properties. They also bought the device and paid for cellular service in most cases. They may also have engaged in quite a bit of browsing and online purchases which fed other ecosystems. But as far as Apple is concerned, it transacted about $48 per user.

As Twitter revenues last year were $317 million, the Twitter user today generates about $1.36 of revenue per year or one thirty-fifth of what an iOS user generates through iTunes and iCloud alone. And note that the number of iOS users is about twice that of Twitter.

Of course one could argue that the iOS user’s participation is not profitable for Apple. It does obtain massive cash flow from iTunes which finances its fashionable data centers and bandwidth but it does not presume to value itself primarily through this revenue.

So back to our friend the CEO - why would you fight for users, then fight to get them to spend lots and lots of time in your app so you can know a lot about them, and then try to sell ads to *other* people which will appear in front of those users when you can just sell the darn thing at the center of your ecosystem? If you can get someone to pay cash for something, take it. It's much, much easier than trying to "monetize" that person indirectly.

Now let's rewind to the iPod. What made the iPod work was the ecosystem: it made getting your music onto your MP3 player really, really easy. Apple didn't really care where the music came from because it was getting its cut of the hardware. And then Apple came up with an easier way of getting that music than searching Napster - you could just buy it from Apple. With a credit card. Then came movies, and TV shows. Then came the Apple Store app and you could buy physical objects in their stores using your iTunes account. Then came apps and Apple had a series of decisions to make. Selling an app and taking a cut was easy but there are several monetization strategies around apps and Apple had to come up with a use case for each:

  1. Apps for purchase: Apple made it easy to purchase using your credit card in iTunes.
  2. Apps for free with content for purchase: Apple allowed content via in-app purchase on your credit card in iTunes.
  3. Apps for free which interface with SAAS products: Apple let these be outside of their payment system, so long as you couldn't pay in the app for the service. But you had to input a lot of information for each service.
  4. Apps for free which allow purchasing of real products: Apple let these be outside of their payment system as well. But you had to input a lot of information for each company.

Everyone has focussed on what Apple Pay does for real-world payments - and that's a lot. On its own that's a big business. The ability to pay with your phone at a physical location: that's really Square's *whole* business (and by the way, I love Square's now-defunct wallet app - I use it every day at my local coffee place). But what Apple has also done with Apple Pay is get #3 & #4 from above into their ecosystem.

One of Two Bulls current clients,  - the smart lightbulb company backed by Sequoia - is one of the very first apps to feature in-app Apple Pay purchasing of physical products and we can verify that the integration is very, very clean. Historically we had to guide our clients through a complex process of evaluating a variety of payment platforms and then implementing them - often in cumbersome ways - but Apple Pay is a much, much easier decision. Now, rather than inputting billing information for shopping apps and SAAS subscription products users can simply pay via Apple Pay. No memorizing numbers, no inputting addresses, and much better security. It's a big win for the user.

What began as a way to buy a lowly MP3 became the ultimate Trojan Horse into all of your payments, online and off.
Share on LinkedInTweet about this on Twitter

________________________________________________/\\\_______________________/\\\\\\_____/\\\\\\_________________ _______________________________________________\/\\\______________________\////\\\____\////\\\_________________ _____/\\\______________________________________\/\\\_________________________\/\\\_______\/\\\_________________ __/\\\\\\\\\\\__/\\____/\\___/\\_____/\\\\\____\/\\\_________/\\\____/\\\____\/\\\_______\/\\\_____/\\\\\\\\\\_ _\////\\\////__\/\\\__/\\\\_/\\\___/\\\///\\\__\/\\\\\\\\\__\/\\\___\/\\\____\/\\\_______\/\\\____\/\\\//////__ ____\/\\\______\//\\\/\\\\\/\\\___/\\\__\//\\\_\/\\\////\\\_\/\\\___\/\\\____\/\\\_______\/\\\____\/\\\\\\\\\\_ ____\/\\\_/\\___\//\\\\\/\\\\\___\//\\\__/\\\__\/\\\__\/\\\_\/\\\___\/\\\____\/\\\_______\/\\\____\////////\\\_ ____\//\\\\\_____\//\\\\//\\\_____\///\\\\\/___\/\\\\\\\\\__\//\\\\\\\\\___/\\\\\\\\\__/\\\\\\\\\__/\\\\\\\\\\_ _____\/////_______\///__\///________\/////_____\/////////____\/////////___\/////////__\/////////__\//////////__

Please rotate your device