Analysts continue to lust for the Next Big Thing from
Apple, with speculation whether it will be a TV, an iWatch or some other
marvelous gadget. Well, surprise – The
Next Big Thing is nearly here, and it’s none of those. I predict Apple’s new
iPhone 5s with its unique killer feature of Touch ID (finger-print access) will
not only give Apple's users the capability to unlock their iPhone but usher in a whole
new era -- thus allowing Apple to unlock its Next Big Business and become the
Leading Payment Processor for non-Apple transactions. Specifically, I believe Apple is on
the cusp of launching a breakthrough offering for retail that virtually
eliminates credit card fraud and streams information to assist the customer in
making purchases in a fun, informed and convenient way.
Apple’s success is that it always starts with big problems
and selectively incorporates technology to eliminate those problems. Apple has
told us that half of its iPhone users do not enter a security code, and hence
their private data is vulnerable. Much like Apple’s introduction of Time
Machine solved the problem that 75% of Mac users were not backing up, Touch ID
fills the void by protecting all those unsecured phones while also simplifying access
with one-touch convenience. Both security and simplicity/convenience are tremendous
benefits, and 9 million customers demanding phones in the first weekend of
sales confirm this.
But is that “all” that Apple is up to? I believe not -- the
real endgame is for Apple to use that secure fingerprint system to solve a much
bigger problem of credit card fraud, which costs retailers in the US $190 billion
a year (see Forbes). Most people don’t realize it, but when we
inform our bank of fraudulent use and the bank magnanimously tells us that we
are not responsible, it is mostly the merchant (not the bank) that pays for
those fraudulent charges (Forbes reports that the merchants pay 93% ($190 billion), the bank
pays 5% ($11 billion) and consumers 2.3% ($5 billion)). So how much would a
merchant pay Apple for an inexpensive and easy solution to bring that loss
ratio close to zero? A lot – maybe as much as 30% of the losses avoided. Further,
the cost to Apple of hardware investment other than servers is $0 since
we are all kind enough to pay for that with a little help from subsidies from
ATT or Verizon when we buy our iPhones and most likely merchants would pay for
their own access points/hardware. Apple’s transaction processing
costs are also minimal since no people are required to process the transactions.
So Apple’s gross margins and profits would be spectacular. Apple makes about
$50 billion a year in profit, and if they captured 30% the fraud savings and spent
a few billion dollars a year in sales and marketing it would be a business
contributing order of magnitude as much profit as everything Apple currently
sells. Put differently, it would be a business making more profit than any
other company in the world -- other than Apple’s existing businesses! Apple
would be more than twice as profitable as Exxon-Mobil -- the second most
profitable company making “only” about $35 billion annually. This is not even
counting the profits from hordes of Android users who would switch to iPhones
in order to access that killer feature, or the tens of millions of pre-iPhone
5s users now given an excuse to upgrade.
But I predict Apple would not stop there. Ever wonder why
Apple has dragged its heels about incorporating NFC (Near Field Communication)?
Perhaps it is because Apple sees greater benefit by connecting your phone over
the whole floor of a retailer with the longer range Bluetooth 4.0 that has been
incorporated into iPhones since the iPhone 4s. With as few as five access
points, Macy’s could communicate with line-of-sight iPhones anywhere on a
floor, and not just to process payments but also to send information about
products as well as in-store coupons and specials. Truly revolutionary.
Apple has huge advantages versus competitors in pulling off
this revolution. With over 600 million Apple
customers with iTunes accounts and registered credit cards, no other company
(including giants such as Google, Microsoft and Samsung) can match that. With
an ecosystem of over 700 million IOS devices in use, and a track record of
pushing out software updates to most of those devices, others can’t match that.
And with Apple’s track record of streamlining the user experience, no one is
likely to win by building a “better mouse trap.” Newcomers such as Jumio and
PayPal lack all those Apple strengths and don’t even stand a chance.
So for analysts that think that Apple innovation is dead
and growth has plateaued – think again. And think differently! All this will
help propel Apple’s stock price to new all-time highs, and even send AAPL through
the $1000/share barrier into new territory at some point in the foreseeable future.
Disclosure: I've owned Apple shares since 1985
