Apple Hopes Apple Pay is iTunes

The question about Apple Pay is how it helps Apple support its main business of selling devices. To be sure, iTunes and other services can be thought of as Apple standalone business segments.

But those services exist to sell more devices. In other words, Apple invests in content delivery and apps to sell devices. Other firms invest in devices to sell content or merchandise, or create advertising delivery networks.

So it is that Piper Jaffray Apple analyst Gene Munster argues Apple Pay is “potentially the most important Internet service introduced by Apple since iTunes."

In other words, Apple Pay, like iTunes, will provide lots of end user value, especially when those users are interacting on Apple devices.

As with iTunes, Apple does not have to “make money” in a direct sense. But Apple has to leverage the capability as it did with iTunes, creating a compelling app that drives sales of its devices.

Precisely how that develops, and how important the new value is, remains the challenge.

Apple could receive 15 cents out every $100 Apple Pay customers spend with participating merchants. It isn’t the amount of revenue, but the broader value, that Apple is seeking.

As iTunes drove sales of the iPod to industry leadership, Apple has to be thinking Apple Pay will drive device sales as well. High quality global journalism requires investment.

The list of early Apple Pay partners includes the 11 biggest U.S. card issuers, representing 83 percent of the card issuer market.

The early partners also include retailers such as McDonald’s and Walgreens which together have 220,000 U.S. stores.

One might argue the partners are hoping for Apple to take leadership in the mobile payments space, boosting transaction volumes and possibly reducing fraud losses, with the only direct competitors being the rival mobile payment system providers.

Basically, Apple has taken a non-threatening approach to revenue sources in the current payments ecosystem, keeping the retailers, card issuers and processing networks in their accustomed roles.

So the key strategic challenge for Apple is making Apple Pay so valuable people willingly buy and remain users of Apple devices for payments of all sorts.

The model is iTunes and iPod.