Will Apple Pay Be Most Significant for Retail or Online Payments?

It’s too early to say how much impact Apple Pay, Apple’s new mobile payment service, is going to have. Many share the belief that if any company is going to make a big difference in mobile payments, it is Apple.

What isn’t yet clear is whether the big impact winds up being “retail mobile payments,” where the iPhone is used in place of a credit card or debit card, or eventually will have more impact supporting e-commerce.

When asked whether Apple pay “kills the credit card,” Apple CEO Tim Cook has quipped “I think we put a dagger in it.” And there is legitimate reason to think retail payments will be a big part of the value and eventual revenue streams for Apple.

On the other hand, some might argue equal success, or perhaps more success, will be found in the “e-commerce payments” part of the business, which is not, strictly speaking, dependent on the payment features of the iPhone.

In other words, Apple Pay might ultimately become more significant as an alternative to PayPal, Visa Checkout or MasterCard PayPass, han as a replacement for a credit card in a retail store.

With 800 million iTunes accounts worldwide, and each potentially able to use Apple Pay, the new payment service has a huge potential installed base of users.

To be sure, Apple needs to convince other online merchants to accept Apple Pay as a payment mechanism, as they now accept PayPal, PayPass, Checkout or credit and debit cards.

Some of us would argue that is the bigger long-term opportunity.

Either way,  it will take some time. The iPhone 6 or 6 Plus features Apple Pay natively, with major retailers going live with Apple Pay in October 2014.

Consumers can then use Apple Pay accounts to pay for purchases at retail locations outfitted with near field communications terminals, and the ability to support Apple Pay.

Apple Pay arguably is more secure than prior efforts. For starters, the iPhone fingerprint reader is used to authenticate the user when making an Apple Pay retail payment.

The other angle is that actual credit card or debit card information is not on the phone, at all.

Instead, cardholder information is “tokenized” and stored in the secure element and never makes it onto the phone’s memory or on Apple’s servers in the cloud.

So it is no surprise that Visa recently announced its new Visa Token Service, which  aims to assure consumers that their mobile devices can safely use mobile wallet and payment services and apps without fear of accidental disclosure of credit card numbers. Apple apparently is using Visa Token Service to support the Apple Pay tokenization feature.

Sprint "iPhone for Life" Moves to Device Rental

One effect of the Apple iPhone 6 launch is that the leading U.S. mobile service providers are moving swiftly to use the launch as a chance to protect existing customer bases and attract new customers.

Perhaps the most unusual is Sprint’s iPhone for Life promotion, where customers rent rather than buy their devices. The program allows users to get a new model iPhone every two years.

Users pay $20 a month for the device rental, and $50 a month for unlimited domestic talking, messaging and Internet access.

Basically, the rental plan creates a new “lowest cost offer” from Sprint. At $70 a month, the rental plan is $10 a month less costly than the no-contract plan that features $30 a month for installment payments on the device.

The two-year contract price represents monthly payments of $85 a month.

Sprint also is offering to pay as much as $350 per line when a customer switches to Sprint from T-Mobile US, AT&T Mobility, Verizon Wireless or “any competitor.” To get the credit, customers must sign up for the installment plan for any new devices, and buy an unlimited usage plan or a “Family Share Pack” including at least 20 Gbytes of mobile Internet usage.

Verizon Wireless is giving customers a free 16 gigabyte iPhone 6 if they traded in an eligible working, older iPhone model and signed a two-year contract. As is typical for any such offer, the key is the two-year contract, meant to deter churn over the length of the contract.

Sprint also has a promotion allowing consumers to trade in as many as three phones per account, promising to pay up to $300 for each trade-in device and matching any offer for a trade-in made by T-Mobile US, AT&T Mobility or Verizon Wireless.

T-Mobile US likewise offers to match trade-in offers from the other three leading national providers, and top it by paying $50 more.

AT&T Mobility is offering a $100 credit toward the purchase of any iPhone model for customers who activate a new line.

Historically, ability to offer the latest iPhone has been a competitive advantage, the best examples being the exclusive AT&T enjoyed at the time of the U.S. iPhone launch, as well as the similar exclusive SoftBank enjoyed in Japan, a period when SoftBank saw its fastest growth of market share.

Conversely, T-Mobile US began to add customers rapidly after it gained the right to sell the iPhone. To be sure, other initiatives also have been launched by T-Mobile, so it is hard to isolate the impact of any particular component.

But it is safe to say all the leading mobile providers see the iPhone 6 launch as a time when customers can be lost or won, very quickly.

As expected, wide adoption of “no-contract” and  device installment plans might play a role in increasing potential churn.

Though Verizon Wireless continues to have a high percentage of accounts on contract plans, AT&T already has 44 percent of its U.S. postpaid accounts on “no contract” plans. AT&T further expects 66 percent of its accounts to be on such plans by the end of 2014.

By definition, it is easier for a customer to switch when on a no-contract plan.

Hence the concern by the leading four mobile service providers about getting as many iPhone 6 upgrades as possible.

The promotional activity around the Apple iPhone 6 comes amid a price war that still shows no signs of abating.

Longer term, there also is the issue of when T-Mobile US will be purchased by another firm, and which firm will do it. It seems virtually certain now that the buyer could not be any of the other three leading U.S. mobile firms. Both AT&T and Sprint have tried, and both have been rebuffed.

That means the U.S. mobile market will continue to feature four leading firms. The only issue now is the identify of the firms in the group of four.

Dish Network has to do something relatively soon, or lose the equity value embedded in its right to deploy Long Term Evolution fourth generation mobile networks.

Comcast does not have immediate pressure, but is another likely candidate to change U.S. mobile market structure, eventually.

Smartphones on Track to Surpass Tablet-Based E-Commerce Revenue

Smartphones have yet to reach the level of tablet-based e-commerce revenue for retailers, but soon will do so, if current strong rates of growth continue. Consider browsing activity, which already has moved decisively in the direction of smartphone-initiated visits.

In 2010, 96 percent of online retail browsing was done on desktops while only four percent took place on mobile devices.

But mobile devices now represent 51 percent of visits to retailer websites, according to Branding Brand’s Mobile Commerce Index.  

Of course, visits are one thing, revenue quite another. But it also seems mobile browsing leads to mobile purchasing, particularly from smartphones.

Retailer revenue from mobile visits was up 111 percent from May 2013 to May 2014, for example, according to Branding Brand.

Between August 2013 and August 2014, revenue from mobile orders grew 89 percent.

Keeping in mind there is a difference between market share (new orders) and installed base, revenue earned from tablet purchases continues to hold a slight lead over smartphone orders.

In August 2014 retailer website tablet revenue represented about 16 percent of total retailer site e-commerce sales. Smartphones represented about 12 percent. With the faster rate of smartphone revenue growth, it is only a matter of time before smartphone sales surpass tablet revenue.

And there is another somewhat surprising change. Though it has been rather widely supposed that larger screens are preferred for online shopping interactions, logically favoring tablets instead of smartphones, end user behavior seems to belie those assumptions.

Between August 2013 and August 2014, for example, revenue from tablet-placed online commerce grew just 18 percent, compared to the 89 percent growth of smartphone revenue over the same period.

How to interpret that data is the issue. Screen size might not be as big an issue as originally thought. Retailer mobile sites arguably are getting better. And more people are using smartphones. All could explain some of the increase in smartphone sales volume.

Other data suggests the enormity of the change that has taken place in visits to retail websites.

A year ago, tablet browsing surpassed smartphones and was expected to continue to outpace the amount of total browsing happening on smartphones.

That now seems to have reversed, as a study by Adobe shows more browsing on smartphones than tablets. The study authors argue the advent of larger-screen smartphones has slowed tablet browsing preferences.

Whatever the combination of reasons, smartphone-based commerce is eclipsing tablet-based commerce.

That might, or might not, suggest a clear trend beyond high adoption of smartphones and now slowing adoption of tablets. Since the study is based on total end user browsing activity, vastly larger numbers of smartphones--compared to the base of tablets--will make a difference.

In 2012, the number of smartphone and tablet owners in the U.S. market were roughly equivalent.

By 2013, there were nearly twice as many smartphone owners as tablet owners. In the first quarter of 2013, about 34 percent of U.S. consumers owned a tablet, according to the Pew Internet and American Life Project.

By January 2014, a separate survey by Pew found that perhaps 32 percent of U.S. adults (18 or older) owned a tablet. Some estimates peg tablet ownership at higher levels. Some 44 percent owned a tablet in 2013, according to the Consumer Electronics Association.

At about the same time, at least 59 percent of U.S. consumers owned a smartphone, according to comScore. Smartphone ownership was twice that of tablets in 2013.

Phablet Sales Surprise: Will Apple Embrace Phablets?

Things change. Sometimes they even change fast. Phablets provide an example.

In February 2013, Flurry said the phablet was “an insignificant player in the mobile ecosystem”

and was not having a meaningful impact.”

Things have changed. After Flurry surveyed owners of a sample of 59,214 devices worldwide, Flurry found phablet adoption (market share) almost almost quadrupled in a year’s time.

“Our data affirms what Samsung and other Android manufacturers have known for some time: consumers are hungry for bigger screens,” said Flurry. A shift in end user behavior drives the change: mobile devices are becoming major platforms for content consumption.

Over the course of a year, the installed base for phablets doubled.

Today, six percent  of all mobile users routinely use phablets, compared to three percent a year ago.

The other noteworthy trend is the shift in tablet form factors, from full-size to small screens.

Small tablets grew from five percent of active users to seven percent over a year, up five percent.

Full-size tablet users also grew from 13 percent  to 15 percent, growth of two percent.

As you would expect, a growing installed base of phablets translates into higher app usage and web browsing from those devices.

While they account for only six percent of active users, phablet users account for 11 percent of all app sessions, up from only three percent of sessions in 2013.

Though Apple’s iPhone 6 announcement might bring Apple into the phablet segment for the first time, Android devices own the phablet market.

Today, phablets account for 18 percent of all active Android devices compared to seven percent in 2013. Over the same time period, demand for medium-sized phones decreased nine percent, year over year.

Demand for small phones shrank four percent, year over year.

The point is that--despite some significant skepticism--phablets are showing stronger demand than many had forecast.

That might have implications for Apple, which traditionally has eschewed the phablet form factor, as well as for all suppliers of tablets.

Though Flurry finds there is not one “killer app” for phablet users.  As do users of tablets and smaller smartphones, users are big on gaming, social and entertainment app categories.

There is one exception, though. “Reading books” is the category in which phablet user behavior is most noticeably different from smaller-screen smartphones. Though accounting for about six percent of the installed base, about 10 percent of “reading” time on all devices happens on phablets.

In early 2013, it might have been easier to dismission phablet demand in most developed markets, though there has been growing evidence of stronger demand in some developing markets.

To be sure, skeptics doubt phablets will get big traction in the U.S. market, even if demand internationally is expected to be significant. In fact, phablet sales are cannibalizing tablets, International Data Corp. has said.

Something similar might be noted about Wi-Fi offload, which some might characterize as complementing, and in some cases cannibalizing, use of mobile Internet access networks.

Some have suggested that the introduction of Long Term Evolution access decreases consumer usage of Wi-Fi hotspots. But most of the studies suggest that reliance on Wi-Fi remains constant, even when consumers have access to mobile networks offering much better experience than 3G networks.

Wi-Fi access constitutes between 70 percent and 80 percent of total mobile device usage, some Informa studies have found. At least so far, some studies have found that LTE users rely on the mobile network a bit more than users of devices connected to 3G networks.

That is about what one would expect if consumers have been relying on Wi-Fi hotspots because of the better experience (speed). If 4G LTE offers a satisfactory mobile experience, people sometimes will use the mobile network where they might in the past have used Wi-Fi.

An Informa survey suggests users on both 3G and 4G networks in 2013 increased their use of Wi-Fi over the course of the year.

The point is that change can happen fast in the mobile business: phablet adoption provides one example. Suddenly decelerating tablet sales provides another example.

On the other hand, reliance on Wi-Fi for smartphone access really has not shown all that much change in end user behavior as 4G LTE networks have become operational in many more markets.

Apple could ratify the change today, in announcing the iPhone 6. Update: Yes, Apple is getting into the phablet segment.

"Mobile Payments A Failure"

Mobile wallet adoption in the retail payments space was always going to be a lengthy process in developed markets, for a couple of logical reasons. 



For mobile payments to succeed, there has to be "something broken" about the business model or experience, for customers, retailers or bankers and processing networks. 



It's hard to make the argument that paying using a debit card or credit card is flawed in some significant way, causing customer or retailer pain.



“It’s my opinion that the swipe isn’t especially broken,” said Josh Silverman American Express consumer products president. Silverman likely was being generous. 



“On wallets generally, we have had wallets in the market for quite some time, and there has been fairly limited adoption of those wallets," he said. 



"I think ‘fairly limited’ is generous" as a way to describe market success for many mobile wallet efforts, Silverman said.



And that is a problem Apple will confront if and when it launches its own mobile wallet effort. To be sure, up to this point, Apple seemingly has focused more on redesigning the retail experience by redesigning the payments process. 



The way people can buy products in Apple stores illustrates the "no-register" approach to the retail experience. 



To be sure, one can make many arguments about the other ways mobile payments and mobile wallets might affect retailing. Those angles range from personalization to promotions and marketing, loyalty, logistics and inventory implications. 



These days, less seems to be claimed about how mobile payments speeds up checkout processes or lowers retailer costs. 



And that is the issue Apple will confront, as have all others. The retail payments system fundamentally is not broken. And it is hard to sell a solution to a non-problem. 

"Internet for Everyone?" Android One Helps

Skeptics often argue that service providers globally are too narrow minded and too greedy to provide high-quality communication services to customers. But that is why markets work. Where there is reasonable competition, there tends to be reasonable innovation.

And there is little question traditional service providers have lots more competition. Not only have virtually all former monopoly markets been liberalized, creating more competitive conditions, but mobile services now challenges fixed services.

With the rise of the Internet, the ability to manage and control prices, terms and conditions of services, device evolution or application creativity have lessened dramatically.

That is why service providers now engage in a relentless and deadly-serious effort to create big new revenue drivers. They must replace legacy revenue streams of huge scale.

On the other hand, the broader industry has achieved some formerly formidable successes many reasonably would have thought would take decades longer. In the 1980s, policymakers were worried about how to make voice services available to everyone. That is a task, but no longer a challenge.

The present challenge is how to provide the benefits of the Internet to everyone as well. And there the ecosystem--now much larger--is getting lots of help. Consider the question of devices. For decades, some had worked to create computing devices suitable for people in developing regions.  

We are on the verge of solving that problem.

Android One is Google’s reference design intended to make up-to-date versions of Android easily available to smartphone users in developing regions, at prices around $100.

The other angle is to help ensure that users in those markets have access to Google services and the most-recent versions of Android. That will help ensure consistency of experience under conditions where hardware platforms might be less robust.

Android One should also help Google maintain a more-consistent look and feel across the whole supply of Android devices sold in a market, since some suppliers will add custom software, and might not include native support for Google apps.

Google apparently is announcing Android One on September 15, 3014 in India.

Android One was unveiled in June 2014 as a way for Google to provide a consistent, high-quality Android experience on entry-level devices.

The premise is that OEMs will build inexpensive hardware that costs between Rs 7,000 ($115) and Rs 10,000 ($165), but the updates will be taken care of by Google.

The growing availability of low-cost smartphones in developing regions is an important trend.

Some of us can remember great "hand wringing" an concern in international policy circles about how to bring telephone service to two billion people who never had made a phone call.

You don't hear such concern anymore, since we rapidly are solving that problem with mobile communications, a solution not envisioned in the 1970s and 1980s.

Two decades ago the question largely had shifted to the problem of how to develop low-cost laptops for developing nations, at retail prices an order of magnitude less costly than devices generally sold in developed nations.

There was some work around the notion of special devices optimized for rural villagers that would be low cost, perhaps $150 or so.

For many at the time, likely most knowledgeable observers, the prevailing thinking was that it couldn't really be done. And that remained true even as recently as the middle of the 2000 decade.

But as we stumbled upon a solution to the problem of getting communications to people at prices they could afford, we are about to solve the problem of getting computers to people, also at prices they can afford.

People will use smartphones with larger screens or tablets as their “computer.” Problem solved.

The notion, for some time, has been that in many parts of the world, the smartphone would be "the computer" most people used. That might turn out to be largely correct, for at least a time.

But it also now is possible that we know how to create and sell computers to people that cost no more than $150. Consider that the prototype "One Laptop Per Child" device had a screen of 7.5 inches diagonal and flash memory, with no keyboard.and used Wi-Fi for Internet connectivity.

The point is that formerly-formidable challenges have been successfully met. There is at this point little reason to believe that the new challenge--Internet for everyone--will not also be met.

Global Mobile Service Revenue Will Begin Declining in 2019

If you want clear evidence of how tough revenue growth has gotten in the global communications business, consider this forecast by Strategy Analytics: though global mobile service revenue growth will accelerate in 2014, it is going to go flat in 2015.

By 2019, mobile service revenue actually will begin to decline.

The good news is that global mobile service revenue will surpass the $1 trillion level in 2015. The bad news is sharply-declining revenue growth rates thereafter, also affected by declining revenues for 2G and 3G services.

European markets remain a trouble spot.  In 2014, European mobile revenue growth will be 17 percent below its 2008 peak. In fact, an apparent jump in global growth rates in 2014 is largely down to the slowing rate of decline in Europe.