Apple's Surprising Cash Problem

Were it a stand-alone business, Apple's (Nasdaq: AAPL  ) iTunes would be huge. The segment is on track to produce more than $8 billion a year in what is surely high-margin revenue. A mixture of music, app, TV, and movie sales and rentals accounts for the bulk of that draw.

Impressed? Don't be. Apple is willfully leaving billions in potential revenue unclaimed.

The potential value of being a market leader
Instead of morphing into an all-purpose commerce platform, Apple has chosen to keep iTunes stuck in a niche even as Google (Nasdaq: GOOG  ) has made no secret of its intent to turn smartphones into digital debit cards.

The system works. Last weekend, I took my boys to see Marvel's The Avengers. We paid a modest $21 for the early showing, charged via Fandango's mobile screen using my Google Wallet account. On my iPhone 3Gs.

As a consumer, I'm grateful for the convenience that Google Wallet offered me in this situation. But as an Apple shareholder, I'm disappointed the Mac maker hasn't figured out a way to better integrate iTunes into the mobile experience. Shouldn't it be possible to generate an iTunes pop-up screen when I've navigated to a "buy now" screen?

Perhaps I shouldn't care. But it's frustrating to look at Apple's surging share of the smartphone market and not wonder what iTunes could become. I'll grant we're far from eliminating cash as the currency of record, but when an increasing number of us carry smartphones – and, accordingly, an increasing number of retailers and platform owners target said smartphones with marketing messages -- building a better payments system only makes sense.

Bite into this big market
Tens of billions of dollars could be at stake. Consider PayPal. The eBay subsidiary handled $4 billion worth of mobile payments last year, and that's without having an app equivalent to Google Wallet. Start-up Square, founded by Twitter's Jack Dorsey, expects to process another $4 billion in mobile transactions this year. How is it that Apple is ignoring this opportunity?

Maybe there's a plan to buy Square. Or perhaps a team is redesigning iTunes to do more. Or maybe there's a skunkworks project under way that, when finished, will altogether change how we think of mobile payments. Whatever the Big Idea is -- presuming there is one -- there are at least five ways iTunes could add value as a payments platform:

1. Instant checkout. Imagine finishing a nice dinner out and leaving, on your own time, without ever having to ask for a check. Apple could enable that via a deal with OpenTable (Nasdaq: OPEN  ) . Reserve online with your iTunes login and then let the reservations system manage the bill -- either automatically, charging your account for the bill plus a standard gratuity, or an amount of your choosing.

2. Movie tickets. See the example above. Had arriving at the Fandago purchase page led to a pop-up asking whether I'd be interested in purchasing with my iTunes account, I would have clicked "yes" and moved on. And revenue that went through Google would have instead gone through Apple.

3. Social buying. Thanks to American Express, it's now possible to get deals on the go -- right when you use social networks to check in to popular locales. Why can't iTunes get in on this action? Just sync your accounts as you would with your Amex card. That way, whenever you took advantage of a serendipitous deal, you'd get the option to kickback a credit to your iTunes account rather than just accept cash back.

4. Mobile couponing. Both LivingSocial and Groupon (Nasdaq: GRPN  ) aim to get us buying more while out and about. Instead of profiting from serendipity, as would be the case in the scenario above, you'd search for deals in the area and buy directly with your iTunes account before shopping. Everyone wins.

5. Travel extras. Chances are you already use a smart device to e-check-in while traveling. Airlines are increasingly using this process to sell invoice-based products such as premium seating or mileage earning enhancers. Why not list iTunes among the payment options? Fewer clicks could lead to more sales. Again, everyone wins.

And that's just a sampling. Think about what might happen were Facebook (NYSE: FB  ) to transform Credits from a neat way to buy goodies for Zynga games into a full-fledged Mobile Wallet. Will it happen? I think so; yet even with a strong mobile app and payments system our analysts see Facebook as a distant second to this social-media winner.

Meanwhile, Apple CEO Tim Cook is sitting on a potential gold mine. Seize the opportunity to make iTunes into the platform it could be, sir. The market won't wait forever. And if you're looking for more info on why investors should be piling into Apple, you can always check out our new premium research report. In it, our senior technology analyst gives the unique pros and cons that Apple faces and what they mean for investors.

Fool contributor Tim Beyers is a member of the Motley Fool Rule Breakers stock-picking team and the Motley Fool Supernova Odyssey I mission. He owned shares of Apple and Google at the time of publication. Check out Tim's web home, portfolio holdings and Foolish writings, or connect with him on Google+ or Twitter, where he goes by @milehighfool. You can also get his insights delivered directly to your RSS reader.

The Motley Fool owns shares of Google, Apple, and OpenTable. Motley Fool newsletter services have recommended buying shares of OpenTable, Google, eBay, and Apple. Motley Fool newsletter services have recommended creating a write covered strangle position in American Express. Motley Fool newsletter services have recommended creating a bull call spread position in Apple. The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.


Read/Post Comments (14) | Recommend This Article (24)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On May 26, 2012, at 12:17 PM, osma wrote:

    I think the author is missing the point of how Apple became the world's most valuable technology company: by creating things that people REALLY want.

    None of the examples listed would be consistent with the Apple brand - not because they are outside of personal media devices, but because they would be clunky and inelegant. And when the company becomes just one more clunky and inelegant "monetizer," the loyalty and fandom go away; and then it's all over.

    Michael Porter's "What Is Strategy" is illuminating here. It says that true strategy is a set of self-consistent tradeoff choices, where a company gives up something in exchange for something else. If Apple does go into payment, it had better be in a truly transformative way ... any "me-too" attempt by the company would be a sure signal that they've lost the magic, and a long-term screaming short.

  • Report this Comment On May 26, 2012, at 12:25 PM, TMFMileHigh wrote:

    @osma,

    >>None of the examples listed would be consistent with the Apple brand - not because they are outside of personal media devices, but because they would be clunky and inelegant.

    How so? Please explain. I see nothing inelegant about a pop-up that offers the chance to purchase with iTunes.

    To the contrary; this sort of integration -- so far lacking in iTunes, which had been comparatively inelegant before iCloud -- is what's made Apple designs so desirable.

    FWIW and Foolish best,

    Tim

    --

    Tim Beyers

    TMFMileHigh, Motley Fool Rule Breakers Analyst, Supernova Odyssey I Portfolio Contributor

    Web: http://timbeyers.me

  • Report this Comment On May 26, 2012, at 12:35 PM, millsbob wrote:

    the only thing i don't like about osma's comment is that i didn't come up with it. ;) brilliant.

    my only addition is that while reading the article, Tim, i kept thinking over and over "iTunes is already widely-regarded as Apple's most embarassing kludge of slapped-together stuff". it has grown like topsy over the past 10 years, agglomerating a bunch of things together that make no systemic sense.

    as osma points out, it would be a sure sign to start pulling back from my ultra-long AAPL position (stock and options) if they paste yet more onto iTunes, let alone something as potentially revolutionary as a generalized payment system.

  • Report this Comment On May 26, 2012, at 12:51 PM, TMFMileHigh wrote:

    @millsbob,

    >>my only addition is that while reading the article, Tim, i kept thinking over and over "iTunes is already widely-regarded as Apple's most embarassing kludge of slapped-together stuff". it has grown like topsy over the past 10 years, agglomerating a bunch of things together that make no systemic sense.

    Maybe I'm crazy then. Because, as I see it, creating an $8 billion a year digital content distribution business from nothing is an unqualified success.

    Millions already use iTunes. They're accustomed to it. Why not make the system more useful?

    Alternatively, can we get some comments on what an iTunes replacement might be? Pretend iTunes is MobileMe and someone at Apple is working on the equivalent of iCloud. What should the new system do? What must it include?

    Thanks much for the comments and Foolish best,

    Tim

    --

    Tim Beyers

    TMFMileHigh, Motley Fool Rule Breakers Analyst, Supernova Odyssey I Portfolio Contributor

    Web: http://timbeyers.me

  • Report this Comment On May 26, 2012, at 12:59 PM, tkell31 wrote:

    I don't know. Long time Apple long I'm not real happy they are reacting to Samsung coming out with a bigger screen rather than the other way around.

    Obviously electronic payments made via a phone device are the wave of the future, and iPhones don't even have the chip to make the transaction securely. If they aren't in the iPhone5 then that is going to be seen as a another area where Apple is chasing Samsung when just a year ago it was the exact opposite.

    Inelegant? Sounds like an older generation. To the younger generations anything that makes life easier is elegant. People are going to want their phones to do as much as possible, if Apple doesn't embrace that it is time to sell.

  • Report this Comment On May 26, 2012, at 1:55 PM, AdamChew wrote:

    @tkell31

    What are you trying to prove by saying you are not happy with Apple's direction as to where they are going with the iPhone.

    Apple only compete with itself by making the best possible product and if you are not happy you have a choice to take your money elsewhere.

    What i can't understand is why would the blogger think Apple is not doing anything about using the iPhone to pay for things, just for your info, if you had missed it, you can pay for coffee at Starbuck.

    I am happy at what they are doing when they come out with the best solution.

    Do I need to whine I need to.

  • Report this Comment On May 26, 2012, at 1:56 PM, AdamChew wrote:

    Sorry it should read.

    Do I need to whine I don't think so.

  • Report this Comment On May 26, 2012, at 2:12 PM, millsbob wrote:

    "Maybe I'm crazy then. Because, as I see it, creating an $8 billion a year digital content distribution business from nothing is an unqualified success.

    Millions already use iTunes. They're accustomed to it. Why not make the system more useful?"

    oh, it's an unqualified business success, for sure. but that's Despite the software platform. iTunes as software is a usability disaster already, and adding a completely-unrelated function to it is making a bad design worse.

    yes, of course Apple should do something in this sphere. no, it should absolutely Not do it via iTunes.

    this is not meant as a criticism, it's an honest question: have you really not read anything about this theme of iTunes being long in the tooth? it's been a constant theme on every Apple-related tech site for over 5 years now. iTunes s/w is little short of a laughingstock, and that's from a crowd of happily-admitted fanboi's (like me). i can't think of a major site which hasn't run multiple articles about this.

    that's why osma & i are so surprised to see your suggestion.

  • Report this Comment On May 27, 2012, at 7:29 AM, rlcato wrote:

    @ millsbob; I must inform you that even the biggist Apple fan (John Gruber) even agrees with you -as well as I. I wouln't be surprised if the other Steve thinks the same way. When they removed the colour from iTunes, I was wondering 'where are they going with this now?' Yeah, it is getting a bit busy.

  • Report this Comment On May 27, 2012, at 8:12 AM, Ostrowsr wrote:

    SO, ONCE AGAIN, WHY IS AAPL ONLY RATED AT 3 STARS?

  • Report this Comment On May 27, 2012, at 9:00 AM, robkrushell wrote:

    Wow, I am astounded that their love of Apple as it is would make these commenters hate such an obviously important extension of the Apple-customer relationship. Apple has two main advantages in the e-pay environment. First, a huge existing customer base that already charges purchases for music, movies, books, etc through itunes. The second advantage is time - which is quickly eroding as the competition is rapidly expanding. Now is the time to move into this area - a guaranteed customer pleaser & "free money" for apple.

  • Report this Comment On May 27, 2012, at 1:55 PM, ttomni6 wrote:

    Here's some basic info about what Apple is working on. Do a search for iwallet at the site and find all the various patents (security and more):

    http://www.patentlyapple.com/patently-apple/2010/11/one-step...

  • Report this Comment On May 27, 2012, at 2:02 PM, Acrobat68 wrote:

    Apple already has the underpinnings of a mobile payment system. Just walk into any Apple store and you become a part of it. I wouldn't at all be surprised to see this be an integral part of iOS 6.

    The beauty of this system is that it eliminates the need for another chip in the iDevice universe, while increasing the need for more devices in the retail sector. The sales kiosk is at the point of contact, not at a till or register, so there is more opportunity for true personal customer service. And it uses the newest Bluetooth technology, which puts the newer Apple devices (once again) ahead of many (not all) of the competitors.

    No doubt, they would build in a system to allow other devices to pay (a universal iWallet?) but the underlying infrastructure will still be Apple based, and that will help them build a hold on their next market. By not announcing the intercompatibility with non-Apple devices until after the iPhone 5 is well in place, they will ensure high uptake of their next device, and a large number of people will switch for this feature.

    As for iTunes, rumor has it that a complete rewrite is in the works. Perhaps this would fit with the idea of an "iWallet" concept.

  • Report this Comment On May 28, 2012, at 4:46 PM, ravens9111 wrote:

    I would love to see the Apple TV come out soon and find out how quick that sells out. Samsung should be scared about this. I am curious if Apple is able to some how use the TV as a gaming console as well to compete with the XBox and PS3. How sweet it would be if you could just download games straight from the TV with a upgraded graphics card that would make other gaming consoles obsolete. Imagine how the App developers would take that on? Instead of users downloading the free version, I think real money could be made on the full version this way, along with being able to transfer those purchases to your iPhone and iPad. I also have no doubt that an iWallet will be coming out in the future. Apple will get that one right too. Just a matter of time.

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