One Overlooked Apple Inc. Technology Investors Should Pay Attention To

It's not going to be a game-changer for Apple's (AAPL -0.57%) bottom line, but iBeacon technology further builds Apple's robust user ecosystem and may soon be making a difference to advertisers and retailers in the constant push to learn more about their customers.

Motley Fool Analysts Nathan Hamilton and Sean O'Reilly discuss iBeacon technology, what it means to Apple, how companies like McDonald's (NYSE: MCD) are exploring its potential, and where consumers could soon begin to encounter it in day-to-day life.

Sean O'Reilly: My phone just sent me a push notification that you're listening to us right now. We'll find out how Apple made this possible on this tech edition of Industry Focus.

TGIF, everybody! I am Sean O'Reilly with the one and only Nathan Hamilton. We're going to be talking a little bit about technology that most people don't know Apple's made, because they aren't throwing it at us all the time.

Nathan Hamilton: Yes. Don't know Apple's made mostly because ... people that don't follow Apple closely probably don't know about it. The industry followers and so forth, sure.

Sean O'Reilly: Like present company, of course.

Hamilton: Exactly. But it's something that ... it's not the iPhone, but it relates to the iPhone. It's essentially iBeacon technology.

O'Reilly: How is this making my life even less private, and how are they learning even more and more about me?

Hamilton: There are ways they are doing that, but obviously it'll come down a little bit to setting your privacy settings and so forth.

One of the intents with iBeacon technology, say for retailers, is you walk in with your iPhone and you walk through a display, say for Jimmy Choo shoes -- who knows? You could receive some sort of notification on your phone.

O'Reilly: Is that a plug for your wife, for what you want for Christmas?

Hamilton: Exactly, yes! She might say Prada or something, a handbag of some sort.

O'Reilly: Definitely.

Hamilton: Yes, a notification could pop up, "Hey, we've got a deal," or "We've got loyalty rewards" when you go to your favorite coffee shop, or anything like that.

There are a lot of ways to look at it advertising wise, but I think it's actually short-sighted to assume it's just advertising because there is so much more going on there.

O'Reilly: Yes. The extent of my knowledge is, it's basically a very low-energy connection, kind of Wi-Fi-ish, that essentially sends notifications to the venue that I happen to be walking into, about ... I don't know, what I was just searching for online.

Say I was doing a search on my phone for shaving kits or something, then I happen to walk into The Art of Shaving, the store at the mall or whatever (unclear), then they'll send me coupons or stuff.

This could apply to going to Target (NYSE: TGT) and all that stuff. One of the big concerns of this has been battery usage, is that right?

Hamilton: Yes, there is a little bit of concern with battery usage. The technology is advancing. We'll see where that ultimately goes in the future, but you hit upon a really good point if you look at how amazingly targeted you could get with an ad.

This potentially could be a use in the future. Say you're surfing on your device and, like you mention, you're looking for razor blades.

O'Reilly: Or even diapers or something, and I go into Target.

Hamilton: Yes. The phone could track that, and the software that's built into the iBeacon devices. To give some background, Apple doesn't actually build the device, but they license their Bluetooth low energy technology for a manufacturer to create the device and the software.

O'Reilly: That was one of the things that you mentioned to me before the show, that I want to make our listeners aware of. Apple's more just licensing this technology out so how much money ...? Do we have any feel for how big this is right now?

Hamilton: Haven't seen anything. I can't imagine ... well, I know this. It doesn't move the needle at all if they really make much money.

O'Reilly: Well, it wouldn't move the needle if they made $5 billion!

Hamilton: Yes, exactly. Maybe even $10 billion.

O'Reilly: Right.

Hamilton: Really you have to look at it ... it's not something that moves the needle. We look at what we call "overlooked" Apple technology. Well, there's a reason it's overlooked -- because nobody really cares unless it's making a lot of money.

But that gets to the short-sighted nature of it, where we have to look at what iBeacon is. It's another sort of software offering or device that fits into Apple's ecosystem. A lot of people look at it, they say, "Apple maybe sells 100 million smartphones -- whatever unit sales or ASPs they get on the phones" -- but how do they actually get people to use their phones?

One, have great devices that are easy to use, technologically advanced. The second is, build an ecosystem around it that makes it very valuable to you and I, both as users and also advertisers, to be able to increase their revenues through maybe offering a coupon, offering special deals, or reminding you that you're on your eighth coffee for your loyalty rewards program when you walk into Starbucks (NASDAQ: SBUX).

That's where it's valuable to a user. It's not just bombarding you with ads. Who knows, it could happen, but ...

O'Reilly: When we were first reading about this, obviously one of the biggest potential uses of this could be analytics; companies finding out that "Oh, Sean's got a kid. He's buying diapers. Let's give him a coupon for diapers when he goes to Target."

It reminded me a lot of what I use as an example all the time. A couple months ago I was on Facebook (META 1.54%), on my newsfeed, and I realized that Facebook knew that I was from Ohio, living in Virginia. They tried to sell me a t-shirt with the Ohio state flag in the shape of Virginia. I was like, "Oh my gosh, these people know everything about me."

Hamilton: Targeted advertising.

O'Reilly: Right. My question, then, is how that translates to the analytics, or just how real money will be made off of this. Facebook, they're basically sending me an ad for a t-shirt based upon something that I may or may not like.

Is my iPhone then the platform? How does that work? How does Apple sell the iBeacon? Is it Target will buy packages of data on everybody that comes into their store? How does that play out?

Hamilton: There's, say the iBeacon or the beacon manufacturers, who actually build the device.

O'Reilly: Right. This is a tiny little chip in my phone.

Hamilton: Yes, that essentially sends out the signal and recognizes where an iOS device is located within a store. There's that part of it, the manufacturer. But built into that, there's also the software providers that run the advertising campaigns. Also, some companies will even build the analytics platform into it.

Then separately there are software companies that could leverage the information that they learn from the iBeacon devices to make decisions on merchandising.

You mentioned analytics. I think that is actually one of the more overlooked areas that the technology could be used for. Yes, advertisements, coupons -- that will definitely be part of it, but you have to look at it; the fact is that an iBeacon enabled device can track a user in a store.

With a grocery store what is it they say? They always put the milk in the back because they know everybody ...

O'Reilly: Right, because then you've got to walk by the detergent and all that stuff.

Hamilton: Yes, you've got to walk through. This is a way to actually quantifiably and tangibly measure those effects.

O'Reilly: It won't be specifically me that they're interested in when I go into the store. It'll be the 5,000 people that went into the store that day and how, on average, everybody behaved.

Hamilton: Yes, on the analytics side of it definitely. You've got to have a lot of data sets to make any meaningful sort of attribution to what is happening.

But you also look at it as well -- say you go to a restaurant. How long is that customer staying in the restaurant? What's the average spend? All that stuff that really comes down to the analytics side and how Apple, with creating -- well, not so much creating the technology but licensing it out -- they're able to build the ecosystem.

It's useful for the advertisers and it's useful for the consumers. A good example of how it's useful is McDonald's is actually doing this and rolled it out to 26 franchises.

O'Reilly: Did they? They didn't tell me!

Hamilton: You're not in Georgia, unfortunately.

O'Reilly: That's true, OK.

Hamilton: Yes, they rolled them out in Georgia for a four-week trial period. They were just advertising the chicken sandwiches.

O'Reilly: They gave all their customers a chip? What did they do?

Hamilton: No, no, no, sorry. They were using the iBeacon platform within McDonald's stores, so you walk in, you receive the notification. What they were upselling or advertising was Chicken McNuggets and chicken sandwiches, and they noticed a high single-digit increase in sales over that four-week period.

O'Reilly: Wow. Did the customers get a discount? What's my incentive for doing this?

Hamilton: I don't know exactly what the campaign was. Maybe they threw away some margin on offering a lower price deal. That could be the case, but we have to look at it; it increased sales and it was effective. Users found it effective and the company, McDonald's, found it effective to increase sales.

O'Reilly: Right. So, why is this being overlooked? I didn't even hear of this until the other day.

Hamilton: I think we touched upon it a little bit earlier; it's not a revenue driver. Who cares, when you've got iPhones, iPads, iTunes, Mac, all the software, driving the company? That's really what grabs the headlines. It's what moves the needle for shareholders.

It's overlooked for a reason like I said, but you really have to put it in the context of, this is just a small offering that Apple has in a broader ecosystem.

O'Reilly: Right.

Hamilton: That's really where the value is for the company.

O'Reilly: It might not be overlooked for long in four or five years, because this definitely plays into the broader trend of just connecting everything in the world around us.

Hamilton: Yes, the Internet of Things. We talk about it a lot. It definitely does play into it, because say retailers find that the ROI is effective and they can send out engaging ads that don't annoy users -- much like Facebook.

O'Reilly: And I did find that ad annoying.

Hamilton: Yes! If they can implement that across all retail stores, if all chains find this effective, you've got fast food companies, restaurants -- these are all just Internet of Things connected devices, talking to each other. Big data, analytics, all of it; throw out these crazy terms and predictions.

You see some of the predictions where they say billions of connectable devices are added -- some say daily, some say yearly. You can see where it amounts to a very large ... I'll call it "portfolio" of devices, all connected to the Internet. This is just another offering.

O'Reilly: Very cool. Hopefully one day I'll walk into Target and my coffee pot will be talking to my phone and they'll be talking to Target and they'll tell me that I'm out of coffee and all this stuff!

Hamilton: That's a good thing to mention as well. There's the smart home.

O'Reilly: Right.

Hamilton: Say you wake up in the morning. I know the first thing I do when I wake up in the morning, I check my email and I walk downstairs, go through. What if my coffee maker noticed that I was in proximity to it and started to brew some coffee?

O'Reilly: Turned on.

Hamilton: Yes.

O'Reilly: Very good. The future is now.

Hamilton: Exactly.

O'Reilly: Well, my phone just sent me an iBeacon notification that our time is up, but thank you for your thoughts, Nathan.

Hamilton: Thank you.

O'Reilly: Have a good day, everybody. Fool on!