By now, if you watch any television at all, you've probably seen a commercial for Apple Pay, Apple's (NASDAQ:AAPL) contactless payment system. There are at least three different Apple Pay commercials floating around the airwaves right now, and Apple didn't produce any of them. These commercials were made by the banks and credit card companies that Apple is working with for Apple Pay.
Whether the advertisements are part of the contracts Apple worked out with the banks is unclear, but this isn't the first time Apple has figured out how to get free advertising. iPhone advertisements have always been subsidized by wireless carriers looking to attract high-end customers to their services.
Comparatively, one of Apple's largest competitors, Samsung (NASDAQOTH:SSNLF), spends huge amounts on marketing and advertising. Last year, the South Korean company spent $14 billion on marketing and advertising versus Apple's marketing budget of just over $1 billion.
While Apple is persuading carriers to provide free advertising for the iPhone, Samsung is spending a large portion of its advertising budget to provide incentives for in-store sales associates to recommend a Samsung device.
This year, Samsung is feeling the impact of relying on advertising. Galaxy S5 sales are lagging behind Galaxy S4, and Samsung had to spend heavily to move units last quarter. The result was a decline in its mobile division's operating margin to just 7.1%. Even Samsung's operating margin performance last year was uninspiring, when it sent 18.7% of sales to its operating income line.
Meanwhile, Apple posted a relatively impressive 28.7% operating margin in 2013. If the company spent as much as Samsung on marketing and advertising, that operating margin would drop to 21%. (Although one would hope an extra $13 billion in advertising would push sales a bit higher.)
It's unlikely the banks and wireless carriers are pitching in billions of dollars to Apple's marketing budget, but they certainly give Apple an advantage over the competition.
Apple is making products that add value to the banks' and wireless carriers' products, so they're happy to advertise them. An iPhone owner is worth more to a carrier than the average smartphone owner is, as that person is more likely to buy a high-end service package for his or her high-end smartphone. It wouldn't surprise me to see carriers starting to advertise the iPad more heavily as they move to add more tablet users to their customer bases.
Banks are hoping Apple Pay will increase the amount customers use their credit cards. While there's not a lot of data on Apple Pay usage yet, early survey results show that Apple Pay users are using the service 1.4 times per week on average. That number is bound to increase as more retailers gain compatibility with contactless payments. Thus, there's clear value in being the default credit card in Apple's new payment system.
These benefits are so good for carriers and banks, they'll happily advertise Apple's products. That includes the iPhone, iPad, and the upcoming Apple Watch. This gives Apple a distinct advantage over the competition when it comes to turning a profit.
Adam Levy owns shares of Apple. The Motley Fool recommends and owns shares of Apple. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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