Apple Pay and the Mobile Wallet Landscape
- By Shudeep Chandrasekhar
The race to get into our pockets in a literal sense has been going on for quite some time between several technology companies. Mobile wallets are not a new phenomenon -- the possibility of technology replacing our physical wallets was created the day mobile phones got the ability to conduct a financial transaction.
Its earliest form was SMS banking, which started as early as 1999. Big technology companies were slow to jump into this market -- until Apple Pay was launched at the end of 2014. From 1999 until then -- a period of 15 years -- it was only banks that participated in this multi-billion dollar transaction scenario.
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As companies all over the world fight for user base and market share, it is becoming extremely important to keep rolling out features and services that will benefit the customer and, in the end, be accretive to the company's eco-system.
The days are long gone when companies planned standalone product launches and then basked in their success. Today is a world of ecosystems, and if your company doesn't have it yet, you can bet your bottom dollar that your competitor soon will.
Take Alphabet (GOOGL), for example. Alphabet makes most of its money from search advertising, so why does it spend billions of dollars year after year on Android? And what about the time, money and the gargantuan effort of sending Google trucks and cars all over the world to create Google Maps?
The monetary benefits of having Android or Maps are practically negligible in comparison with their advertising revenues, so why are they doing it? It's because they're building an ecosystem of users -- not just for search, and not just for Android or Maps; they're building a Google ecosystem where users can benefit from multiple products and services so they won't think of going to a competitor.
The more we use Maps, the higher our chances of using Search; the more we use Android, the better Google's chances of staying in our pockets or in our hands all the time. As long as we're using something from Google all the time, they've effectively created that ecosystem that ultimately ties into their revenue model.
That's the most effective moat for a technology company today. It's not about products or services anymore. It's about how much time a consumer spends with those products and services.
And part of that aggressive ecosystem push is the mobile wallet concept. Right now, Apple (AAPL), Samsung (005930.KS) and Alphabet are the three top players in space. Let's take a brief look at the timeline of their launches to see who's ahead and who needs to catch up.
Apple Pay launched on Oct. 20, 2014 in the U.S.
Samsung Pay was launched in South Korea, the electronic giant's home country, in August 2015 .
Google Wallet was released in 2011, and Google merged it into Android Pay, which was launched in September 2015 .
Clearly, Apple did have a bit of head start over its rivals, and now they're slowly closing the gap Apple established in the market.
To give a bit of background, iOS and Android are the two operating systems that are in control of the mobile OS market around the world. Samsung mostly uses Android for its phones, so when you use a Android Samsung phone you will obviously end up having two choices, either to go with Android Pay or Samsung Pay.
Let's look at some numbers for Android and Samsung to understand how they might fare against each other in this battle for mobile wallet supremacy.
Android's market share advantage
Source: Android Headlines
Nearly 80% of the global mobile phone OS market is under Google's control, with Apple coming in at a tad less than 20%. While that might seem like Android rules the mobile ecosystem, you have to consider this:
During the first quarter of this year, Samsung accounted for 27.8% of smartphone sales around the world. In 2015, Samsung sold 81.3 million phones, out of which only 3 million phones had Tizen, Samsung's own operating system. The company is still mostly Android.
With a near-28% of global mobile phone market share and nearly 35% of the global Android market in its pockets, Samsung Pay poses a huge threat to Android Pay.
In addition, Samsung Pay is only available on the company's high-end phones, which is the high-end of the Android market itself.
To put it another way, if Samsung Pay had never seen the light of day, Android might have run away with the bulk of mobile wallet transactions. As it stands, however, it's a clear three-way fight between Apple, Samsung and Google.
How does the price of smartphones figure in this equation? One might assume it is irrelevant, but a look at the numbers tells a different story.
On average, iPhones are far more expensive than most of their Android counterparts. Aside from a few models from Samsung and other players, Apple pretty much holds the luxury smartphone segment. That means their customers are more likely to have more disposable income as well. As a result, their online spending will also tend to be higher.
These are not mere assumptions. Here's what Apple Insider reported for Black Friday 2015:
"Apple accounted for nearly 75 percent of online sales on mobile devices on Black Friday, new data from Adobe reveals. In all, sales from mobile devices accounted for 33.2 percent of online revenue, up from 27 percent in 2014.
Some $2.74 billion in purchases were made with mobile devices for last Friday's shopping "holiday." Purchases from Apple devices outpaced Android by a nearly three-to-one margin."
Moreover, with the increase in global market share for Android, the price disparity between iOS phones and Android phones is widening. Logically, that makes sense because as Google and Samsung keep adding more and more customers in emerging markets and more and more mobile phone manufacturers compete for the low end of the pricing spectrum, the average spending capability per user will keep declining.
In fact, many of the low-end smartphone buyers may not even have credit cards with which to conduct online transactions.
As an anology, think about the automobile market. Luxury cars are obviously a much smaller segment than economy cars, and the people the economy segment don't have the buying power that luxury car buyers do.
Though the overall number of customers that Apple has might be less than one-fifth the total Android user base, they have more disposable income and a higher probability that they will spend more than a typical Android user. Now throw Samsung into the ring and 35% of the cream of Android users will have the option of using Samsung pay as an alternative.
For now, Apple does have a good chance of maintaining the lead in terms of revenues even though Samsung is likely to expand its mobile wallet to include more users in the non-premium segment of its market.
Android's advantage is sheer volume for now, but I suspect Samsung will seriously eat into Android Pay's potential for revenue generation.
In summary, the game is Apple's to lose. It can't afford to have Apple Pay go the way of Apple Maps, for example. That is why the aggressive push into web payments and the impending battle with PayPal on that front. And with Apple's device revenues on the decline, the company is now heavily dependent on the success of Apple Pay to pull it out of what could turn out to be its first revenue decline fiscal year in several years.
Disclosure: I have no position in any of the stocks mentioned, and no intention to initiate any position in the next 72 hours.
This article first appeared on GuruFocus.
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