A few days ago, I reported on a collection of recent patents that appears to point to a massive rollout of an Apple (AAPL) payments system to rival PayPal (EBAY). One reply in the Comments section immediately caught my attention:
All large companies file tons of patents that they will never use. This is a defensive measure in case they infringe on another companies patents which they all do in the computer realm.
That's a perfectly valid assumption. Many large companies, especially tech companies, file tons of patents that they will never use. The mere existence of a patent or a series of interrelated patents is no guarantee that the product will ever be produced.
That said, I continue to maintain that Apple is rolling out a large scale mobile payments solution to rival PayPal. It may not emerge fully formed like Athena from the head of Zeus. The scope may initially be limited to P2P transactions within Apple's proprietary ecosystem. Nevertheless, it will happen.
How do I know that? I know that because PayPal told me so.
PayPal's Proposal
Three payments industry executives recently leaked talks between eBay-owned PayPal and Apple to Re/code, a fledgling tech journal owned by Revere Digital LLC and spearheaded by Walt Mossberg, Kara Swisher and other AllThingsD alumni. (Note that Kara Swisher previously leaked both the Yahoo internal layoff memo, No-Work-From-Home memo, the Henrique de Castro memo, and was the early bird on the Yahoo Tumblr acquisition.)
These people, who have spoken to contacts at both Apple and PayPal, say that PayPal is essentially willing to white-label parts of its payment service to be used in an Apple mobile payments system - anything from fraud detection to back-end infrastructure, even possibly down to the processing of payments.
"They're telling them, 'We'll do it in the background," one of these people said. "Basically, it's just, 'We want to be a part of this.'" Two of these people said it's unlikely Apple would find any need to link up with PayPal, though they would not rule out the possibility."
Means, Motive And Opportunity
However, for the sake of argument, let's put the unverifiable "friend of a friend" sources to one side for the moment, take a step back, and simply observe at how the pieces are lined up on the board. FIDO's membership includes Samsung (OTC:SSNLF), eBay/PayPal, Microsoft (MSFT), Google (GOOG), BlackBerry (BBRY), Discover (DFS), MasterCard (MA), and Visa (V). In other words, it's an everyone but Apple club. Amazon (AMZN), which rolled out its own new Pay With Amazon service back in October, is also notably absent from the FIDO Alliance roster.
The Shot Heard Round The World
When divining the intentions of another, be it an individual or a mega corporation, in the absence of complete information, it's important not only to pay attention to what people say, but to what they actually do. Actions speak louder than words, and contracts speak loudest of all.
In the case of Apple's incipient mobile payments platform, PayPal's announcement that it had partnered Samsung on its fingerprint authentication enabled Galaxy S5 to let users pay for items password-free at all online and brick-and-mortar stores that accept PayPal could hardly send a louder message to Cupertino.
In case you missed it, here's an extract from PayPal's Chief Product Officer Hill Ferguson's February 24th statement at the Mobile World Congress on the incorporation of PayPal's mobile payments services into the Galaxy S5:
PayPal will be the first global payments company to support its mobile fingerprint authentication technology. Samsung Galaxy S5 users will be the first to use their fingerprint to login to shop at any merchant that accepts PayPal on mobile and in-stores - no passwords or logins to remember. This builds on yesterday's news that PayPal will be available on the new Samsung Gear 2 smartwatches.
Samsung is one of the world's most trusted handset makers, with a presence in more than 150 countries. By using fingerprint authentication instead of a traditional login and password on the new Samsung Galaxy S5, consumers benefit from an even more secure and seamless mobile and in-store shopping experience across the millions of merchants that accept PayPal.
We spearheaded the Fast IDentity Online (FIDO) Alliance last year and predicted that the industry would soon move beyond passwords, and this announcement brings us one step closer to that reality. By working with Samsung to leverage fingerprint authentication technology on their new Samsung Galaxy S5, we are able to demonstrate to consumers don't need to sacrifice convenience to increase security. With a simple swipe of a finger, consumers can still securely log into their PayPal account to shop and pay with the convenience that mobile devices afford.
Remember, Apple's legal position is that it invented the GUI running on that Galaxy S5, to say nothing of the "black rectangle" form factor. It's a safe bet that Apple is less than thrilled that Samsung's fingerprint sensor is getting, in the words of Mobile Nation's Rene Ritchie, "a free ride on Touch ID's wave." Now PayPal is "working with Samsung to leverage fingerprint authentication technology" so that "with a simple swipe of a finger" consumers can "pay with the convenience that mobile devices afford?"
That's a declaration of war.
The Sleeping Giant
PayPal's ubiquitous online merchant directory isn't going to stop merchants from tripping over one another to cater to the most affluent segment of the mobile market. With 575 million active accounts, Apple has more populated digital wallets than any other player in finance. 575 million accounts is 1.37x the total number of MasterCards issued worldwide, 3.5x the number of card holders in the U.S., 5x the number of cards on file as PayPal and 3.4x the number of cards on file for Amazon.
In a 2012 survey of more than 5,000 consumers in the U.S. and U.K. conducted by marketing consulting company KAE and research and survey company Toluna, 10% of respondents said they would bank with Apple. When those respondents were narrowed to include people who already own Apple products, that number shot up to 43%.
Moving The Needle
One of analysts' biggest objections to the release of accessories like the iWatch is that the addressable market isn't large enough to make a dent on the company's bottom line even if Apple monopolized the category. Mobile payments are projected by Gartner to have 448 million users and $617 billion in transaction volume by 2016, while IDC puts the addressable market at $1 trillion in TPV by 2017.
That will move the needle. Nothing says "financial growth" like a growing presence in Finance. If Apple were to match PayPal's performance, the result would be an additional $30 billion in annual revenue in a market that's growing by an average of 42% a year (Gartner). Even at $1 trillion a year, m-commerce will still only account for 2.5% of total global commerce, leaving plenty of opportunity for growth well beyond 2017.
Going forward, I expect a relatively tight trading range of $500-$550 to reflect that fact going into the next two quarters. Any dips to the lower end of the range prior to Apple's June Developers Conference offer an attractive opportunity to attractive entry point for going long on Apple's 2014 product cycle.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article. (More...)
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