Take-away from Amazon’s Financials & Earning Call

Amazon released their quarterly earnings today. I took a stab at trying to derive insights from the numbers. Here is what I learn:

AWS is the driver of their operating margin

AWS’ revenue and operating income grew impressively year over year

Meanwhile, North America operating income grew even more impressively year over year, making up for the International segment

Q1 2019 saw the shipping cost growth slow down and the explosion of growth in free cash flow

Across segments, YoY revenue growth decreased quite a bit, especially in the subscription and advertising. AWS makes up 13% of Amazon’s revenue

Net Income as % of Revenue Increased Sharply

Other take-aways

  • Amazon announced intention to turn a two-day shipping Prime into a one-day shipping Prime, though it admits that the endeavor will take time
  • The company said that they signed up more members for Prime in 2018 than any other year. Except the 100 million figure mentioned in the past, there was no other revelation in the earning call today
  • The company refused to comment on the acceleration or deceleration of advertising business
  • Little was mentioned about groceries. The word appears once in the press release and 4 times in the earning calls

Take-aways from Facebook’s quarterly report

This post will be about what I took away from reading Facebook’s quarterly report, presentation and earning call transcript.

  • There are 2.7 billion people using Facebook, Instagram, WhatsApp or Messenger each month with more than 2.1 billion people using at least one every day.
  • Stories have more than 500 million actives every day across all platforms
  • Mobile ad revenue by 30% year over year and made up of 93% of Facebook’s revenue this quarter
  • 3 million advertisers use Stories Ads
  • Interactive Stories Ads was introduced last month
  • Facebook daily active users reached 1.56 billion with growth in India, Indonesia and Philippines leading the way. I wonder how this number relates to the 2.7 billion figure mentioned in the first bullet. For instance, I use all the apps from Facebook almost on a daily basis. Will I count as one or four users?
  • “The average price per ad decreased 4% and the number of ad impressions served across our services increased 32%”
  • “Payments and Other Fees revenue was $165 million, down 4% year-over-year and down 40% from Q4 which benefitted from holiday sales of Oculus and Portal.”
  • “Turning now to expenses. Total expenses were $11.8 billion, up 80%. This includes a $3 billion accrual taken in connection with the inquiry of the Federal Trade Commission into our platform and user data practices. This matter remains unresolved, and we estimate that the associated range of loss is between $3 billion and $5 billion. Absent this accrual our total expense growth rate would have been 46 percentage points lower. Operating income was $3.3 billion representing a 22% operating margin. Absent the accrual, operating margin would have been 20 percentage points higher.”

Daily Active Users YoY Growth

Source: Facebook

DAUs year-over-year growth in fiscal year 2019 slowed down compared to Q1 2018.

Monthly Active Users YoY Growth

The same sentiment goes for Monthly Active Users

Revenue YoY Growth

In Q1 2019, the revenue YoY growth in America is the largest among geographies, even bigger than that of APAC

Average Revenue Per User YoY Growth

Average Revenue Per User YoY Growth in US & America is pretty impressive given how competitive the market is and the size of Facebook’s already massive business.

Operating Margin

Operating margin in 2018 contracted across the quarters compared to 2017. Even without the expected FTC fine, the margin would be 42%, lowered than that of previous first quarters in 2017 and 2018.

Thoughts

The numbers show that even though the growth slowed down in the first quarter of 2019 compared to Q1 2018, the business strength still seems to be pretty impressive, especially in APAC and North America. However, the company still has a lot of issues to deal with. The scandals related to the company are reported almost on a monthly basis. I suspect that ensuring the user safety and integrity of the platforms will be expensive and challenging. Plus, regulations and lawmakers are putting increasing pressure on Facebook. GDPR was mentioned repeatedly during the earning call in the sense that compliance with such regulations would negatively impact the business. In addition, Amazon has been growing fast as a fierce competitor in the advertising field, taking ads money from Google.

There is mention of cannibalization between Feed Ads and Stories Ads and Facebook building tools to help advertisers place ads in the most efficient and effective way

Now, we’re really applying that lesson to Stories. First, we need to convince marketers that people are using Stories, and I think having seen the mobile shift, their process – they’re getting that I think more quickly. But then we have to make it easy. So if you look at some of the tools and products I’ve talked about in the last couple of quarters, now you can – rather than us saying to you, go make a Stories ad you can just send us some pictures, some text, some very easy posts and we will create some Stories ads for you.

So our process is, we have one sales team selling all of these products; I think that helps us a lot because they already have those relationships. And we’re doing all we can to make it very easy to adopt the format. We also want to make this as automated as possible. So the long run view should be that you can give us maybe simple pictures, maybe simple videos, maybe an ad you’ve produced and we can do the placement for you. Because we think over time our systems will do a better job deciding where your ads should be placed and even helping you target. And so you’re seeing us build tools in that direction as well.

In terms of how much of its incremental, I’m sure not all of it is. There’s – definitely has to be some cannibalization for people who are doing feed ads as they get Stories. But we’ve seen that over time as we move people we’re able to get increasing shares, hopefully, of their budget but it’s our job to earn that. We tell marketers all over the world that we want to be the best dollar, the best minute, the best euro they spend and it’s up to us to prove that ROI and we’re going to continue to do that.

To convince people to pay for something, first it’s better to prove that the goods in question have value. By making Stories cheap, Facebook makes it an appealing option in addition to the Feed Ads. Though there is concern over cannibalization, Facebook doesn’t seem to have trouble increasing the revenue or the advertising Average Revenue Per User.

Details matter. A lesson from reading financial statements & earning calls

Since I started to invest in my free time, I have spent a great deal of time on reading materials related to the companies I am interested in. Much of such time is on the official financial statements from the companies. For me, it has been a rewarding exercise in and of itself as I have learned a lot about the businesses. One of the lessons is to pay attention to details which, despite in only footnotes, can carry significant information and insights. An example is this footnote from Facebook’s quarterly earning report today:

Source: Facebook

If you read the table from top to bottom, you’ll likely be surprised at the stark difference in SG&A between this and last year. The footnote below explains why it is the case. Without paying attention to the footnote, in many cases, you’ll miss out important information.

Here is how the same footnote is presented in a presentation. This time, the difference in Operating Income is more “obvious” due to the visual effect.

Source: Facebook

Another source of valuable information is the earning calls. Quite often will you find information from the calls that is not in the official report. For instance, in the last earning call, Apple revealed this on their subscriptions:

Thirdly, as you mentioned, our subscriptions are becoming a very large portion of our business and they’re growing very well above services average. And the fact that we are saying that we will surpass 0.5 billion during 2020, we’re not putting a specific date during 2020, but I think you’ve seen over recent quarters that we’ve been adding about 120 million on a year-over-year basis for a number of quarters now. And this is an incredible staggering number, right, when you think about it.

Source: SeekingAlpha

Such information, I believe, is not available in the SEC filing. Yet, it is very informative to investors.

Obviously, when you invest your own money, you’d better know as much about the companies you invest in as possible. Thus, it requires as much research as possible and I find reading materials, including but not limited to the call transcripts and financial statements, highly informative and helpful.

“Game of Thrones” Keyword on Google Trends

Hundreds of millions of people around the globe love and watch the show. Game of Thrones needs no introduction. As the two-year wait ended on Sunday, the show is back on with the last season ever. I did a little bit of experiment to see how popular it is on search engine.

Since I use Google Trends as the tool in this experiment, it’s good to revisit what Google Trends is. I’ll let one of their own explain it

Trends data is an unbiased sample of our Google search data. It’s anonymized (no one is personally identified), categorized (determining the topic for a search query) and aggregated (grouped together). This allows us to measure interest in a particular topic across search, from around the globe, right down to city-level geography.

You can do it, too — the free data explorer on Google Trends allows you to search for a particular topic on Google or a specific set of search terms. Use the tool and you can see search interest in a topic or search term over time, where it’s most-searched, or what else people search for in connection with it.

Source: Google News Lab

To display different levels of online interest, Google uses a scale of zero to 100 for the index. Here is how Google defines the metric:

Numbers represent search interest relative to the highest point on the chart for the given region and time. A value of 100 is the peak popularity for the term. A value of 50 means that the term is half as popular. A score of 0 means there was not enough data for this term.

So what is the difference between this season and last seasons in terms of online interest? Below is the chart I took last Saturday with the “Game of Thrones” keyword. The spike in 2017 was during the premiere of season 7.

Taken on 13th April, 2019

Here is what the chart looks like at the moment. Same market, same time frame, only a few days apart

Taken on 17th April, 2019

The previous spike in 2017, as shown in the screenshot above, looks like Arya next to the Mountain, which is the expected spike this week. Data from Google predicts that folks will search on and talk about the show a whole lot this week.

While the data clearly shows an increase in online interest, it’s only an index and there is no telling on how many searches this season garnered compared to the previous seasons. Plus, it’s not clear on what contributes to the spike. Is it because of the household name Game of Thrones already possesses? Is it because of the wait? Is it because of the finality of the show? Or is it because of the strongest marketing push I have seen from HBO?

I find it a very interesting phenomenon. A show like GoT has been aggressively advertised. Magazine covers, interviews on TV shows, newspapers articles, behind-the-scene clips, several trailers, a viral tactic to place the full-sized thrones in undisclosed locations around the world, a red carpet in New York, you name it. If anybody says that brands such as GoT don’t need marketing, show them what has been done in the past few weeks. They are not dumb and they don’t throw money at unnecessary tasks. But at the same time, I wonder how the marketers can analyze and objectively pinpoint whether the marketing actually works for a show like GoT.

Disney+

Thursday was a big day for Disney as the company announced the much anticipated streaming service called Disney+. You can learn more about it from this link. The top executives went through a lot of aspects of the new service, including programming, roll-out plan, pricing, investment in future original content and forecast financial impact. The service will offer users ad-free access to an incredible library of content owned by Disney, such as Marvel movies, Pixar, Star Wars, Disney and National Geographic. Users will also be enjoying some new original content such as WandaVision, Loki or Falcon and The Winter Soldier. The price is very attractive at $6.99/month or $69.99/year with all content downloadable for offline consumption.

It is a serious challenge to Netflix as Disney has plenty of content that can appeal viewers across demographics, the brand name, the marketing expertise and the financial resources. It can be argued to some extent that Netflix also has a brand name (apparently “Netflix and chill” is quite popular in our society), content (it invests billions of dollars in originals) and the marketing power. But there are two things that Disney has going for them: additional revenue streams and the ability to bundle more.

Firstly, below is the segmentation of Disney’s revenue and operating income. (Figures are from Disney 2018 & 2017 annual reports and in $ millions)

Metric2018201720162015
Revenue – Services        50,869         46,843         47,130         43,894
Revenue – Products          8,565           8,294           8,502           8,571
Revenue – Media Networks        24,500         23,510         23,689         23,264
Revenue – Parks and Resorts        20,296         18,145         16,794         16,162
Revenue – Studio Entertainment          9,987           8,379           9,441           7,366
Revenue – Consumer Products & Interactive Meida          4,651           4,833           5,528           5,673
Operating Income – Media Networks          6,625           6,902           7,755           7,793
Operating Income – Parks & Resorts          4,469           3,774           3,298           3,031
Operating Income – Studio Entertainment          2,980           2,355           2,703           1,973
Operating Income – Consumer Products & Interactive Media          1,632           1,744           1,965           1,884

In 2018, Parks and Resorts’ operating income is almost three times that of Netflix in total, let alone other segments of Disney.

Source: Netflix

I think it’s great for Disney to offer an attractive penetration pricing model to quickly sign up viewers and scale up. Additional revenue streams, in my opinion, can help finance the play. Meanwhile, a Netflix plan is almost twice as expensive as Disney+, at least in the US market. I doubt that Netflix will lower its price to match Disney+’s, given their increasingly big investment in content and troubling negative free cash flow.

Source: Netflix

It’s not a zero-sum game. I believe that a lot of viewers will have both streaming services or even have Netflix exclusively, but on the other hand, some will likely choose Disney+ over Netflix. If the economy is still strong and folks have disposable income to spare, I think it will be beneficial for Netflix. However, if the economy contracts in the future and spending cut is required, I suspect that Disney+ at this current price will appeal more than Netflix.

Secondly, Disney now also has ESPN+, a sports subscription, and Hulu. Disney already said that there was a chance they would bundle Disney+, Hulu and ESPN+ together. It will be even more attractive to viewers.

With all that being said, execution matters. Though it seems Disney has a lot going for them, this is a new territory for them while Netflix is the trail blazer in video streaming services. I am excited about this competition in the future and Disney+ itself, as a big Marvel fan.

Disclaimer: I have Disney in my portfolio, but this post stems from my curiosity and is not an investment suggestion or anything more than just my opinion.

What I learned from Uber S-1

Its filing is packed with a lot of information. Below are my take-aways so far from reading it

It’s doing a lot of things

Apart from the ride-hailing business that it has been known for, Uber also offers Uber Eats, Uber Freights and New Mobility, including e-bikes, e-scooters. Additionally, it has been investing in autonomous driving cars as well.

Personal Mobility

In the quarter ended December 31, 2018, the average wait time for a rider to be picked up by a Driver was five minutes.

The rapid growth and scale of our Ridesharing products, which to date have accounted for virtually all of our Personal Mobility offering, demonstrates the size of our opportunity:

• Revenue derived from our Ridesharing products grew from $3.5 billion in 2016 to $9.2 billion in 2018.

• Gross Bookings derived from our Ridesharing products grew from $18.8 billion in 2016 to $41.5 billion in 2018.

• Consumers traveled approximately 26 billion miles on our platform in 2018.

Uber Eats

Our Uber Eatsoffering allows consumers to search for and discover local restaurants, order a meal at the touch of a button, and have the meal delivered reliably and quickly. We launched our Uber Eats app just over three years ago, and we believe that Uber Eats has grown to be the largest meal delivery platform in the world outside of China based on Gross Bookings. For the quarter ended December 31, 2018, the average delivery time was approximately 30 minutes.

Of the 91 million MAPCs on our platform, over 15 million received a meal using Uber Eats in the quarter ended December 31, 2018, tapping into our network of more than 220,000 restaurants in over 500 cities globally.

Uber Freights

We serve shippers ranging from small- and medium-sized businesses to global enterprises by enabling them to create and tender shipments with a few clicks, secure capacity on demand with upfront pricing, and track those shipments in real-time from pickup to delivery. We believe that all of these factors represent significant efficiency improvements over traditional freight brokerage providers. Since Uber Freight’s public launch in the United States in May 2017, we have contracted with over 36,000 carriers that in aggregate have more than 400,000 drivers and have served over 1,000 shippers, including global enterprises such as Anheuser-Busch InBev, Niagara, Land O’Lakes, and Colgate-Palmolive. Uber Freight has grown to over $125 million in revenue for the quarter ended December 31, 2018

Impressive growth has slowed down

Really impressive growth, but a further look reveals that the growth seems to slow down

Their market map indicates that there is not much room for further horizontal expansion. What Uber can do is to dig deeper in each market to gain more market share. Uber said that as of the quarter ended December 31st, 2018, 74% of their trips and 52% of their Gross Bookings were from outside of the US.

It hasn’t made money operationally yet

Operationally, Uber hasn’t made any money. A positive sign is that their revenue grew faster than their operating loss. In 2018, their operating loss was more or less at the same level as it was in 2016 even though revenue grew significantly in the same period

Regulations, Regulations, Regulations

Throughout the filing, regulatory challenges are repeatedly mentioned and for a good reason. Uber’s struggle with authority bodies around the world has been well documented. Below is what Uber said specifically how regulations restrict their ride-sharing operations in a few countries

We plan to grow our current SAM by expanding further into our six near-term priority countries, Argentina, Germany, Italy, Japan, South Korea, and Spain, where our ability to grow our Ridesharing operations to scale is currently and may continue to be limited by significant regulatory restrictions

In 2018, we derived 24% of our Ridesharing Gross Bookings from five metropolitan areas – Los Angeles, New York City, and the San Francisco Bay Area in the United States; London in the United Kingdom; and São Paulo in Brazil. Over the same period, we generated 15% of our Ridesharing Gross Bookings from trips that either started or were completed at an airport, and we expect this percentage to increase in the future.

If some regulations are imposed in those important markets or around airports, however likely or unlikely, it may meaningfully affect Uber’s revenue.

Another aspect related to laws is how Uber classifies its drivers. Here is what it said specifically on the matter

Our business would be adversely affected if Drivers were classified as employees instead of independent contractors

If politicians in the markets where Uber has operations decide to force the company to treat its drivers as employees and give them minimum wage, it may be an issue

Culture

The first of the norms Uber laid out in “How We Approach The Future” section reads: “We do the right thing. Period”. Not really surprising, but a welcoming sign from a company that endured a public backlash symbolized by the hashtag #DeleteUber not so long ago.

In the filing, Uber promises to “release a transparency report, which will provide the public with data related to reports of sexual assaults and other safety incidents claimed to have occurred on our platform in the United States.” this year. Another welcoming sign.

Furthermore, unlike other tech companies, Uber won’t have dual share structure which is implemented to give the founders, usually, more voting rights. For example, Mark Zuckerberg has more than half of the voting rights at Facebook.

Their stakes in strategic partnerships

In August 2016, we completed the sale of our operations in China to Didi in exchange for an approximate 18.8% interest in Didi, which, based on our current information, we estimate to be 15.4% as of September 30, 2018. In February 2018, we consummated a joint venture with Yandex whereby we and Yandex each contributed our operations in Russia/CIS to a joint venture which we refer to as the Yandex.Taxi joint venture. We received a 38.0% interest in the Yandex.Taxi joint venture at the closing of the transaction, which, based on our currently available information, we estimate to be 38.0% as of December 31, 2018. In March 2018, we completed the sale of our operations in Southeast Asia to Grab in exchange for a 30.0% interest in Grab, which, based on our currently available information, we estimate to be 23.2% as of December 31, 2018. We measure our interest in each of our minority-owned affiliates based on the outstanding shares of capital stock on an as-converted basis but without taking into account securities exercisable or exchangeable for shares of capital stock or its equivalent (including outstanding vested or unvested stock-based awards and any reserved but unissued stock-based awards under any equity incentive plan of our minority-owned affiliates).

Its business deals with Google

According to the filing, Uber paid Google from Jan 1, 2016 through December 31, 2018, $631 million, $70 million and $58 million for Marketing & Advertising (Ads), technology infrastructure & enterprise services (which I believe is Google Cloud Platform), and Google Maps respectively.

Book: Retail Disruptors: The Spectacular Rise and Impact of the Hard Discounters

For the past two months, I lost interest in picking up a book for some reason. Nonetheless, the streak ended today as I finished this book.

The book offers a detailed and insightful view on hard discounters which usually act as disruptors in a local retail market. The book defines hard discounters as follows:

Hard-discount retailers offer basic goods and daily necessities at the lowest possible prices, while maintaining high-quality standards. A hard-discounter store differs from discount supermarkets or hypermarkets like Asda, Kaufland, or Walmart. Hard-discount stores are typically about 8,000-15,000 square feet, less than one-tenth the size of a Walmart Supercenter, with probably lower staffing levels.

To reduce costs, hard discounters often display items on shipping pallets and in the boxes in which they arrive. The store is minimally decorated and offers a limited assortment of consumer packaged goods and perishables – typically less than 2,000 stock-keeping units (SKUs). In contrast, the average US supermarket carried 40,000 to 50,000 SKUs in 2017, while a Walmart Supercenter sells over 100,000 grocery and non-grocery items.

Here is what I learned from it

Beware of potential threats in the market. The book told stories of retailers around the world that paid the price for under-estimating hard discounters. They dismissed the arrival of hard discounters at first and when they realized the threat was real, it was already too late to stop the hard discounters.

Benefits of offering a limited assortment of SKUs. I am usually overwhelmed by a plethora of choices at restaurants or supermarkets. As the book says, to shoppers who are under time pressure or who intend to buy rather than browse, a better shopping experience is to be offered streamlined options or a limited range of choices. Plus, retailers who sell a limited assortment, especially private labels, can negotiate a better economic deal with suppliers due to economies of scale. A better deal will help the margin of hard discounters. Additionally, a limited assortment of goods means smaller stores – lower rent, saved costs on logistics and staff.

Go-to-market strategy. Hard discounters tend to enter a new country through a specific market first. Get the foot in, the logistics and operations in and then expand. Also, each go-to-market strategy varies from one country to another due to a host of factors such as household income per capita, economic growth, shopping preferences. Blindly adapting a blanket strategy to different markets may lead to failures.

The book offers a comprehensive view on different aspects of hard discounters and retail in general. It confirmed my belief that a competing strategy can be made up of so many factors that are intertwined together, including to not limited to:

  • The size of assortments
  • Whether a retailer carries more private labels or national labels
  • How man perishable items a retailer carries
  • Whether it has a good brand name
  • Whether it has economies of scale
  • Whether the shopping preferences of local shoppers are a good fit
  • How much a retailer spends on marketing, promotions and discounts; and for how long it can sustain the effort.
  • A retailer’s culture

After penetrating a market, whether a retailer can survive the competition depends on the retailer’s ability to carve out a niche in the market where it can be competitive, using a combination of the above factors or more.

A few notable stats

  • Private labels account for somewhere between 70-90% of hard discounters’ assortment
  • In 2017, middle-class shoppers in the UK account for 60% of shoppers at Aldi and Lidl
  • In Germany, hard discounters accounted for three out of every ten euros spent on grocery purchases or 60 billion euros in 2017
  • Aldi entered Australia in 2001, and by 2017, had cost conventional retailers like Woolworths and Coles AU $16 billion in lost annual revenues
  • Trader Joe’s offers around 3,500 different items, Lidl between 1,500 and 2,000 while Aldi carries between 1,200 and 1,400 products
  • In Germany, Lidle was the largest advertiser among grocery retailers in 2017 (almost 280 million euros) and the sixth-largest advertiser in the country ahead of McDonald’s, Daimler, Unilever and Samsung
  • Trader Joe’s sales per square foot is $1,633, twice that of Aldi and Lidl, four times that of a Walmart supercenter and 8 times that of Dollar General
  • In Australia, 26% of Aldi shoppers were from high-income families in 2006. The figure shot up to 50% in 2014
  • For the average US grocery retailer, a loss of 1% in sales leads to a loss of 17% in operating profit

Lyft stock down by 12% and some thoughts on investing

After popping up 8% on the first day of its IPO last Friday, Lyft’s stock dropped by almost 12% today. That’s what I find baffling about the stock market. How much of the business could change in the span of 4 days? I haven’t encountered news that could justify the drop of that size. What changed? Will it go further down tomorrow? Or will it shoot back up again? And by how much? I literally have zero idea.

Charlie Munger once said that if you want to make money by buying low, you have to know when to sell high and it’s hard. Given what I have seen so hard, he is right. You don’t know when it is “high” enough to satisfy your own greed. Some may say that determining an intrinsic value of business by discounted cash flow (DCF) will be helpful in knowing when to buy and when to sell. That’s true, but DCF itself isn’t an easy and straightforward practice. It’s really hard. Here in this clip (around 6:50), Charle (not sure if he was 100% serious) mentioned that he never once saw Warren Buffett do a DCF. Plus, a renowned expert in valuation, Aswath Damodaran, admitted that he missed the mark way off when he tried to value Uber in 2014. I once participated in an M&A competition with three of my close friends. In the course leading up to the contest and the contest itself, we had to do quite a few valuation with DCFs. The method involves a lot of assumptions and it’s more art than science. Each company requires a different approach and almost no valuation is the same. If an expert such as Professor Damodaran struggled to get it right, what are the odds of ordinary folks nailing it? My money is on the “not very high” bet.

I don’t know a perfect method in investing, but I agree with Warren Buffett that buying or selling on prices is not investing. I’d recommend these two books if you are interested in life advice and investing. Poor Charlie’s Almanack and The Most Important Thing: Uncommon Sense for The Thoughtful Investor. If you have time, read more from Charlie Munger. He is really a wealth of wisdom. Plus, you can read financial reports (SEC filings of the companies) or S-1 if companies are filing to go public and subscribe to Seekingalpha.com or Yahoo.com to read the transcript of their earning calls. Plenty of useful information can be had from such sources.

I have my own reasons to invest in the companies in my small portfolio and if I go bust, at least I will learn a ton about business and go out on my own terms.

Bundling and Unbundling with Apple

“Gentlemen, there’s only two ways I know of to make money: bundling and unbundling.”

Barksdale

Bundling is the act of adding several individual services or features together in one package. Think of Amazon Prime as the example of bundling. With Prime, you’ll get fast deliver (my experience lately hasn’t exactly matched that), free return, Prime Videos, audiobooks and access to exclusive deals, just to name a few.

Unbundling refers to the act of selling a service/feature separately from an usually bundled service or product. Think of flight tickets as an example. Before low-cost no-frill, flights tickets had many features, but low cost fliers such as Ryan Air were the pioneers of selling only flight tickets and making the other features such as luggage, priority check-ins as add-ons and additional revenue.

With Apple, an example of their bundling is Apple Card/Pay. I have seen quite a bit of criticisms online about the features of the service aren’t anything new. To some extent, yes, that may be true. The thing is that Apple managed to bundle all the following features together to make an attractive product that is yet to be seen elsewhere.

  • Beautifully and elegantly designed titanium card
  • No fees
  • Rewards and immediate cashback
  • Acceptance everywhere (Apple claimed) for Apple Card and 40+ countries for Apple Pay
  • In-app management
  • Security as in that biometric validation is required for payments with both Apple Card and Apple Pay
  • Privacy as in that consumer data won’t be used or shared with advertisers
  • Application process is fairly easy, reportedly, through Apple Wallet, which is loaded on your phone by default
  • Integration between Apple Card and Apple Pay

With regard to unbundling, I think that’s what Apple is doing with their hardware and services. Most services can only be enjoyed on Apple devices, yet such services lure consumers to the luxury devices which have been highly profitable to Apple. On the top of my head, there are three subscription services from Apple that an average consumer may likely use: Apple News+, Apple Music and iCloud. Soon there will be Apple Arcade too. Selling services separately and services from hardware gives users freedom to choose. If Apple bundled everything into, let’s say, $100/month for 1.5 years for the use of a new iPhone and all services, that would make some customers pay for what they didn’t use. Nonetheless, if the usage of paid services is high and consistent, I wonder if Apple will have an optional bundle for services alone for power users.

Thoughts on Apple Card

On Monday, Apple introduced its in-house credit card called Apple Card. Since it’s not available yet and the details are quite numerous, you can read more in these two articles on TechCrunch and The Verge or watch the presentation yourself here. I’ll just lay out my thoughts on the card below

I am convinced that Apple Card will attract a lot of sign-ups. After all, it’s Apple. The application process is reportedly straightforward and easy (we’ll see soon in the upcoming months). You can apply for the card from your Wallet app and the card will be shipped to you. If you use an iPhone 6 or later and are a fan of Apple, you will likely want to try your hands on the beautiful-looking titanium card for free, as long as you qualify for one. Plus, there are millions of installed iPhone 6 or later out there. So getting folks to sign up won’t be an issue. What about the usage for Apple Card? For consumers to use the Card, Apple has to give them a reason to, an incentive.

Security & Privacy

Security & Privacy is a big sell from Apple and it’s no different in this case. Apple Card comes without the stuff that makes credit card fraud possible from the physical card perspective. Plus, the way Apple sets it up makes credit card fraud significantly more difficult

Because of the way it is set up, every purchase with Apple Card requires biometric identification aside from purchases with the physical card. In the case of a non-Apple Pay transaction online — you must get your card number from the app and that is unlocked via Touch ID or Face ID, so biometrics are still in the path. And, for Apple Pay transactions, they are authenticated at the time of transaction. I personally think it would be cool to optionally require a confirmation from your phone to let a charge go through as well, but that is likely a v2 situation.

From TechCrunch

In other words, somebody needs to steal your card, your phone and either your thumb(s) or your face to make an unauthorized purchase.

Apple claimed that it wouldn’t know anything about consumer purchases using Apple Card. Plus, Goldman Sachs won’t sell data to marketers. If you care about privacy, it is attractive. Now that I work in the credit card industry, I can tell you that the level of privacy intrusion by banks is crazy. It is entirely possible to track the location of a cardholder to a store, know whether a purchase is made and if a purchase is not made, use the user data to run ads offline and online to motivate spending. If Apple and Goldman Sachs can do what they claim, this is an appealing feature, but I doubt it will be the dominant one.

No fees

According to Apple, you won’t be charged with late fees or penalty fees. You will just incur interest on your late payments. A nice feature, but from my perspective, it is not a hugely attractive one, especially if you are like me who isn’t late on credit card payments. After all, late payments will affect your credit score and consequently future APRs.

APRs

Pretty in line with the industry standard. Nothing special about this as far as I am concerned

Visibility into purchase details

Apple claimed that users could see more details on what a purchase was and where it happened from the Wallet app, instead of the user-unfriendly lines you see from your balance statement or mobile app. Once again, a nice feature that won’t be a dominant one.

Cash back

Above is the cash back policy for Apple Card and Apple Pay. 3% on Apple-related purchases is nice, but it is not a daily event, given how expensive Apple items are. 1% cash back with the physical card is nothing special. It’s even less attractive than many credit cards out there on the market. The interesting one is Apple Pay

From Creditcards.com

Because other credit cards offer two percent cash back or more on certain categories only, two percent cash back on every category by Apple Pay is more beneficial to users. According to Apple, Apple Pay will be available in 40+ countries at the end of this year. The number of merchants that accept Apple Pay is impressively high in some countries. Here is what Apple reported on the presentation

There are cases in which Apple Pay will not be competitive. For instance, if you have a card that gives back 4% cash back on dining, it sure is a better alternative than Apple Pay, even if Apple Pay is an available option. Or if you have a co-branded credit card such as a hotel or airline co-branded credit card, there is a switching cost as you want to increase your rewards points.

But using a physical credit card isn’t as convenient as a contactless option such as Apple Pay, nor is it as secure. So which payment option works in a situation depends on what situation that is and what kind of credit card user you are. If you care a lot about rewards and cash back, as well as have the time and mental fortitude to remember all the details, using multiple cards is the way to go. Nonetheless, if you are like me, a “one guy, one card” type, I would prefer something simple and easy to use/remember. Then I can see the appeal of Apple Pay. Contactless, fast, secure and decent cash back.

A push for Apple Pay

I believe that Apple Card is another push for Apple Pay to make it the “iPhone” equivalent of payment methods. Since Apple Pay is not ubiquitously available, the Card offers the connection between Apple Pay and merchants who don’t accept the service yet. If you use the Card, you’ll earn cash back that can be, in turn, used for Apple Pay. As explained above, Apple Pay can seem to be an attractive payment method to a certain type of users. According to Apple, they are on their track to meet the goal of 10 billion transactions on Apple Pay this year. If you are already satisfied with Apple Pay, I suspect that you will get more hooked when Apple Card is launched.

It makes sense to push for Apple Pay as I think Apple will earn more revenue from the service than the Card. After all, whatever revenue from the Card will have to be split with Goldman Sachs as well.

To recap, I think that this is a push for Apple Pay from Apple, an attempt to thread a delicate line between getting into the financial world and not suffering from the regulatory headaches that come with actually getting in there. Personally, I don’t think it is a “winner takes all” situation. I suspect that users will carry multiple options around and that each type of credit card user will display different levels of love towards Apple Pay and Card. I am excited about the future updates from Apple for the Card, regarding features and benefits. After all, this is just their first iteration.