Apple’s investment in the App Store and its value

Many folks criticize Apple for taking commissions on the sale of digital content on iOS devices, saying that the company doesn’t do anything in the sale process to deserve the commission. I disagree. I outlined my thoughts on the criticisms of the App Store. In the latest filing as part of its legal battle against Epic Games, Apple provided some data points on what they spent on the App Store and the impact. Because these excerpts come from a legal document submitted to a court, it’s unlikely that Apple made them up. Have a read and decide for yourself if it’s reasonable to ask a company not to benefit from the servers it renders and investments it makes. Also, would you do the same if you were Tim Cook running the company?

Investment in data centers and staff maintaining the App Store

Apple has spent billions of dollars to develop and maintain the App Store. The data centers alone that Apple has established to facilitate the App Store have cost Apple many billions of dollars, and Apple spends hundreds of millions of dollars per year to employ the engineers who contribute to the App Store’s success.

Services that Apple provides under the License Agreement include handling more than 25 million customer support cases a year with a dedicated team of over 5,000 full-time AppleCare advisors; verification of customer accounts to maintain the integrity of the marketplace, including removal of hundreds of millions of fraudulent customer accounts each year; and implementing other measures to combat fraud and refund abuse.

Apple contracts with third-party payment settlement providers to facilitate Apple’s own ability to accept customer payments. During this process, transactions are verified and payments authorized, but this function is just one part of the process and is outsourced to third parties to whom Apple itself pays a fee. 

Source: Apple’s filing

The App Store removes administrative hurdles for developers such as cross-country taxes

While expanding developers’ ability to monetize their apps, IAP also removes administrative burdens and allows developers to effortlessly sell their services to, and receive payments from, customers in the 175 countries where the App Store operates. This support includes collecting and managing payment information from around one billion potential customers around the globe; handling conversions to 45 currencies; and ensuring compliance with local tax laws, and handling tax withholding in scores of countries. Moreover, the records maintained through IAP help Apple provide both routine and customized business analytics to app developers. For many developers, it would be prohibitively complex and costly to carry out these tasks on a similar scale. Yet Apple’s infrastructure makes it effortless for them. 

Source: Apple’s filing

The App Store shields consumers from potentially harmful apps

Since January 1, 2020, Apple has processed more than four million app submissions, approving approximately two thirds of them and rejecting approximately one third for noncompliance with the Guidelines and/or the agreements. For example, more than 100,000 app submissions are rejected each year for data collection and storage practices that run afoul of Apple’s strict requirements for consumer privacy protection. Most of these developers whose apps are rejected make changes to their apps to address Apple’s concerns, and ultimately have their apps published to the App Store.

Source: Apple’s filing

Since 2017, Apple has terminated:

more than 75,000 accounts of developers for introducing new features to their apps without going through App Review, i.e., bait-and-switch conduct, in which a developer makes changes post-review to circumvent the app review process, also referred to as Illicit Concept Changes (ICC);

more than 2,000 developer accounts for introduction of a non-IAP payment method for in-app sales of digital content; 

more than 60,000 developer accounts for inclusion of hidden features or obfuscated code or for facilitating the download or installation of executable code; and

more than 175,000 developer accounts for other fraudulent conduct.

Source: Apple’s filing

Disclaimer: I own Apple stocks in my portfolio

Brief thoughts on Apple One & Apple Fitness+

Yesterday, Apple held an event to announce updates on their hardware, software and services. Everything related to Apple should be widely covered. You can read about the event on the news. I just want to share my thoughts on the two notable services: Apple One and Apple Fitness+

Apple Fitness+

It’s a fitness subscription that resides inside the Fitness app and is built for Apple Watch. Essentially, if you’re wearing an Apple Watch and have a screen that can show various workouts developed by Apple, you can see health and exercise data while sweating and hustling through the physical torture :D. According to Apple, there are workouts for everyone, including Cycling, Treadmill, Rowing, HIIT, Strength, Yoga, Dance, Core, and Mindful Cooldown. Each workout is accompanied by curated music, but you can also add your own tunes from Apple Music. Apple claimed that machine learning on device would use your previous workouts as well as health data to personalize suggestions for you. All the data would not leave your devices.

Apple Fitness+ home screen on iPhone 11 Pro.
Figure 1 – Apple Fitness+. Source: Apple
Figure 2 – Apple Fitness+. Source: Apple

Apple Fitness+ will be available at the end of the year in the US, Australia, Ireland, the U, Canada and New Zealand. A subscription will cost $9.99/month or $79.99/year with one month trial and can be shared with up to five people. To gain access to Apple Fitness+, customers need Apple Watch Series 3 or later.

Now, I have seen a lot of comparison with Peloton since the service was announced. Let’s take a look at whom each should be for

Whom it is for
Apple Fitness+ 1/ Those who own an Apple Watch Series 3 or later
2/ Those who don’t want to spend at least $1,400 for a piece of equipment and a subscription on top of that just for workout
3/ Those who don’t have a lot of interior space for a bike or a tread
4/ Those who travel quite a lot and can’t carry equipment
5/ Those who prefer working out without equipment
6/ Those who want to incorporate health data always on Apple devices with workouts
Peloton1/ Those who don’t own an Apple Watch Series 3 or later (Obviously!)
2/ Those who are serious enough about fitness to make a sizable investment in a Peloton bike/tread
3/ Families whose multiple members want to share the same account and bike/tread
4/ Those who have enough space for a bike/tread
5/ Those who stay home often enough

For those who already owned a Peloton machine and subscription, I don’t imagine they will sign up for Apple Fitness+. The sunk cost of a Peloton bike/tread is so high that consumers will try to milk as much out of it as possible. Hence, Peloton shouldn’t have to worry about that. While Apple has many fans, it also has as many, if not more, critics. As Apple Fitness requires an Apple Watch, Peloton shouldn’t worry much about this segment of the market, either. It’s inconceivable to think a non-Apple person would invest in a Watch and iPhone (who has the former without the latter?) just for this fitness subscription.

What should worry Peloton is potential customers who own Apple devices and don’t have a Peloton subscription. To those who are interested in fitness enough to spend $10/month, but not as much to spend $1,400+ for a bike, Apple Fitness+ should be much more appealing as the barriers to entry are much lower. Sure enough, a $350 Apple Watch is still a significant investment, but if historical product rollouts by Apple are nothing but an indication, they will add more health-related functions to their Watches to make them more attractive. Case in point. The new Apple Watch will be able to monitor oxygen level in blood. Hence, compared to a big and expensive bike from Peloton, a combination of a Watch and Fitness+ should be an enticing alternative.

With that being said, I do think the market is big enough for these two players. The hardware requirement limits Apple in the same way as it does Peloton. But if a non-Apple phone or smart watch manufacturer jumps into the fitness market and offers the same service, it can spell trouble for Peloton because in that case, the manufacturer wouldn’t be limited by the hardware requirement any more.

Apple One

This is one of the badly kept secrets. On Tuesday, Apple announced its long anticipated umbrella subscription bundle called Apple One. Basically, an Apple One subscription offers consumers access to multiple Apple services such as iCloud, Apple Arcade, Apple Music, Apple TV+, Apple Fitness+ and Apple News+. Below are the tiers and prices

Figure 3: Apple One Tiers. Source: Apple

A bundle is to encourage consumers to use more individual services, usually at a discount. Apple One is no exception. If you buy services individually and add them all up together, Apple One offers a great value for money. Morgan Stanley had a great summary below

Image
Figure 4 – How much money is saved with Apple One. Source: Ben Bajarin

Premier offers an astounding 45% discount and if your family is already using most, if not all, of the included services, Premier tier is a no-brainer. Additionally, it’s worth pointing out that customers with Apple Card will get 3% cash back from Apple One, on top of the already incredible discount.

What gets me excited about a bundle like this is what lays ahead. If you think about it, I believe that Apple must have had this vision for a while. First they rolled out iCloud. Then Apple Music. Then Apple News+, Apple Arcade, Apple TV+ and Apple Fitness+. There is no way that Apple will stop here. I am confident that they already have something in the pipeline already. It won’t surprise me if they add more and more services to their flagship bundle and make it the Amazon Prime of Apple Services. A few options I can think of:

  • Apple Care?
  • A service related to books as they already have iBooks
  • Something related to cars as iPhone can replace car keys for the new BMW already

Apple is known for incremental yet effective progress over time, proven by its approach to hardware and software. So don’t be surprised that it is taking the same path here with Apple One

Disclaimer: I own Apple stocks in my portfolio.

Antitrust hearing with 4 big-tech CEOs

A disappointing hearing

Today, the long anticipated hearing by The House Subcommittee on Antitrust, Commercial, and Administrative Law which features Jeff Bezos, Tim Cook, Sundar Pichai and Mark Zuckerberg, the four powerful CEOs of big tech companies, took place. Suffice to say, I am not surprised at what transpired, but I am pretty disappointed. I don’t think that there is an objective or a desirable outcome from this hearing. While Democratic officials focused more on the issue at hand which concerns antitrust practices by these companies, their Republican colleagues, in particular Representative Matt Gaetz and Jim Jordan, were more interested in an entirely issue: alleged bias and censorship of conservative views on social media. Jim Jordan even compared Apple’s famous 1984 ads campaign to the so-called cancel culture almost 40 years later! Ranking Member Sensenbrenner even mistook Facebook with Twitter when he tried to question Mark Zuckerberg on Twitter’s decision to temporarily suspect Don Jr’s account. You don’t need to spend time on the hearing, but you can get some idea on the quality of this event based on those incidents.

Notwithstanding the difference in pointed questions, every lawmaker in this hearing did more grandstanding than listening. The 5-minute rule is there to ensure that every lawmaker has a chance to ask questions and that witnesses don’t digress. However, the rule’s side effect is that lawmakers don’t wait for witnesses to answer. Instead, they push their own assumptions/allegations on witnesses or just restrict complicated matters to a “Yes/No” question. If this hearing is to uncover how these CEOs approach competition, why is it that they weren’t allowed to talk more and elaborate?

The format of the hearing needs to change in order to yield results. I have a few thoughts in mind on what can be implemented:

  • Every question at a hearing should stick to a topic. Anyone who violates this rule twice should be kicked out of a hearing. For example, Jim Jordan today didn’t ask questions on anti-competition. He threw allegations towards the witnesses on alleged bias to conservatives. So did several other GOPs. How do those questions belong to the Antitrust conversation at hand?
  • Every lawmaker should have 5-10 minutes, but there should only 5-10 questions allowed. A limit on the number of questions can help ensure the quality of questions, give witnesses more time to elaborate and reduce grandstanding. Many issues are complicated and take some explanations.
  • Before a hearing, questions should be compiled in advance on a portal/website and witnesses must answer in writing before appearing in front of lawmakers. Written answers offer witnesses space and time to elaborate and remove the constraints of time. During hearings, lawmakers can just build off of the written answers submitted in advance.
  • Similarly, there should be a collection of follow-up questions that are answered after a hearing.

Not every acquisition of a competitor violates antitrust laws

Facebook and Google were grilled today on their previous acquisitions: Facebook on Instagram, WhatsApp and Google on DoubleClick. I was baffled by this line of question. Take Facebook’s acquisition of Instagram several years ago as an example.

When Facebook paid $1 billion to acquire Instagram in 2012, nobody could be 100% sure that it would be what it is today. At the time of the acquisition, Facebook was already a big player primed for its IPO and heavily invested while even though it was growing fast, Instagram had around 30 million users, generated no revenue and was valued at $500 million. The startup was struggling to grow its team and infrastructure. Joining Facebook did give Instagram benefits on the way to having more than 1 billion users, as the book No Filter noted below

“It was the most dire server problem in company history. Instagram was now important enough to be mentioned in every press story about the meltdown, alongside Pinterest and Netflix. Coworkers, none of whom did that kind of engineering, sent ice cream to the office as support. Sweeney ate several scoops to try to make it through the night, though he accidentally fell asleep multiple times on his keyboard.”

“The infrastructure wasn’t the only problem bubbling up to an intensity the tiny team could barely handle. Spam was everywhere on Instagram. So was troubling and abusive user content, which the community team could no longer finish sifting through in its shifts—and which was starting to appear in their nightmares. Frustration over the financials aside, selling to Facebook might give employees their lives back.”

Excerpt From: Sarah Frier. “No Filter.” Apple Books.

“Systrom gave four reasons. First, he reiterated Zuckerberg’s argument: that Facebook’s stock value was likely to go up, so the value of the acquisition would grow over time. Second, he’d take a large competitor out of the picture. If Facebook took measures to copy Instagram or target the app directly, that would make it a lot more difficult to grow. Third, Instagram would benefit from Facebook’s entire operations infrastructure, not just data centers but also people who already knew how to do all the things Instagram would need to learn in the future.”

Excerpt From: Sarah Frier. “No Filter.” Apple Books.

“So that summer, Zuckerberg directed Javier Olivan, Facebook’s head of growth, to draw up a list of all the ways Instagram was supported by the Facebook app. And then he ordered the supporting tools turned off. Systrom again felt punished for Instagram’s success.

Instagram was also no longer allowed to run free promotions within the Facebook news feed—the ones that told people to download the app because their Facebook friends were already there. That had always brought a steady stream of new users to Instagram.

Another of the new changes would actually mislead Facebook users in an attempt to prevent them from leaving for Instagram. In the past, every time an Instagram user posted with the option to share on Facebook, the photo on Facebook said it came from Instagram, with a link back to the app. Instagram’s analysis showed that between 6 and 8 percent of all original content on Facebook was cross-posted from Instagram. Often, the attribution would be a cue for people to comment on the photo where it was originally posted. But with the change mandated by the growth team, that attribution would disappear, and the photo would seem as if it had been posted to Facebook directly

Excerpt From: Sarah Frier. “No Filter.” Apple Books.

Consolidations in the same industry always involve reduction of competition. The fact that Facebook is a giant company doesn’t make every single acquisition it made illegal or inappropriate. That’s why I don’t get folks are so upset about Facebook’s acquisition of Instagram. I think it’s safe to say that having Instagram at its current size benefits end users, entrepreneurs and small businesses. There is no guarantee that without Facebook, Instagram would have had the same achievement. It’s also worth noting that the FTC, at the time, approved this merger. As a result, why suddenly did this issue become trending again?

Using data to launch private labels isn’t illegal or bad in and of itself

One of the popular themes in this hearing is the use of data from other businesses by big tech companies to launch competing products. Amazon is accused of using data from startups that work with its investment arm and from sellers on its website to launch competing products. First of all, if Amazon violates any confidentiality term to gain illegal access to sensitive data, then yes they should be held accountable. However, I don’t think using aggregate data stemming from activities on its own website to launch private labels is inappropriate or illegal. What do you think Target, Walmart, Kroger or a litany of other retailers do? Where do you think they got intelligence before launching their own private labels? Here is the revenue share by private labels of retailers. The practice went back to several decade. So, why suddenly is it an issue?

Furthermore, even though Amazon has 35%-40% of the US eCommerce, it still has to compete with brick-and-mortar stores. Hence, if you account for physical stores and the whole US retail market, Amazon occupies only 6%, according to Ben Evans. It’s a bit of a Catch-22 situation for lawmakers. Focus on eCommerce alone and it’s not fair. Look at the whole retail segment and Amazon is likely off the hook as they have only 6% of market share. Imagine that as a successful business owner, you were told not to venture in a different segment, how would you feel? You’d probably say: “wait a minute, that’s unAmerican and against capitalism. Why aren’t I allowed to compete in another category just because I was successful in one?”

What I’d have a problem with is if Amazon abuses of its power to promote its private labels without merits. Specifically, if Amazon pushes its own labels which don’t have any positive reviews at all ahead of more established brands with a lot of reviews, then it’s problematic and not in the best interest of consumers. In that case, Amazon’d deserve scrutiny and criticisms.

App Store commissions

I’ll write about this issue in more details later, but here are a few basic points I want to bring up. Every company that plows resources properly into an operation earns the right to make money from such an operation. Even as one of the biggest and richest corporations in the world, Apple should be able to do that too. As a result, when Apple is responsible for manufacturing its own devices and creating the operating systems that include the App Store, Apple earns the right to monetize their effort. It’s unreasonable to expect Apple to run a charity out of the App Store. Whether the 30% or 15% commission is too high warrants a legit discussion, but I strongly disagree with folks who say Apple should just charge developers its cost of running the App Store.

While developers are important, they are just one side of the coin. The other side is Apple customers. Apple needs to ensure that the user experience on the App Store is as pleasant as possible. Otherwise, they wouldn’t sell as many devices and make as much money any more in the near future. That’s why they have guidelines on the App Store. It’s not reasonable to expect Apple let developers do whatever they want when Apple’s brand is on the line. In life, there is no free lunch. Developers shouldn’t expect to leverage Apple’s infrastructure and reach to customers without abiding by their rules. We all know the saying that goes “my house, my rules”, don’t we?

There is a legitimate concern over the inconsistency of Apple’s rule enforcement. The concern is amplified when it comes to select cases in which Apple has a conflict of interest with regard to its own apps. On that front, I do agree Apple should be held accountable and scrutinized by users, developers, media and the authorities.

In summary

The hearing is a waste of time for the most part, in my opinion. There are interesting discoveries revealed by the committee in the documents submitted by the companies; which you can find here, but the format of these hearings needs upgrading and the answers we got today from the CEOs weren’t that meaningful. I do believe that some of the anti-competition claims on big techs should be fleshed out more.

Disclaimer: I own Apple and Amazon stock in my personal portfolio

A feature I wish iBooks had

I read books on my iPhone nowadays. There are two main reasons for that

  • I love taking notes while reading. It helps build a note system which refreshes my memory quickly all the points that I deemed worth remembering. With physical books, I can’t do the same
  • Admittedly, I pay for books once in a while, but mostly I use gen.lib; which is a website that offers free ebooks in various genres. After I download books to my Mac, it usually doesn’t take long for iBooks on my phone to sync and have those books ready in the app

Much as I like the experience of reading on iBooks, I wish it had a feature that’d allow readers to quickly store or buy books referenced by authors. Take a look at the example below

With the current iBooks, I have to highlight the name of the “The Tao of Warren Buffett” book and save it in my notes section. Later on, if I want to buy the book, I’ll have to exit what I am reading, go to the Search function, type in the name from my memory and buy it. There is so much friction and the experience is anything, but ideal. What I’d love to have is that once I press on the name of the book, a pop-up will show on the screen that has the book information from Apple’s bookstore and I can just tap on my phone screen to add it to my to-read list. The list should be able to sort books by added date or alphabet.

In fact, links on iBooks are clickable as you can see below. So, I wonder why there isn’t such a feature for iBooks. If friction is removed, I think readers are more likely to buy more books; which means more revenue for Apple and publishers.

Apple’s fall-out with Hey and the “Apple Tax”

If you follow tech Twitter, you likely won’t miss one of the big stories today: Hey’s fight with Apple. Hey is a new email service developed by Basecamp and was launched a couple of days ago. Right now, the only way to use Hey is to get invited on its website and pay for a subscription. The app was rejected by Apple twice because there is no in-app purchase option through which users could pay to use the service and through which Apple could financially benefit by taking its standard 30% cut. Apple issued an ultimatum: comply with our rules or get removed from App Store, along with access to millions of people who own Apple device. There are a few issues at hand here, so I’ll go through it one by one.

Before we begin, a bit of disclaimer right upfront: I own Apple’s stock in my portfolio, but I don’t think I am too partial to the company here. You’ll be the judge.

So, what are the rules?

Here is what Apple says in their guidelines

3.1.1 In-App Purchase:

If you want to unlock features or functionality within your app, (by way of example: subscriptions, in-game currencies, game levels, access to premium content, or unlocking a full version), you must use in-app purchase. Apps may not use their own mechanisms to unlock content or functionality, such as license keys, augmented reality markers, QR codes, etc. Apps and their metadata may not include buttons, external links, or other calls to action that direct customers to purchasing mechanisms other than in-app purchase.

Source: Apple

And

3.1.3(a) “Reader” Apps: Apps may allow a user to access previously purchased content or content subscriptions (specifically: magazines, newspapers, books, audio, music, video, access to professional databases, VoIP, cloud storage, and approved services such as classroom management apps), provided that you agree not to directly or indirectly target iOS users to use a purchasing method other than in-app purchase, and your general communications about other purchasing methods are not designed to discourage use of in-app purchase.

3.1.3(b) Multiplatform Services: Apps that operate across multiple platforms may allow users to access content, subscriptions, or features they have acquired in your app on other platforms or your web site, including consumable items in multiplatform games, provided those items are also available as in-app purchases within the app. You must not directly or indirectly target iOS users to use a purchasing method other than in-app purchase, and your general communications about other purchasing methods must not discourage use of in-app purchase.

Source: Apple

I am not a lawyer, but based on the text above which was referred to by Apple in correspondence to Hey indicates that consumers can still use services from apps like Hey, even though they are not acquired in-app, provided that in-app purchase is an option and not discriminated by app creators. My understanding of the issue here is that, barring any unpublished behind-the-scene details, Apple wanted Hey to add in-app purchase, but the email service refused to.

Here is the communication between the two

Clearly, when a consumer is presented with an option to buy goods or services in app, he or she will jump at it. Apple prohibits languages that discourage the use of in-app purchases. As a consequence, text such as “you can subscribe here, but it will help us more if you do on our website” will likely be banned. Because of those two factors, it’s understandable that Hey doesn’t want to have an in-app purchase. Most of the time, consumers will choose that option and Hey will have no choice, but to give Apple the commission. From Apple’s point of view, without forcing apps to include in-app purchase as an option, what app would voluntarily shoot itself in the foot and lose 30% of revenue? Also, it’s certainly not a good user experience to juggle back and forth between a website and an app, especially for new users that don’t subscribe yet to an app.

What I think is problematic are

  • The inconsistency in their handling that makes the rules look arbitrary and their enforcement look like an abuse of power
  • By making users, after downloading an app, go to a website to subscribe and then come back to use the app, Apple creates friction; which becomes problematic in the context of an app competing with Apple’s own service such as Spotify (which I will talk about later).

“Why do we have to pay while some others get a special treatment?”

One of the main arguments from the CTO of Basecamp is that there are other apps that get a special treatment from Apple and can bypass the rules on in-app purchases. Why is there such an inconsistent enforcement of the rules?

This is indeed frustrating. I tried Fastmail and Spark on my phone. You have to pay for Fastmail on a browser first before you can log in on its mobile version. Spark app is available to use, but there is no in-app purchase option that I can find. The same applies to Netflix. While it’s not a fair comparison between Hey and a household name with bargaining power like Netflix, being treated differently than your peer email services is unfair and I can see why Hey folks are frustrated.

In fact, I think Hey did the exact same thing as those two email apps did. The app only has these screens

Source: Macrumors

How is that different from the likes of Fastmail, Netflix or Spotify (I’ll talk about it later)? Yes, by not having an in-app purchase, Hey violated Apple’s verbatim guidelines, but since other apps and especially some offering the same service get exempted, you can’t help but feel for Hey for being singled out. Worse, Apple threatened to delete Hey app from the App Store

Apple told me that its actual mistake was approving the app in the first place, when it didn’t conform to its guidelines. Apple allows these kinds of client apps — where you can’t sign up, only sign in — for business services but not consumer products. That’s why Basecamp, which companies typically pay for, is allowed on the ‌App Store‌ when Hey, which users pay for, isn’t. Anyone who purchased Hey from elsewhere could access it on iOS as usual, the company said, but the app must have a way for users to sign up and pay through Apple’s infrastructure. That’s how Apple supports and pays for its work on the platform.

Source: Macrumors

I still don’t see why Hey isn’t allowed on the App Store when Netflix and Spotify should have most of their users as consumers. The inconsistency in enforcement of its own rules makes the rules arbitrary and the double down makes the company look like an outrageous bully.

Does Apple deserve to earn the 15-30% commission?

A lot of folks argue that there is no reason for Apple to generally take 15-30% commission from subscriptions and digital services sold through App Store. I tend to disagree on this. Without knowing the exact details, I still think there are expenses that go into maintaining and building the App Store. Somebody will have to review apps, keep the servers up, police content, fix bugs, authenticate payments and keep the marketplace secure. You don’t want an app that uses your data for reasons unknown to you without your consent, do you? You also want to feel that your credit cards are secured when making a payment on App Store, don’t you? None of those is born out of thin air. If Apple already invests in the App Store and makes it work well with Apple devices, why can’t they reap the fruits of their labor? While 30% commission may be too high; which is a legitimate argument, saying that Apple shouldn’t take commission at all is a bridge too far for me. Why shouldn’t they profit from their own investment? Wouldn’t you feel the same way if you were in their shoes?

Some may say that the App Store increases the value of Apple devices from which Apple already profit handsomely. Hence, the company shouldn’t be too greedy by profiting on developers. Well, maybe. But another argument is that Apple also invests a lot in designing and manufacturing their hardware. They deserve to profit from their own investment, whether it’s hardware or software. To answer the question whether Apple deserves the commission, my answer will be yes. How big that commission should be is another discussion.

In fact, Apple argued, in its response to Spotify, that the majority of apps on App Store don’t pay to Apple

Source: Apple

If you look at this point objectively, you can see from Apple’s perspective, it makes sense to “ask” apps that use their secure payment method to contribute to the ecosystem. The problem stems in part from how Apple “asks”, as I mentioned above, and how their policy can be argued to favor its own services at the expense of others. Like Spotify…

Source: Apple

What about Spotify?

There is a lot of bad blood between Apple and Spotify. The music streamer even created a website detailing their complaint on Apple’s unfair practices. One of the main complaints is that by forcing Spotify to have an in-app purchase option and, as a result, handing over 30% commission to Apple, Apple is abusing its power to make Spotify’s service uncompetitive compared to Apple Music.

There are two contrasting views through which you can look at this issue. On the one hand, if Apple gave Spotify a pass because one of Apple’s services competes with the Swedish company’s, 1) the argument seems arbitrary and weak, and 2) we’d go back to the point of inconsistent application of the rules.

On the other hand, does Apple commit anti-trust practice on Spotify? Well it depends. On Spotify iOS app, users can still log in with an existing account without having to pay anything, meaning that Apple will receive no revenue from Spotify

I logged in successfully, and when I tried to upgrade my plan, here was the screen

There is no option to upgrade in-app. The only instruction is to go to Spotify website. I am not sure if the change took place recently to placate regulators, but if this has been the case, existing users can still access Spotify and new users can choose to either go to pay for subscriptions on Spotify’s website or leave. Also, while the approved language (“please go to Spotify’s official website to learn more”) here doesn’t discourage any possible in-app purchase, normal users may not understand what is the issue here. They may as well just feel discouraged to have to go to a website, subscribe and go back to the mobile app. One can argue that this extra step creates friction for potential users to sign up and subscribe for Spotify, in contrast to the virtually frictionless experience with Apple Music, which is Spotify’s competitor. Another argument is that if Spotify wants to eliminate friction, it has to pay up; which hurts margin; or it has to increase prices; which hurts its competitiveness.

You can see both sides’ points in this argument.

Summary

With regard to Hey, Apple can technically enforce the rules which clearly state that there needs to be an in-app purchase option. It gets murky because they have applied their own rules so inconsistently that Hey can’t help but feel singled out for following the exact same companies that got an exemption from Apple. The double down feels like either Hey is unfairly targeted or Apple wants a payback for the PR attack that Hey caused on them. There is a sentiment that Hey knew the rules of the platform beforehand, and likely a possibility that things would come to this point. Yet, they chose to do this and piggyback on the current public narrative against tech giants’ anti-competition behavior for publicity gain and to strong-arm Apple. I don’t know for sure, but I can certainly see where such a sentiment comes from.

The price of taking advantage of a platform is that you have to follow the platform’s rules and be at its mercy. But if Apple decides to use its power in this case, it should give a better explanation as to the inconsistent application of its own rules and start being more consistent. Otherwise, it will create bad blood between itself and a key party that contributes so much to the ecosystem. Plus, well, that’s exactly the behavior of a bully. Exert power just because it can.

Regarding the “Apple Tax” on services that compete with Apple’s, I think it will be debated and decided in court. We can have many folks argue on each side’s behalf, but like other controversial issues, we likely won’t have a solution unless a court renders a decision.

Cobranded Credit Cards and Apple Card

In this post, I’ll try to deduce the reasons why Apple and Goldman Sachs decided to collaborate on Apple Card. What follows in this entry is my deduction from available information and based on my experience working in the credit card industry. First, I’ll touch on the concept of cobranded credit cards and what brands and issuers often get out of a partnership. Second, I’ll talk a bit about Apple Card. Last, I’ll give my thoughts on why Apple and Goldman Sachs may benefit from their relationship. These are my own thoughts only and if you have any thought or material that can contribute to the topic, I’ll appreciate it that you share with me.

Cobranded Credit Cards

You probably have seen a few cobranded credit cards before at popular stores or when you fly with domestic airlines

Source: Google Images

So, what exactly do brands and issuers get for working on cobranded credit cards?

Every brand wants to establish as close a relationship with consumers as possible. One of the popular methods is through a credit card with exclusive benefits. However, brands would be subject to a lot of regulations if they issued credit cards on their own. There would be also a lot of expenses that’d go into servicing accounts. No brand wants that extra burden in addition to running their own business. That’s why they need financial partners.

To compensate an issuer for bearing the risks and operational expenses, a brand usually takes care of the cost of exclusive brand-related benefits. For instance, shoppers receive 5% cash back at Target when they use Target credit cards. I don’t know the exact detail, but my guess is that Target will be responsible for most of the cash back, if not all. Additionally, brands can assist issuers with acquisition costs. Issuers spend thousands of dollars, if not much more, every year to acquire new customers. Brands have an already established relationship with their customers, brand awareness and financial resources that can help issuers in this regard.

On the other hand, issuers are responsible for dealing with financial regulations and servicing accounts. That’s why issuers try to sign as many partners as possible to leverage economies of scale. A small number of partners wouldn’t make operational expenses justified.

Issuers also have to compensate partners for leveraging their brand names. Agreements between issuers and partners vary on a case-by-case basis, but I wouldn’t be surprised if an agreement featured:

  • An issuer pays a partner for each new acquired account and a smaller fee for a renewal
  • An issuer pays a partner a fixed percentage on total purchase volume
  • An issuer pays a partner a fee when accounts make the first purchase outside partners’ locations

What do issuers get in return?

Issuers, of course, keep all financial charges and fees such as annual fees, cash advance fees or late fees. Besides, issuers can generate revenue from interchange fees. In every transaction, a merchant bank which works with a merchant has to pay an issuing bank which issues a credit card to the consumer who shops at the merchant a small fee for accepting credit cards as payment. Payment networks like Visa or Mastercard act as a middle man between a merchant bank and an issuing bank, and decide how big the fee, which is called interchange, should be. What I just describe is a gross simplification of what transpires behind the scenes in a couple of seconds or less in a transaction. There is a lot more to it. Essentially, for the sake of simplicity, just imagine that for every transaction, an issue bank receives 2% of the transaction volume in interchange fees. So if an issuing bank handles $1bn in transaction a month, that bank will get $20 million in interchange fees. Lastly, as mentioned above, issuers can also leverage partners in terms of acquisition costs.

IssuersPartner Brands
Responsibilities– Service accounts and handle regulatory compliance
– Bear risks of charge-off
– Compensation to partners 
– Additional rewards expenses as selling points to consumers
– Assistance in acquiring new accounts
Benefits– Financial charges and fees
– Interchange fees
– Marketing leverage from partners’ outreach
– Deepen relationships with customers
– Compensation from issuers
Table 1

Apple Card

Apple Card is an Apple-branded credit card issued by Goldman Sachs. You can only apply for an Apple Card via your wallet app on Apple-produced devices such as iPhone or iPads. The Card is so synonymous with Apple that you can barely hear about Goldman Sachs.

Apple reportedly will offer monthly payment plans for iPads and ...
Source: The Verge

Apple Pay’s selling points include:

  • No fees
  • Simple application process
  • Premium look and feel
  • Unlimited 2% cash back when you pay with Apple Card using your Apple Watch or iPhone
  • 3% cash back from select merchants such as Uber, T-Mobile, Nike, Walgreens, Duanereade and of course, Apple itself
  • Security as each transaction must be verified either by Touch or Face ID
  • Apple and Goldman Sachs promise not to sell consumer data with a 3rd party for marketing purposes

What’s in it for Apple and Goldman Sachs in launching this Apple Card?

Goldman Sachs isn’t know for consumer banking. It’s known for its investment banking business. Apple Card is the first attempt at consumer banking from the renowned company. As the issuer, Goldman Sachs (GS) will have to deal with all regulatory and security challenges while bearing the risk of charge-off. They will also take part in servicing accounts, but the work is shared with Apple as Apple Customer Service agents handle upfront communication with users. Since Apple Card has no fees whatsoever, what GS can benefit from this collaboration, I allege, include

  • Interchange fees
  • Insane marketing power from Apple and its global footprint in the form of millions of installed iphones
  • I imagine that if this collaboration succeeds, GS will want to sign more partners to achieve economies of scale, leveraging what they learn from operating Apple Card

Apple allegedly wants to launch Apple Card for two reasons: 1) to deepen relationship with users, to motivate them to buy their hardware more 2) to generate more service revenue. As a technology partner, I don’t imagine Apple will have to deal with fraud, regulatory or security concern. In exchange, Apple provides marketing outreach and technical assistance in incorporating Apple Card into its ecosystem. Additionally, from what I read, customers who need technical assistance will reach out to Apple Customer Service agents. Hence, that’s also what Apple brings to the table. Also, the company may allegedly be responsible for Apple-only rewards and interest free payment plans when customers buy Apple products. In terms of rewards with 3rd parties such as Nike or Uber, I can’t find any relevant information. If I have to guess, my money will be on Apple taking the bill for extra rewards as well.

Goldman SachsApple
Responsibilities– Service accounts and handle regulatory compliance
– Bear risks of charge-off
– Compensation to partners 
– Market Apple Card to users 
– Offer technology to make the card work with Apple Pay and its devices
– Help service accounts 3% cash back on Apple products and services
– Interest-free payment plan for customers when buying Apple products
Benefits– Interchange fees
– Leverage marketing power from Apple and its footprint
– Deepen relationships with customers
– Compensation from Goldman Sachs
Table 2

According to Apple, the number of transaction through Apple Pay has grown substantially since it was launched. As of Jan 2020, the annual run rate for Apple Pay reached 15 billion transactions. Not all Apple Pay transactions are through Apple Card. The card debuted only in August 2019. Since Apple doesn’t offer details on Apple Card transactions, let’s run some scenarios by assuming that the annualized transaction count for Apple Card is 500 million to 2 billion. If average ticket size (dollar amount per transaction) ranges from $20 to $60, the transaction volume will be as follows

 Annualized Apple Card Transactions
             500,000,000                         1,000,000,000                2,000,000,000 
$20$10,000,000,000$20,000,000,000$40,000,000,000
$40$20,000,000,000$40,000,000,000$80,000,000,000
$60$30,000,000,000$60,000,000,000$120,000,000,000
Table 3

Interchange fee rate varies depending on numerous factors. However, if we assume that the rate is 2% of purchase volume, based on the scenarios above in Table 3, GS would receive the following as interchange fees

Annualized Apple Card Transactions
             500,000,000                         1,000,000,000                2,000,000,000 
$20$200,000,000$400,000,000$800,000,000
$40$400,000,000$800,000,000$1,600,000,000
$60$600,000,000$1,200,000,000$2,400,000,000
Table 4

As you can see, the more Apple Card transactions, the bigger the interchange fees for GS. Given that Apple has legendary marketing prowess, an installed base of millions of devices and rising demand for contactless payments, the numbers may even grow bigger in the near future.

On Apple’s side, it is reported that Apple takes 0.17% cut on each Apple Pay transaction. In terms of Apple Card transactions, I think the cut will be even bigger, but won’t be bigger than GS’ interchange fee rate. Since we assume that GS receives 2% in interchange fee rate, let’s say Apple receives somewhere from 0.2% to 1% on purchase volume. How much would Apple receive, using the lowest purchase volume for each scenario of transaction count (first row respectively in Table 3)?

 Annualized Apple Card Transactions
             500,000,000                         1,000,000,000                2,000,000,000 
0.20%$20,000,000$40,000,000$80,000,000
0.50%$50,000,000$100,000,000$200,000,000
1%$100,000,000$200,000,000$400,000,000
Table 5

A few days ago, Apple and Walgreens announced that new Apple Card customers would receive $50 bonus in Apple Cash after spending at least $50 at Walgreens using the card. The promotion is valid till the end of June. It signals to me that 1) Apple wants to acquire more customers for Apple Card and 2) Apple may also receive a fee whenever a new customer comes on board. I don’t imagine $50 bonus would be paid for Walgreens or GS. Why would they do so when there is no sustainable benefit? If Apple shoulders the cost of the acquisition bonus, or at least most of it, it will likely not make financial sense to just rely on fees from card purchases to recoup the investment.

In sum, I hope that the information I shared and my thoughts are useful in helping you understand more about the credit card world that is complex yet fascinating. I spent quite some time thinking about the collaboration between Apple and Goldman Sachs as the presence of a tech giant and an investment bank in the consumer banking area is quite interesting. There isn’t much information out there so I would love to learn from whoever has useful information to contribute to the topic at hand.

Disclaimer: I own Apple stocks in my personal portfolio

A few notable graphs from Amazon and Apple earnings

Tech giants reported their earnings this week and proved how resilient their businesses are amid arguably the most challenging environment ever. In this post, I’d like to demonstrate with visuals how important AWS is to Amazon, and how China, Wearables and Services are to Apple while it has become less of an iPhone company.

Amazon

Apple

Teams vs Zoom and the art of reporting confusing numbers

Since the stay-at-home order started around the globe, demand for videoconferencing has skyrocketed. Facebook even introduced a new video service for its users. What has caught my interest, though, is the battle between Zoom and Teams by Microsoft. Zoom stock has surged significantly for the past two months, especially after it reported that it had 300 million daily active users. Or so we thought

Zoom has confused the comparisons, though. Zoom originally stated it had “more than 300 million daily users” and that “more than 300 million people around the world are using Zoom during this challenging time.” Zoom later quietly deleted these references from its blog post, and it now only claims “300 million daily Zoom meeting participants.”

The differences are important, as is Zoom’s transparency around them. Daily meeting participants counts multiple meetings, so if you have five Zoom or Teams meetings in a day, then you’re counted five times. Zoom has not yet revealed exact daily active user counts, and it looks like Microsoft could be a lot closer to Zoom usage than many had assumed.

Source: The Verge

For comparison, Microsoft announced today that it reached 200 million daily meeting participants in April. Since the two use the same label, does that mean Zoom has taken Teams’ lunch? Not quite there yet.

The daily meeting participant count can be misleading. For example, Teams doesn’t have a limit on call duration, to the best of my knowledge, while Zoom puts a 40-minute limit on calls that involve more than three participants. So if the participants are willing to set up another call after the free 40 minutes expires, it will bloat up the daily meeting participant count, even though it’s still one meeting that has the same folks involved.

Daily usage can be misleading as well. For instance, I use Jabber at work and it is powered up automatically on my work station. If I don’t interact with anyone on the app, does it mean I am among the daily users still? To be fair, the two companies don’t elaborate on this, but there is one comment from a Microsoft executive

It’s been phenomenal, if I’m honest with you. Let me just start with the DAU thing because there’s a lot of needling on this and we define the DAU. Daily active user for us is the maximum number of users who take an intentional action over a 24-hour period. That’s really important for me to hit. What we call passive actions do not count. So auto boot does not count. Minimizing a window does not count. Closing the app does not count. We also got a lot of questions about that. Skype does not count. So when we release our numbers, we just don’t feel like we want to get in the weeds of kind of argue with people, but the DAU very real.

Source: Microsoft

Another reason is the mix of added users/usage. In its latest investor call in March, Zoom’s CFO commented the following

Image

Granted, there may have been more development since the comment. Frankly, it’s unclear how the surge in usage benefits Zoom financially without the company’s disclosure. Nonetheless, it’s not surprising that the majority of the increased usage comes from the free tier.

On Teams side, it’s not particularly providing a clearer picture either. Back in January, during the Q2 earnings call, Microsoft announced they had 20 million daily active users. 3 months later, the figure stands at 75 million. Quite an achievement. But like Zoom, Microsoft has a free tier that allows video or calls. As a result, barring a comment from the Seattle-based company, it’s not clear how many Microsoft added as paying customers.

Source: Microsoft

The point is that it’s really hard to determine which videoconferencing tool is the better performer between the two leaders Zoom and Teams. The way data is reported by the two companies makes it really challenging to have an apple-to-apple comparison.

Contactless and card penetration trend from Visa.

In this post, I want to share with you what I found while I was doing some research on credit card trends.

Tap to pay

  • As of March 2020, one in three card present transactions by Visa is tap to pay, up from one in four a year ago (1)
  • In 2019, excluding the US, 55% of Visa transactions were contactless (1)
  • In the US, there are 145 million contactless credit cards in circulation and Visa expects that the number will reach 300 at the end of 2020 (1)
  • 17 out of the top 25 issuers are fully issuing tap to pay cards. 8 out of the top 10 merchants are accepting tap to pay. 60% of all in-store transactions in the U.S. are now taking place at terminals that are enabled for tap to pay. (1)
  • Globally, tap-to-pay has resulted in 20% life in card transactions. (2)
  • In the US, tap-to-pay cards led to plus 4 more transactions per month and $160 increase of spend per month (2)
  • “CEMEA now has the highest tap to pay penetration of any Visa region. 2 of our CEMEA countries, Russia and Georgia, are in the top 10 tap to pay countries in the world. Georgia is, in fact, number one, with an incredible 96% tap to pay penetration.” (2)
  • 77% of active terminals in South America are contactless-enabled. Tap-to-pay penetration was doubled in one year. Chile and Costa Rica have a leading 50% contactless penetration
  • “For example, on transit for London services, we saw double the transactions and 70% higher growth in spend by tap to pay transport for London users versus those not using tap to pay. In New York City, Visa is partnering with Chase to promote tap to pay in and around subway stations that are contactless enabled. As a result, Visa has crossed 4 million taps within the MTA system and contactless payments will be accepted system-wide by the end of 2020.” (2)’
  • In Asia Pacific, tap to pay penetration increased from 29% in 2016 to 41% in 2019. Post activation, tap-to-pay card saw 3.8 times more transactions and 1.8 times more spend per card. Specifically, tap-to-pay cardholders made 3.9 times more transactions at fast food restaurants and 2.3 times more at supermarkets and grocery stores
Source: Visa

Card Penetration

  • On average, an American makes 12 cash transactions a month. 55% of all transactions under $10 were made in cash (2)
  • In daily segments such as gas or supermarkets, card penetration stood at 60% for the US (2)
  • Retail digital spending has grown at CAGR of 23% since 2016, yet it still only makes up 14% of global retail spending (2)
  • Cash and check penetration remains at 92% for Sub-Saharan Africa, excluding South Africa (2)
  • “The macro trends are incredible. It (Sub-Saharan Africa) has the fastest-growing population among major regions, double the global average and half of sub-Saharan Africa is under 18 years of age. It has 46 countries, and 6 of which are in the top 10 fastest-growing economies in the world. The market is still greenfield. Cards have only penetrated 3% of PCE, and 2/3 of the population does not have a bank account. Yet Africa is home to nearly half of all mobile money users. Sub-Saharan Africa is mobile first. People use their mobile phones daily to make and receive payments. This opens immense, immediate and long-term opportunities for Visa.” (2)

References

  1. Visa Inc at Wolfe Research FinTech Forum (11th March 2020)
  2. Visa 2020 Investor Day

Disclaimer: I own Visa stocks in my personal portfolio

Kindle App vs iBooks on iOS 13

Amazon isn’t exactly known for its design capability, yet I am relatively pleased with the Kindle App on iOS 13. Below is a brief comparison between the two apps in terms of features and UX.

Appearance

The Kindle app offers different options to adjust the font, the theme, the spacing between rows, the brightness and the view.

With the exception of the ability to change spacing between rows, all the other features are very similar to what iBooks provides. Personally, I appreciate the green theme available on Kindle.

Looking up and translating words

Additionally, readers can translate, look up unknown words and learn more about them via Wikipedia inside the Kindle app handily. All readers need to do is to select the word and the features are automatically presented.

On iBooks, it’s a little bit different. After clicking on a word and choosing “Look up”, readers will be taken to a page that includes various options related to the word in question

Taking notes

It’s a little bit frustrating to take and copy notes on iOS. As the short video shows, users have to select a block of text manually again for any use.

If users want to use the copied text somewhere, iOS has a default footnote that comes with every single copy. The note itself reminds users of the title and author at hand, but it creates another step that becomes annoying if repeated.

On Kindle, taking notes is a bit easier. A whole block of text can be chosen and copied with only a touch of your fingertip. Additionally, there is no default footnote as in the case of iBooks.

Flashcard

Kindle has one feature that is absent on iBooks: Flash Cards. It’s pretty handy for those that like to take notes and come back later to test their memory.

In short, the two apps provide very similar core functionalities. The difference comes, I suspect, mainly from special use cases. Personally, because I often copy quotes and notes from books to this blog in my book review entries, I prefer Kindle to iBooks.