Business Unlimited Ultimate+ for iPhone

Small business owners, you may want to pay attention to the new subscription that T-Mobile and Apple just announced today. Called Business Unlimited Ultimate+ for iPhone at $50/month/line, new customers with 6 lines will receive:

  • Unlimited text, call and smartphone data domestically
  • 200 GB of hotspot data per month
  • Unlimited Wi-Fi on select flights from American, Delta, and Alaska Airlines
  • Unlimited text and data while overseas, including 5GB of free high-speed data per month
  • Each employee on a new line gets a new iPhone 13. All the lines get Apple Business Essentials, which includes device management, 24/7 Apple support, and iCloud backup and storage into a single subscription, and Apple Care+. The two Apple services in total cost around $13 per device per month.

T-Mobile business customers can add Apple Business Essentials and/or Apple Care+ separately without a group plan and pay the standard subscription fees set by Apple.

In addition to the new Ultimate+ package, T-Mobile already has 3 existing small business plans. Compared to Ultimate+, Business Unlimited Ultimate (BUU), the highest among the existing plans, offers 100GB less in hotspot data per month, no iPhone 13, no Apple Care+ and no Apple Business Essentials. On the flip side, it does have Microsoft 365 Business 1 Basic and 1 Standard license ($25/month value) and usually costs $40/month/line ($30 now as a limited-time offer). Since each iPhone 13 costs at least $700, small businesses likely find net benefits from Ultimate+, even though they will have to pay more every month for each line.

What I really don’t like so far about this deal is that there are plenty of terms & conditions that can catch customers off guard. T-Mobile makes it clear that $50/line/month doesn’t include taxes and fees, but stops short of explaining in details and an easy manner what those fees are and when they are applied. I get it. It’s hard to make any website appealing while displaying page after page after page of terms and conditions. However, companies usually obscure the important details and “force” customers to accept the terms and conditions before making a deal. I am afraid this won’t be an exception to the rules, based on the reputation of these companies.

What’s in it for T-Mobile?

The press release from the communications giant is that Ultimate+ is the first and only wireless plan in the country as of now that offers Apple Business Essentials and Apple Care+. I looked at the websites of Verizon and AT&T and indeed no plan can match the latest offering from T-Mobile. What Apple brings to the table will help their partner stand out from competition and attract small business customers. However, I remain skeptical of how much T-Mobile can benefit from Apple Business Essentials. Here is why.

To have at least 6 employees who actually NEED 6 new iPhones and data to do their job, a small business has to reach a certain scale. A team of two or three entrepreneurs likely won’t be the target audience of this wireless plan. Even if a small business meets the scale requirement, the expense won’t stop there. A phone is NOT the primary technology tool to work. You need a laptop or a PC. Apple Business Essentials only offers the maximum value when all the devices are in the Apple ecosystem. Hence, it will cost a small business more to cover Apple Business Essentials for the additional hardware, let alone the Apple Care+. In that case, a business owner will wonder if it is really necessary to shell out at least $300/month for Ultimate+. Or will it be better to just cover Apple Business Essentials for the laptops? Those who can justify the expense will even have to have a bigger operations scale. The higher the required scale, the less I think the impact that this new service will have on T-Mobile.

What’s in it for Apple?

This partnership with T-Mobile provides Apple with another channel to grow Apple Business Essentials. It’s logical to combine a device management subscription with a wireless plan. Instead of spending money and growing the workforce to market the subscription, through this collaboration, Apple can leverage T-Mobile salesforce and marketing efforts. After all, T-Mobile is the second biggest carrier in the country and has the scale as well as resources that Apple requires.

Then, why not Verizon or AT&T? I don’t know how Apple executives made this decision, but one possible reason is the advantage in 5G that T-Mobile has over its rivals. Contrary to AT&T and Verizon , which prioritize download speeds at the expense of coverage, T-Mobile is willing to lower the top speed in order to widen their availability. This approach leads to the highest customer satisfaction with T-Mobile 5G connection.

Source: Speedcheck
Source: PCMag

Know for its obsession with user experience, Apple doesn’t want spotty 5G services to ruin their device users’ experience. From the user experience and marketing channel perspective, I can see why Apple chose T-Mobile. But there could be plenty of other reasons, namely T-Mobile being the only carrier willing to bend to Apple’s will. Nonetheless, as an Apple shareholder, I am happy to see Apple’s push into the SMB world. This won’t be their last move.

Apple Pay Later

WWDC is where Apple shows off its new software updates and sets the expectation for what is to come in the next year. It kicked off on Monday with a flurry of announcements on iOS16, MacOS Ventury, watchOS 9 and iPadOS 16. Among these announcements, I want to focus on one that is really interesting from a financial product standpoint and, to me, the next step forward towards making Apple not just a consumer brand. Per Apple on Monday:

Apple Pay Later provides users in the US with a seamless and secure way to split the cost of an Apple Pay purchase into four equal payments spread over six weeks, with zero interest and no fees of any kind.3 Built into Apple Wallet and designed with users’ financial health in mind, Apple Pay Later makes it easy to view, track, and repay Apple Pay Later payments within Wallet. Users can apply for Apple Pay Later when they are checking out with Apple Pay, or in Wallet. Apple Pay Later is available everywhere Apple Pay is accepted online or in-app, using the Mastercard network.4 Additionally, with Apple Pay Order Tracking, users can receive detailed receipts and order tracking information in Wallet for Apple Pay purchases with participating merchants.

When the news on the service broke on Monday, it triggered a lot of questions due to the lack of details. Until yesterday when Apple agreed to disclose more information. Per CNBC:

A wholly owned subsidiary of Apple will check user credit and extend short-term loans to users for Apple Pay Later, the tech giant said. Apple has partnered with Mastercard, which interacts with the vendors and offers a white label BNPL product called Installments, which Apple is using. Apple Card issuer Goldman Sachs also is involved as the technical issuer of the loans and is the official BIN sponsor, the company said. But Apple is not using Goldman’s credit decisions or its balance sheet for issuing the loans.

Apple will run a soft credit check to ensure that borrowers are capable of paying back the loans, which will likely be capped at around $1,000, the company said. If Apple Pay Later loans aren’t repaid, then Apple will no longer extend those users credit. But the company said it won’t report the missed payments to credit bureaus. Apple will initially launch Pay Later in the United States

Per Bloomberg:

A wholly owned subsidiary will oversee credit checks and make decisions on loans for the service, which is called Apple Pay Later. The business — Apple Financing LLC — has necessary state lending licenses to offer the feature, though it operates separately from the main Apple corporation, the company said in response to Bloomberg questions. 

Apple has been working to move many elements of its financial services in-house as part of a secret initiative dubbed “Breakout.” In addition to taking on lending, credit checks and decision-making, Apple is working on its own payment processing engine that may eventually replace CoreCard Corp., Bloomberg reported in March. It’s also working on new customer-service functions, fraud analysis, tools for calculating interest and rewards for other services.

The company is also working on a longer-term “buy now, pay later” program called Apple Pay Monthly Installments, Bloomberg has reported. While the shorter-term Apple Pay Later offering doesn’t use Goldman Sachs or other major partners, the longer-term plan is likely to rely on an array of other companies — including Goldman Sachs — that could offer different plans and interest rates. 

The new revelations shattered some of my original assumptions. At first, I thought users could turn on the payment plan after the fact, just like what Affirm Debit+, American Express or Chase offers. Now, it seems shoppers have to choose upfront whether to use an installment plan. Second, I didn’t expect Apple to go as far as securing state licenses in order to offer loans. The report from Bloomberg suggested that the company had a long-term and ambitious plan regarding financial services, a plan that is big enough for them to take on more compliance work, the underwriting itself and possibly the loan balance on its balance sheet. Nonetheless, because this is Apple, a company known for being a control freak over user experience and key capabilities, its desire to underwrite loans, process payments and battle fraud are totally on brand.

Even though the newly reported details are helpful, I still have some lingering questions that I’d love to understand more:

  • The transaction amount is currently capped at $1,000. Is there a minimum limit? Can I still go to a restaurant and put my dinner expense of $20 on a payment plan?
  • Apple Pay Later is slated to go live in the US later this year; which is not a surprise. If there is a plan to expand internationally, how long will that take? Apple Card went live almost three years ago and it’s still exclusively available in the US
  • Costco doesn’t accept Mastercard at its stores. Can I still use Apple Pay Later there? That seems like a significant use case for shoppers in the US
  • What does the application process look like? I can’t imagine that any cashier or customer would wait comfortably for a two-minute in-store Apple Pay Later transaction
  • iPhone is very popular among young folks who don’t have a lot of credit history. This type of financial product definitely resonates with them. How much risks would Apple tolerate from this population?
  • What is the unit economics of a transaction? How much would Apple charge merchants?

BNPL providers usually charge 2-6% of a transaction amount. These providers argue that they earn this cut because they raise the average order volume (AOV) as well as bring more leads to a business. While Apple Pay Later will also help merchants increase the AOV, what would Apple do to generate more leads at the top of the funnel? We already see promotional emails like this from Apple, but will Apple add a Deals tab somewhere in the Wallet?

Implication for Apple’s future

For the argument sake, let’s assume Apple will earn in revenue 3% of all Apple Pay Later transaction amount, including the 0.15% cut it already has on every Apple Pay transaction. Affirm did $13 billion in loan volume in the US in the last 12 months. If Apple Pay Later had the same volume, a 3% cut means that the company would earn almost $400 million in revenue, before expenses. It’s not nothing, but it’s still essentially a rounding error for a machine that generated $365 billion in revenue last year.

The bulk of the value that Apple Pay Later brings is to increase the stickiness of the Apple ecosystem. Existing users have one more reason to stay locked in. Those on the fence have one more reason to lean towards Apple. Merchants will be more motivated to add Apple Pay to their checkout pages. Regarding merchants, I do think Apple has a big plan in place to become more than just a consumer brand.

Going back to the first announcement, buried inside the text and overshadowed by the installment product is the fact that consumers will soon be able to track orders from Wallet on Apple Pay purchases. For this to happen, Wallet will effectively become an ordering system where merchants can process orders and have the delivery status updated. Instead of having an iphone as a payment reader and another software as an ordering system, Wallet can function as both. All a merchant needs is an iPhone. Here is how I see it:

First, Apple launched Apple Business Essentials, a subscription program that helps small companies manage their Apple devices. Then, the company introduced Tap To Pay with iPhone, which allows merchants to use their iPhone as a payment terminal without any extra hardware. A few days ago, Block (Square) said that they would bring Tap To Pay with iPhone to Square sellers who can use their Square POS app on an iPhone to receive payments in stores. Next, Apple Pay Later offers another payment option to shoppers and all the benefits that BNPL can bring to sellers, including higher average ticket value and conversion rates. Last but not least, merchants can use Wallet as an ordering system. Can you see the picture now? Payment is an integral part of doing business nowadays. If Apple devices and services can become integral to companies’ payments, Apple will have a stronger case for Apple Business Essentials. Far-fetched? Perhaps, but I am curious to see if my prediction comes true.

Implications for other BNPL providers

CEOs of Klarna and Affirm already got on TV to appear defiant and confident in the outlook of their business. But I suspect that the last few days already triggered some serious discussions in the boardrooms. How could they not take this seriously? Apple has some advantages that none of these BNPL firms have. First, Apple is one of, if not the most, recognizable and talked about brands in the world. It doesn’t have the brand awareness debt that a newcomer in this space would have. Second, Wallet is a native app that lives on Apple devices by default and requires no further download. If shoppers don’t have BNPL apps downloaded beforehand, the only way these firms can process loans is through merchants’ checkout pages. Unfortunately for them, Apple Pay is at least as popular a checkout button as any. Plus, if Apple can manage to push Apple Pay Later to Apple Watch, I don’t see how Affirm or Klarna or PayPal can get there to compete. Third, some BNPL firms are required to pay interests and expenses on the loans they generate. Apple, on the other hand, has an otherworldly balance sheet and generates cash as well as any company in the world. That should give Apple advantage in terms of unit economics. For now, Apple only offers one flavor of BNPL, but as Bloomberg reported, there are more to come. Hence, whatever advantage on product offerings that the likes of Affirm or Klarna have over Apple may soon evaporate.

Do I believe that this is a winner-takes-all space? No. BNPL firms will still have their space with their loyal followers and non-iOS users. However, their growth will likely be capped with the introduction of Apple Pay Later. I expect that we’ll see moves from these providers in the near future as they will try to bolster their positions while Apple Pay Later gets its feet wet.

In short, as someone who is interested in payments and invested in the future health of Apple as a company, I am excited about Apple Pay Later. Not only the service, but also what Apple does to launch it the way they do, I believe, will have an impact on the business. Personally, I am curious to see if my prediction on Apple Business Essentials will ring true. I also want to see how the BNPL space will change with the arrival of Apple Pay Later. Some already cast demise on BNPL providers as they are now just a feature that Apple offers. But I am skeptical of that view. The space is big and just because you compete with Apple, it doesn’t mean you can’t survive or grow.

Apple Q2 FY2022 Results

On Thursday, Apple announced the results of their Q2 FY 2022. Overall, the company recorded almost $97.3 billion in revenue the last 90 days, a record for Q2 in Apple’s history. That means they generated more than $1 billion a day. The 9% YoY growth is already on top of the 54% growth last year. To put it a bit more in perspective, only 26 companies in the S&P 500 had more revenue in the whole year of 2021 than what Apple made in this quarter. It’s also worth noting that these numbers were affected by the supply chain constraints. Just really spectacular! While YoY growth rates have been declining, it’s not a surprise given the rule of big numbers. Plus, this year will see some hardware upgrades that can catapult Apple’s revenue to new heights.

Product, Service and Overall Margin
Figure 2 – Product, Service and Overall Margin
Apple 4-quarter rolling average revenue
Figure 1 – Apple’s YoY Revenue Growth & Rolling Average Revenue

While Services still only makes up 20% of the company’s revenue, its gross margin is a spectacular 73% due to higher sales from advertising, the App Store and cloud services. I suspect this trend will continue in the future. It costs Apple little to offer cloud storage and how many Apple device owners who love taking photos and videos yet are limited by the free storage don’t have an iCloud subscription? Apple Care is a warranty program that gives a bit more assurances to device owners. Given that Apple products last a very long time and most customers are careful with their devices, Apple Care is a very profitable service for the company. The iconic tech giant recently launched Apple Business Essentials, which is similar to Apple Care, but for small businesses. The new service has a lot of potential and will be a great contributor to the company’s margin. Last but not least, advertising. It’s not a coincidence that every popular platform wants to have an ads solution. The demand is always there and the margin is high. Apple is still in the early stage of monetizing traffic to the App Store; therefore, will undoubtedly fine-tune its ads operations so that it will keep raking in profitable dollars.

Apple Paid Subscriptions
Figure 3 – Apple Paid Subscriptions

In the last quarter, supply chain constraints still badly affected iPad, making it the only major business segment of Apple without a YoY growth. Wearables and Services haven’t had a down quarter in the last three years. In fact, growth has been in double digits. Mac showed an impressive 15% growth on top of a 70% increase last year. According to Apple’s CFO, “we had a March quarter record for upgraders, while at the same time, nearly half of the customers purchasing a Mac were new to the product”. iPhone, led by the iPhone 13 line-up, grew by 5% after recording 66% increase last year. The company estimated that the lockdown in Shanghai will impact revenue by $4-8 billion in Q3. Hence, the winning streaks of some segments may likely come to a halt in 90 days, but since demand is very strong for Apple products, the company has reasons to be confident in the long-term health.

Apple's Business Segments' YoY Revenue Growth
Figure 4 – Apple’s Business Segments’ YoY Revenue Growth

Regarding geographic segments, Americas is a bright spot with YoY growth of 19%, better than management’s expectations. Europe was adversely impacted by the pause in Russia for a month. China is still Apple’s 3rd biggest segment, but the company warned that Covid-related restrictions would affect demand, at least for Q3 FY2022. Japan and Rest of Asia Pacific felt the impact of unfavorable foreign exchange rates.

Apple Geographic Segments' 4-Quarter Rolling Average Revenue
Figure 5 – Apple Geographic Segments’ 4-Quarter Rolling Average Revenue

Overall, it is another great quarter from Apple despite all the macro challenges. It is proof that the underlying strengths of the business are still intact and goes to show the calm and competent leadership of the management. Zoom out and you will see that there is no other company that can rival Apple in terms of product and service portfolio, the global scale and the customer loyalty. There are challenges and uncertainty ahead, including the war between Russia and Ukraine, Covid-related restrictions in China, the supply constraints, especially silicon shortages, and unfavorable exchange rates. Nonetheless, I am confident Apple will navigate through such challenges deftly and come out stronger.

Disclaimer: I own Apple stocks in my portfolio

Apple’s next growth opportunity. Disney+ added more subscribers while raising prices. ESPN+ achieved its FY2024 target

Corporate & Commercial – Apple’s next growth opportunity

Apple has always been a household consumer brand. There are still areas that the company can explore in the consumer space to fuel growth such as the global availability of their services, next generation chips, the AR glass or the long waited yet mysterious Apple Car. I remain excited about Apple’s growth prospect as a consumer staple, but Apple may be more than that in the future. There are signs lately that Apple may make a push into the corporate segment. First, it launched Apple Business Essentials, a device management service for small businesses with fewer than 500 employees. The program is still in early days, but the company already said that thousands of small businesses already participated in the program. That’s Apple’s style: choose to come to the market when a service or product is ready and deploy consistent incrementalism over time. Remember how some ridiculed their introduction of Wearables, which is now their 3rd largest business? And if they manage to build that muscle and processes to deal with small businesses, there is no reason not to think that they can expand their market and go further upstream.

Then on the earnings call, Luca Maestri (Apple’s CFO) revealed this anecdote:

Shopify, for example, is upgrading its entire global workforce to M1-powered MacBook Pro and MacBook Air. By standardizing on M1 Max, Shopify continues its commitment to providing the best tools to help its employees work productively and securely from anywhere. And Deloitte Consulting is expanding the deployment of the Mac Employee Choice program, including offering the new M1 MacBook Pro to empower their professionals to choose devices that work best for them in delivering consulting services.

Source: fool.com

I feel that M1 is the last puzzle piece that Apple needed to start making moves in the corporate market. The chip makes Apple devices more powerful and efficient, exactly what the white-collar folks like myself want and opposite of what we are used to (like all those bulky and burning Dell computers). As employees like Apple’s products, companies are more incentivized to offer such products as perks to retain talent; which plays into Apple’s hands. In the past, whether Apple’s products were the clear winners might be up for debate, but the introduction of their in-house chip put the question to rest.

This week, Apple revealed that future iOS updates would let merchants accept transactions with just a tap on their iPhones. The value chain analysis or how exactly this would benefit Apple are still question marks. I suspect Apple will take a small cut on every transaction like they do with Apple Pay transactions. Also, if merchants rely on an iPhone as a card reader, Apple Business Essentials will suddenly become an appeal so that they can manage their devices properly. These are just two early signs of what Apple can put together for businesses. I am eager to learn what they have in store because I am almost confident that they have a roadmap in mind already.

Disney+ and ESPN+ added more subscribers while raising prices. ESPN+ achieved its FY2024 target

The first quarter of FY2022 was a good one for Disney as the company continued to add more subscribers to its flagship streamer Disney+ outside of India and ESPN+ while increasing Average Revenue Per User (ARPU). The testament to the strength of a product or service lies in the ability to retain customers while raising prices. In that sense, Disney+ has so far defied critics and proven its mettle, showing that its streaming services are capable of challenging anyone else in this highly competitive market. The iconic company set the long term target of 230-260 million Disney+ subscribers by the end of FY2024. There are 8 more quarters to go. To attain that target, Disney needs to deliver a quarterly net add of at least 13 million subscribers. The company is on the right track to do so. In fact, the management said that even without the rights to Indian Premier League, the nation’s cricket competition that is arguably the biggest acquisition tool in the Indian market, it is still confident of meeting the FY2024 guide.

If you look at India, we’re certainly going to try to extend our rights on the IPL. But we’revery confident that even if we were not to go ahead and win that auction that we would still be able to achieve our 230 million to260 million. So it’s an important component for us around the world. Obviously, really important in India, but not critical to us achieving the 230 million to 260 million number that we’ve guided to.

Source: Walt Disney Q1 FY2022 Earnings Call

While Disney+ added more subscribers in the US and Canada than Netflix in the last few quarters, I don’t think that any comparison can be fair. The two streamers are operating at a different scale and life stages. Netflix is much more established and has a much bigger subscriber base. Hence, even though it added fewer customers, we shouldn’t draw any conclusion yet on either.

ESPN+ already achieved the FY2024 guide of 20-30 million subscribers. Its tally at the end of Q1 FY2022 is already 21.4 million. I am sure with an imminent international expansion and addition of rights to more sports, ESPN+ will attain the higher end of the guide range, if not exceed it.

Disney+ North America net add subscribers and ARPU
Disney+ excluding Hotstar net add subscribers and ARPU
ESPN+ net add subscribers and ARPU

Weekly reading – 20th November 2021

What I wrote last week

My thoughts on Apple Business Essentials

What I think about Apple Pay & Apple Card

Good reads on Business

HelloFresh: Delivering on Process Power. This episode goes deep into the operational aspect of Hello Fresh. I certainly under-estimated it and its operational complexity.

Macy’s CEO, a department store veteran, fights to fit in the Amazon future of retail. Macy is an interesting case study in which its online presence is so valuable that activist investors want it to be publicly traded alone, separate from the physical stores. “Of the company’s 5 million new customers that came in over the second quarter, more than 40% came to Macy’s digitally, Gennette said on the earnings call. In an effort to capitalize on its most valuable customers — those who shop at Macy’s both in-person and online tend to spend three times more than those who only shop at one or the other — Macy’s has invested in data analytics so it can follow when and what they shop, then tailor incentive programs and product messaging to them.”

Breaking Down the Payment for Order Flow Debate. A good read on the payment for order flow debate and why orders on trading apps like Robinhood are halted when there is too much volatility.

Apple is sticking taxpayers with part of the bill for rollout of tech giant’s digital ID card. As an Apple shareholder, it is good to see the power that Apple wields against even the states. As a tax payer, I am quite concerned that the few participating states so far seem to give that much ground to a private company.

The end of “click to subscribe, call to cancel”? One of the news industry’s favorite retention tactics is illegal, FTC says. I am really glad that the FTC intervened to protect consumers. If you want an example of how governments can help citizens, this case is exhibit A.

Airlines Are Rewriting the Rules on Frequent-Flier Programs—Again. “The airline will make it possible to earn elite status without taking a single flight starting in March. Credit-card miles will count more toward status than ever before. Those who are true frequent fliers will get some added benefits, and business travelers who aren’t taking as many trips will be able to boost their status with their spending. Small-business owners and others who use their credit cards a lot now can be a top dog at American before they ever lift the buckle on a seat belt. Delta says it will automatically roll over status that SkyMiles customers have this year to 2022. In addition, it will pool qualifying miles earned this year and next together toward 2023 status requirements. Delta is also offering bonuses to qualify for elite-status tiers faster and is counting the flying that members do on award tickets toward status levels.” Another change that was encouraged by the pandemic. What doesn’t kill you makes you stronger, I guess.

What Went Wrong With Zillow? A Real-Estate Algorithm Derailed Its Big Bet. When you are in a business of risk management and become reckless and carried away by the pandemic, the consequences can be dire.

Stuff I found interesting

Japanese Philosophies That’ll Help You Spend Money Consciously. “Chisoku talks about being content with what you already have. Wabi Sabi talks about finding beauty in imperfection. As things age and decay, they become more beautiful. Mitate teaches us that every object has more than one purpose.”

New Zealand’s 180-million-year-old forest. “While most petrified forests are far removed from the modern forests that grow near them, Curio Bay’s petrified forest, which is a representation of an ancient Gondwana forest of cycads, gingkos, conifers and ferns, still has its descendants in the present-day forests found here. About 80% of New Zealand’s trees, ferns and flowering plants are native having evolved in isolation for millions of years.”

One of the World’s Poorest Countries Found a Better Way to Do Stimulus. “In Togo, a nation of about 8 million people where the average income is below $2 a day, it took the government less than two weeks to design and launch an all-digital system for delivering monthly payments to about a quarter of the adult population. People such as Bamaze, with no tax or payroll records, were identified as in need, enrolled in the program, and paid without any in-person contact.”

Stats

The state’s venture capital share has jumped from $300 million in 2016, to almost $3.1 billion in 2020 — 866%– according to Crunchbase. That makes it the state with the fastest growing venture capital rate.”

Drug overdose deaths exceeded 100,000 in the U.S in the 12 months ending April 2021

Out of 100 children born prematurely in Vietnam every year, 17 die in the first 28 days. My country has a long way to go in terms of public health.

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Source: Dave Ambrose