Apple Card grew balance by $1 billion in 3 months, up 50% from June 2020

Apple Card’s balance grew by $1 billion (50%) in 3 months

Back in July, Goldman Sachs, the issuing bank for Apple Card, reported this in its Q2 earnings call:

Funded consumer loan balances remained stable at roughly $7 billion, of which approximately $5 billion were from Marcus loans and $2 billion from Apple Card

Source: Seeking Alpha

Three months later, the bank said this on its Q3 earnings call this month:

Funded consumer loan balances remained stable at $7 billion, of which approximately $4 billion were from Marcus loans and $3 billion from Apple Card.

Source: Seeking Alpha

My best guess is that the figures for Q2 and Q3 were likely as of the end of June and September. In the banking world, we call them month-end balance. Both Goldman Sachs and Apple have been very tight-lipped about Apple Card. There is very little information and data publicly revealed by either party. With that being said, I do think that it’s positive for Apple and Goldman Sachs to increase month-end balance in 3 months’ time.

There are two ways that this could possibly happen. 1/ The existing accounts in the portfolio saw more usage and a higher accrue of balance and 2/ the portfolio expanded with new accounts and its balance increased. Because we are still struggling in a once-in-a-lifetime pandemic, scenario #1 seems less likely to me. Even if the portfolio’s size stayed the same in September as it did in June, the increase in balance would be much lower than 50% as we see here. Hence, it’s my belief that Apple Card portfolio has expanded and as a result, so has the balance. It’s worth pointing out that since the number of accounts likely increased yet there is no official reporting on it, we don’t really know if the average balance per account really went up from June to September. Nonetheless, a higher balance means:

  • More accounts were opened
  • Accounts were used more, leading to an increase of balance
  • Customers are more likely to revolve, resulting in interest income for Goldman Sachs

Last year, Apple announced a payment plan for iPhones with 0% interest for 24 months. In June 2020, the payment plan expanded to include other product lines:

It’s not a stretch to see that these financing options contribute to the increase in balance of Apple Card portfolio. From Goldman Sachs and Apple’s perspective, they would prefer cardholders to make purchases outside Apple, but because there is little information officially revealed, there is no way to dissect how the portfolio is really performing.

At $3 billion in balance as of September 2020, Apple Card portfolio has so much room to grow. Based on outstanding balance, it’s quite small, compared to other issuers, though it’s unclear whether these portfolios are strictly in the US only

  • Chase: $122 billion in balance for consumer credit card as of Q3 2020.
  • Capital One: $12 billion in balance for consumer credit card as of Q2 2020.
  • Discover: $70 billion in balance for consumer credit card as of Q2 2020
  • Wells Fargo: $36 billion in balance for consumer credit card as of Q3 2020

A persistent and lucrative clientele for Goldman Sachs

I wrote a bit about the partnership between Apple and Goldman Sachs on Apple Card here before. Now I want to add a couple of more points to the conversation.

Apple users are enduring and lucrative. Once a person becomes an Apple user, he or she likely stays in the ecosystem and buys more products and services, as proven by Apple’s financials and analyst estimates. As of Q3 2020, Apple’s Wearables made up 11% of Apple’s total revenue and was the fastest growing segment in FY2020. Apple reported over 550 million subscriptions, up by 130 million from a year ago. With the introduction of Apple One and Apple Fitness+, that figure will likely go up even higher in the near future. Once an iPhone-reliant company, Apple now finds a robust source of revenue from Services, which was responsible for 22% of the company’s top line in Q3 FY2020.

Moreover, Neil Cybart, a prominent Apple analyst and the owner of Above Avalon, reported that nearly half of Apple users owned only one device: iPhone. He also estimated that only 35% of iPhone users in the US wear an Apple Watch. These estimates indicate that more Apple users will buy addition products on top of their iPhones and become engaged at a higher level in the ecosystem.

There is no credit card that offers 3% cash back AND interest-free financing options for Apple products and services like Apple Card. Hence, Goldman Sachs has a unique access to a lucrative clientele that

  • Tends to be sticky and loyal to Apple
  • Buys new expensive Apple products regularly on a few-year basis
  • Uses their Apple Cards monthly with their service subscriptions. Working in the credit card world, I can tell you that having users engaged and actively use cards every month is one of the major concerns for issuers. With Apple subscriptions and an expanding base, albeit as small as $3 per month for iCloud, Goldman Sachs likely will get a good number of active accounts with consistent spending every month, without any acquisition expenses.

Future opportunities

At first, there were only exclusive deals with 3% cash back from Uber, Uber Eats, Walgreen, Duane Reader and T-Mobile. Since then, Apple Card has welcomed to the fold Nike in November 2019, Exxon Mobil in June 2020 and Panera in August 2020. Additionally, Apple began to have acquisition bonus campaigns for Apple Card this year. A few months ago, there was a $50 bonus for every new Apple Card user with a minimum $50 purchase at Walgreen. Just a few days ago, it was reported that there is now a $75 bonus for new Apple Card users with a qualifying purchase at Nike. The more exclusive deals like these are, the more likely consumers will use Apple Card outside of Apple. And there is no reason to believe that they won’t add new partners or have acquisition campaigns in the future.

Besides Apple Card, Apple has been consistently and regularly promoting the use of Apple Pay with ad-hoc deals such as 15% off with American Eagle in October 2020, 50% off with Snapfish in July 2020 or 30% off with Rayban in May 2020. There is no data on how many Apple Pay accounts are paired with Apple Cards. But given the fact that users can only earn 2% Apple Cash from every Apple Pay transaction by using Apple Card, I won’t surprise me that Apple Pay promotions indirectly benefit Apple Card and Goldman Sachs.

There are rumors of new Apple products in the works such as Air Tags, Airpods Studio or Apple AR glasses. The more products and resulting services there are, the better the future outlook will be for Apple Card.

Disclosure: I own Apple stocks in my personal portfolio.

Weekly readings – 3rd October 2020

What I wrote

Macroeconomic consequences of the election and my review of Long Way Up as well as the book Rage by Bob Woodward

Business

The CEO of Snowflake penned an article on culture designed to win. I am not 100% a fan of this seemingly cut-throat ideology, but it seems to work out well for him

Google is enforcing its own payment on Play Store

Axios seems to be doing quite well with 1.4 million newsletter subscribers, up from 700,000 a year ago. I always like their reporting, especially Jonathan Swan.

How mask sellers sold their goods on Etsy

This business lesson series from Protocol is pretty cool. Check it out

ARK’s bull thesis on Square and Cash App

Meat sales increased during the pandemic, with 50% of the surveyed consumers reporting buying and cooking more meat

Source: Piplsay

Technology

What Apple did behind its Scribble feature

The Verge’s interesting story on Amazon One, Amazon’s latest consumer-centric technology

What I found interesting

Once a beacon of hope garnering admiration from around the world, the US has lost a lot of respect from people around the world in the past 4 years, highlighted by its failure to deal with the pandemic

Cement is responsible for 8% of the world’s CO2 emissions

An unprecedented look into Trump’s tax returns by The New York Times. You can say a lot of things about NYT, but this piece alone should earn them a lot of subscriptions. Excellent work by the journalists involved.

Germany has its own Fauci, but the country actually listens to him

Weekly readings – 26th September 2020

What I wrote

Some data points and arguments in favor of Apple and its App Store guidelines

My review of the book: The Psychology of Money

Business

How Wegmans Keeps Winning

A bear case on Microsoft Azure

Innovation is rampant in the fintech world and this new idea for a credit card is one of them

An investigative piece on how Mark Zuckerberg responded to criticisms from his own ranks

The SaaS Financial Model You’ll Actually Use

Technology

The secret history of Windows on Surface Duo

Adobe introduced Liquid Mode in even Free Adobe Acrobat Reader! It makes changing a PDF’s content so much easier. Try it out!

What I found interesting

In the last 30 years, under-5 child mortality rate has dropped from 93 per 1000 children in 1990 to about 38 in 2019. A remarkable achievement

About a special Japanese citrus

South Korea managed to contain the pandemic while minimizing the impact on its economy. WSJ had an interesting piece on how it did so

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

Weekly readings – 19th September 2020

What I wrote

I reviewed a few books such as: The Anatomy of The Swipe, Tape Sucks, The Motley Fool Investment Guide, 7 Powers: The Foundation of Business Strategy

I put down some thoughts on Apple Fitness+ and Apple One

Business

A deep dive analysis into Snowflake

A study on the effect of Wikipedia on businesses

Our estimates show that adding about 2,000 characters (approximately two paragraphs) of text and one photo to a city’s Wikipedia page increased the number of nights spent in this city by about 9% during the tourist season compared to cities in the control group.6 The effect comes mostly from pages that were initially relatively incomplete. In particular, the treatment increases hotel stays by about 33% in cities which initially had very short pages in a particular language, while there was no effect on city-language combinations where the pages were well developed.

Technology

A review of Microsoft Duo by WSJ. It’s quite concerning that a $1,400 phone has a subpar camera and a buggy software

What I found interesting

A brief profile by BBC of Freiburg, a green and futuristic city in Germany

An interactive map of the Earth some 240 million years ago

A damning memo of a Facebook employee on how the leadership turned a blind eye on election manipulations. She wrote “I have blood on my hands”

The US is almost at the bottom among advanced countries when it comes to well-being of children

The Three Year Rule: How To Stay Motivated Working On A Long-Term Project

A WSJ profile on Trevor Noah and his journey from South Africa to America

According to Census, Asians had the highest median income in the US in 2019 and foreign born folks grew median income at a faster rate than native-borns

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.

Weekly readings – 12th Sep 2020

What I wrote

Three documentaries that I think will intrigue and interest you intellectually

Business

FT’s interview with Reed Hastings that gave some insights into Netflix’s culture

Contactless penetration in the US is around 5-6% while that in non-US markets is around 66%, according to Visa

Bessemer Venture Partners shared their internal memos on several investments, including those in Wix, Shopify or LinkedIn

Although interested viewers need to become a Disney+ subscriber and have to pay $30 for premier access to watch Mulan, the movie reportedly garnered $33 million in its opening weekend

An extensive investigation in Nikola and its CEO

WSJ’ profile of Alphabet CEO – Sundar Pichai

The Athletic says it hits 1 million subscribers after surviving sports shutdown

For a company whose most users are female, Pinterest has a working culture designed to instead favor men

A brief profile of Andy Sassy, the CEO of AWS

Though it has made significant strides in automated driving, owners should not rely on Tesla’s driver assistance features to necessarily add safety or to make driving easier, based on Consumer Reports’ extensive testing and experience. 

Most features within Tesla’s Full Self-Driving Capability suite worked inconsistently, including the Autopark self-parking system that has been around for several years.

Source: Consumer Report on Tesla

Technology

TikTok revealed some details regarding their highly regarded algorithms

A brief overview of the new changes to the App Store guidelines

What I found interesting

The True Story of Lee Kuan Yew’s Singapore

An excellent study on the impact of Covid-19 policies on the economic recovery

US households spent only 40% of the first and only stimulus check so far. Some used up the check while others didn’t use it at all

My thoughts on criticisms of the App Store

Should Apple benefit from the App Store?

If you invest in a restaurant, you are entitled to its benefits and profits. If you write a software from scratch, you’re entitled to the economic benefits from it. That’s how business works. A party puts time and money at risk for a shot at success. It is the case for many and should be the case here for Apple. Apple introduced the App Store in 2008 and over the years, it has invested a lot in growing and maintaining the App Store. On principle, it should be treated equally as other businesses. Some argue that Apple should not charge commission fees on its platform. Well, Apple is responsible for the store and it should be able to benefit from it the way it sees fit. If you run a restaurant and somebody comes in and asks you to not charge for food or drinks, what will you think? Insane, right?

Is 30% too high a commission?

Apple levies a 30% commission on digital goods bought through its in-app purchase. For subscriptions, the commission is 30% in the first year and drops to 15% in the second year onwards. Many have lamented that the fee is too high and it puts an enormous financial strain on developers, especially those that are already operating on a low margin. Well, there is no free lunch in the business world. Developers have access to a lucrative user base with more than 500 million paid subscribers and a billion active devices. By being on the App Store, apps can be found through the search function, as well as accessible in every corner of the world. Users can download the app in a matter of seconds with the level of trust that can be hardly found anywhere. Is it right to argue that developers should get all of those for free without having to pay? I don’t agree with that.

Some said that Apple should NOT get any compensation on a regular basis because it doesn’t contribute to the development of apps. But developers don’t pay Apple to receive development input. They pay Apple for the app distribution. No matter how good your product is, if you can’t figure out distribution and get it to the hands of customers, what worth will it be? People pay Facebook or Google for access to a select group of users. Folks pay to attend high-end conferences to mingle with executives and potential clients. Donors pay to participate in fundraising dinners to talk to lawmakers so that they can have more influence. I don’t see the problem with Apple charging developers for this limited yet important commodity: access to customers who trust Apple and are willing to pay for apps on Apple devices.

When I was researching on Wix, I came across this from its annual report:

The App Market consists of web applications that are developed by us or by third-party developers. All third-party applications undergo a limited evaluation which is focused mainly on technical functionality, and partner agreements are signed prior to publication in the App Market. We are customarily entitled to a share in 30% of net revenues from the sale of every third-party application purchased through our App Market. We are responsible for the development, operation and maintenance of applications that we create, and the third-party developers are responsible for the applications that they create. However, we may remove a third-party application at any time if it does not meet our standards or for other reasons.

Source: Wix

A short while ago, Apple commissioned an independent study on marketplaces’ take rate. When you look at what other platforms charge, the rate at which Apple sets its commission doesn’t look as outrageous as others make it out to be

Source: Analysis Group
Source: Analysis Group

Apparently, what Apple is doing is similar to the industry standards. I don’t see there is anything inherently wrong with the commission approach. As to the question of how high the commission should be, I’ll argue that it will never be low enough for developers unless it goes down to zero. Some long-time industry observers noted that developers used to pay for a much higher share of their revenue to have apps distributed in the past, before the App Store was debuted. They cheered when the App Store was introduced and the commission was 30%. Now, they are complaining that 30% is too high. I suspect that 15% will please developers more in the next two years and they will complain again after that.

Should Apple stop requiring the use of in-app purchase?

If your apps don’t generate revenue on Apple devices, you don’t have to pay Apple for anything. In fact, a study commissioned by Apple estimated that 85% of billings on the App Store in 2019 belonged solely to developers. If an app sells digital content and goods that are consumed on Apple iOS, Apple charges a commission. There are a few cases in which apps can avoid in-app purchase

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.

3.1.5(a) Goods and Services Outside of the App: If your app enables people to purchase goods or services that will be consumed outside of the app, you must use purchase methods other than in-app purchase to collect those payments, such as Apple Pay or traditional credit card entry.

Source: Apple

What these exceptions essentially say is this:

  • If a customer already has a subscription purchased before, the customer can continue to use that subscription and the app doesn’t have to pay Apple. For instance, if you install Netflix or Bloomberg app AFTER purchasing a subscription on a browser, neither Netflix or Bloomberg has to pay Apple
  • If an app acquires new users on an Apple device with its payment mechanism, it is obligated to offer in-app purchase as well and it must not use language that blatantly discourages the use of in-app purchase
  • If you book an Uber, but the transaction takes place in a car, not on an Apple device, Uber can avoid using in-app purchase. The same case applies for AirBnb rentals. If you book a room on AirBnb iOS app, but stay in a physical room, AirBnb doesn’t have to pay Apple. However, if AirBnb offers AirBnb Experiences on iOS, asks users to pay and then offers content on iOS, then it will have to pay Apple

I do think these exceptions make sense. If the consumption of goods or services takes place outside an iOS device, Apple shouldn’t benefit from that. In return for giving such apps access to users, Apple benefits from the presence of the apps that make the ecosystem and their devices more useful. Imagine how much you would like your iPhone less if it didn’t have Uber, AirBnb, Booking.com apps, just to name a few.

If Apple didn’t mandate the use of in-app purchase, how many apps would voluntarily use it? My guess is: not many. Hence, every time a user opens an app on their iPhone, they would have to go to a browser to pay for services. That wouldn’t be a nice user experience.

If Apple didn’t forbid the discouragement of in-app purchase, I imagine apps would play every trick in the book to favor their own payment mechanism. Take Turbo Tax below as an example of tricks that apps could use. In that case, Apple would be affected financially. Therefore, I can see the reasoning behind its requirement of not discouraging the use of in-app purchase. If you don’t look out for yourself, who will?

Source: ProPublica

A curated store or an open system?

Many argue that Apple should open up its walled garden like Android. The problem is that while Apple is known for security and privacy, the same can’t be said about Android, which is prone to malware. A study estimated that Android devices are 50 times more malware-affected than iOS ones. Plus, Apple is known for protecting user privacy. It went to court against the US government for that. Many users, including yours truly, appreciate it greatly.

It’s worth pointing out that Apple wasn’t the first to introduce a locked-down system that didn’t degrade. Nintendo, Sony, and Microsoft consoles restricted the software that could be modified on their host operating systems and ran with limited capabilities. This resulted in fewer support calls, reduced frustration, and limited piracy.

One of Apple’s most touted virtues is that the company creates secure devices that respect user’s privacy. In fact, they have even gone to court against the US government over security. Yet iOS remains the most secure consumer operating system. This has been made possible through multiple layers of security that address different threats.

For now, let me just say that, as a parent, there are few things that would make me happier than more stringent App Store rules governing what applications can do. In the end, I value my iOS devices because I know that I can trust them with my information because security is paramount to Apple.

In the battle over the security and privacy of my phone, I am happy to pay a premium knowing that my information is safe and sound, and that it is not going to be sold to the highest bidder.

Source: Miguel de Icaza

Opening up a platform to allow total freedom for developers may not be as good as many think. Take Facebook as an example. It strives to give everyone’s freedom to say whatever they want. The consequences are that folks use First Amendment Right to spew out misinformation and hate speech. With regard to apps on Facebook, you don’t need to look further than what happened with Cambridge Analytica.

The problem with an open platform is that giving everyone unrestricted freedom is a preclude to getting the worst behavior from them. Precisely because of that, I much prefer a curated and controlled platform. Of course, that means Apple is very powerful as it can dictate which app is distributed and how. We should definitely strive to continuously hold Apple accountable, but requiring Apple to open its marketplace isn’t the solution.

Apple stifles innovation?

Since its debut, the App Store has facilitated the introduction of many apps. Without the App Store, we likely wouldn’t have Uber, Lyft or Robinhood, just to name a few. So far, it has been a boon to innovation in my opinion.

Some argue that Apple’s iron grip on the App Store limits future innovation. Well, that may sound logical on the surface, but I really doubt the sentiment. The reason is that it’s difficult to pinpoint exactly what sort of innovation is being stifled by Apple’s rules. There are only a handful of app marketplaces for phones. Even though they differ from one another to some extent, they should work essentailly the same way. If an app can appear on Google Play, which works similarly as the App Store, it shouldn’t have to alter its core too much to be featured on the App Store. If an app cannot work on any of the app marketplace, then it’s hardly Apple’s fault that such an “innovation” can’t be brought to life.

Innovation is very abstract and can be misused as a blanket reason like “national security”. The argument that Apple stifles innovation CAN be a valid one, but as of now, I see it more like a hypothetical scenario with no evidence to back it up.

Apple’s inconsistent enforcement of its rules

In my opinion, most of Apple’s fights with developers resulted from execution failure. The rules are there, but they applied the rules differently from one case to another. To Hey as an example, the app was rejected in the beginning because it didn’t offer in-app purchase. However, the issue was that Hey’s competitors did the exact same thing, but were approved by Apple to appear on iOS. As you can imagine, laws don’t mean much if they aren’t applied fairly and consistently. It’s the same for the App Store Guidelines. To make the Guidelines more respected and mean anything, Apple must be better in its application.

Some may argue that Apple has to handle thousands of updates and apps on a daily basis, so it’s understandable that some slipped through the cracks. I’d say that as a $2 trillion company that holds so much power over us, it should be better.

Solutions to the App Store issue

The App Store Guidelines haven’t changed much since they were written. While I tend to agree that they may need updating, I struggle to see exactly how they should be. One reason is that this is a very nuanced and complicated issue. Apple has to strike a sweet balance between its own interest and the interest of users as well as developers. Only Apple has enough information to make informed decisions.

Some, including Ben Thompson, argued that Apple should update its guidelines based on the marginal cost of apps. Specifically, apps that have marginal costs should be granted a lower commission (10%) than the standard 30% now. While it may sound logical, I doubt its practicality for the following reasons:

  • What would be the thresholds for an app’s marginal cost to be qualified for a lower commission? 5%, 10% or 30%? I suspect if this approach was implemented, we would see more apps claiming to have increased marginal costs
  • How would Apple validate the marginal cost? Surely, relying purely on an app’s words wouldn’t be the case. If an app has to submit financial records, who is to say those records are correct?
  • Plus, do you really want a $2 trillion company to have financial records of thousands of private entities? I don’t.

Right now, the practical and feasible things I think Apple can do include:

  • Be more consistent in its application of the App Store Guidelines
  • Be more transparent and communicative when it comes to high profile disputes to explain its side of the story
  • Think about how to change the App Store moving forward. I am sure they would prefer not having PR onslaughts. Hence, I truly hope that somewhere inside the company, some folks are trying to figure out a solution to this problem.

One grey area that is highly complex lies in the case of Spotify vs Apple Music. Spotify refuses to adopt in-app purchases because its low gross margin doesn’t allow it to. Apple Music, which competes with Spotify, may not be subject to the 30% requirement as Spotify. Some argue that Apple, as the owner of the App Store, shouldn’t launch competing products. However, as a company, Apple should be able to launch any product or service that is in accordance with the laws. I don’t see any legal problem with the existence of Apple Music. It is, to a high degree, similar to retailers launching private labels to compete with brands. I understand that a lot of critics are vocal about this behavior, but it has been around for a long time legally and until somebody makes it illegal to do so, I don’t see why Apple should be an exception.

Summary

It comes down to essentially this: when developers benefit from the App Store, they operate on the terms of Apple. Apple gains its enormous bargaining power by expertly managing both software and hardware. The $2 trillion+ valuation, customer satisfaction and half a trillion in app sales in 2019 are both proof that whatever the company is doing works and a condemnation of the lack of alternatives.

Of course, lawmakers can intervene and force Apple to change. I believe if that is the case, the company will appeal to even the highest court in the land and actually may have a chance to win. There are appeals from tech observers that the existing anti-trust regulations aren’t modern enough for the tech giants and should be updated. I believe it will be a time-consuming and complex process and I, for one, am glad that it’s not my job.

Disclaim: I own Apple stocks in my portfolio

Likely competition for Uber/Lyft in California. Grocery delivery is growing. Apple’s response to Epic’s lawsuit

Potential competition for Uber/Lyft in California

The two poster children of ride hailing companies in the US, Uber and Lyft, are having a legal fight with the state of California. The outcome of that battle remains to be seen, but if they lose, the companies already threatened to leave the state. Meanwhile, CNBC reported that at least 2-3 ride hailing startups talked about potentially swooping in to replace Uber and Lyft if they depart. One of those startups that I found interesting is Alto. Alto is a ride hailing startup that mainly operates in Dallas and Fort Worth. What differentiates Alto from their two bigger peers is that Alto’s drivers are salaried employees with benefits. Also, drivers don’t have to worry about gas or maintenance costs. Here is what their recruitment page says

Source: Alto

Some critics of AB5, the law that can potentially cause Uber/Lyft to leave California, say that the law is flawed in that it kills the flexible schedule that drivers, classified as contractors, enjoy. That is a valid point. Some do prioritize a flexible schedule over everything else. I have seen myself several drivers who just drive on the weekends to get some more money on this side gig. These drivers likely wouldn’t appreciate entering an employment contract that would likely require them to work more than they want. Clearly, in this case, AB5 likely won’t work.

That; however, doesn’t change the fact that Uber and Lyft’s refusal to classify drivers as employees can put drivers as disadvantage. Some drivers put in a lot of working hours, but do not earn enough after they take into account gas, car maintenance expenses and dead miles (hours when they drive around without any rides). Because they are not employees, they don’t have benefits like paid time off or insurance either.

There are two separate camps in this argument with virtually conflicting interests. Whether AB5 alone is a sufficient fix remains to be seen, but the existence of companies like Alto and its willingness to enter California’s market offer proof that there is an alternative model to what Uber and Lyft stand for.

Online grocery continues to grow amid the pandemic

Since March, Covid-19 has pushed online grocery to new heights that few could have predicted. According to Brickmeetsclick, even though growth has plateaued in June, online grocery sales reached $7.2 billion and an incredible 85 million orders.

Recent market developments suggest that the trend is likely to continue in the upcoming months. Shipt announced the drop of membership requirements and instead let customers pay $10 for a single order, $9 per delivery for 3 orders and $8 for 5 orders. Additionally, Walmart and Instacart recently partnered to provide same-day delivery in four markets across California and Oklahoma. Last Thursday, DoorDash entered the grocery delivery market with DashPass, a $10/month subscription which allows customers to order and receive groceries in about an hour. Last month, Uber joined the party with their own grocery delivery option through the main Uber and Uber Eats apps. Moreover, FreshDirect unveiled its expansion into New Jersey, New York and Connecticut.

Grocers and delivery services are working in tandem to facilitate more online grocery spend. Grocers let customers receive orders at their front door, pick up and drive up at stores. Delivery services lower barriers and compete with one another to acquire users. In the near future, this battle will be very fierce and the biggest beneficiary will be the end consumers.

Apple’s legal issues with Epic Games

Apple responded to Epic Games’ lawsuit over the App Store policies. In the response, Apple offered reasons why the court should let Apple continue to ban Epic Games’ apps while the legal battle rumbles on, including:

  • Epic’s alleged harm is not irreparable. Epic’s apps will be reinstated on the App Store if the game maker removes its own payment option, the cause of its violation of the terms of services, and adheres to the guidelines that Epic agreed to from day one.
  • Epic’s alleged harm is its own doing. The game maker first asked Apple for a special treatment by creating an Epic Store inside the App Store. Then, it asked Apple to open up the App Store by allowing more payment options. After the requests were declined, Epic Games decided to circumvent the App Store policies by offering its own payment scheme, suing Apple and launching a coordinated PR attack.
  • Apple does not engage in anti-competition practices and the App Store policies are to make sure that 1/ consumers’ privacy and safety are protected and 2/ Apple gets paid for its investments

The legal document is here and if you’re interested in this kind of stuff, you should have a read.

Personally, I don’t think Epic will win this legal battle. The App Store is Apple’s investment and intellectual property. Hence, Apple is entitled to enforcing the policies on the app marketplace, the same policies that Epic Games has agreed to when it launched its apps on the App Store. Whether Apple is wielding too much power is another matter for discussion, but if you created a marketplace and invests a lot of resources into it, it’s pretty difficult to understand the sentiment that you’re not allowed to benefit from your own investments or to enact and enforce policies that you see fit.

Plus, what happened, based on the emails exchanged between Apple and Epic, seems pretty distasteful and bully-like from the latter. On 6/30/2020, Tim Sweeney wrote to Apple the following, which is part of a longer email. His requests were rejected by Apple on 7/10/2020:

Source: Scribd

On 8/13/2020, Epic wrote to Apple, declaring its intention not to follow the App Store guidelines and to take legal actions if Apple retaliated. Apple subsequently wrote to Epic twice, informing the app maker of its violations and asking it to remedy the situation. Epic Games instead sued Apple for enforcing rules on…Apple’s own app marketplace.

Source: Scribd

Since I am not a lawyer, I’ll leave the argument on legal standings to the court and the lawyers from both sides, but from a common sense perspective, I don’t see a chance for Epic here. Hey app from Basecamp had trouble with Apple before. Instead of raising a legal fuzz, Basecamp raised the issue publicly on Twitter and engaged in discussions with Apple to resolve conflicts, which it did. And Hey didn’t even demand to have its way in the App Store like Epic Games did. That’s the way to do it, not the course of actions and manner that Epic Games pursued here.

This legal battle will leave Epic’s reputation tainted while also not doing Apple’s any favor.

Weekly readings – 15th August 2020

What I wrote last week

I wrote a bit about Epic Games vs Apple, Goldman Sachs’ inroad further into consumer credit card world and the potential departure from California of the likes of Uber & Lyft

A historic day for America when Kamala Harris was named as Biden’s Vice President Candidate

My thought on Disney’s latest quarter

Business

Horace Dediu wrote a blog post answering some questions on Apple’s cash strategy

A long and informative deep dive into TikTok and what makes it great

Another deep dive by Turner Novak on Pinduoduo

Nick Sleep on Costco

Meet the Woman Who Got Joe Rogan and Michelle Obama to Spotify

Netflix Business Model & Economics 

A thread on why Avalara has real competitive advantages

Technology

Here’s why Apple believes it’s an AI leader—and why it says critics have it all wrong

How the government’s new real-time payments system could transform commerce

Apple wins a Patent for a Possible Dual Display MacBook Supporting a Virtual Keyboard & more

A potentially life-changing technology for visually-impaired folks

What’s going on with Apple Maps

What I find interesting

An inside look at a data analytics firm that Mike Bloomberg is using to help Democrats

The 19th-century entrepreneur who pioneered modern ice cream

A very long and interesting post on the bombing of Hiroshima and what was happening at the time based on recollections of a few survivors

Giant American Cars Don’t Belong on the Streets of the Future

How Taiwan’s Unlikely Digital Minister Hacked the Pandemic