Apple’s Masterstroke That Should Boost Both Hardware And Services Revenue

Summary:

• Apple Inc.’s “Tap to Pay on iPhone” augments the appeal of iPhones over competitors’ mobile devices, particularly for conducting certain types of customer-facing commerce.
• Proliferating enterprise use would also spur payment platforms / app developers to allocate more resources towards building iOS apps, as opposed to Android apps, inducing a self-reinforcing network effect.
• A growing use of third-party business-oriented apps on iPhones would also boost App Store revenue from app sales / in-app sales, and bolster Apple’s App Store pricing power.
• The rising prevalence of iPhone’s “Tap to Pay” could also boost App store advertising revenue, as app developers seek to get their business-oriented apps in front of enterprise users.
• Amid the proliferating enterprise use of iPhones, Apple could leverage the ensuing data to build services particularly targeted towards enterprise users, thereby creating new revenue streams.

Apple Inc. (NASDAQ:AAPL) has been striving to attract more enterprise users into its Apple ecosystem. Financial management services play an integral role within enterprises’ wider business systems, inducing Apple to introduce “Tap to Pay on iPhone.” Since launching it in early 2022, various payment platforms have been enabling iPhone’s “Tap to Pay” through their iOS apps, increasingly augmenting the appeal of iPhones, and bolstering the tech giant’s enterprise ambitions. The growing use of iPhone’s “Tap to Pay” by businesses is not only a boon to Apple’s iPhone/ hardware segment, but also to its services division.

iPhone’s Tap to Pay increases appeal of iPhone for enterprise use

iPhone’s Tap to Pay enables merchants to accept contactless payments on their iPhone, essentially turning the mobile device into a Point of Sale (POS) terminal. While it would not necessarily encourage all businesses to replace traditional POS hardware with iPhones, it does encourage greater use of the mobile device for commercial purposes, particularly at certain types of customer-facing businesses.

For instance, sales personnel at retail stores can accept payments from customers through partner-enabled iOS apps, such as those run by Shopify (SHOP) or Block’s Square (SQ), directly using their iPhones. This eliminates one of the cost barriers to starting one’s own business. Traditionally, people that want to open up physical commercial sites need to purchase POS hardware device(s) like registers and payment terminals, which can be expensive, particularly for price-sensitive SMEs. With the launch of “Tap to Pay on iPhone,” SME aspirants can start conducting business from anywhere, using their iPhones as payment terminals. As a result, this POS feature augments the appeal of iPhones over competitors’ mobile devices, and helps attract enterprise consumers into the Apple ecosystem. This, in turn, bolsters Apple’s ability to cross-sell more of its hardware devices for commercial use, such as iPads and iMacs.

One might wonder why Payment Service Providers (PSPs), such as Stripe and Square, which sell their own suite of POS hardware devices, would be willing to partner with Apple to enable “Tap to Pay” through their POS software apps on iPhones. After all, a growing use of iPhones as payment terminals would result in fewer sales of their own POS devices. The answer lies in Apple’s brand power. The iPhone has a massive installed base (proclaiming 1 billion active users in January 2021), and continues to grow, as CFO Luca Maestri shared on the Q4 2022 earnings call:

Thanks to our strong iPhone lineup, we set a quarterly record for upgraders and grew switchers double digits. This level of sales performance, along with unmatched customer loyalty, drove the active installed base of iPhones to a new all-time high across all geographic segments. And the latest survey of US consumers from 451 Research indicates iPhone customer satisfaction of 98%.

The growing iPhone installed base compels PSPs to enable iPhone’s “Tap to Pay” within their apps in order to stay top of mind among iPhone users that could potentially become business owners, or are already engaged in commercial activities requiring POS solutions. Merchants that want to start using their iPhones as payment terminals are required to download a supported payment app from the App Store, such as Shopify POS or Square POS. If, for instance, the merchant’s current PSP does not facilitate iPhone’s “Tap to Pay,” it could undermine the merchant’s impression of and experience with that PSP, and may even encourage them to migrate to a PSP with a “Tap to Pay”-enabled iOS app. Therefore, the prominence of the iPhone encourages PSPs to enable “Tap to Pay” as part of their merchant acquisition and retention efforts, to the benefit of Apple.

“Tap to Pay on iPhone” initiated as a partnership with Stripe and Shopify, and has since grown to partner with Block’s Square and Adyen, and will soon also be supported by financial services giants such as Chase and Worldpay. Partnerships with massive commerce platforms like Shopify and Square helps accelerate enterprise adoption, thanks to their large merchant bases and continuous merchant acquisition endeavors. Moreover, these commerce & payment platforms offer services that extend beyond payment solutions, such as CRM, team management and other essential business solutions. As more and more merchants use iPhones to conduct commerce through mobile apps, it encourages these commerce/ payment platforms to allocate more of their resources towards building apps that are compatible with iOS, as opposed to Android.

Moreover, beyond the PSP partner platforms, it can also induce other app developers to focus more on building iOS-compatible business-oriented apps, to capitalize on the proliferating enterprise use of iPhones. This, in turn, induces a network effect, whereby the growing availability of and continuous advancements in business-oriented iOS apps encourages more enterprises to use iPhones, which then further encourages commerce & payment platforms/ app developers to build (or enhance) iOS-compatible business software. This self-reinforcing network effect results in more and more iPhone (and subsequently other Apple hardware) sales, and keeps users increasingly engaged within the Apple ecosystem.

A boon for services revenue, too

A growing use of third-party business-oriented apps on iPhones would also boost App Store revenue from app sales / in-app sales, and bolster Apple’s App Store pricing power. Furthermore, proliferating enterprise use of the App Store to search for useful business apps would not only induce app developers to build more iOS-compatible commerce apps, but would also augment the appeal of advertising apps on the App store. App developers would want to get their business-oriented apps in front of the growing base of enterprise users, by appearing prominently in relevant search results, thereby improving App store advertising revenue potential.

Increased enterprise use of the iPhone in general would also yield Apple insight into how the device and inherent software is used in professional contexts. This data could subsequently feed into the company’s endeavors to innovate new products and services, particularly aimed at enterprise use. Apple’s suite of services has mainly been oriented towards general consumer needs up till now. Revenue from the company’s services segment has witnessed a slowdown in growth lately, only growing 14% year-over-year in fiscal 2022, compared to 27% in fiscal 2021.

Keep in mind that Apple faces tough comps from the pandemic boom. Nevertheless, investors are keen to see how Apple strives to boost services revenue growth going forward. Creating enterprise-oriented services is one route the company could take. Amid the proliferating enterprise use of iPhones, Apple could leverage the ensuing data to build services particularly targeted towards enterprise users, thereby creating new revenue streams, and potentially re-igniting services revenue growth.

Summary

Progressively offering merchants “Tap to Pay on iPhone” through a growing number of partnerships with PSPs is certainly a meaningful step forward towards Apple’s enterprise ambitions. The POS feature augments the appeal of iPhones over competitors’ mobile devices, particularly for conducting certain types of customer-facing commerce. Proliferating enterprise use would also spur commerce & payment platforms / app developers to allocate more of their resources towards building apps that are compatible with iOS, as opposed to Android. This would induce a self-reinforcing network effect encouraging greater use of the iPhone for commercial purposes.

Consequently, the rising prevalence of iPhone’s “Tap to Pay” could also boost App store advertising revenue, as app developers seek to get their business-oriented apps in front of enterprise users in an opportunistic manner. The proliferating enterprise use of iPhones would also yield insights into commercial use of the device, which Apple could leverage to build a new line of services particularly targeted towards enterprise users, thereby creating new revenue streams.

Apple sells multiple hardware products and services, which investors should consider in aggregation when making investment decisions. Given that this article focuses specifically on iPhone’s “Tap to Pay” for commercial use, a neutral ‘hold’ rating will be assigned to Apple stock.

Disclosure: I/we have a beneficial long position in the shares of SHOP either through stock ownership, options, or other derivatives. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.