$1 Trillion Reasons Apple Wants In On This Market

When a company with an almost $650 billion market cap moves into a market, everyone else takes notice. Apple (NASDAQ: AAPL) is generating a lot of press, over its rumored peer-to-peer payments addition to Apple Pay. The peer-to-peer payments business is estimated to be a $1 trillion-dollar opportunity. For a company that just reported over $51 billion in revenue, this is the type of business that gets Apple investors excited. One stock that immediately took a hit on the news was PayPal Holdings (NASDAQ: PYPL), which dropped by less than 2%. Was the PayPal selloff warranted, and more importantly what does this mean for Apple investors?

Apple Pay with a Twist

Apple’s peer-to-peer service was actually mentioned as far back as July of this year, when the patent idea was unearthed. Apple Pay is accepted in over a million stores, and is growing in popularity, expanding into personal transactions seems like a logical next step.

Apple is, “reportedly in negotiations with U.S. banks to create a mobile personal payment platform.” IPhone owners would be able to use Apple Pay to transfer funds from their checking account to their friend’s account. With no fee charged to the person receiving the payment, or to the sender, one big question is how does Apple make money on this?

In the same way that Apple wasn’t the first to offer streaming music, the company isn’t afraid to enter a crowded space. The payments business seems to be dominated by PayPal, which at last count had nearly 170 million registered users. Alphabet (NASDAQ: GOOG) is trying to lean on the millions of users who have an Android device to push Android Pay. Android Pay is accepted at over a million stores, and is expanding into peer-to-peer payments as well. Though Facebook isn’t thought of as a transactional kingpin, even the social network added payments to its Messenger service.

While the details of Apple’s peer-to-peer business may not be ironed out yet, it’s a good bet that hundreds of millions of iPhone users will be interested to see how this service may benefit them.

The Pandora Case Study

In order to get a sense of how Apple could change the landscape in the peer payments business, it makes sense to look at where Apple has gone before. Specifically, Apple Music’s entry into the streaming music business, and how this has changed the perception of Pandora Media (NYSE: P).

As one of the pioneers in streaming music, Pandora seemed to be one of the best ways to play this shift in the industry. Unfortunately, Spotify jumped into the game and seemed to offer users a better value. As with many industries, once a few companies garner attention, everyone from Alphabet, to Microsoft, to Beats wanted a piece of the action. Apple Music launched in June 2015, and many thought this might be the final nail in Pandora’s proverbial box.

In the month prior to the launch of Apple Music, Pandora shares dropped from $18.67 (May 29) to $15.54 (June 30). However, this almost 17% decline was shorted lived. Just three months after the launch of Apple Music, Pandora shares climbed to $21.34 (Sept. 30), a more than 37% increase from its low. However, the stock today trades at less than $14 a share, based on lackluster recent results.

Pandora said that its, “number of active listeners declined by 1.6% sequentially,” due to “significant category spending and trial offers across multiple players. In other words, the field is crowded and customers are fickle. Pandora didn’t get killed right away by Apple Music, but by the proliferation of multiple competitors going after the same space.

PayPal’s Future?

Whether they are paying a bill online, or sending money to a friend, PayPal has become the default personal payment system for millions of users. With rumors of Apple trying to move in on its turf, PayPal shares dropped by just under 2% on the news.

PayPal investors should keep a few facts in mind. First, this less than 2% decline was following an almost 19% increase in just the last month. The stock has been on quite a run, so a pullback shouldn’t have been a surprise. Second, as Peter Lynch once said, competition is never as healthy as total domination. As Apple, Google, Facebook, and others offer their own money transfer services, PayPal isn’t alone anymore in this space.

Third, PayPal used a backhanded compliment to cement its competitive advantage. The company said, it “welcomed anything that brought attention to the mobile payments space.” However, PayPal was quick to point out that it has, “multiple services (that)…work across multiple devices and Operating Systems.” To interpret that in layman’s terms, our service is device agnostic, and can be used on multiple platforms, good luck trying to compete.

PayPal investors need to pay attention to each new entrant. However, as big as the electronic payments business is, it seems likely there will be multiple winners. PayPal is one of the leaders, and Apple’s expanded Pay service won’t change that in the short-term.

What Does this Mean for Apple?

The biggest question surrounding the potential expansion of Apple Pay is, how does this peer-to-peer business make Apple money? When a user pays for a purchase with Apple Pay, Apple gets a cut of the transaction. With peer-to-peer payments, the rumor is, there will be no cost to the banks, and only credit card transactions may see a fee.

Some are suggesting this is Apple’s way to push more customers toward the iPhone. While this is an obvious benefit to the company, this seems to miss the additional revenue streams that may be available.

First, Apple may benefit from the float of the funds between the customers. Second, any expansion of Apple Pay to make it more useful should drive further adoption of the retail payments business. Anything that pushes Apple as a payment platform, creates a halo effect on the rest of the business.

In the end, the PayPal decline looks like a blip on the radar for a strong company with millions of satisfied users. Apple should come out a winner on this service as well. The iPhone may be the flagship product, but if Apple can get customers thinking of it as a payments company, this could be the “next big thing” that investors never saw coming.

Regardless, this is yet another feature that Apple can to its already strong arsenal to keep its customers interacting with each other in a highly profitable and growing ecosystem.


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