iPhone 6 – Apple’s Strategic Opportunity

8 September 2014

We are likely to see much innovation in the iPhone 6, but I suspect there is even more innovation that we won’t see. Purpose of blog today is to help my friends navigate through the coming tsunami of press, to what really matters. What are the things I’m looking for? If you are looking for a list of new iPhone 6 features in this blog.. you will be sadly disappointed.. I’m much more attuned to payments, network strategy, commerce, security/Auth.. admittedly myopic. Note payments stuff is in last paragraph

Tomorrow

Don’t get caught up in buzzwords like NFC, payments, tokens, BLE, Secure Enclave. Will it have a new security architecture? Yes, industry leading from hardware through firmware, OS and Apps.. Will the iPhone be able to do payment? Sure… Emulate a hotel door room key? Yep, in fact it could virtualize and emulate any chip card including the GSM SIM. Yet focusing on this stuff is kind of like talking about what the internet could do…  can I email my Aunt in Singapore? Buy a book from a seller in Seattle… The key questions for investors and start ups in the Valley is: HOW WILL THE iPHONE 6 CHANGE COMMERCE?.

Why am I excited about the iPhone 6? It is the dawning of a new age of mobile “platform”. This leads to the obvious question of: what is a platform, and how can anyone lead it? My favorite book on platforms is Platform Leadership: How Intel, Microsoft and Cisco Drive Industry Innovation. The authors provided a great model to assess the 4 Levers of Platform Leadership

  1. Scope of Firm: What is done inside, how they encourage outside investment and focus
  2. Product Technology: Architecture, Interfaces, Modularity, What do they expose to partners?
  3. Relationship with Complimentors: Support of Complimentors, acting on ecosystem needs, path to consensus and standardization, profitability
  4. Internal Organization: What is the “core”, and how are resources allocated to core activities vs support for partners.

Apple has a massive check mark in #2 (Product Technology), as they are 3-5 years ahead of every handset maker (integrated hardware thru OS and Software). How do we measure this lead? Admittedly technology is a little harder to quantitatively measure than financials and market share, so for the later: Apple captures 70% of industry profits (from 18% market share), #2 in consumer brand (behind Google), and #1 in retail sales per square ft. Most would agree its hard to get to these stratospheric numbers on crappy hardware.

On the technology side, Apple is the only vendor (since RIM) to have developed a secure mobile platform for biometrics, encryption, smart card emulation, …etc. All using a proprietary architecture from A8 Processor, Secure Enclave, OS, Apps and integrated into cloud services. For example, Apple has thrown the GSMA’s NFC under the bus in favor of their own unique design. I think of it this way: RIM started with security in mind and then tried to bolt on a browser and other features consumers wanted beyond secure e-mail. Apple started with the consumer and is now (with the iPhone 6) rolling out the most secure mobile platform in history. I believe Google is 18mo-3yr behind (with ARM/TEE and SE Linux) primarily because they don’t have the same HW control as Apple (see Secure Element, NFC, HCE, EMV, Tokens and Cards).

From a platform perspective the REAL question is Can Apple pull levers 1, 3 and 4?

Platform Leadership

Most all of us know the Microsoft/Intel Story (see reference). WINTEL’s pace of innovation crushed Apple by creating industry standards (ex PCI Bus) and allowing hundreds of companies to specialize on many subcomponents (dives, processors, applications) which further increased performance, decreased price and expanded usage… which in turn drove more investment. Intel’s Architecture Lab (IAL) was centerpiece of this success: an investment in defining and supporting the platform (ex the common infrastructure “bus”) that allowed for specialization and defined interaction (and accelerated Intel’s dominance). No one asked Intel to lead.. they TOOK IT (with great success). Leadership is not creating APIs and taking a 30% cut of revenue, it is recognizing that a business where 100s of companies can succeed is a much bigger business. This is particularly true in Commerce.

In physical commerce, I look at Visa and Mastercard as the best “commerce” platforms. This comment will draw ire from all my merchant friends, but it is factual (total volume processed). The beauty of the V/MA business model is that 1000s of banks invest (and merchants pay) billions of dollars to make this work. They have struck a tremendous balance between bank, consumer, and merchant. They have become the standard for interaction. One that will start to shift significantly toward merchants in next decade (for another blog).

With respect to platforms and mobile, I was in Hong Kong last year constructing scenarios with a major investment bank, with the key question: Where will value flow in mobile once handset hardware is a commodity? (Battery life, processors, screen resolution, are all good enough). What are the FACTORs of competition today? Can someone else change the game? I went through this analysis in my blog on Stage 4 Value Shift.

As we look for where the form of mobile competition may change, it would seem to be outside: hardware, software and network bandwidth. If hardware is good enough, and not the primary factor of competition, it must be software, services or data that will drive competition in the next phase… If platform is decided on software only.. then software platform with most open standard and most users (ANDROID) should dominate as any connected devices (handsets and everything else) have lower cost and more ability to “specialize”, particularly if intelligence is in the network (not the device).  But software is currently not the point of competition either… If not DEVICE software, or hardware, or network connectivity.. then what?

 

… Orchestration and Trust:  mobile phone transforms into the networked device “bridging” the virtual and physical world then value (and profitability) will shift from platforms executing transactions to coordinating interactions.

Apple’s greatest asset is its ability to change consumer behavior (see blog Apple and Physical Commerce, and Consumer Behavior). Apple’s reputation is well deserved and earned “the hard way” by remaking: phones, music, mice, computers, apps, …etc.  Through consistent delivery of value within fantastic hardware delivering great (and fun) consumer experiences they earned trust for their products and brand. The greatest NEW opportunity for Apple to influence consumers beyond the individual (music/contacts/calendar) and eCommerce (browser, apps) to the real world: Commerce. Apple’s core gap? How will it allow for investment, specialization and define interaction of aligned participants.

Commerce Platform

I’m assuming Apple will get its consistent A+ in hardware, and there will be a bundle of new capabilities in the phone and connected devices (ie iWatch). But commerce is between a consumer and a merchant/manufacturer. What “platform” will exist to assist Merchants? What is Apple’s role in mediating platform (and consumer) with the merchant (beyond the app store)? How will Apple enable 100s of other companies to invest billions of dollars to make its Commerce Platform the centerpiece of value orchestration? Beacons (see Apple iBeacon Payment Experience)?

Google, Amazon, Facebook, all organize millions of businesses, and billions of consumers. Apple is missing the business side… in a BIG way (remember iAd). From a network strategy perspective, Apple has created a consumer focused nodal platform (vs hub centered orchestration). They certainly have the opportunity to create a hub (ie iCloud), but their hardware centric organization may keep this from maturing (Lever 4). Thus Apple is 5 years behind Amazon, Google, Facebook in delivering value to merchants, and orchestrating Commerce. As I stated above, handsets are becoming a commodity, Apple’s new handset will not lead in screen resolution or battery life.. consumers will start to look at the VALUE it provides in connecting to other REAL WORLD businesses.

A January 2001 Harvard Business Review Article: Where Value Lives in a Networked World put it this way:

In more general terms, modern high-speed networks push back-end intelligence and front-end intelligence in two different directions, toward opposite ends of the network. Back-end intelligence becomes embedded into a shared infrastructure at the core of the network (cloud), while front-end intelligence fragments into many different forms at the periphery of the network, where the users are. And since value follows intelligence, the two ends of the network become the major sources of potential profits. The middle of the network gets hollowed out; it becomes a dumb conduit, with little potential for value creation. Moreover, as value diverges, so do companies and competition. …. In a connected world, intelligence becomes fluid and modular. Small units of intelligence float freely like molecules in the ether, coalescing into temporary bundles whenever and wherever necessary to solve problems.

where value lives

Apple’s strategic opportunity is to orchestrate these information bundles and consumer insight in a way WHICH THE CONSUMER CONTROLS. This was the focus of my previous Apple Strategy Blog: Apple’s Platform Strategy: Consumer Champion.  Unfortunately, it seems that Apple’s management team may be so hardware focused that they are missing this opportunity. Retailers like Nordstrom, Macy’s, CVS, and Starwood will show (tomorrow) how excited they are to work with Apple. But Apple needs a version of Intel’s IAL, that is focused on Retailers, Gimbal and Commerce.  Actually, I believe Apple’s gap here is so large that they must find a way to partner/acquire someone else in this space (not paypal). This is a $100B opportunity, and if Apple doesn’t move on it, it will be left competing on screen resolution, and hyper sensitive affluent consumers seeking data privacy.  (Note to Apple, one of my companies would love to pitch you a few ideas here).

My top strategy questions for tomorrow

  • Does Apple see strategic growth for iPhone as working in real world (Commerce)?
  • What level of investment/support will Apple give to “community”? How (IAL)?
  • Where does Apple “Stop” and partners “stop”
  • Apple’s organization.. anything changing? Is it still H/W dominated?
  • Apple’s phone is no longer differentiated by external features.. so what is different and why is it valuable to consumers? Merchants? (Can Tim articulate)
  • Does Apple see itself as the Consumer data/privacy champion? How do you monetize anonymity?
  • How will retailers work with Apple?
  • How will beacons be supported?

Security, Authentication and Anonymity

The biggest features we will see (IMHO) surround  how Apple is completely reworking the role of authentication and security in the platform (see iPhone 6 Secure Enclave, great article from Networked World). Apple’s proprietary mechanisms for “smart” card emulation (credit card, hotel door key, transit pass) will impact many, many industries (see Authentication in Value Nets).  Apple has ROCKED THE CART substantially with this capability. My guess is that they will demonstrate the obvious tomorrow with contactless card emulation (V/MA/Amex) and security keys (Starwood hotels). The much more sensitive area is virtualizing the GSM SIM. I believe the iPhone 6 is capable of virtualizing the SIM, I have no idea if they will demonstrate the capability.

From a consumer perspective, the big changes will surround Apple’s efforts to limit ad tracking will significantly impact advertisers (see Tech times ). I believe there is hidden genius here as they turn themselves into the ultimate consumer protector… both online and in the physical world.  They are the gatekeeper and orchestrator… the only entity that can know what a consumer is doing. Question is can anyone else work with Apple (and the consumer) to request that the gate be opened. For example, will Apple be the primary publisher (please send phone ID 187349387 the following message .. and Apple approves).

Payment Stuff

Most of my readers are in this area.. so sorry for saving this till last. I described how payments will work in the new iPhone back in March: Apple’s iPhone 6: GSMA’s NFC thrown “Under the Bus”. The key innovation in iPhone 6 should be credited to Visa and Mastercard: tokens. No longer will Primary Account Numbers (PANs) be sent in the clear as we have with EMV, and NFC today (I know, hard to believe.. see this blog for background). Now if someone steals your phone.. and breaks Apple’s unbelievable security.. they have a number.. that is COMPLETELY worthless.. they can’t use it anywhere.  At time of manufacture and OS load, Apple has loaded 6 tokens: Visa credit, Visa Debit, MA Credit, MA Debit, Amex, China Union Pay, (and perhaps a few backups).  These numbers are locked up in the secure enclave, they are 16 digits long and are BINs that processors can route to the appropriate network. The networks operate as TSPs (Token Service Providers) and map the Tokens to the Actual Bins. The primary key for the mapping is Token, plus Token Assurance Information, plus Phone ID.  Technically.. everyone of us could have the same exact 16 digit token and Visa/MA/Amex could still map the correct card based upon the other unique information.

My biased view is that the networks emulated what Google (under Osama Bedier) put in place 3 years ago as Google also operates this Token environment within their TXVIA acquisition. The big plus for Google is that the consumer can register any card they want, as Google does not charge the banks anything.

The biggest “surprise” over last 2 months is that Apple has squeezed 15-25bps from the 5-6 participating banks at launch (C, BAC, COF, JPM, Amex and perhaps WFC). The challenge for phone wallet companies has always been there is no economic model for them. Banks know that wallets will not work without cards.. for example Apple has little chance of success if Chase, Citi and Cap One don’t participate. Thus someone must have “blinked” and the others followed. No one wants to be left out of the Apple launch. Thus to participate in the Apple wallet, Issuers will need to cough up the fee to Apple. There are 3000+ issuers in the US.. so this may be a little challenging on the consumer side. I also have firm G2 that BAC, C and possibly WFC will enable debit cards (have no idea how these will be priced).

My G2 tells me that the Issuers refused to give on CNP interchange, so even though Apple has tokens and can sign them with same assurance information a “tap” at the POS will have a different rate than an eCommerce/mCommerce CNP transaction. One of my bigger unknowns is how Paypal will play in all this launch. I understand Apple is near launch of an “off Apple” eCommerce payment scheme (?EasyPay?).. will Paypal be the merchant acquirer and white label a PayPal like button (pay with “Apple”).

Strategically, Payments are moving to be part of the Operating System. What does that mean? See blog. My favorite payment quote is from Ross Anderson at a Federal Reserve meeting. If you solve for Authentication in payments, everything else is just accounting. This is a key example of how Apple has the potential to completely turn the world of payments upside down. For start ups this means that payment is no longer a specialized function, just as TCP/IP was not in Windows 95 launch.. and became part of the standard stack.. so are payments with iOS and Android. There will be no more Paypals in the future.. A key WIN for Visa, Mastercard and Amex is that Amazon, Apple, and Google are all of one mind: Let consumers pay they way they want to pay.

Arcane payment stuff. I’m more than a little interested in how Apple will actually get paid beyond the honor system. Card emulation applications have no idea who they presented the card to, or size of transaction. Visa/MA/Amex will be able to track transactions, but don’t know of any formal facility to pay a wallet company within the settlement stream, meaning that the issuers will be cutting the check based upon data that only V/MA and/or the issuer themselves have. So beyond the pure “TSP” role, is there also a role for wallet settlement in the overall V/MA scheme. Optimally, issuers would have one way to register cards for participation in any given wallet, this was a significant flaw in the NFC TSM card provisioning flow. It would be very smart for V/MA to take this on. In other words a new V/MA process for registering card/token scheme/Assurance information/approved wallet (ex HCE).

Merchant Acceptance

My view is that the MUCH larger problem for Apple is merchant acceptance. As I outlined in Apple Payment Experience, Apple did not want to launch within network contactless specifications, they wanted certification of BLE.  Apple presented its solution back in August of 2013 and the issuers went “nuts”.. going to V/MA telling them “You are going to let Apple own the PATENT for how a card goes from phone to merchant.. I thought that was your job”. Thus we see the press release on tokenization in Oct 2013 that came out of no where.  The networks did not want to fragment acceptance infrastructure and give merchants the opportunity to accept Apple BLE and not NFC.

There will be 2 or more merchants moving from MCX to Apple tomorrow, one rumored is CVS. Of course they could still accept MCX, but rumor is MCX agreement precludes other forms of mobile payment acceptance. Payment acceptance is no peripheral battle to merchants. This is a VERY VERY big deal and I don’t believe Apple understands it at all. Net margin in retail is around 2.6%, so taking a 225bp card is VERY MATERIAL. Retailers tell me that mobile is the #1 thing they think about in strategy, and they are quite confident that they are in the best position to influence consumer adoption and value creation (ala Starbucks). My hope is that Apple can work out its desired BLE experience directly with MCX retailers.. and let the merchant/consumer decide how all this works. See  Value Creation and Distributed InnovationStatic Strategies and the Rewiring of Commerce and in Future of Retail

How will the iPhone 6 Change Commerce?

Remains to be answered pending Apple’s platform support strategy. Where does Apple see its role in value creation? (Or does Apple just see a role in consumer protection?) The Google, Amazon roadmap is much clearer to me.. I don’t want to buy into a hardware company.. hardware is becoming a commodity, value orchestration is the $100B+ opportunity.

This is not a clean wrap up.. but my football game is on and I want to watch it.

 

 

 

iPhone 6 – Payment Update – Sept 2014

Super short post that summarized my 20 odd tweets this week. Frequent readers should skip to last section “New G2”

Feel 100% comfortable with my March Predictions iPhone 6 – Payment Predictions, only thing I missed was release date (September 9th… not October).

Looks like Apple got squeezed into the bank box. As I related in Apple… Payment via BLE/Beacons will still happen (but when is issue) Apple wanted to launch the payment product with BLE (not NFC) but existing payment networks didn’t want to cause merchant chaos in fragmentation of acceptance infrastructure.. so pushed apple back into the NFC mold.  The payment experience is as I outlined in May Apple iBeacon Payment Experience. I don’t see ereciepts as part of launch.

Also confident in my predictions that Visa and MA are running the TSP (see iPhone 6 – Payment Predictions)

 

  1. Consumer walks up to cash register, a payment terminal beacon provides information to Apple payment application that it is close proximity to payment terminal ID xxxxx (TID),
  2. Merchant scans goods for purchase. No mobile processing of loyalty, coupon, discount information
  3. Merchant payment terminal cannot send total amount due since it does not have Apple handset information/UUID. So how will Apple do it? My guess is Apple will provide UUID to the Payment Terminal via BLE at application wake up to perform a “lite” checkin with payment terminal. Good news is that there would be no data connectivity requirements, but it requires a new payment terminal… For everyone else.. there is no total amount due (99% at launch).
  4. Legacy NFC. At application wake up,  phone asks “pay merchant with Apple wallet”?
  5. Consumer validates transaction with fingerprint biometric
  6. Consumer taps phone (NFC) and Card token presented Payment Terminal via NFC Merchant processor routes token to payment network which translates and routes to bank for authorization
  7. Payment is authorized (as happens today).

NEW G2

  • Launch customers in payment likely to include Macy’s and Nordstrom
  • Apple will also likely launch with Starwood Hotels for hotel room door key provisioning (as I tweeted last week)
  • Apple was able to get 15-25bps from top 5 issuers (JPM, C, COF, BAC, Amex). These are the only issuers that will work at launch. As part of this fee, Apple will release token assurance information (see Token Assurance – Updated)
  • Apple will also launch an eCommerce/mCommerce buy button in EasyPay. This will NOT receive any card present or preferential rate. This is less a function of in App purchases and more a function of 3rd party ecommerce sites having a EasyPay button for fast IOS checkout. Will in App purchases have this as well? Good question, seems logical
  • The following cards are provisioned into Apple’s secure enclave at time of manufacture/OS loading: Visa Debit, Visa Credit, MA Debit, MA Credit, Amex, China Union Pay.  (NO DISCOVER)

Unknowns

  • What will apple do for all the iTunes cards not from one of the top 5 issuers. That will be a rude experience. How will they enroll 3000+ issuers into this scheme and get each one to cough up 25bps
  • What is pricing on debit. Technically everyone will support debit, but no one is incented to make it work.
  • Don’t know how Paypal will run in this model.. so this is a mystery, particularly with launch of EasyPay.. will Paypal be a whitelabel here? I am confident that Paypal will be part of launch.. what I don’t know is how..
  • How will Apple ensure they get 25bps from the banks, they have no insight into the transaction.. the card is presented and that is the last Apple sees of it. This has been a problem for other wallets as well. It is one reason why google created the proxy card.. to see all the transactions.

Updates Sept 8

  • Enrollment, looks like Banks will be supporting a BarclayCard/Google Wallet like enrollment process from within online banking.. This is very, very smart.
  • Bank of America, Citi and Wells are all rumored to be supporting Debit card inclusion in Apple wallet day one..

barclaycard-save-to-google-wallet

 

iPhone 6 – Payment Predictions

30 April 2014

I’m on a roll, so thought I would put this out there as a positive prediction (vs describing how Apple is Throwing GSMA’s NFC under the Bus). My views are as much informed from the “negative” as the positive. For example, my starting hypothesis is Apple will enable a POS payment capability in iPhone 6. It was the reason for the timing of the Oct 2013 “token” announcement from the big 3 payment networks. As most of us asked “where on earth did this come from”…. It came from Apple (or the network response to Apple’s initial plan).

My problem in figuring out what is going on (if anything) is that Banks have no idea what Apple is planning. Current guess below revolves around assumption that the 3 payment networks do understand the plan. Thus the question becomes “what can Apple do in payments that starts with the payment networks, but does not involve the banks”? Constraints? It must involve: tokens, Apple’s security architecture, 600M cards on file, existing card presentment infrastructure, existing rules, recent lessons learned, and be able to expand to iBeacons.

My predictions

  • Apple will have a certified EMV contactless capability from V, MA and Amex in the iPhone 6.
  • Apple’s contactless is a proprietary architecture, based upon both tokens, and 3 card emulation applications (4 perhaps with Paypal)
  • Each Network will act as a Token Service Provider (TSP), with one token in each card emulation application. The TSP specs give this away, per the Spec, the TSP must be approved by issuer and have ability to translate token to Card. Apple may want to be the TSP… but Banks will say no. This solves a BIG problem with card provisioning, with V/MA/Amex already having the “proxy” card/token provisioned in the iPhone, and each bank working with respective network to turn on their card.  This is the Google model, with the networks running the TSP as opposed to Google/TXVIA.
  • Apple will not work in iBeacon model at launch, but rather EMV Contactless. You notice I’m not saying NFC.. from a merchants perspective this will look like NFC, and use the NFC protocol, but certainly not from a GSMA NFC perspective. There are no other vendors in this solution beyond Apple and their hardware suppliers (?Broadcom?)
  • Cards will be “provisioned” into the wallet through complex process involving Issuing banks, TSPs, and Apple. Apple’s inventory of Cards on file will be registered with the TSPs, and Banks issuers will approve based upon Token Assurance information , MNO information, card usage information … (yesterday’s blog).
  • Fingerprint will be key process which unlocks card/wallet and enables EMV Contactless interaction. Customer experience? EMV Contactless, consumer unlocks phone with fingerprint and authorizes purchase on Payment Terminal. iBeacon? Same thing only works on all iPhones via BLE (no proximity/NFC)
  • How will Apple make money on this? They won’t… nada. Altough there COULD be a way forward given that the product presented to merchant is in control of Networks AND the Issuers are in control of their cards.. a potential… but given lack of issuer participation, I have no idea of how they would pull this off. I do believe that there are groups in Apple that want to make money on a card present transaction, but join the club.. there is no economic model in any network agreement for a wallet provider.
  • I want to emphasize again.. this is just the easy payment part. I strongly believe that looking at payments in isolation is the wrong way to view this (see Blog).

I like this.. IF consumers can choose which payment products to store in phone (debit card). I think the Bank Issuers will flip out when they hear that V/MA have locked themselves into the TSP role.. talk about a reversal from TCH. Issuers could make the case that the networks own the fraud loss since it is a network proxy card wrapping the issuers card…. can’t wait for that one to happen.

I’m 90% confident in the above… lets see if I can keep my perfect track record on Apple, Google, Tokens and NFC.