WHAT YOU NEED TO KNOW
Even before Steve Jobs departure from day-to-day operations, there was a tremendous amount of interest in Apple Inc.’s growing stockpile of cash. Combining Apple’s $76b in cash and investment balance with their theoretical borrowing availability (roughly 1.5x leverage on TTM $20b in EBITDA) gives Steve Jobs and co. the capacity for a $115b shopping spree. Thinking about how Apple develops products and adjacencies, this is what we think Apple should do:
- Turn your iPhone into your wallet. Cost: $45B.
- Transform AirPlay from a feature to a platform. Cost: $3B.
- Instead of Multi-Touch, think No-Touch. Cost < $10B
1. Turn your iPhone into your wallet:
There have been a number of rumors that Apple will include near-field communication (NFC) technology in the iPhone 5 when it launches this fall. NFC will allow the iPhone to feature tap-to-pay technology and transform the iPhone into a mobile wallet. While this seems very exciting, and would allow Apple to leverage its over 200mm credit card accounts in 3rd party purchases, the merchant infrastructure is not really in place (outside of the NYC Taxi system).
The lack of tap-to-pay ubiquity shouldn’t prevent Apple from expanding aggressively into the payments business. Apple has already expanded its payments platform outside of iTunes with the launch of in-app purchases (of which it takes 30% share). The purchase of PayPal would explode Apple’s 3rd party purchase capacity and access to online (for now) retailers. PayPal has over 200mm accounts (100mm active) and nearly $70b in TTM off-eBay payment volume. PayPal will have some overlap with Apple’s 200mm+ credit card accounts, but gives Apple access to debit card/bank-transfer payment market.
PayPal has already created a slick “tap” pay implementation on the iPhone licensing Bump Technologies software. This allows to PayPal users (including businesses) to transfer money over PayPal by “bumping” two iOS devices together. It’s not as technologically advanced as NFC (making use of geolocation, the accelerometer and the clock), but it works seamlessly. Until NFC is really ubiquitous, the Bump/PayPal combo is an elegantly bootstrapped solution. Mobile payments are still a relatively small business for everyone, but growing fast. PayPal is tracking to $3b in mobile TPV this year, up over 100% y/y.
While a lot of people will look at PayPal’s current scale and say a deal would be too expensive, one has to imagine how big PayPal could be in Apple’s (and the iPhone’s) hands. How big would MasterCard be if Kmart owned it?
- Goal: Turn any iOS device into seamless payment engine.
- Potential Target(s): PayPal (via eBay), Bump Technologies
- Total cost to Apple: ~$45b (upfront, net of eventual core eBay re-IPO).
2. Transform AirPlay from a feature to a Platform:
Many research analysts and tech bloggers are convinced that Apple is going to produce a consumer television, but I just can’t see it. The LCD TV business is a terrible one. Low price, low (single-digit) margin and subject to big supply/demand/inventory imbalances. Developed market large size panel penetration growth has already peaked, meaning volumes will come at even lower prices and in the form of replacements.The big 3-D (premium priced) upgrade cycle is DOA. [what could change this? a thought for later or see: OTHER DOC]
Most of the LCD TVs people are buying (at no price premium) are of the simple, internet-connected variety. These software upgradeable panels allow simple (photo sharing) and complicated (full facebook integration) apps. Apple should aggressively push AirPlay (to this point limited to a few A/V receivers with no Video support) to the TV manufacturers. Apple could conquer the living room without convincing people to buy an AppleTV, sullying itself with a low margin TV business or having to navigate the cable set-top box jungle.
With AirPlay’s increased availability, Apple could offer its application developers deeper functionality. Apple should buy Shazam (privately held), which will allow users to tag music anywhere for later streaming at home. An audio fingerprinting API would greatly enhance the usability of applications like Spotify and Pandora (not to mention the upcoming iTunes Match) on the mobile device. I would have recommended Apple buy Into_Now to incorporate the same functionality around TV/Film tagging (plus the technology behind the live TV video indexing), but Yahoo beat them to it.This functionality could redefine “Catch Up TV:” imagine flipping past a movie you were interested in seeing, but it was already an hour from the beginning. Your iPad identifies it, lets you know from which services you can find/buy it (including iTunes) and then seamlessly streams it to your large LCD; all without the annoying cable remote or clunky search. Probably not worth buying all of Yahoo ($12b enterprise value), though there are potentially some content-side competitors.
- Goal: Drive higher content consumption on the Living Room television via iOS as the gateway, while avoiding the PayTV providers (and set-top boxes).
- Potential Target(s): Shazam, SoundHound, iPharro
- Total cost to Apple: < $3b.
3. Instead of Multi-Touch, think No-Touch:
While touchscreens have been available to consumers for nearly 15 years and multi-touch technology has been around for nearly 20 years, it was Apple that mainstreamed the technology with the iPhone launch in 2007. Since then, multi-touch has become the standard input format for smart phones (not made by RIM) and has found its way into desktop computing. This works great on small screens, but not in the living room. The future of the living room comes from a surprising place: Microsoft.
Microsoft’s Kinect platform has been surprisingly successful. Launched as a new gaming platform, its usability and capability excited the hacking community, which quickly put Kinect to multiple alternate uses. Microsoft, realizing its gaming platform had given them a backdoor into controlling the living room put out a software development kit (SDK) so application developers and media owners could capitalize and push content to the home. With its combination of voice and motion commands, Kinect eliminates the need for a remote and, more importantly, keeps the viewers’ eyes locked on the big screen. And it could have belonged to Apple.
How can Apple catch up? Some of the pieces are already in place. Apple’s iPhoto features basic facial recognition software, though it’s not particularly impressive. On the voice side, last year Apple bought Siri, a voice command application developer. Unlike traditional voice recognition/speech-to-text software, Siri’s technology is built around executing commands and answering questions. Before Apple’s purchase, Siri had partnerships with OpenTable, StubHub, CitySearch, RottenTomatoes, among others. Think of the convenience of pressing a single button and saying “dinner for two at Mexican restaurant at 6:30pm and two adults for Harry Potter at 7:30pm” and having the phone execute. Apple should be putting this functionality in the hands of developers and I think it is a mistake Apple chose not to include these features in the iOS5 beta API.
To make voice commands truly seamless, Apple would need to include more intensive and integrated speech-to-text functionality. While not everyone will dictate emails in public, it can be extremely tedious to type on a 3.5” screen. Nuance Communications has a standalone dictation app available for iOS, but its functionality and portability is limited. Their technology could easily be integrated into core iOS applications (Safari, Email, Calendar, etc.) and made available to enhance 3rd party applications. Voice recognition could also be used to enhance device security by incorporating it within the OS lock-screen and customized application access.
The other ingredient to making iOS truly hands free would be the addition of object tracking, facial recognition and motion capture. This could enhance security (both facial and voice recognition to access devices, apps and content) and functionality. Imagine ordering your iPad to “find Meatless lasagna recipe” and then navigate around Epicurious in the kitchen without ever touching greasy fingers to the iPad screen. Primesense, the technology firm behind the core of the Kinect platform, is still privately held. Gesturetek, another licensor of extensive 3-D depth measurement and gesture based recognition and control software is also privately held. Gesturetek has also done extensive product development around multi-touch displays and tables/surfaces, so might fit nicely into Apple’s technology platform. Gesturetek recently sold some of its assets to Qualcomm for use in its mobile phone platform, so the remaining value of its technology/IP portfolio may be lower.
- Goal: Improve security and interactivity of iOS and OSX through expansive voice commands, speech to text, facial recognition and motion capture.
- Potential Target(s): Siri (already purchased), Nuance Communications, GestureTek, Prime Sense
- Total cost to Apple: Siri ~$150MM + Nuance $6.7B + GestureTek $500MM + Prime Sense $2.5B <= $10B