- Investors need to understand what mobile wallets mean to the tech companies that offer them.
- Why is Apple at the top, and does it have the staying power to remain there for the long-run?
- What are the market share numbers underlying this relatively new initiative for Apple, Samsung and Google?
Mobile-based payments have been around since 1999. Beginning with SMS Banking, payments soon moved to the online platform with the advent of smartphones. But technology companies have been slow to embrace this as a viable business opportunity. Why, then, is Apple Pay such a critical component of Apple Inc. (NASDAQ:AAPL) future now?
Apple Pay and Its Competitors
Although Alphabet Inc's (NASDAQ:GOOGL) Google Wallet has been around since 2011, it was only in 2015 that they merged it with Android Pay and rolled out the service on a full scale. But it was Apple that broke onto the scene in a big way with the launch of Apple Pay on October 20, 2014. The following year Samsung Pay was launched and then, shortly after, Google Wallet got a new avatar in Android Pay.
In terms of growth, Apple has the lead, with around 10 million active users on the Apple Pay app. Samsung and Android follow neck and neck with about 5 million active users each.
Although it may seem that all of them compete for essentially the same market, that’s not necessarily the case. Each of them caters to an exclusive segment, and we’ll see what those segments are in just a moment.
The first question we need to answer is this: why are tech companies so aggressive about driving their mobile wallets forward now? What’s changed in the last decade and a half to suddenly prompt them into action.
The answer: it’s all about ecosystems.
What are these Ecosystems?
In today’s world, tech products cannot stand alone and succeed. Either they will become obsolete, or a competitor will come up with a better idea and take away their customer base. Today is all about customer bases and keeping them engaged by any means necessary.
To illustrate this point, let’s take Microsoft as one of the best examples of ecosystem-building. The old Microsoft was all about selling individual units of software. On the strength of their operating systems and productivity suites alone, they wanted to dominate the PC world. And they pretty much did that until PC sales around the globe started their gradual decline.
As smartphones and tablets made their appearance, companies like Apple and Google started to dominate this space - not only with their own operating systems but entire collections of mobile applications that could run on these operating systems. On the one hand, Apple had an end-to-end solution offering hardware as well as software; on the other was Google’s Android and the Google Play phenomenon.
Microsoft was now left with a legacy business that was about to begin its decline. So what did they do? They got on the cloud bus that was being driven by Amazon’s AWS. This was the beginning of the ecosystem that Microsoft continues to create.
As time went by, they kept adding to that cloud by moving everything that was formerly a standalone product. Today, Microsoft not only has Azure Cloud, Skype and other tools, but also Office 365 and, more recently, Windows 10 subscriptions, Microsoft Stream and more.
This is the kind of ecosystem I’m talking about. Once a user is within that ecosystem, there is a plethora of options to choose from. In Microsoft’s case, that ecosystem clearly targets enterprise users. For the average enterprise business, Microsoft has everything it needs to be productive: Office tools, video conferencing, email, cloud storage, a development platform, hybrid cloud options, video streaming and lots more.
In Apple’s case, they’re only just building out their ecosystem for individual users. There is an entire family of mobile devices and PCs, plus a robust bank of applications and several third-party-enabled utilities and features. And now they’ve added Apple Pay as part of that ecosystem in order to keep people coming back to them again and again.
That’s the real reason companies like Apple, Google and Samsung are investing heavily in the mobile wallet space.
Market Share Projections
Since these are relatively new lines of business for all three companies, we won’t see any segment reports telling us how big they’ve become. However, from an analysis of smartphone and operating system market shares, we can arrive at reasonable projections.
First, let’s start by comparing Apple’s iOS with Google’s Android.
As you can see, Android has the advantage by a wide margin, controlling 80% of the mobile OS market. Discounting all other minor players, that leaves Apple with less than 20% market share. But Apple still has more than 1 billion active devices as of the second quarter of 2016.
Last September (2015), Google revealed that there were approximately 1.5 billion active Android devices. That figure is likely to be close to 2 billion this year, and that’s supported by the figures for app downloads on both operating systems.
As you can see from the first graph above, Google Play - Android’s app store - had twice as many downloads in Q1 2016 as iOS. Though the correlation is admittedly loose, the downloads comparison should reflect the number of active devices.
Using that comparison, Android Pay has double the potential user base of Apple Pay even though they’re only at half of what Apple actually generates (revenue) at this time. That gives them a huge potential for growth over the next few years.
But Android is not going to get away scot-free with rapid, unimpeded growth. With Samsung in the fray, it’s going to be a tough battle.
Well, the first reason is that Samsung holds the upper end of the Android market - just like Apple holds the upper end of the entire smartphone market. In fact, Samsung holds a full 35% of the Android market and nearly 28% of the smartphone market as of Q1 2016.
Source: Android Headlines
The second reason - the not-so-obvious one - is one that I’ve already mentioned: that Samsung practically owns the upper end of the Android market. Their premium devices - the ones that Samsung Pay is currently available on - are at the top end of not only the Android market but come very close to iPhone prices as well. And that’s the edge that Samsung has over Google when it comes to users even though the common denominator is Android.
In the final analysis, it would seem that Apple and Samsung are more closely matched for mobile payments than Android is on other devices. But market share is not the only reason. It’s the economic segmentation between their user bases.
Apple users typically have more disposable income, as do high-end Samsung device users. While this might seem like an assumption, the acid test was conducted last year on Black Friday - and Apple won hands down.
“Apple accounted for nearly 75 percent of online sales on mobile devices on Black Friday, new data from Adobe reveals.”
So, while Apple, Samsung and Google seem to have very similar smartphone market shares, it’s clear that Apple Pay will end up the winner when it comes to transactions. Call it an Apples to Apples comparison, if you wish!
In summary, I think Apple Pay will always have the edge because even though they lag Samsung and Android in terms of smartphone market share, their users will invariably generate more mobile wallet transactions than users of the other two.