Apple Takes the Long Road on Mobile Payments
AAPL 1.01% often bides its time before diving in to developing tech markets, which explains why it's largely on the sidelines in the mobile-payment wars.Inc.
Mobile payment is a new battlefield in the wireless industry, with companies fighting to offer consumers a way to pay for purchases with their smartphones instead of wallets. Mobile-payment transactions are expected to exceed $600 billion world-wide by 2016, according to market-research firm Gartner Inc., up from $172 billion this year.
Google Inc. GOOG -0.60% last year unveiled its Google Wallet service that lets some users hold Android phones in front of small terminals near cash registers to pay tabs. A group of wireless carriers is pursuing a similar service, called Isis.
But Apple's entry is noticeably less ambitious.
Last month, it unveiled a service called Passbook that pulls together loyalty cards, tickets and coupons. But Passbook, which Apple will release this fall, drew attention for what it doesn't do: It can't link directly to credit or debit cards, so consumers can't use it to replace their wallets.
Holding back in mobile payments was a deliberate strategy, the result of deep discussion last year. Some Apple engineers argued for a more-aggressive approach that would integrate payments more directly.
But Apple executives chose the go-slow approach for now. An Apple spokeswoman declined to comment on the decision-making process.
Apple's head of world-wide marketing, Phil Schiller, in an interview last month, said that digital-wallet mobile-payment services are "all fighting over their piece of the pie, and we aren't doing that."
"Apple is always a comfortable number two," says Piper Jaffray analyst Gene Munster, citing its relatively late entries in the MP3 player, smartphone and tablet markets as examples. "They let their competitors do their market research for them."
The approach leaves competitors and partners, from media companies to retailers, scratching their heads trying to anticipate the moves of the world's most valuable company.
As competition in the smartphone market, in particular, heats up, it could leave Apple vulnerable. Still, the market is nascent enough that Apple can afford to take its time, says Nick Holland, a senior analyst at the Yankee Group. "Right now it is just a gold rush," he says, saying the business models and leaders will be more solid in 18 months.
He and other industry watchers, from analysts to rivals to security professionals, expect Apple to come out swinging eventually once consumers become more comfortable substituting their phones for their wallets.
Apple would appear to have an advantage in the mobile-payment arena. The company has sold more than 200 million iPhones and has some 400 million credit-card accounts registered with its iTunes store.
Last year, Apple engineers and executives considered some aggressive approaches to exploit that advantage when in-house debate over the market began in earnest. Google unveiled its Android payment system around the same time.
A small group began investigating whether the company should create a new service that would embed various payment methods into the iPhone or build a payment network of its own, according to people familiar with the matter.
Apple's head of iPhone software, Scott Forstall, was interested in the idea, say people familiar with the matter, and engineers on his team began to brainstorm a comprehensive "wallet app."
They discussed whether Apple should facilitate payments to merchants directly, one of these people said. The idea didn't go very far, on account of the complexity, including the possibility that the company would need to become a bank.
The Apple team investigated ways to make money from various ideas, such as teaming up with an existing payment middleman and taking a small cut of many transactions rather than layering on an additional fee. Some who worked on the project referred to the idea as "the Superman III" play, in honor of the movie's greedy tech-savvy villain, this person said.
The team started to scale back its ambitions. Apple engineers discussed the possibility of a mobile software app that would give users access to payment cards, along with coupons, in one place and recommend which one should be used for each sale, according to one of these people.
For instance, when a user went to buy clothes at department store Macy's, the software would recommend whether they should use their standard credit card or a Macy's card, if they had one, based on available offers through each.
Meanwhile, Apple's iPhone-hardware division had already been studying technologies for over-the-air payments, including a version of Bluetooth connections that require less energy and near-field communication, known as NFC, according to several people familiar with the investigations.
NFC technology lets users tap their phones at terminals near a cash register to pay. Google Wallet uses this technology, and Microsoft's service plans to as well.
Apple employees patented some NFC ideas but worried about whether the technology was secure enough, and whether they could squeeze in the required chip and a new antenna without severely impacting the iPhone's battery life. Executives were also leery of the slow adoption of NFC among retailers, whom industry analysts predict won't adopt it in any meaningful way for three or four more years.
When the payments plan came to an executive review in early 2012, several Apple senior executives balked, says a person briefed on the meeting.
Apple's chief financial officer, Peter Oppenheimer, questioned whether there was newer secure technology that employed the Internet rather than use NFC, this person said.
Apple's Mr. Schiller was worried that if Apple facilitated credit-card payments directly consumers might blame Apple for a bad experience with a merchant.
The executives ultimately opted for the more scaled-down version of Passbook, which engineers still referred to as the "wallet app."
After Mr. Forstall showed off the service at Apple's developer conference last month, analysts immediately predicted Apple would add more payment functionality eventually. "What they essentially have is everything you would store in a physical wallet apart from the cards," says Mr. Holland of the Yankee Group. "I imagine Apple will layer physical world payments as a future capability."