Apple Pay, partnerships and software as disruption

With Apple Pay just launched and some sort of TV product floating on the horizon, it strikes me that there are three ways to think about how Apple changes industries. 

The first and obvious one is that Apple builds very tightly integrated products. It always tries to controls all the parts of the experience that matter, and over time it tends to bring more and more in house. Hence, it now designs the CPU in the iPhone and iPad and is rumoured to be planning to design the baseband chip too.

This degree of integration gives performance and power management advantages but more importantly makes tightly controlled hardware-software user experiences much easier than for a disaggregated platform like Android. This is particularly important for Apple Pay because the unique thing about it is the experience, not the principle of using NFC for card payments, which has been around for years, both at Nokia and in Google Wallet. Moving from three or four steps to one wave of the phone is only the last 10% of the problem, but of course it’s the 10% that takes 90% of the effort and makes all the difference in consumer adoption, and it’s vastly easier because of the tight integration that Apple gets from controlling the entire platform. 

The interesting part of this integration is that it tends to appear in stages. That is, Apple often builds 'Minimum Viable Products' by releasing discrete components one by one, making sure that each works well on its own and has a sensible stand-alone use case, and ties them together into a larger whole later. Hence Apple Pay needed the fingerprint scanner for Pay, but shipped it a year earlier with other use cases. These building blocks need to have both a specific and a more general purpose: unlock your phone now, payment platform later when other pieces are in place. Equally, I would expect things like loyalty cards to be integrated with Apple Pay in due course, as well as developer access to the NFC chip (just as the fingerprint scanner got an API a year on). 

Second, Apple is distinguished as much by what it doesn't integrate as by what it does. It didn't buy or build a record label and it didn't hire A&R guys. It didn't buy a mobile operator or create an MVNO. It never bought movie or TV rights, and it hasn't created a new payment platform. It is partnering with Chase and Visa, not competing with them. 

This tends to confuse people who hate their phone company/cable company/bank: they wish Apple would get into that business. But this is to misunderstand what those businesses are. My archetypal 'silly Apple rumour' is that Apple will buy Boeing to replace the inflight entertainment systems with iPads because inflight entertainment systems are bad: that may well be true, but that's not what Boeing's business IS. It makes, and sells, very big, complex machines, and the screens are totally peripheral to that business. Record labels and film companies know about finding talent and making great entertainment, mobile operators know how to run vast, complex networks of physical infrastructure and so on.  Apple (or for that matter Google or Facebook) has no skills and no advantage here. So why build when you can partner? Leave it all on their balance sheet. Leave subsidies, credit risk and talent scouting to other people. This brings to mind an ATD interview with Steve Jobs and Bill Gates, when they were each asked what they admired about the other: Bill Gates said taste (in the broadest sense) and Steve Jobs said he envied Microsoft’s ability to partner. Apple's learned something of that. 

This drive to partner means that though Apple may have a fractious relationship with mobile operators or movie studios, it does not tend to mount existential threats to them. This can contrast with Google, which with projects like Google Fibre tends to retain the grad-student idea that it can do anything at all better than anyone else. Apple looks more like a challenging partner than a challenger. Apple Pay is perhaps the best example of this: it allows banks a far greater role in the transaction (and data) than Google Wallet did, and Apple did not build a payments platform - it is not competing with Visa or Chase Manhattan. 

Third, though, for all that Apple may look like a partner, there is something inherently destabilizing in moving an industry into software. Apple didn’t build a record label itself, and gave the labels a great way to compete with piracy, but it also accelerated the unbundling of the album, which has been a huge part of the collapse in recorded music revenue in the last decade. Equally, Apple has not built a global payments platform, but it is moving the end-point of the payment system into software, and that itself is destabilizing. Passbook, after all, is a platform. What happens when any payment ‘card’ can be provisioned instantly in software? When Apple allows third party apps to use the NFC at a point of sales as well as the fingerprint scanner? What does that do to Bitcoin adoption? When you shift the entire route to market of an industry into a new platform with new dynamics, you can cause a lot of pain to incumbents even without doing anything to take them on directly. Much the same applies to TV. 

Finally, I suspect that for Apple the most important part of Apple Pay may be its use in apps, not at physical retail. If you can acquire a credit card and address with just one tap then a major cause of drop-off and cart abandonment goes away, and that in turn alters the calculus around whether you make an app or a website: you have to get people to install the app (which is a cause of drop-off), but after that everything is seamless, whereas on a mobile website you don't need to drive an install but do need to get people to type in their card (though with keychain Apple has a solution here as well). The immediate effect of this is to reinforce the position of iOS as the platform where most merchants see the majority of their value, and hence of course drive them to continue to make iOS apps and make them first, which in turn drives iOS device sales, especially to people who buy things, a virtuous circle that Apple is already benefiting from at the expense of Android. The interesting question here, of course, is what Apple's next step is. Does it try to enable Apple Pay for website accessed on iOS devices (which would be very challenging)? Add it to Macs (though this is a much smaller market)? And, of course, what if it gives third party apps access to payment data in the same way (controlled, permission-based) it does for health?