Apple: iPhone Fingerprint Reader Means Government Business

| About: Apple Inc. (AAPL)

A widely rumored feature of September's upcoming iPhone launch is the fingerprint reader. A telltale sign this may be true comes from Apple's (NASDAQ:AAPL) $356 million acquisition of AuthenTec in July 2012. The company operated in the access control market working with fingerprint readers.

If a fingerprint reader is embedded in the new iPhone (perhaps in the home button), then Apple could quickly become the de facto leader in mobile device security, and both enterprises and governments around the world would likely look to add iOS devices to their networks.

ICE Justification Yields Clues

In October 2012, U.S. Immigration and Customs Enforcement - ICE, announced a major iPhone win for a high security government agency.

The contract was for iPhone services sourced through various carriers with a total award value of $2.1 million, covering 17,676 users. The contract yields clues to government demands for, and needs, in mobile device security.

Business requirements considered in the justification described:

  • "biometrics fingerprint and retina scanning for immediate identification of an individual."
  • "biometrics for facial recognition indemnification of an individual."

The justification for the contract compares and contrasts iOS, Google's (NASDAQ:GOOG) Android and BlackBerry (NASDAQ:BBRY) mobile operating systems. In categories like "digital certificates and identity management," and virtual private network support, all three options scored a 5/5. But, BlackBerry expectedly dropped the ball in "commercial viability" with a 2/5, and Android received 1/5 for operating system modification and detection, probably due to its open source nature.

While the fingerprint reader capability seems possible, facial recognition with the iPhone is as well (pending the right software). If one or both features make it into the new iPhone, porting them to the iPad will likely happen too, and the government may get hungry for more iOS products.

Apple is Winning Government Contracts

On August 27th, 2013 the Department for Veterans Affairs posted a solicitation for 210 iPhone 5's for the Western New York Health Care System. Albeit, a small contract, I expect to see more and more government iPhone contracts, especially if the new phone launch focuses on security.

In February of this year Apple landed a major contract with the New Zealand police, for an estimated $159M over the next 10 years. The contract provides 6,000 users with an iPhone, and 3,900 with an iPad as well.

In November, 2012, the National Transportation Safety Board justified paying to switch to iPhone 5 devices, even though they had the opportunity to upgrade to BlackBerry devices through their contract with Verizon Wireless (NYSE:VZ) for free. The justification cities failing BlackBerry handsets as a reason for the switch.

The TSA in May 2012 also released a contract for purchasing up to 1,000 handheld Apple devices.

If security is the main focus of the new iPhone launch, I expect we will see a significant rise in sole source / solicitation for iPhone devices across many government departments.

Speculating on The Trade-In Program

I'm sure you've heard of the recently announced Trade-In program. Announcing a program like this on the heels of a new device launch, leaves me to wonder if the new features in the phone won't be as glamorous as they once were.

Historically speaking, demand for the latest iPhone after its launch date, has always been exceedingly high. So why announce a trade-in program now?

Since the general consumer is the greatest owner of the iPhone, I'm speculating that this new model won't appeal to the masses as much as previous new iPhone models have. This supports the theory of a security focused phone, possibly with a fingerprint reader, and facial recognition software.

Not to knock the consumer, but if you've got a tech background, you know; the average consumer says they care about security, but their digital behavior often says otherwise.

A fingerprint reader may be unappealing to the masses, and a "big brother" like feature may even scare some away. If the new phone is in fact weak on consumer appeal, then the trade-in program will likely make up for some lost consumer sales.

From BlackBerrys To Apples

BlackBerry is widely quoted as saying they have 1 million government customers in North America, customers Apple may slowly acquire over time. The company generated $261M in software revenue (licensing, maintenance, support, upgrades) in FY2013 and the company is relying heavily on success of BlackBerry Enterprise Server 10 to help it move into the future.

The company was awarded authority to operate on Department of Defense networks with the Q10, Z10 and Blackberry Enterprise Service 10. This is one of the key lifelines that keep Blackberry's government business alive.

If the new iPhone comes loaded with security features as discussed, it would seem plausible that security analysts at the DoD would have to look long and hard at how the Apple solution stacks up to BlackBerry's.

Where Does Apple Go From Here?

With the pending new phone launch, the trade-in program, and celebrity investor Carl Icahn taking a large stake in Apple, the future looks bright. Given share buybacks, and a stack of cash, I think Icahn and others are looking for $700/share within the coming year.

Even if the newest iPhone doesn't attract as much consumer buzz as usual, continuing to win in the enterprise and growing government contracts are key to Apple's continued growth.

Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in AAPL over the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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