I think Apple's (AAPL) next big innovation might be iBeacons and mobile payment processing. Apple didn't invent indoor beacons or the idea of indoor navigation, but iBeacons can greatly improve indoor navigation (think malls, stadiums, Target, etc.), create additional revenue opportunities for Apple, and prove that Apple can still innovate. Apple has been quietly working toward this for years and I think we will know within six months whether it will catch on to become Apple's next big innovation. If it catches on, it will change the way we navigate indoor spaces and I think it could result in an increase in Apple's forward P/E of 2 points (from a 12 to 14, a pps increase of about $100).
I am an amateur investor who is overweighted in Apple at an average of $420. I started buying Apple in March 2013 and have benefited greatly from the ideas and research shared on Seeking Alpha. This article is an effort to give back to all the people who have written articles or posted comments, and is a way to get feedback. This is research I did for my own benefit. If what I write makes sense or if you think I have reached the wrong conclusions, please say so in the comments. I want the feedback -- that will help me make better decisions. If I reply to a comment, I will be polite; I am not here to argue or to try to convince you that I'm smart or right.
Predicting what Apple will do isn't easy because its plans are top secret. It takes a lot of research and thinking like a detective to figure out what Apple might be planning to do. Please bear with me -- this subject is somewhat complicated. But if I'm right, it will be good for Apple investors. Obviously, there is a lot of speculation in this article and the article doesn't cover every detail, but it gives you a good start if you want more information. I don't claim to be an expert about anything discussed in this article -- I am only sharing what I know and what I believe might happen. If you know more, please contribute your knowledge in the Comments below.
How iBeacons Could Change In-Store Shopping and Indoor Navigation
You may not have heard much about iBeacons -- the first significant discussion only started appearing online in September 2013. iBeacons are Apple's version of a way to use smartphones to navigate indoors. Apple didn't invent indoor "beacons," but has improved and energized them. iBeacons are small, cheap, and can be bought separately, but according to the Dec. 7 TechCrunch article linked below "every iOS device since the iPhone 4s and iPad 3rd gen is already capable of being either an iBeacon receiver or transmitter, as long as it's properly configured."
Many stores already have iPads as marketing displays or for payment processing and those can be turned into iBeacons. iBeacons must be turned on to work and the customer will need an app to use them inside a store (an app for each specific store), so they aren't a privacy concern. iBeacons can work with both iOS and Android and can allow mobile payment processing. I won't go into a technical explanation or a comparison of iBeacons to NFC -- there are lots of articles about that. Suffice it to say that NFC has been out for two years and it hasn't really caught on for in-store retail, and the fact that American Eagle is replacing NFC with iBeacons says something. American Eagle's reasons for changing to iBeacons are explained below.
Some examples of how iBeacons can be used are:
1. Individuals can use iBeacons for helpful purposes such as finding the location of indoor places such as restrooms, seats at a ball game, the store you are looking for at the mall, or the part of a store you are looking for (e.g., electronics or men's clothes).
2. If you have an app on your phone (iOS or Android), the store can interact with you, and stores like that idea. For example, the store can welcome you, offer you coupons, make it easy for you to ask a question, and help you find what you are looking for. The idea is to make your shopping experience better and more profitable for the store. The store can only contact you if you turn on the app.
Why I Think iBeacons Might Be Installed in Many Stores
1. I think the hook for consumers will be that iBeacons can make it easier to navigate stores. We have all been frustrated finding stores at the mall, finding the restrooms in a store, finding a section of a store, or getting help at a store. A solution to those problems is something we would all appreciate.
2. Retailers see other advantages, such as being able to interact with customers and offer coupons, specials, directions, help, and increasing sales.
3. Retail is very competitive and every time a store installs iBeacons (or activates them in an iPad), its competitors will consider adopting them.
4. iBeacons are cheap -- about $50 each if bought separately, but they are included in iPads. A small store might need one to three and a large store might want one for the entry and every department.
5. Apple has huge name recognition and credibility -- the Apple name is trusted. That is why companies that are in the beacon business are now promoting them as iBeacons or iBeacon-compatible.
6. Apple's iPhone customers are known to be higher income and those are the consumers most retailers want to target. That is one reason I believe major retailers will take iBeacons seriously and react favorably to the idea of Apple providing mobile payment processing.
Who Is On Board So Far?
According to a BusinessWeek.com article from Oct. 24:
Retailer American Eagle Outfitters (AEO) has been using NFC systems since 2011, but the technology has accounted for less than 0.1 percent of transactions, says Joe Megibow, the company's senior vice president of e-commerce. 'Technically, NFC's worked pretty well,' he says, 'but as far as satisfying a customer need, it's been really, really small.' 'There are opportunities for marketing and selling that don't play in the NFC world,' Megibow says. After two years with NFC, American Eagle is ready to try something new. 'By this holiday shopping season,' he says, 'we'll have iBeacons in our stores.' ...and... 'Major League Baseball plans to roll out an iBeacon program at stadiums next year.'
And from TechCrunch.com on Nov. 20:
ShopBeacon, as the new (Shopkick) iBeacon transmitter is called, begins trials today in Macy's in Union Square, San Francisco and Herald Square, NYC, before Shopkick rolls it out to more of its retail partners across the U.S. ... Those retailers include American Eagle Outfitters, Best Buy, Crate and Barrel, JCPenney, Macy's, Old Navy, The Sports Authority and Target, among a number of consumer brands that also promote product offers through the app.
More Clues to Apple's Plans and How iBeacons Could Benefit Apple
Below are quotes from other articles that I found insightful:
1. From a Business Insider article on Dec. 7:
But the reason iBeacon could be a game-changer is because it doesn't require retailers to invest in a lot of specialized equipment ... By some estimates, as many as 190 million iOS devices are currently out in the world capable of being iBeacons, reports TechCrunch's Matthew Panzarino ... That means this is a ready-made system just waiting for retailers to launch the apps ... Android app developers are working on software that will make Android work with iBeacon.
2. From AppleInsider.com on Nov. 20:
Apple quietly introduced iBeacons alongside iOS 7 at July's Worldwide Developers Conference, and the Bluetooth Low Energy-based technology was quickly recognized for its potential to revolutionize location services with its low power requirements and ability to precisely pinpoint users' locations inside buildings. Many believe it could form the basis of a new iTunes-powered mobile payments system, similar to what Google has attempted to create with the NFC-based Google Wallet.
3. From TechCrunch.com on Dec. 7:
According to Scott Paul, CEO of ArmorActive, 'Apple continues to be the tablet of choice for the majority of kiosk use that we build at ArmorActive,' Paul told TechCrunch. 'Android is there, but we find that even though the price can be more competitive, the [fragmented] versioning of the OS and change in size makes it difficult to rely on the device for long-term deployments.' (Paul's company has installed 50,000 tablet 'kiosks' in retail, hotels and restaurants. An example is in the Kate Spade retail chain where the iPads are used as simple digital signage displays). We asked Paul about the implications for the retail tablet install business if currently installed iPads can be used as iBeacons. While he was aware of the iBeacon system, and Apple's rollout today, he was surprised to learn that existing hardware could also be used as an iBeacon. 'This would present a major advantage to Apple, as many businesses have already implemented these devices into some part of its business, so iBeacons could essentially be turned on all over the business landscape with just a little education and awareness,' Paul told us. 'This would further the value of using tablets in retail, as they can both display and transmit messages to those who have displays in their pocket. Apple would widen the gap between themselves and other tablet manufactures, because now their existing hardware plays nicely with your iPhone or iPad and would require such close proximity to make a handshake. NFC has failed to provide this value as evident in the ISYS hardware rollouts that see little adoption.' and... 'This will be the next big frontier for indoor mapping and retail, and Apple has an enormous -- possibly insurmountable -- head start because of how forward-thinking it was with Bluetooth LE hardware.' and... 'Apple, by rolling out hundreds of millions of units capable of being both users and active transmitters, has positioned itself to be the de facto standard … Apple has already established its hardware as a must for any new systems to either integrate or support … This isn't Apple rolling out beacons in a few of its stores. It's Apple rolling out potential beacons in every store that has an iPad -- and there are hundreds of thousands already out there. Now, when a retailer makes a decision about tablet kiosks or signage, they've got the incentive of a hyperlocal advertising or customer-service system built right in … This is going to end up selling an absolute ton of iPads.'
How Will Apple Roll Out iBeacons?
You probably wonder "How is Apple going to get iBeacons into stores?" The answer, I think, is brilliant -- it appears Apple will rely on app developers and other companies to do it. The Macy's installation, for example, was by a company named Shopkick. Another company is Estimote. Both companies have videos on YouTube about iBeacons. Using other companies will allow iBeacons to be rolled out much faster than if Apple tried to do it. Some might quibble about the difference between "beacons" and "iBeacons," but notice that the beacon companies are promoting their beacons as iBeacons or "iBeacon compatible." The point is that "iBeacon" is already the commonly used terminology, and that identifies the technology with Apple. As for the apps required, Apple already works with thousands of app developers so that piece of the puzzle is in place. That explains why iBeacons are already being rolled out when most people have never heard of them.
Two Ways iBeacons Can Increase Apple's Revenues
The articles referenced above mention two ways iBeacons can increase Apple's revenues:
1. iBeacons should result in the sale of lots of iPads for in-store marketing and payment processing. It could possibly result in increased adoption of iPads as a replacement for cash registers.
2. iBeacons set up Apple to go into mobile payment processing because iBeacons are needed for that to occur. Apple could become a competitor to PayPal and use an approach similar to PayPal. Apple's improvements to iPhone security can make mobile payment processing more secure than the current credit card processing system.
Discussion of Apple Starting Mobile Payment Processing to Compete With PayPal
Below are some thoughts and research:
1. Getting involved with mobile payment processing is a natural for Apple and should be relatively easy. Apple has the financial strength, the name recognition, the credibility with consumers and retailers, and the iTunes platform is in place. The main thing lacking was "How can Apple get the stores to install a system that can accept mobile payment processing by Apple?" iBeacons can solve that problem because they can allow mobile payment processing.
2. As mentioned above, iTunes can provide a platform for mobile payment processing. In June, Tim Cook said there are 575 million iTunes accounts (vs. 135 millions PayPal accounts).
3. According to PayPal's website, PayPal contributed 42% of eBay's revenues in Q3 2013, and PayPal expects to process $20B in mobile payments in 2013, a 500% increase since 2011.
|Company||F P/E||Cash||Op. CF|
Source: Yahoo Finance Key Statistics on Dec. 9, 2013.
Visa and MasterCard are included to show how the market values payment processing companies that have strong balance sheets. eBay is included because it owns PayPal. Google and Amazon are included to show how the market values perceived potential and buzz. (The numbers in the above table are simplistic but they make the point. Cash doesn't include long term investments. Op. CF is Operating Cash Flow ttm.)
Impact on Apple's Share Price
I don't know the amount of actual revenue that might result from additional iPad sales and mobile payment processing, but from the table above, it is apparent that Apple's forward P/E is much lower than Google, Amazon, and companies engaged in payment processing that have strong balance sheets. The knocks on Apple (and apparent reason for its low P/E) are that "Apple can't innovate any more" and that it lacks diversification. If iBeacons take off and Apple starts mobile payment processing, I think the buzz associated with those events could result in Apple's forward P/E increasing from 12 to 14. By my calculation, that would result in a price per share increase of about $100. A 14 P/E is still at least 10% lower than any company listed above and much lower than Google or Amazon. In my opinion, Apple is the only company that is capable of causing this indoor navigation system to be widely adopted. It appears Apple has been working toward this for several years and it will be impressive if Apple can pull it off.
Final Comments and Request for Feedback
If you have thoughts or information related to this subject, I hope you will share them in the comments below. I don't claim to have all the answers or to be an expert about anything discussed in this article. There might be revenue opportunities related to this that I haven't thought of. If iBeacons are going to catch on, I think the buzz will develop quickly (within 6 months). Will iBeacons catch on? Do you think Apple will get into mobile payment processing? If iBeacons catch on and Apple announces it is getting into the mobile payment processing business, how much will the stock price move? Could this convince investors that Apple can still innovate? Do you see other revenue opportunities for Apple that could result from iBeacons?