Apple: Monetization Is Easier Said Than Done

Aug.20.14 | About: Apple Inc. (AAPL)

By Michelle Jones

Apple Inc. (NASDAQ:AAPL) may have a plethora of opportunities present in its massive database of credit card information, but can the company really monetize that database? And are there other ways Apple might be able to monetize its users? Analysts have made so many suggestions at this point that investors have begun to expect further monetization from Apple, but Sanford Bernstein analysts say it probably isn't as easy as most believe it is.

Monetization possibilities for Apple

In a report dated Aug. 18, 2014, analysts Toni Sacconaghi, Jonathan Cofsky and Eric C. Garfunkel gave a list of the monetization possibilities that have been suggested for Apple. After all, the company has about 500 million iOS users, about 600 million App Store accounts, around 800 million iTunes accounts, most of which have credit card information attached to them, and "very high customer engagement metrics," according to the Sanford Bernstein team. A benchmark from International Business Machines (NYSE:IBM) said earlier this year that Apple devices made up more than double the amount of online traffic and more than five times online sales when compared to Android devices on Black Friday and Christmas Day.

In addition to those opportunities, Sacconaghi and his team say there are also plenty of other opportunities as well, like advertising, search and ecommerce. All of these areas tend to have higher margins and higher recurring revenue and profitability levels. Cook himself has been talking about monetization possibilities for nearly two years.

Apple's efforts "notably unimpressive"

The Sanford Bernstein team reported that historically, Apple's efforts in monetizing its installed base and developing services haven't been that impressive. For example, the company launched iAd four years ago, but the service hasn't had much of an impact. In September, the company revealed Apple Radio, but it appears like management wasn't even convinced of success. They ended up buying Beats Electronics, which already had an established streaming radio business.

And then there are the continuing iCloud problems, the much-hated Apple Maps app, and the lack of monetization for Siri. Sanford analysts note that management hasn't offered any comments on any of these offerings in the past three earnings calls.

Apple and the law of large numbers

The analysts also note that Apple's huge revenue base of $180 billion makes it hard for the company to make an impact with any of these types of offerings. They say even the iTunes music store, which is probably Apple's best monetization effort, has only about $6.5 billion in revenue annually, which is a tiny percentage of the company's overall revenue.

And third, the analysts note it will take some time for Apple to monetize its user base. They said that while there's plenty of potential, it's going to take a lot of time to realize all of that potential. For example, seven-year-old Twitter (NYSE:TWTR) has only about $1 billion in annual revenues. Apple rakes in that same amount through iPhone sales every three days.

Apple's opportunity in payments

Out of all the opportunities Apple has, payments are perhaps the most talked-about option. The Sanford Bernstein analysts suggest that the company could compete directly with eBay (NASDAQ:EBAY) subsidiary PayPal. In January, Cook suggested that they're interested in payments and incorporating the option in with the Touch ID fingerprint sensor. He added that they could go even beyond that at some point as well.

Of course the Sanford Bernstein team notes that Apple's credit card database makes it very well-positioned to "offer a seamless web and in-app purchase experience." They believe the company could even offer lower fees to commerce companies compared to traditional credit card companies. They suggest that a payments role including both online and offline purchases is also a possibility, especially if the iPhone 6 ends up having near field communication.

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Disclosure: None.