The Sunday Brief

Connecting technology, telecommunications, and the internet

The Apple Card – A Wolf in (Titanium) Sheep’s Clothing?

by | Aug 18, 2019 | TSB

Greetings from Davidson, North Carolina, home of Davidson College Athletic Department Fan Fest 2019.  This picture pretty much captures it all – fellowship, family, food trucks, and fall sports.

Before going into this week’s topic, a quick note of congratulations to interim CEO Robert (“Bob”) Guth on the announcement to sell Continuum Communications to TDS Broadband for $80 million.  While the transaction is still subject to voter approval in November, the removal of a large debt burden from the towns of Mooresville and Davidson is significant.  It’s also a terrific deal for TDS who also owns Baja Broadband (Utah) and Bend Broadband (Oregon).  Based on the Wikipedia summary here, it’s also the first property purchased in North Carolina since they left the state in 2015.  Welcome back to the Tar Heel state, TDS, and kudos again to my good friend Bob for his diligence and perseverance throughout the sale process.

In other news, local Davidson start-up Lucid Drone Technologies will be participating in the Y Combinator Summer Pitch Competition as a finalist on Monday.  Andrew Ashur, David Danielson, and Adrian Mayans have built quite a company over the past year, and, as an investor and advisor to Lucid, I am pleased with the initial product adoption and their overall business model.  TechCrunch should be covering the company in an upcoming article.  Best wishes to the team as they pitch to thousands on Monday.


The Apple Card – A Wolf in (Titanium) Sheep’s Clothing?

In May, Tim Cook described the Apple Card (which is backed by Goldman Sachs and MasterCard) as “the most significant change in the credit card experience in 50 years.”  At first blush, however, the card’s benefits (Titanium physical card, great category spending notifications, GPS/ map coordinates for every purchase made, interest cost implications of not paying the full balance every month, etc.) appear to be more visually appealing than anything else.  A beautiful user interface is the expected result for any Apple product.  The question now becomes “How will it change the trajectory of Apple’s sales and increase market share?”

Without a doubt, increased Apple Card users will reduce any churn to Android.  In a remarkable return to Apple’s hardware/ software verticalization, new Card users cannot pay their bill from the Web, only through their Apple Wallet application (or through a Goldman Sachs customer care representative if their phone is stolen).  Note:  Apple Wallet is only found on devices that run iOS.  From the latest Consumer Finance Protection Board study (using 2016 data), about 40% of the general purpose credit card-using population (Visa, AMEX, MC, etc., as opposed to private label Macy’s or Kohl’s retail card) carries a balance every month (see nearby chart).  This figure rises to 60% if the highest quality credits are excluded. Because of the iOS payments restriction, an Apple Card user with revolving card tendencies will need to remain an Apple customer until the last payment.

Interestingly enough, last week’s teaser story from CNBC on the Apple Credit card described Apple’s push into lower FICO scores (and appropriately smaller credit limits).  This would reinforce the idea that card usage (% of total cardholders using the card every month) to engender brand loyalty is an important objective of the Apple Card.

Will current Apple customers sign up for a no annual fee, low interest rate card?  If brand loyalty is any indicator, the answer is yes.  In Forbes recent ranking of the world’s most valuable brands (November 2018), Apple was #1 by a landslide ($206 billion vs. $168 billion for #2 Google).  Now-Apple-competitors Visa and American Express were ranked #25 and #27 respectively ($27 and $26 billion in value, respectively).  AT&T is ranked #11 and Verizon #19, but the value of both brands combined is about one third as valuable as the Cupertino king.  Visa, American Express, MasterCard, Wells Fargo and HSBC are all ranked in the top 50 Global Brands, but their combined brand value is half of Apple’s.

What would entice Apple customers to use this card before others?  This is where things get very interesting.  As noted in a blog post in May by Ken Segall (one of the key contributors after Steve Jobs’ return to Apple in the late 1990’s, including the brain child behind the “Think Different” campaign), Apple was very close to launching a credit card in 2004 which would reward customers with free music and other amenities.  Here are a few ad copies he posted:

Apple has been mum on how they would use the Apple Card to attract new purchases (e.g., would they use this to drive higher levels of Apple Cloud vs. iTunes vs. Apple TV content), but recent reporting from Bloomberg indicates that their focus may not solely be on low-dollar items.

In their study of the Apple Card terms and conditions, they discovered that Apple is considering the option of financing larger purchases over longer periods of time at favorable interest rates (the specific language in the Customer Agreement reads: “We may from time to time offer you different APRs and different terms that will apply to specified Purchase Transactions or other balances on your Account. Details will be provided at the time that these terms are offered to you.”)

This sounds innocuous enough, until it’s coupled with Apple’s current (February 2019) activity with Ant Financial in China, where they are offering 0% a.p.r for up to 24 months to qualified customers (more on that in this Reuters article).  According to Reuters, “Users buying products worth a minimum of 4,000 yuan worth from Apple would qualify for interest-free financing that can be paid over three, six, nine, 12 or 24 months.” (4,000 yuan is ~$575).  Bottom line:  Apple could be contemplating using the Apple Card as an alternative to traditional carrier-based device financing.

Here’s one possible timeline/ outcomes scenario :

  1. Apple announces their new series of iPhone devices in September 2019. Like the iPhone XR, XS, and XS Max, the new devices are multi-carrier (note: it’s likely to be announced iPhones will not have millimeter Wave radios included).  It is also highly likely that new iPhone devices will include eSIM technology which greatly eases switching between carriers.
  2. As a part of the announcement, they offer an additional monthly payment incentive to existing iPhone customers who upgrade their iPhone using the Apple Card (this would be classified as a specified Purchase Transaction described in the Customer Agreement above)
  3. Monthly installment payments are now made to Apple, not to AT&T, Verizon, or T-Mobile
  4. Service on iPhones will be handled through existing Apple and Best Buy stores (see recent announcement here). Reminder:  70% of the US population lives within 15 miles of a Best Buy store.
  5. In order to compete with Apple’s new financing offer, the carriers will have to increase their trade-in and port-in incentives. Cost Per Gross Add (CPGA) rises – more Buy One Get One (BOGO) offers.
  6. If they choose not to counter this offer, millions of new and upgrading no-contract customers will now have no monthly equipment installment payment tie to Verizon. Churn rises.

The adoption rate depends on the incentive described in point 2.  Here’s a few ways Apple could make the offer attractive and still maintain strong relationships with their strongest distribution channel:

  1. Discounted or deferred payments. Promotion would be “Trade in an Apple 8 or greater model, finance through the Apple Card, and get up to a year of payments on us.” Assuming a 64GB Apple 8 in good condition is worth $300 today, and that the new Apple XR variant costs $799 ($33.29/ mo. for 24 months), this might be worth several hundred thousand upgrades.  As is seen on other term-based installment plans, Goldman Sachs makes money if the device is not paid in full by the end of the term.   Impact to carriers would be minimal as they could easily counter with BOGO or increased trade-in value offers of their own.
  1. Increased trade-in value on upgraded devices. Using the above example, if the trade-in value were increased to $450, the new monthly payment would be $14.54/ month for 24 months.  Apple would take a lower margin on each new iPhone sold, but would presumably make additional money through the card and app store as well as  increasing loyalty.  This would drive up CPGA for the carriers if they decided to match the offer.
  1. Sacrifice higher margin features for increased iPhone upgrades. Promotion would be “Buy a new iPhone using the Apple Card and receive 2 TB (Terabytes) of Apple Cloud OR Apple Care on us for as long as you own the device.”  This is currently a $9.99/ month product (Apple Care plan would exclude loss/theft option) but both are high margin products.  Apple does not publish their Apple Cloud product stratifications, but the incremental cost between 200GB and 2TB is pennies per month.  Carriers would not be happy with this one as they make very good profits from providing device protection.  But providing cloud storage would be a lot more attractive than the next option.
  1. Increased device storage. Promotion would be “Buy a new iPhone using the Apple Card and receive the 512GB version for no additional charge.”  The retail difference between the cost of the iPhone XS 64GB and 512GB versions is $400 (the cost to provide the extra Gigabytes is less than $40). There are lot of puts and takes to this promotion, but for Apple, it would greatly increase the use of premium apps like Apple Music which provide the ability to download favorites for offline viewing/listening.  This would (gradually) increase the use of offline content for videos which would reduce streaming data tonnage.  Long-term, this could be bad for the carriers (but it would instantly increase the use of the Apple Card for equipment installment purchases).

There are many other angles that Apple might consider (e.g., cross-promotion with the Apple Watch, iPad, Mac and other products), but there’s no doubt that the Apple Card is a wolf in (titanium) sheep’s clothing to the carrier community.  To prevent a competitive free-for-all, the carriers need to rethink their pricing strategies (including 24 and even 36-month service plan contract discounts).

As a reminder, we will be posting a Deeper blog on Tuesday which will include a bibliography of all of the articles discussed in TSB and a few that we did not have time to consider.  If you would like a copy of either the Top 10 Trends (the Apple Card introduction was one of them) or the IoT Basic presentation discussed in last week’s TSB, please let us know at the email below and we’ll send as soon as possible.

Next week, we will be discussing AT&T’s relationships with Microsoft, Dell, and IBM.  Labor Day’s TSB will examine the role of Citizens Band Radio Services (CBRS) in the communications landscape.

Until then, if you have friends who would like to be on the email distribution, please have them send an email to and will include them on the list.

Have a terrific week!



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