Mobile Commerce: AAPL and GOOG Have Home Field Advantage

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AAPL and GOOG have enormous advantages in the emerging phenomenon of mobile commerce. With platform control over mobile devices, they stand between consumers and the many companies looking to engage with them to influence and complete mobile transactions online and in stores. In this position, AAPL and GOOG can define their own solutions as defaults and make them superior in convenience and performance, while thwarting alternatives. Still, while the two may wield similar power, their approaches will be very different. AAPL will look to establish the iPhone to a role as the primary trusted credential for digital identity on-line and in the real world, further cementing the loyalty of its customers, allowing it to collect tolls on transactions, and promoting the extension of iOS to other devices in its users’ lives. In contrast, GOOG hopes to lever its extraordinary consumer reach and data analytic capability to facilitate connections between brands, merchants and consumers, accelerating the progress of m-commerce and sharing in the value that can be created. Both should be successful on their own terms, but the benefits will be more meaningful to GOOG. Forward thinking merchants that embrace mobile platforms as partners can prosper, but more insular retailers may struggle, as could independent payments solutions like PayPal.

Mobile is accelerating changes in consumer commerce. B-to-C commerce is a cycle of money, goods and information that plays through distribution, retail merchants, and payments on one side, and brands, media, and communications networks on the other. The ubiquity of mobile enhances the power of e-tail and digital advertising to pressure both sides of the cycle. Pragmatically, these players are assessing opportunities created by the rise of m-commerce, even as the long term implications for many profitable aspects of their historic business roles are obviously and unequivocally compromised.

Mobile platforms have the power. AAPL’s iOS and GOOG’s Android platforms exert enormous influence over the way that users interact with the emerging m-commerce cycle. At the least, the platforms encourage the use of favored services by setting them as defaults – improving the convenience of using them, enhancing their functionality and promoting efficiency and value creation around the cycle. More ominously, platforms can impede or outright block the commerce services that they do not like, thwart efforts to promote independent branding and demand fees from commerce cycle players looking to reach end users on their devices.

Digital ads still stop short of the sale. Digital offers advertisers targeting and tracking that is impossible with traditional media, but, thus far, have been unable to tie ad impressions all the way to confirmed sales, particularly when they are completed off line. Mobile commerce be a solution, if the platform owners are able to negotiate partnerships to benefit the necessary stakeholders in the chain. These include advertisers and merchants, but also payments players and mobile network operators (MNOs), all of whom can either facilitate or stymie m-commerce.

Merchants have purchase data but no reach. Retailers jealously guard their transaction data, but have very limited means to act upon it. This data is isolated – not linked to demographic, interest and behavior profiles – and outside the store, merchants have little communication with their customers. Merchant apps are a hard sell. Smartphone owners use just 26 apps per month, new apps are installed infrequently, and 80% of apps are used just once and abandoned. Starbucks, with its caffeine addicted users making daily visits, may have cracked the code, but no others have replicated the success, and most will need the cooperation of the platforms if they are to build meaningful m-commerce businesses.

M-payments are necessary but not sufficient to drive m-commerce. Mobile tech can substitute for traditional cards, but the solution offers little of real value to either consumer or merchant without broader changes to the overall commerce cycle. Merchants must see more customers making more purchases with lower transaction costs if they are to support m-payments. Consumers must see an easier, faster, more convenient and/or cheaper way to shop if they are to adopt and use m-payments. Achieving these conditions will require coordinated change around the commerce cycle.

AAPL acts as an agent for its users. AAPL has a closed system centered on the iPhone, delivering tightly integrated products that interwork to offer a superior user experience and closely managing the access to and from 3rd parties. It has few ambitions to disintermediate most of the functions of traditional commerce, but rather to force them to come through iOS to get to the customers, fronting 3rd party brands with its own and requiring beneficial terms. With Apple Pay, banks, networks and merchants are denied access to the coveted iPhone user base unless they agree to AAPL’s requirements – a 15bp fee from the banks, replacement of the network brand at acceptance, no 3rd party m-payments on the platform, and no change to merchant economics.

GOOG looks to orchestrate value. GOOG already plays a key role in the m-commerce cycle, not just as the owner of the largest platform, but also as the leader in digital advertising. From that position, it can lever its platform control, its consumer reach and influence, its profile data and analytic capabilities, and a growing competency in logistics to accelerate the speed and efficiency of the cycle as a whole, facilitating transactions in the process. It aspires to forge partnerships to improve data flows, match buyers to sellers, reduce friction, and thus, drive value. We expect that GOOG will soon announce its intentions in m-commerce, explicitly tying a comprehensive m-payments initiative to enhancements in its digital ad program, including tracking impressions to completed sales with merchant partners.

M-commerce problematic for non-platform players. GOOGs initiative to track ads to completion, if successful, would be unique, and a real advantage for it vs. digital ad competitors, like FB, which do not have platform leverage to offer retailers. AAPL and GOOG’s moves to integrate payments directly into their operating systems for on-line, in-app and in-store purchases, particularly if they gain lower “card present” fees, is an existential threat to independent m-payment solutions, such as PayPal, Square and others. AMZN, the alpha challenger to traditional retail, has established sufficient consumer reach and logistical advantage to prosper in m-commerce, although a comprehensive m-payments solution may be off of the table. Other e-tail and retail solutions will cope with the power of platforms – app store fees, difficulty generating app downloads and usage, default payments utilities, promotion of favored shopping partners, etc. Only those with large, loyal and high frequency user bases can prosper without explicit support from AAPL and/or GOOG. Of the two, GOOG is the more likely to offer it.

Please see our published research page for the full note.

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