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As the launch of the Apple Inc. (Nasdaq: AAPL) iPhone 6 careens our way, we're seeing more and more speculation that the iDevice king wants to add digital payments to its "ecosystem."
And that's going to further supercharge the business of NXP Semiconductors NV (Nasdaq: NXPI), the specialized chipmaker whose shares are up 195% since we recommended them back in May 2012.
Let us show you why…
The "Smart" Money… Really
Apple is working with the Eindhoven, Netherlands-based NXP to add "near-field communications" (NFC) technology to the new iPhone 6. Apple has scheduled one of its major marketing events for Tuesday, Sept. 9. Most folks are expecting the company to introduce the iPhone 6, the iWatch, and a digital-payments service.
According to reports in the Financial Times and Bloomberg News, Apple has included NXP's NFC chips in the new iPhone – and perhaps in the iWatch, as well.
NFC technology works just as the name indicates: It allows device owners to pay for purchases by wirelessly connecting to checkout terminals or ticketing systems.
Despite investor obsession with iPads, iPhones, and the iWatch, it's this push to add digital payments to the company's technology ecosystem that could fuel the next phase of Apple's growth. Indeed, that's why we've been telling you about the company's efforts to add other products, services, and technologies to its stable of offerings.
One technology that could also factor into this push into retailing and payments is the "iBeacon," which technologists say could revolutionize smartphone technology in a way that makes handsets the go-to devices for the Internet of Everything.
The iBeacon was originally described as being a threat to NFC technology. Instead, it looks like they will be complementary.
The iBeacon is a Bluetooth-based system that functions kind of like an indoors global-positioning system (GPS) that lets retail stores, museums, and sports teams employ such strategies as "proximity marketing" and "customized marketing."
With proximity marketing, the beacon's ability to sense where you are can allow a nearby restaurant or store to send you their latest specials. Customized marketing is similar, except that the offers or coupons you receive will suit your specific interests.
Once you're "hooked," so to speak, the digital wallet comes into play – allowing you to pay for your purchase by holding your phone near the transaction terminal's "receiver."
There's been a lot of testing of iBeacon technology over the past year. According to reports I've seen, it's been used at Major League Baseball stadiums, at a swath of retail outlets, and by Virgin Airlines.
The rollout of the digital payments system could kick iBeacon demand into hyperdrive.
RBC Capital analyst Daniel Perlin – who covers "point-of-sale" firms like NCR Corp. (NYSE: NCR), as well as the credit card companies – told clients in a research note that Apple will benefit from the following three "key attributes" that are "crucial to drive adoption" of payments:
- An installed base of 500 million iPhones.
- At least 800 million iTunes subscribers.
- And the kind of market power and brand cachet that translates into "the ability to drive the necessary standards."
It's Hard… but Old Habits Die
One of Apple's biggest challenges will be the need to change consumer buying habits. If you're like me, you're pretty comfortable with the credit card. So Apple will have to find ways to induce folks to stop using their "plastic" – and use their smartphones, instead.
Apple will try to drive consumer "adoption" with such devices as a loyalty points system.
"We believe part of Apple's strategy to introduce a wallet could be to enable consumers to shop and pay anywhere Visa, MasterCard, and Amex is accepted, but create a loyalty program 'iPoints' (managed in iTunes) that can only be redeemed in the Apple ecosystem," RBC's Perlin wrote. "In this example, consumers could potentially double-dip, earning loyalty points from Apple and from the banks' legacy rewards programs represented by the card brands. We further believe this type of loyalty program could be used to help fund many of Apple's new streaming product offerings."
Christopher Brendler, a payments-sector analyst who works for Stifel Nicolaus, agrees that plastic credit cards remain a "tough competitor." But he thinks that Apple is the company that's finally "cracked the code" on point-of-sale smartphone technology.
"We see game-changing potential" in Apple's efforts, Brendler told clients in a research note.
Initially, Apple will further ease the transition by focusing on brick-and-mortar purchases.
"With NFC and iBeacon to follow, we expect Apple's payments product to be more focused on physical, brick-and-mortar retail than online where the checkout screen is already inundated with potential PayPal competitors (Google, Amazon, Visa, MasterCard)," Brendler wrote. "We think Apple correctly sees a much bigger opportunity offline where consumer adoption is still negligible as the current iterations from PayPal, Google, and ISIS don't really solve much of a consumer problem. Much to their chagrin, plastic cards are fast and convenient enough and also enjoy mass acceptance."
Two other factors could work in Apple's favor.
About the Author
Before he moved into the investment-research business in 2005, William (Bill) Patalon III spent 22 years as an award-winning financial reporter, columnist, and editor. Today he is the Executive Editor and Senior Research Analyst for Money Morning. With his latest project, Private Briefing, Bill takes you "behind the scenes" of his established investment news website for a closer look at the action. Members get all the expert analysis and exclusive scoops he can't publish... and some of the most valuable picks that turn up in Bill's closed-door sessions with editors and experts.