Will Apple Own The Payments Customer?

This is, of course, is the quote made famous in 1908 by Spanish philosopher and essayist, George Santayana. Published as part of his five-volume opus, “The Life of Reason,” Santayana’s insight is that examining the past, and learning from it, is the only way we can avoid repeating the same mistakes in the future. 

Eight years after Apple did its first mobile carrier deal, Apple pretty much owns the mobile customer who uses their handset. In 2022, eight years after Apple did its first bank and network deal, will Apple own the payments customer?

Here’s why I ask.

Up until about June 2007, network operators ruled the mobile world and they did so with an iron fist.

Handset manufacturers that wanted access to their networks had little, if any, bargaining power. In fact, to the network operator, the handset was an inconvenient means to their very lucrative end – simply a way for consumers to access their valuable voice and data services.

Carriers pretty much told handset makers and software developers what they could do or not do. Usually it was not to do anything that the carriers were doing, could do, might do, or might have some aspiration to do at some point in time.

Back then, remember, even if you had a smartphone, about the only “app” you could get was a ringtone, and the carriers even tried to control that. Carriers, therefore, controlled innovation in the mobile space since they more or less decided what got to market and when.

The consumer appetite for access to the Internet via mobile devices masked what was an obvious problem: there really wasn’t that much innovation coming from the mobile carriers. The mobile carriers though never felt much pressure to change things up. In the U.S., in particular, their handset subsidy business model locked consumers into contracts for at least two years, giving them a captive audience that minted them billions and billions and billions. Analysts reported that in the U.S. alone, mobile operators took home $11 billion a year in the early 2000s. Outside of the U.S., consumers didn’t have much choice either.

In 2007, Steve Jobs and the iPhone rocked their world.

It took 18 months for Steve Jobs to accomplish what everyone at the time said was impossible.

Jobs signed a 5-year exclusive deal with AT&T to sell Apple iPhones/tablets in exchange for getting complete control over the design of the handset, how much that handset would cost and the software that would come with the phone – and most importantly what wouldn’t (including anything from AT&T itself). Jobs also convinced AT&T to invest millions to create a new customer on-boarding and service provisioning process and an unprecedented revenue sharing deal that would pay Apple $10 a month from each iPhone customer’s monthly AT&T phone bill. (He did the same thing in other countries—every country initially had an exclusive.)

Apple and Jobs gave up very little in return.

What started at Apple once-upon-a-time as a vision for it to become its own MVNO and control every single aspect of the mobile/customer experience, ended in Apple’s ability to leverage the assets and the pocketbooks of one of world’s major mobile network operators – and drive a massive shift in the balance of power in the mobile carrier ecosystem in the process. Why go through all of the rigmarole to become an MVNO when Apple could get the mobile operators to bear the cost of operating the network that powered the device – and get them to pony up a cut of the revenue!

Pretty soon, and certainly by the time the AT&T contract was up, the handset and access to apps became the reason that consumers wanted to buy a mobile device – and they were willing to spend big to get that. The iPhone showed the world what innovation using a mobile device with access to the Internet looked like, and Apple became the brand synonymous with mobile innovation. iPhone customers were regarded as innovative by association, and Apple the primary brand that the customer associated itself with in the process.

Of course, a consumer could only use the Apple iPhone with AT&T network services and had to go to an AT&T store (or the Apple store) to purchase the product. But AT&T was no longer driving the purchase behavior of the phone nor the consumer affinity to it. In the U.S., Verizon just about had a heart attack over AT&T’s lead and ran to its archenemy, Google, and begged for an Android phone.

Now before you feel too sorry for AT&T, they didn’t exactly come out on the short end of every stick for those 5 years. Their average revenue per user was nearly 2x that of the other carriers, $95 compared to $50. AT&T was still ringing the register selling voice and data plans, but they were no longer front and center with their iPhone customers. Customers just loved the iPhone in ways that they didn’t love their Motorola phones.

And as you will soon see, that would create a big issue for AT&T longer term.

It’s September 9, 2015, just about 4 years after Apple’s exclusive deal with AT&T expired. Apple is on its way to becoming the world’s first trillion- dollar company and is a beloved consumer brand everywhere in the world.