Apple capitulates to end war with Qualcomm

Qualcomm and Apple agreed to settle all the ongoing litigations with the iPhone maker paying the chipset maker an undisclosed amount and signing a six-year licensing agreement.

On Monday, Qualcomm and Apple went to court over the allegation that Qualcomm has been abusing its monopoly position to over-charge for its chips. The stakes could have run up to tens of billions of dollars, with the OEMs Foxconn and Pegatron already demanding compensation of $9 billion dating back to 2013. The case at the Southern District Court of California in San Diego was meant to last for five weeks.

On Tuesday, the two companies released a brief statement to announce a settlement. “Qualcomm and Apple today announced an agreement to dismiss all litigation between the two companies worldwide. The settlement includes a payment from Apple to Qualcomm. The companies also have reached a six-year license agreement, effective as of April 1, 2019, including a two-year option to extend, and a multiyear chipset supply agreement.”

This is definitely good news for the two companies especially for Qualcomm, and good for the industry and consumers. Specifically, for Qualcomm it means its business model will remain intact and the company can put an end to a multi-year legal saga; for Apple, in addition to avoiding the punitive $31 billion penalty, this settlement will be able to quicken its steps to launch a 5G iPhone, making up the gap already expanding between itself and the leading pack.

A few hours later, Intel announced that it intends “to exit the 5G smartphone modem business and complete an assessment of the opportunities for 4G and 5G modems in PCs, internet of things devices and other data-centric devices. Intel will also continue to invest in its 5G network infrastructure business. The company will continue to meet current customer commitments for its existing 4G smartphone modem product line, but does not expect to launch 5G modem products in the smartphone space, including those originally planned for launches in 2020.”

It must have been a blow to Intel’s mobile ambition, especially after it announced only late last year that it would bring the launch of its first 5G modem forward by half a year to the second half of this year, an act to prove the doubters wrong. That originally planned 5G modem to be launched in 2020 referred to in the announcement, presumably a second generation, was supposed to power the first 5G iPhone, after Apple all but officially declared that it would enter into an exclusive relationship with Intel.

Putting the two things together it may be reasonable to infer that Apple agreed to settle after it had realised that it does not have other options than coming back to Qualcomm for the supply of 5G modems (assuming Intel had updated Apple about its imminent decision to withdraw from the market).

In addition to leaning in on Intel, Apple has also been reported to be strengthening its in-house modem development capability, ultimately aiming to rid itself of reliance on external suppliers. Based on the terse announcement released together with Qualcomm, it looks Apple does not believe the home-grown modems will be good enough to compete with Qualcomm in the next few years. Huawei is another supplier that has launched its own 5G modem, but it may be safe to estimate that the chance of Apple going for Huawei chips is slim.

In keeping with the normal practice of settlement cases like this, the companies did not disclose the amount Apple will pay. However, Qualcomm updated the SEC shortly after the settlement announcement was made, as the settlement would have material impact on the earnings. The company expected an EPS incremental of about $2 “as product shipments ramp” without giving a specific timespan. As a reference, in the quarter ending 30 December 2018, Qualcomm delivered an EPS of $0.87 on the back of a total revenue of $4.8 billion. Therefore, assuming Qualcomm’s operational efficiency remains largely constant, the payment Apple will make could run into the $10 billion range.

Payment aside, there must be some soul-searching going on inside Apple, including by Tim Cook, the CEO, who came from a supply chain management background: how could Apple have let itself be cornered so badly in the first place? It’s hard to view this as anything other than complete humiliation for Apple, especially when you consider how aggressively it pursued this case.

On top of the millions it will have paid to lawyers Apple’s negotiating position in arriving at this settlement, considering what was widely assumed about its 5G modem situation, must have been very weak. So it’s quite possible Apple has ended up paying considerably more for Qualcomm’s chips than it would have if it had never initiated this war. Having said that, Apple’s share price seems completely unaffected by the news, probably indicating offsetting relief that it’s back in the 5G game. Qualcomm’s share’s however, surged 23% on the news.

Apple announces original content, a credit card and a news subscription service

Apple’s big services event didn’t disappoint, with a bunch of potentially disruptive launches together with new levels of hyperbole and clapping.

The headline service was Apple TV+, which marks Apple’s first major foray into original content. We were treated to an interminable procession of Hollywood types, starting with Stephen Spielberg and culminating with Oprah Winfrey, all taking it in turns to come onto the stage and hype their projects. Judging by the line-up Apple has realised it needs to spend big if it wants to take on the likes of Netflix.

As ever the audience of media and analysts at the live event were about as objective and sceptical as hungry puppies. Every pause in the polished narrative was filled with rapturous applause and ecstatic whoops. So choreographed was it that we wouldn’t be surprised if there were prompts and the tendency to cheer at the mere mention of a new product without waiting to even find out anything about it was especially jarring.

As was Apple CEO Tim Cook’s toe-curling hyperbole. “TV at its best enriches our lives and we can share it with the people we love,” he pronounced at the start of the TV announcement. The original content bit was preceded with the revelation that “great stories can change the world.” This sort of stuff was pretty hard to stomach when Steve Jobs was delivering it, but his messianic zeal just about pulled it off. Cook offers little such salve.

The other potentially disruptive announcement was a new Apple credit card called Apple Card. This had been rumoured for a while and, as expected, it has been create in partnership with Goldman Sachs and MasterCard. In reference to Apple Pay Cook felt compelled to say “Its growth has been literally off the charts,” for some reason. The most intriguing part of the card is the offer of 2% cash back on every purchase, which makes you wonder how much merchants are going to get stung for its use. There’s also a physical card made out of titanium that only offers 1% for some reason.

Apart from that we got a couple of new subscription services. The more significant one is for news and magazines that will set you back a tenner a month and will be positioned as a potential solution to the cash crisis faced by the media, but let’s see. “We believe in the power of journalism,” said Cook. There was also a teaser for a games subscription service that will offer exclusive titles and make it easier to play across platforms.

“We’re honoured that the absolute best line-up of storytellers in the world — both in front of and behind the camera — are coming to Apple TV+,” said Eddy Cue, Apple’s SVP of Internet Software and Services. “We’re thrilled to give viewers a sneak peek of Apple TV+ and cannot wait for them to tune in starting this fall. Apple TV+ will be home to some of the highest quality original storytelling that TV and movie lovers have seen yet.”

“Apple Card builds on the tremendous success of Apple Pay and delivers new experiences only possible with the power of iPhone,” said Jennifer Bailey, VP of Apple Pay. “Apple Card is designed to help customers lead a healthier financial life, which starts with a better understanding of their spending so they can make smarter choices with their money, transparency to help them understand how much it will cost if they want to pay over time and ways to help them pay down their balance.”

“We’re committed to supporting quality journalism, and with Apple News+, we want to celebrate the great work being done by magazines and news outlets,” said Lauren Kern, Editor in Chief of Apple News. “We think the breadth and quality of publications within Apple News+ will encourage more people to discover stories and titles they may never have come across before.”

Note Apple News has an Editor in Chief. Cook made it clear that Apple would only serve up the right kind of news for its subscribers and he has been clear about his willingness to impose a moral filter on everything Apple does. You have to wonder how empowered to interfere with the content published on Apple News this Editor in Chief will be.

“This represents a landmark moment for Apple with a major event solely focussed on services,” said Analyst Paolo Pescatore, who was at the event. “It underlines a growing and strong focus on services as a future source of revenue growth. In essence Apple is seeking to become a Netflix of everything in services; music, news and magazines, video and games.

“Netflix has done a great job to date. However, more content and media owners will pull programming off its offering. This represents a significant opportunity for the likes of Apple who has scale and greater resources. There are too many players chasing too few dollars. The market will evolve towards a handful of players in the future.”

Apple idiosyncrasies aside this felt like a fairly solid  launch event. The company has an amazing track record of disrupting industries and seems likely to do so again with original TV content and consumer finance. The scene is set for a content arms race with only the biggest spenders likely to survive and Apple has a deepest pockets of all. Game on, here are some vids.

 

Apple and Goldman Sachs may soon issue a credit card together

The Wall Street Journal reports that the iPhone maker from Silicon Valley and the Wall Street stalwart are mulling over the idea of jointly issuing a credit card to Apple users.

Quoting people familiar with the situation, the paper claimed that Apple and Goldman Sachs may start a trial of the card on their own staff in the coming weeks before it is launched later in the spring. A similar partnership was earlier reported in May 2018 by the same paper.

If this does happen, it will not be the first time Apple takes part in card issuing. The company has already partnered Barclays to issue Barclaycard with Apple Rewards, by which users can earn points from purchases made at Apple or elsewhere, which can then be converted to Apple Stores or iTunes Store coupons.

Nor is Apple the only internet company to issue bank cards. Amazon, for example, has partnered with multiple banks (including RBS and NatWest in the UK) to issue different kinds of credit, debit, cash-back and other types of cards with different benefits.

Where the Goldman Sacks card will be different, according to the WSJ article, is its tighter integration with features offered by the Apple Wallet app on the iPhone and the iPod Touch.

By now, users of Apple Wallet can store in the app “credit, debit, and prepaid cards, store cards, boarding passes, movie tickets, coupons, rewards cards, student ID cards” etc. Then users can use “passes on your iPhone to check in for flights, get and redeem rewards, get in to movies, or redeem coupons. Passes can include useful information like the balance on your coffee card, your coupon’s expiration date, your seat number for a concert”, and so on.

The speculated card is said to work with these Wallet functions as well as with upcoming features. For example, Wallet may keep spending limits, track rewards, encourage users to pay down their credit card debt, and manage balances. These will not be fundamentally new ideas. Apple Watch is already attempting to improve the user’s physical wellness, and the recent update on iOS has added notification of user’s screen time.

This may bring addition benefit to Apple, at a time when its Products business is slowing down while Services is growing to be more important. As a concrete example, Apple could get higher commission fee from transactions on its own cards then on those made through Apple Pay linked to cards issued by other institutions.

For Goldman Sachs, on the other hand, the main driver would be the iOS users. Traditionally an investment and wholesale bank, Goldman Sachs only recently opened an online retail banking business in the shape of Marcus by Goldman Sachs. A joint credit card would be a good channel to access the iPhone users, which are believed to be higher spenders among smartphone users. Eventually, WSJ claimed, the card may expand to offer personal loans, wealth management services, and other financial products, which would be closer to Goldman Sachs’ heart.

JP Morgan launches its own cryptocurrency but don’t get too excited

JP Morgan has created the first cryptocurrency to be backed by a U.S. bank but you can’t buy any and it’s not obvious what the point of it is.

“The JPM Coin is based on blockchain-based technology enabling the instantaneous transfer of payments between institutional accounts,” said an announcement based on gibberish-based grammar. In essence this seems to be a digital mechanism designed to speed up the movement of money within JP Morgan’s systems, nothing more.

They gave the exclusive to CNBC, which also got to chat to Umar Farooq, head of JP Morgan’s blockchain projects, who likes to start his sentences with ‘so’. “So anything that currently exists in the world, as that moves onto the blockchain, this would be the payment leg for that transaction,” he said. “The applications are frankly quite endless; anything where you have a distributed ledger which involves corporations or institutions can use this.

“Money sloshes back and forth all over the world in a large enterprise. Is there a way to ensure that a subsidiary can represent cash on the balance sheet without having to actually wire it to the unit? That way, they can consolidate their money and probably get better rates for it.”

So in essence JP Morgan is offering to exchange their client’s dollars for cryptocurrency tokens representing exactly the same amount, which it reckons they’ll be able to move around more easily. This is quite a different concept to something like bitcoin, which has seen massive fluctuations in its value against the dollar. One JPM Coin will always be worth one dollar.

JP Morgan’s Q&A sheds a bit more light on the matter. It has much more in common with stablecoin than cryptocurrency in that it’s strictly pegged to the dollar, so it’s basically a digital IOU. The big difference is that JPM Coin is private and only available to JP Morgan institutional customers. Once again: the main point of it is to reduce settlement times, nothing more.

Right now JPM Coin is still in its prototype phase and the stated use-case feels like a bit of an anti-climax for people hoping this signifies the next phase of the cryptocurrency revolution. Maybe the such a public endorsement of the technology by a big establishment name will catalyse something, but it’s unlikely to be the kind of total financial autonomy for the individual dreamt of when bitcoin first arrived on the scene.

Prepaid market is an operator blind spot – research

Some new research commissioned by mobile financial services company Juvo has concluded operators are wasting loads of cash through prepaid churn.

The research was conducted by Strategy Analytics, which is having a busy day. It took a look at eight prepaid-dominant markets: Argentina, Brazil, India, Malaysia, Mexico, the Philippines, South Africa and Thailand; and concluded that in these markets alone, operators wasted $670 million last year replacing lost prepaid subscribers.

Otherwise known as PAYG or contract-free, the prepaid market probably gets a bit overlooked in developed markets as there’s nothing operators like more than signing someone up to a nice, fat two year contract. But as well as being a big piece of the action in developed markets, it tends to dominate developing ones.

Now, on one level remarking that churn is an issue in a market with no contractual obligation involved seems like a bit of a redundant statement. Of course punters are going to shop around and exhibit minimal loyalty. But the apparent point of Juvo commissioning this study is to show there are still plenty of things that could be done to efficiently reduce this churn.

It should also be noted that Juvo, in common with all other companies, doesn’t tend to just commission surveys for a laugh. It contends that what it has to offer can help operators with this prepaid lack of stickiness and has consistently messaged on the matter of prepaid churn. But that said, the findings of this study still have independent merit.

Prepaid accounted for 71% (5.7 billion) of global mobile connections and 32% ($265 billion) in service revenues in 2018. In developing economies those numbers move strongly in the direction of prepaid, for example is accounts for 94% of connections and 80% of revenue in Africa. SA also says it’s more profitable than you might think, with EBITDA margins of 40-55% in developing markets (apart from India, where Jio has thrown a spanner in the works).

SA Juvo 1

This background is designed to set up the punchline which is, of course, churn. The second chart below shows monthly prepaid churn of 3.1-6.5% across the countries studied. This equates to 37-80% annually meaning that, on average, operators have to totally replace their prepaid subscriber base every couple of years.

SA Juvo 2

“Until now, the industry has been in the dark on the scale of the costs associated with prepaid mobile churn, and the portion of prepaid OPEX spent on reacquiring the same customers,” said Phil Kendall of SA, the author of the report. “What this research allows us to do is to confidently calculate the profit that can be unlocked when prepaid churn is reduced. Success in the highly volatile, promotion-fueled prepaid market will go to those operators who can improve customer loyalty, allowing them to make strategic choices between OPEX reduction, accelerated growth or investment in service differentiation.”

“The market opportunity here is 5.7 billion customers and over $265 billion in annual revenue,” said said Steve Polsky, CEO of Juvo. “However it is hampered by huge churn and missed opportunities. As an industry, we need to talk about prepaid, we need to change our approach and we need to put identity at its heart. Prepaid customers in emerging markets consistently churn because they are constantly told ‘no’. No you’re out of airtime. No you don’t have enough money. We have to start with ‘yes’.”

The report, called ‘Death by a thousand nos’, offers a deeper dive into the prepaid churn issue, as well as some top tips on what to do about it, and can be downloaded from the Juvo website. With a major driver of the postpaid demand – the smartphone market – in significant decline, it seems likely that prepaid will become a bigger deal for all operators. So it’s probably a good idea to start thinking about how to make the most of it.

Is mobile payment going too far when cash has become unacceptable?

When mobile payment with smartphones has become the means of choice at retail outlets, the central bank of China needed to remind businesses they should not reject cash payment.

Once upon a time, people said “cash is king”. Not anymore.

In most retail outlets in China, mobile payment with smartphone apps WeChat Pay (of Tencent) and Alipay (of Alibaba) has become the de facto option. Customers with credit or debit cards only, including the cards on UnionPay (China’s clearing platform), are sometimes in bad luck. It turns out even cash payment may not go all the way, which prompted the central bank, People’s Bank of China, to issue a warning notice to the retailers that rejecting cash is against the law.

This fast and massive move towards mobile apps based payment dwarves the slow uptake of NFC based contactless payment championed by the technology companies. This is despite the tech heavy weights Apple and Google having been supporting NFC payment since 2014. The enthusiasm in which consumers and businesses embrace it, even with the clout of Apple and Google thrown behind it, has been underwhelming.

According to the research firm Berg Insight, the total number of NFC enabled POS terminals grew by almost 100% in 2017 to reach 54.5 million, most actively in North America and Western Europe. Only about 30 million of the terminals have been activated.

Apple has refused to disclose user numbers or transaction values related to Apple Pay, although different research has put the number of users who could pay with Apple Pay and who actually did it at about 3%. The uptake of Android Pay is no better. The comparable adoption rate is estimated at about 1%.

It is safe to say Apple CEO Tim Cook’s ambition to replace wallets with Apple Pay has not gone too smoothly. Mr. Cook himself was reported to have been rejected to pay for his coffee with Apple Pay by a barista, reported The Information.

In contrast, WeChat Pay and Alipay did not only handle over 90% of China’s $16 trillion mobile payment transactions in 2017, they are also actively expanding overseas. An agreement was signed last week with the Kenya based Equity Bank to bring the services to eastern Africa including Uganda, Tanzania, Democratic Republic of the Congo, South Sudan, and Rwanda, in addition to Kenya. With a smartphone penetration level much lower than in China, we do not believe retailers in Africa will rush to refuse cash payment though.

Crime moves upmarket as fraud becomes the UK’s number 1 offence

New research from Experian claims fraud is now the UK’s most common criminal offence, much to the dismay of thugs and hoodlums everywhere.

The company’s Annual Fraud Indicator 2017 estimates the annual cost of fraud in the UK is £190 billion, exceeding the total Gross Domestic product of 148 out of 191 countries on the planet. Splitting it down, private sector fraud costs the UK economy £140 billion over the course of 2017, while it is only £40.3 billion in the public sector.

“Awareness of the dangers fraud poses is growing, but the total of £190 billion is startlingly high,” said Nick Mothershaw, Director of Fraud and Identity Solutions at Experian. “Plastic card and online banking fraud continues to increase, so new regulations which make it harder for fraudsters to use someone’s cards online are a necessary step.

“Fraudsters are shamelessly opportunistic and are now turning their attention to the pensions release, lured by the promise of high value returns when their scams are successful.”

Procurement has been pinned down as the biggest sucker for fraud, but the report notes new technologies are opening up new opportunities for the tricksters. Online Banking fraud has grown by 226% and Telephone Banking Fraud by 178% in the past year, with millennials getting caught out as well.

While this number is surprisingly high, the growing popularity of mobile money and contactless payment solutions might add to the problem. Another area which we haven’t seen the impact of is social media.

With the online world taking more control of our daily lives, authentication techniques using social media accounts are becoming more common. The vast majority are used for free services, but that doesn’t mean someone won’t work out how to commit a white collar crime using this little development. Individuals seems very enthusiastic about handing out their personal information online, and in truth we haven’t seen any particularly devastating negative impacts yet. That doesn’t mean it isn’t possible though.