Rumor has it that Apple (AAPL) might extend its digital payment processing business by allowing current iTunes Store account holders to purchase digital goods, including movies, TV shows and iPhone apps from third-party wholesalers, resellers, and value-added resellers.
We believe that Apple’s idea is to expand the iTunes platform to other third party vendors selling through other gateways in order to earn a sideway income from these purchases. This new line of business may not be good for Apple as payment processing fees are relatively low particularly for cheaper goods. As a strategy, Apple drives higher-margin business and has succeeded in this respect so far. However, even if this new line of business helps in increasing volumes, we feel that cost per transaction is likely to be high and this might hurt the company’s profitability.
Further, this move would put Apple in direct competition with services offered by recognized players in the payment processing industry such as Google’s (GOOG) Checkout, Amazon’s (AMZN) One-Click-Buying, eBay’s (EBAY) PayPal and Facebook’s ‘Pay with Facebook’ platform payment processing solutions.
Apple has expanded and improved its distribution capabilities by opening its own retail stores in the U.S. and internationally, which resulted in increased retail sales by 40.0% to $2,460 million (averaging $10.0 million per store) in fiscal 2008. We believe Apple should sell its own products rather than products developed by third parties at its iTunes stores as the smaller vendors will not be able to pay the fees required by Apple.
This could be the first step to a growing payment processing business for Apple. However, given the difficult environment, strong competition and poor margin profile, we remain skeptical about the company’s prospects.
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