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Apple's Next Big Thing: iTunes

Stocks in this article: AAPLEBAYGOOG

Ironfire Capital's Eric Jackson said that of the biggest revenue stream to come from the new focus on software and services, payments is it. "I think that's an interesting area," Jackson said in a recent email.

The mobile payments industry is likely to be different in developed markets, than it is for merging markets, given more competition in developed markets, Citi notes. "Relatively high levels of bank penetration as well as smartphone penetration in Developed Markets means the evolution of Mobile Payments will be different than in Emerging Markets," Citi wrote in its research report. It noted that Japan, with 55%% penetration rate, is considered a success. "Transit and retail applications are typically important in Developed Markets and are likely to be the "killer app'," and that's where Passbook could be Apple's key.

Passbook is app-based, and consumers with smartphones are much more accustomed towards apps, than they are NFC chips. There are still hardware challenges for a cloud-based solution, such as Passbook Citi wrote in its research. These include POS hardware and software upgrades, ecosystem partnerships, systems integration and marketing, but a cloud-based solutions seems to be the easiest way to solve the problem.

Though mobile payments are expected to be a huge hit, consumer adaption is still ongoing, as infrastructure gets rolled out to merchants, including new point-of-sale systems, and changes in the phone. Currently, the iPhone does not support Near Field Communications (NFC) chips, which is one way to support mobile payments.

Aside from mobile payments, iTunes could be paired with a service like Twitter (remember Apple's failed social network, Ping?), to make its software and services divisions that much more important. Twitter is increasingly becoming the go-to place where people get their news, and it would have strategic importance, Jackson notes, even if Twitter's annual revenue wouldn't move the needle for Apple. He noted that by bringing in the Twitter team and giving them autonomy, Apple could "build the area up and make it an area of strength, not a weakness."

Apple's innovation engine isn't stalling from a product standpoint, but software and services does need a boost. An updated version of iTunes, teamed up with Passbook, could be the innovation and drive Apple needs to deliver on its message that it's not just a hardware company, that's it more than that.

-- Written by Chris Ciaccia in New York

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