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Apple's Next Product Is Here (Update 1)


Right now, consumers purchase content, be it movies, TV shows, songs or apps using their Apple ID, and that's proven to be a big business for Apple. Last quarter, Apple generated $4.4 billion in iTunes/Software/Services related revenue, up 19% year over year.

Morgan Stanley analyst Katy Huberty notes cloud-based services are helping Apple's strong iOS ecosystem. "iPhone and iPad benefit as they help enable the shift to
cloud, which more than offsets the impact to Macs," Huberty wrote in a note following Apple's report. "Cloud-based services are key opportunities given Apple's market-leading account base of 575M+."

However, Apple does not handle payments outside of its core products, as does PayPal, Square, or Google (GOOG - Get Report), with its Google Wallet initiative. By doing so, Apple could use new technologies, such as iBeacon, to further this initiative. "We expect to see many innovative uses of iBeacon technology from other businesses and developers in the coming months, including retailers and professional sports," Apple CFO Peter Oppenheimer said during last night's earnings call.

Investors have been clamoring for Apple to move into new products and services. Recently, activist investor Carl Icahn, who owns a $3.6 billion stake in Apple, suggested Apple could move into mobile payments in a filing with the Securities and Exchange Commission. "...Apple could introduce a next generation payments solution. In terms of whether the marketplace is well addressed by mobile payments solutions, Tim Cook has said 'I think it is in its infancy... I think it is just getting started and just of out of the starting block.' With the fingerprint sensor, iBeacon, 575+ million credit card numbers stored in iTunes, and Apple's homogeneous iOS installed base with 79% of devices using iOS 7, we believe a revolutionary payments solution is now a very real opportunity that the company could choose to pursue."

Icahn is also pushing eBay to spin off its PayPal unit, calling it a "gem," noting it should be unburdened away from eBay's legacy Marketplaces business.

Analysts have picked on on Apple's recent bump in capital expenditures in the second-quarter. Coupled with Cook's comments that new products are coming in 2014 is a sign of optimism for Apple, as it pertains to software and services.

UBS analyst Steve Milunovich, who rates Apple a "buy" with a $625 price target, picked up on this. "Spending supports more offerings-R&D almost doubled the last two years and F2Q expenses should be unseasonably strong at flat sequentially," Milunovich wrote in his note. He went on to say, "Cook said Apple has plenty of disruptive ideas but needs to concentrate resources on the best opportunities. This approach has worked historically and fits with our belief in focus-we are willing to give Apple the benefit of the doubt."

Though mobile payments are expected to be a huge hit, as consumers seek easier ways to pay for physical goods and services, consumer adaption is still ongoing. Infrastructure is still being rolled out to merchants, including new point-of-sale systems, and changes in phones. Currently, the iPhone does not support Near Field Communications (NFC) chips, which is one way to support mobile payments, but Samsung's flagship phone, the Galaxy S4, does.

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.

With Apple moving into new product categories potentially including wearable technology, Belus Capital Advisors portfolio manager and RealMoney contributor Brian Sozzi believes it's time for Apple to step up its game in mobile payments. "By being 'The Man' in mobile payments, and then rolling out wearables every fall (and eventually something to serve as the home hub), Apple will control the next generation of how goods and services are consumed," Sozzi said in an email. "Think of it this way: Apple is selling the devices that serve as hubs in our hands and others have built mobile wallets and payments off their hard work, it's time for Apple to push them all aside."

--Written by Chris Ciaccia in New York

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