AAPL: The Anomaly of Disruption- Why an Event of This Magnitude is Rare

I read John Gruber's comments on Horace's piece (on Asymco) that stirred up thoughts I have long harbored. Horace talks about how people fail to grasp Apple because they focus on the products Apple sells- their physical attributes classifying them in a singular product category type, which is vastly different than the products Apple builds- the solutions its products provide to the user (jobs they perform). The iPhone fulfills a wide range of needs, which varies among users. In addition, the list of solutions Apple builds into iPhone has expanded and continues to lengthen. Hence, it can't be thought of belonging to a single category, such as a just a mobile phone. 

Gruber adds that Horace's point explains why many analysts incorrectly categorized Apple as PC maker in a commodity industry (back in that era), and now view Apple as a wireless handset maker in a saturated market dependent on product replacement cycles. This fails to account for all the services and content being sold that the iPhone makes possible. In addition, this flawed thinking fails to account for accessories that the iPhone makes possible as well- the Watch and AirPods. These two collectively are a business the size of Netflix-- and turn an actual profit. Apple's ecosystem and massive user base should afford it a higher multiple, yet it trades closer to a valuation shared by stodgy hardware makers, as Horace laments. 

Gruber reminds us that the same people who misclassify Apple are the same ones incessantly asking "where's the next iPhone?" Not literally an iPhone, but a new Apple product that is as successful. John's comments imply this is a very dumb question to ask. Read my statements below to see why I believe it's totally asinine. This was an "aligning of the stars" or "perfect storm" that Apple was able to take advantage because of its savviness as a technology integrator.

The introduction of the smartphone, namely the iPhone, was the product of a confluence of technologies that had simultaneously advanced to the point of feasibility allowing them to be implemented in mobile phones. Such things as 3G, miniature and power efficient components, micro GPS chips and antennas, along with services like Facebook, were in their  infancy not existing until the latter part of the first decade of the new millennium. 

The smartphone makers (non-Apple) did a poor job exploiting technological improvements. Palm's OS was developed for the very primitive Palm Pilots in the preceding era. Palm OS remained basic as it didn't evolve at the pace of hardware. Blackberry was similar. Old OS on new hardware. Microsoft took advantage of the then powerful hardware with its Mobile Windows OS, replete with menu bar drop down lists and file explorer. And, many other desktop Windows features that had no business on a mobile device. It was a very poor fit and buggy. Pre-iPhone devices had small displays due to the physical keyboard taking up so much real estate. Those devices had touchscreens, but they were the resistive type which responds to pressure, hence the stylus that's lost in the first week. These devices had internet browsers but the web experience was unbearable rendering them useless. Special mobile versions of websites were required. So while hardware had become robust, mobile operating systems were less than ideal, and in the case of Palm and Blackberry- their OS had been designed when hardware performance was not so robust. Apple enters and takes advantage of the current technological capabilities (as well as improving further); the iPhone was a coherent package of the aforementioned coupled with a revolutionary mobile OS that unlocked their full potential. In short, Apple was an integrator- combining 3G (2nd iPhone), mini components, new touchscreens (capacitive), iPod, Palm PDA-like apps, AND- HTML browser offering the full web experience for the first time. 

To understand how the iPhone was a once in a lifetime product in terms of impact and popularity, look at all the features that had to come into existence at roughly the same time. It was the collective whole of these items that allowed the iPhone to be so revolutionary. The genesis of the iPhone depended on many events outside Apple's control, as it didn't invent 3G, ARM processors, and so on. Apple just saw the possibilities and understood what it would take to bring them into fruition. Critics question Apple's innovation abilities since the company has not introduced a product as revolutionary (or close to) as the iPhone more than a decade ago. Considering that many of the required technologies were all evolving on separate paths, for them to congeal and become to synergistic making the iPhone possible- is a very rare event.  

HARDWARE:

• Processors- low-power, high output, small. 
• Battery- high capacity, small footprint. 
• 3G- data speeds making the Web tolerable. 
• Wifi- small radio, internal antenna (not a card with antennae protruding from the side like PC)
• Capacitive touchscreen- swipe gestures, virtual keyboard- larger display, no stylus.
• Flash storage- fast, low power needs, no spinny disks like early iPods. 
• Camera- multi-megapixels offered decent/fair pics (no comparison to flip phones).
• GPS- small chip/antenna, power efficient.

SOFTWARE:

• OS- touch-based, virtual keyboard, continuous zoom and scroll (pinch & swipe).
• Widgets- stocks, weather, calculator etc borrowed from Mac OS.
• HTML mobile browser- it's combination with swipe/scroll gestures.
• Predictive text- not totally new but Apple integrated in virtual keyboard- after the letters T, H, are entered, the keyboard knows X is not a possibility to shrink that key's strike (landing) space and predicts E and I (and other possible letters) are probable subsequent inputs, thus it expands their keys' landing zones.
• Maps- Apple's built-in native app (Google's API) vs other mobile maps.
• YouTube- Apple's app with YouTube API.
• Apps- games and services-based apps- Yelp, IMDB.

The functionality and popularity of smartphones largely stemmed from services from non-hardware entities. The marriage of social media and mobile devices was highly synergistic. Who likes to come back from a long night at the bar or long vacation trip and transfer photos from a camera to a computer to then go post on FB? It's much better to do it that when it happens. It was the existence of such services (and new possible ones) that when intelligently crafted for mobile devices boosted the their appeal- both smartphones and services, in a perpetual feedback loop. 

SERVICES: 

• Social media- Facebook, Twitter, services born from mobile- IG etc.
• Google maps- the service integrated into Apple's app coupled with GPS.
• Photo / Video sharing services- Flickr, YouTube.
• iTunes- music and movies.
• Product reviews / price compare- Yelp, Amazon. 
• Web-based Information Services- weather, stocks (Yahoo), news, sports scores, integrated in device-side clients (apps).

When one considers the number of devices that were replaced by a singular smartphone, it is is difficult to believe that we will see something like the iPhone (its impact) anytime soon, if ever in a lifetime.

CONVERGENCE:

• PDA- Palm pilots, electric rolodex, etc.
• MP3 Players- iPods.
• Cameras- Digital and disposable.
• Video Players- personal DVD players.
• Audio Recorders- dictation devices etc.
• Navigation devices- in-car, hand held, etc.
• Watches.
• Alarm Clocks.
• Timers- forget the one on the oven.
• Books
• Newspapers
• Cable TV
• PCs
• Calculators
• Personal planners- physical notes, calendars, to do lists. 
• Radios- local broadcasts, scanners for ATC, police, fire, and rescue etc.
• Wallets- paper tickets and boarding passes, reward cards, credit cards (where accepted).

There are probably more items for each list that could be added, but I think the point is clear. The iPhone and smartphones in general have had such a monumental impact due to the integration of a plethora of features and functionalities that existed elsewhere, on other devices or in other forms. The iPhone introduced an OS that could unlock and capitalize on the hardware that was coming available. It further leveraged services to make the iPhone a highly useful and usable device. It is the most successful product ever. Taking the global population and adjusting for people too old, or not old enough, who don't have mobile access, or the financial means- we are probably looking at close to 1 out of 5 eligible humans  who are iPhone users. 

The success of smartphones have been based on the multiple needs they fulfill. The jobs that they do for the user, some formerly tasked by other devices and means. That explains the colossal impact. The inception of the smartphone hinged on many physical technologies that had to be contemporaneously present for such a powerful product to be born. 

Because this depended on so many parties, in so many places, along with a number of pre-existing and future services-  it is not logical to expect that Apple, or anyone else for that matter, can or will introduce anything close the societal impact that smartphones have had. At least not for a longtime.

AAPL: How Popular are Apple's iPhone Financing Plans in the US? Here's a Look

Apple offers iPhone financing through 24-month zero-interest installment loans funded by Citizen's Bank (US). How popular is Apple's financing product? From the data I have gathered, the take-rate is pretty low- less than 1 million per quarter. It's probably not as low as it appears considering that a very low percentage of iPhones are bought at Apple retail stores. 

The loan payments are charged to the user's credit card each month through autopay. It's almost like financing the financing. It could be buyers don't want to fool with an installment loan and have it affect their credit report when they can just use their credit card to finance the purchase. That's less than ideal if the balance isn't paid down or off in short time. Credit card interest rates are typically relatively high, and the full balance of the purchase accrues interest from the start. 

The Apple plans are more advantageous since it's just the monthly payment (opposed to full balance) that would accrue credit card interest fees.  Given that Apple's stores are typically located in very affluent zip codes, it's likely very few buyers need financing plans.

With these plans, iPhone users can give back their iPhones to Apple after a year if they buy a new iPhone. Apple will pay off their loan balance. And the process restarts itself. 

How does Apple offer 0% financing? Especially given that not Apple, but a bank is the lender? 

Apple sells the loans at a discount. If a customer buys a 720 iPhone and agrees to 24 monthly payments of $30, Apple will sell that loan for perhaps $680. The bank earns $40 in interest income on $680 loan. Apple sweetens the deal with the bank by opening a bank account where proceeds from the loan sales are deposited. Apple has to keep a compensating balance at Citizen's- likely equal to the outstanding loan principal. Apple disclosed this arrangement in its most recent 10-Q due to the new accounting rules requiring restricted cash to be separated out on the balance sheet. 

Most often, when a company has a restricted cash balance it is due to credit quality concerns. Lenders will require cash to be set aside for collateral purposes, especially when a firm lacks other suitable assets to pledge as security. 

That is not the case here. Banks have to hold a minimum amount of deposits, or required reserves. If a bank takes in $100 of deposits they might only be able to make $90 in loans and having to keep only $10 of depositor's money on-hand (or on deposit at the Fed). If Citizen's originates $1M of iPhone loans and Apple deposits $1M in an account at Citizen's, then it doesn't eat into the bank's lending capacity. Since banks only have a finite amount of allowable lending capacity. They don't want to waste loanable funds on low margin loans when the bank has the opportunity to lend at higher interest rates. With a compensating balance on deposit, there is no opportunity cost for the bank, thus it will accept a lower rate. 

Plus, Apple reduces their cost of credit risk through loss-sharing agreements. In short, by reducing Citizen's credit and opportunity cost, Apple doesn't have to take as large of a haircut on the loan sales as Citizen's will accept earning a lower interest rate. 

Citizen's has disclosed the balance of "merchant partnership" loans which are the Apple iPhone financing plans f(or most quarters). Apple has only reported restricted cash for the most recent quarter- 2Q19 ending in March. The restricted cash balance included in non-current assets lines up with Citizen's numbers. I don't know what the restricted cash in current assets is from. The caption says "primarily" which obviously means not 100% so my take is the amount classified as current is related to something else. 

 

 

Taking the disclosed balances, I calculated the amount of new iPhone loans for each quarter. Using an assumption for ASP, the number of iPhones sold under installment plans can be calculated. 

The change in loan balance from quarter to quarter does not represent the amount of new iPhone loans extended since the previous quarter's balance will be paid down to some degree. Thus, the amount of payments made on the outstanding balance must be calculated first. 

I didn't take the time to try to be super accurate by incorporating more realistic assumptions since these numbers are so low it's not really worth the time. However, this should be roughly accurate.

Assumptions:

1) 24 month Average loan life (none paid off early).

2) No payments are made on loan balances in the quarter which they originated.

You can see in the table the big jump for the quarters that the iPhone X and iPhone Xs / Max were introduced. 

5G Primer and Expectations (for early stages of US 5G networks)

5G is often described as revolutionary, delivering 20 gigabit speeds with near zero latency that will enable a number of disruptive technologies, such as augmented/virtual reality, mission critical communications, autonomous vehicles, an so on. 5G's vision is radically different than previous generations, but for smartphones 5G is just another typical, evolutionary step. The exceptional figures for speeds and latency being talked about do not pertain to smartphones. Carriers are looking to 5G for new revenue streams, particularly from businesses and government.

The real excitement over 5G is more business/industrial oriented, than it pertains to the mobile consumer. Technologies such as edge cloud computing, industrial IoT (Internet of Things), autonomous driving, telemedicine, etc. stand to benefit the most. For mobile consumers, 5G will enable augmented/virtual reality use cases, along with online gaming where low latency is imperative. Many things that 5G promises don't even exist yet. 

TERMINOLOGY:
5G encompasses a wide range of qualities that vary based on purpose and coverage area, which is determined by the frequency of spectrum. 

5G can come in 3 different forms-
1) Low-band - highest coverage, lowest speeds (slow)
2) High-band- lowest coverage, highest speeds (currently extremely rare)
3) Mid-band-  blend of coverage and speeds  (currently non-existent)

DATA SPEED & COVERAGE COMPARISONS FOR DIFFERENT SPECTRUM 

The high band consists of millimeter wave frequencies above ~30GHz which is being used for Fixed Wireless Access (FWA), or broadband to the home. Currently, there are very small areas in handful of cities with mmWave 5G. mmWave coverage will always be very sparse, and it won't be relevant for smartphone users anytime soon. mmWave is more suited for specific use cases. For the purpose of this report, ignore the mmWave 5G as the focus here is smartphones.     

COMPARISON OF PERFORMANCE QUALITIES FOR LOW AND MID-BAND SPECTRUM

5G below 6GHz frequencies will provide macro coverage and is what smartphones will typically use. In the US, carriers are planning to use their current low-band spectrum for 5G as mid-band spectrum is not available yet, but the FCC is working on relocating incumbents in the desired bands to make available for 5G. Using unlicensed mid-band spectrum is also being considered. Frequencies in the 3.5GHz - 5GHz range (mid-band) don''t travel as far as low-band, resulting in a lot less coverage area than 600MHz - 700MHz. This will create coverage gaps if carriers overlay mid-band spectrum across their low-band cell site foot print.   

Low frequencies (low-band) do not provide the speed and latency of the higher frequency mid-band spectrum, and the amount of low-band spectrum currently licensed is most likely not adequate for wide carrier signal (100MHz) channels required for high data speeds.    

MID-BAND SPECTRUM (above 3GHz) WILL ALLOW FOR 100MHz CHANNELS

COVERAGE AREAS FOR DIFFERENT 5G SPECTRUM BANDS

INTRODUCTION:

This report includes a brief primer on 5G wireless technology along with my expectations for 5G smartphones/service in the US over the next couple years. The main thesis here is that I don't expect performance for 5G smartphones will be noticeably different/better than advanced versions of LTE early on. 5G will not be be "must have" feature for smartphones. 

The 5G that smartphone users will encounter in the US isn't fully 5G because it is unlikely carriers can meet the 100MHz channel size defined by 5G standards. Nor will US carriers use new, higher frequency spectrum (Sub-6GHz) in early stages. T-Mobile and Verizon have only around 100MHz most markets. AT&T has 1.5x to 2x that in some markets, but for all carriers the spectrum is broken into small blocks and spread across many bands. In addition, carriers still have to allocate spectrum to their legacy LTE and 3G networks.   

The addition of mid-band spectrum along with minimum100MHz channels are major factors in 5G performance that will be absent in the early stages. 5G will increase capacity which boosts data speeds, but it is when those efficiency gains are combined with more high frequency bandwidth that results in large throughput increases. 

As 5G networks and mobile handsets begin rolling out this year, I do not expect 5G network coverage will be widespread for at least two years. The 5G currently being deployed will not provide the full potential that 5G envisions. This "Early 5G" as it pertains to smartphones is more of an evolution of LTE.  "True 5G" is many years away. The real promise of 5G is sub-millisecond latency, or delay, which enables such use cases such as a virtual reality and autonomous vehicles. Low latency and multi-gigabit speeds are possible from EHF spectrum, or millimeter waves, which is broadcasted from small cell sites having a several hundred meter radius. Millimeter wave 5G coverage will be limited to a small number of locations. 

LTE TO 5G:
5G and LTE have similarities as number of standards have been introduced in LTE-Advanced (Pro) and carried over into 5G. LTE evolves into 5G opposed to being discrete like 2G, 3G, and 4G. 5G is built on top of a LTE core network which is possible since this is the first time a new wireless generation uses the same waveform and multiple access as its predecessor- LTE and 5G use OFDM. The range of spectrum (mid-band) where smartphone data speeds could be considerably higher (due to wider channels and wavelength) is currently assigned to other radio services. 

LTE continues to evolve. Initially peak data speeds for LTE were thought to be 100Mb/s. versus 2Gb/s possible today. Telecom execs have mentioned that years ago they never fathomed that LTE could deliver the speed and performance it does today. LTE has been able to continue improving by adopting 5G technology. A number of 5G standards, such as carrier aggregation, 256-QAM and Massive MIMO, (and others) are being introduced on LTE networks, as they evolve to becoming a "5G" network. The real distinction between LTE and 5G is the RAT (radio access technology)- the air interface or 5G radio at the cell site and modem in the mobile device. 5G enables wider carriers and scalable sub-carrier spacing. Devices will be connected to the same network as calls and signaling are always handled by LTE and data by 5G, if available.

DATA SPEEDS CONTINUE TO INCREASE FROM ADVANCES IN LTE 

Deploying 5G is not super complex. Cell sites are upgraded to meet LTE-A standards, which includes more antennas for MIMO, to name one. The LTE upgrade is the biggest part. For 5G, antennas are replaced with upgraded models that connect to LTE and 5G simultaneously. A 5G baseband, or radio chip is also installed at the cell site (base station). Then all is needed is a software upgrade.      

5G SMARTPHONES:
Several 5G smartphones will be introduced this year, but the iPhone will not be one of them. There have been rumblings that Apple risks being late to the 5G game. IDC stated Apple could face a tough 2H19 due to the coming 5G and foldable devices from its competitors. I find that to be a ridiculous statement; we've seen how the foldables hype has unfolded, and there is no appeal for a 5G smartphone given the lack of 5G networks.  

I am not convinced a 2020 5G iPhone is truly necessary. If 5G coverage is sparse, performance is questionable, and iPhones cost more, then it undoubtedly makes little sense to add 5G connectivity until those drawbacks subside.  

Tim Cook would not talk specifics, but did say (paraphrasing) Apple is always looking at different technologies and selects the right time when those things come together, especially from a cost point of view. There are a lot of added costs for handsets to support 5G due to the need for more RF content and increased antenna complexity. Historically, battery and connectivity performance has been poor for early versions of new generation wireless technology. 
  
Will consumers buy a higher-priced device with potential connectivity/battery performance issues coupled with the likelihood 5G coverage will be limited? And, especially given that initial 5G speeds will not be significantly better than advanced versions of LTE? And, how much to users value higher data speeds? For web browsing, most often it is browser processing power and server-side factors affecting speeds, especially when a webpage is stuffed with ads. 

The are considerable challenges for implementing 5G in smartphones due to the huge number of spectrum bands and unprecedented bandwidth requirements, and this is compounded by the need to support simultaneous 4G LTE and 5G connections. Smartphones will need to make space for the added 5G components. Dual LTE/5G connectivity needs two primary antennas which requires an additional DC converter. MIMO requires 4 antennas to support 4 receive paths, and the vast range of spectrum bands that must be supported increases the RF content in a device. I would think shrinking the battery foot print would be the easiest solution to free up real estate. Of course, this comes with the sacrifice of battery life which is less than ideal given the power consumption obstacles 5G adds. Premium handsets incorporate envelope tracking with power amplifiers minimizing power consumption, but ET's are only expected to 60MHz of bandwidth which will increase PA voltage for wideband 5G transmissions. The impact on iPhones is likely less, given iPhones already support multiple antennas along with possessing power consumption excellence.  

The 5G networks that currently exist in the US are the millimeter wave variety suited for Fixed Wireless Access. It is unclear when Sub-6GHz 5G for smartphones will be available in the US. US carriers won't be in any hurry to light up their networks until they can get 5G smartphones in their customers hands. This will likely revolve around the timing of a 5G iPhone considering nearly half of US smartphones are iPhones.

5G NETWORKS-  NSA 5G NR (vs SA):

The 5G network in current development is termed NSA 5G NR which stands for Non-Standalone 5G- New Radio. Non-standalone indicates that its not a new/separate network, but rather a new radio with 5G technology standards attached on top of an existing network. NSA networks use for LTE for the network core.  

The other type of 5G network is SA, or standalone, where the network is its own entity- a "True 5G" core. Standards for SA 5G are still being finalized so it will be years before standalone networks exist. NSA represents an intermediate step on the path to full 5G service. 

The industry has decided on the diagram in the middle illustrated below- NSA to EPC (LTE)       

It's hard to know how big an improvement Sub-6GHz 5G in the US will be versus the advanced versions of LTE because -  advanced LTE is a lot like 5G and the major differentiator-  mid-band spectrum with 100MHz channels - won't happen in the US near-term. That said. I do not expect mobile 5G in the US will be dramatically better than LTE speeds currently possible today. 

5G SPEEDS DEPICTED ARE FOR mmWAVE- LOW-BAND 5G SIMILAR TO LTE-A

5G TYPES:
There are two types of 5G service classified by their frequencies. They are drastically different. Data speeds increase as frequencies increase.

1) mmWave (Millimeter waves)
mmWave is located on the EHF band (extremely high frequency) which are frequencies above 20GHz and capable of delivering data speeds as high as 20Gb/s. This requires using  large blocks of spectrum to construct channels as wide as 1000Mhz. AT&T and Verizon have significant high-band spectrum holdings and both have installed mmWave service in several markets. Despite its mind-blowing speeds, mmWave 5G is of limited use due its very short range (several 100 meters) and poor propagation qualities requiring line-of-sight transmission. It's likely it will be used solely for fixed wireless access. Typically antennas are installed on utility/light poles every several hundred meters. In essence, mmWave networks are a collection of glorified WiFi hotspots. 

According to a Google study, it would cost over $400B to install antennas on 13 million light poles for covering less than half the US population. To put this in perspective, The Big 4 US carriers collectively spend less than $50B annually on wires capital expenditures. Some of that spending is for maintenance capex- replacing worn out and malfunctioning equipment. 

High-band spectrum is relatively plentiful since it's of little use other than in outer space. Radio waves at such as high frequency are absorbed in the atmosphere limiting the range to several hundred meters. Within range, they require clear line-of-sight from base station transmitter to receiver on user equipment.   

2) Sub-6GHz- 

Sub-6GHz 5G is subdivided into two types:

• Low-band spectrum- (600MHz - 2.3GHz US) currently used by 3G & LTE.
• Highest propagation and range
• Slowest data speeds ~200Mbps

• Mid-band spectrum- (3.5GHz -5GHz)
• supports urban areas 
• high speeds ~2Gbs 

Sub-6GHz 5G is what mobile devices will use due to its longer range which provides a much wider coverage area. 5G radios can be installed on existing cell sites opposed to mmWave requiring a massive number of micro-sites. Sub-6GHz 5G will use mid-band spectrum somewhere in the 3.5-5GHz range. Current wireless networks use low-band spectrum- frequencies between 600MHz - 2.3GHz. 5G carriers (broadcast signals) are supposed to have 100MHz channel widths compared to 20MHz possible with LTE. Advancements in wireless technology has allowed LTE to increase bandwidth beyond 20MHz through a method called carrier aggregation which combines several 20MHz carriers. 

Since mid-band spectrum is not available to deploy in the US yet, AT&T and T-Mobile are refarming low-band spectrum in the 600-700MHz range for 5G. This will serve as an anchor due to its superior range and coverage qualities, however data speeds will be inferior. 

The US needs to find a solution to its shortage of mid-band spectrum. The 150MHz of MB spectrum expected by 2020 won't get it done, especially if it's split among 2,3, or 4 carriers. 

There are some creative ways to boost bandwidth by sharing unlicensed spectrum that LTE-LAA, LTE-U and 5G are able to take advantage. There has been a debate about sharing 5GHz band which is currently used by wifi. 

Many countries have 100's of MHz of mid-band spectrum in contiguous blocks that can provide wideband channels. This will give them the edge in data speeds for the early stages of 5G service. 

FREQUENCIES FOR MID-BAND SUB-6GHz 5G   

5G FREQUENCIES- ALL BANDS:

US 5G OUTLOOK:

TMUS and AT&T claiming to have nationwide coverage (Sub-6GHz) by the end of next year. Currently, the US lacks mid-band spectrum which is the global standard for Sub-6GHz 5G service. The FCC is working on freeing up mid-band spectrum by relocating incumbents. This process has been slow and doesn't appear it will conclude in the near future. In the meantime, Verizon and AT&T have been deploying 5G on their high-band spectrum (mmWave), used for fixed wireless access, in very select locations. 

Mobile coverage supplied by Sub 6GHz 5G is being rolled out by AT&T, T-Mobile, and Sprint on their current low-band spectrum - primarily in the 600MHz to 850MHx 

T-Mobile stated that its 5G service will improve average speeds from 30 Mb/s to 60-70 Mb/s, and expect that in two years average speeds can increase to more than 100 Mb/s. They expect in 5 years real-life speeds will reach 300 Mb/s. LTE is capable of delivering the same performance. I don't think AT&T 5G will be significantly higher provided that it won't use mid-and spectrum with wider channels.   

There are a couple reasons to expect an unremarkable speed boost. First, data speeds are not as fast for low-band compared to higher frequency spectrum. Second, and most important, US carriers don't have a ton of low-band spectrum to begin with. Verizon has a little more than 100MHz and AT&T little more than 150MHz in most markets; that's insufficient for the 100MHz carriers that 5G standards call for. The quantity of spectrum and channel bandwidths are the major determinants of data speeds. 

AT&T:
AT&T is using band 5 (850MHz) and band 12 (700 MHz) for 5G.  As shown in the maps below, AT&T only has 10MHz blocks in most markets. AT&T's total 5G spectrum holdings amount to around 50MHz for 700MHz Band 12 and 25MHz for the Band 5 (850MHz). Band 12 is used for LTE as well, thus I doubt AT&T will be using all of it for 5G. My guess would be with Carrier Aggregation AT&T likely use 40MHz carriers (4 x 10MHz).  

Stated many times before, the real secret sauce is a single, wideband 100MHz channel, not a bunch of narrow channels lopped together. The guard bands separating aggregated channels consume spectrum leading to the inefficient use of spectrum.

MULTI-CARRIER 5G IS SIMILARLY INEFFICIENT AS LTE CARRIER AGGREGATION

AT&T has 130MHz of 24GHz mmWave and 400MHz of 28GHz mmWave that has been deployed in several markets. It does not seem AT&T will ramp mmWave deployment significantly in the near-term. It's chief engineer is cautious on mmWave since they have little idea how real-life performance will turn out being that it's a totally new technology. It makes sense to evaluate the performance of real-world users before investing in a wide scale deployment. 

10MHz CHANNELS FOR OF MAJORITY MARKETS (Memphis has 15!)

10MHz CHANNELS FOR OF MAJORITY MARKETS

Historically, carriers have acquired additional spectrum to dedicate to new generation network builds, as they did for 3G and 4G. This holds true for the 5G mmWave networks as VZ and T acquired roughly 1000MHz and 500MHz, respectively. Regarding Sub-6GHz spectrum, US carriers have not boosted holdings as of yet. FCC will have to make mid-band spectrum available before 5G performance really takes off. In short, for 5G service to be robust and ubiquitous, US carriers have to obtain additional spectrum, specifically in the mid-band frequencies. 

VERIZON:
Verizon appears to be solely focused on mmWave 5G as it has given little indication it is actively pursuing Sub-6GHz 5G. I assume this is due to the lack of spectrum VZ currently licenses. VZ management did comment that they expect new technology allowing LTE and 5G to share the same spectrum will be available next year. This would eliminate the need to take spectrum away from its LTE network to solely dedicate to 5G. However, VZ management appears to be more focused on enhancing its current LTE network. 

VZ's 5G efforts are focuses FWA (Fixed Wireless Access) that delivers gigabit broadband to the home. Verizon has a fiber broadband product- Fios. However, typically the last leg of th FTTH (fiber to the home), from the street to the house- is not economical when it involves digging up driveways/yards and running wires above ceilings and through walls. Cable broadband providers have an incumbent advantage from the long-existing coax cable connections found in virtually every residence. Eliminating the need to run fiber to the home allows FWA carriers to compete with cable companies. Verizon is also targeting businesses which it says are the majority of its FWA subscribers. 
     

To justify the investment in 5G, carriers are looking for ways to monetize the service. FWA provides those opportunities especially regarding businesses which are less price sensitive.
It is hard to envision how smartphone 5G service could be monetized because I don't think mobile users would pay a premium for faster data speeds when they are already fast.   

I've read reports that propagation has been much better than expected, as well as reports that it's terrible. An analyst at BTIG tested Verizon's 5G network in the few hundred feet that it covered, and he was very unimpressed. While it appears mmWave is Verizon's sole focus,  

SPRINT:
Sprint has the best prospects for early 5G service. It has nearly 200MHz of 2.5GHz spectrum, with as much as 180MHz in many markets. 2.5GHz is capable of higher speeds than the low low-band frequencies the other carriers are using. Management has stated its intentions of using the 2.5GHz for 5G, but their plans will depend on whether the T-Mobile merger is approved. Sprint hasn't posted a profit in over a decade. Sure, that's an accounting profit which includes depreciation and Sprint does have positive operating cash flow but that's wiped out with capex. Sprint is saddled with debt, and when maintenance capex requirements are considered, its investment capacity is constrained. Luckily, 5G doesn't require much investment beyond that required for upgrading LTE, which I think Sprint is pretty far along.  

T-MOBILE:
TMUS is using 600MHz for its 5G network. The carrier only has average of 31MHz per market, with some having 40MHz, which is rather paltry. That explains why management only expects speeds to double to around 70Mb/s, as performance gains would be entirely due to 5G RAT given low channel bandwidth. 

If TMUS and Sprint are allowed to combine, its 5G network has the potential to be more robust. It's unclear if T-Mobile's comments regarding expectations 100Mb/s speeds in two years were based on assumption of receiving regulatory approval for the merger. TMUS has 200MHz of mmWave spectrum, but appear to be focused on low-band rollout.  
AT&T AND 5G E:
Last year, AT&T pushed out "5G E" network indicator on devices capable of connecting to its upgraded LTE service.  AT&T's use of "5G" erupted in criticism and controversy, prompting a lawsuit from Sprint because those devices are not equipped with a 5G chip. AT&T's justification was that when users are connected to 5G E network they can receive much higher data speeds and that this network will be the foundation for 5G service, hence the "5G." and the "E" signifying the evolution to 5G. Sure, it's misleading but I it's not entirely far-fetched when considering that advanced LTE networks include 5G technology. In addition, without mid-band spectrum and capacity for 100MHz channel widths in the early stages, having a 5G radio does not lend significant advantage compared to advanced LTE- a primary thesis of this report. So it's likely that "5G E" won't be terribly inferior to AT&T's 5G in the early innings.  

I have been pondering the reasons why AT&T would do this-- what this implies about the company's plans and expectations for its 5G service as it relates to smartphones. It is surprising (and telling) that AT&T would display 5G on 4G phones, a move that limits its potential to promote/sell 5G devices and service in the near future. Many subscribers will think they already have 5G because it says so on their phone. 

The whole sales approach is based on emphasizing what the consumer does not have and why he/she needs what this new product/service does have. Product differentiation is key. The LTE indicator is a constant reminder to users they do not have 5G. Yet, now that some see 5G, it is challenging trying to sell folks something they believe they already have. Of course, this works both ways as it makes it harder for AT&T's competitors to gain these users' attention.  

AT&T's "5G E" ploy suggests the company's expectations for its 5G service are pretty low in the near-term. Given that the majority of AT&T's subscribers are iPhone users, fall 2020 would be the earliest point AT&T would have a 5G device with broad appeal. 

This would also confuse iPhone users, thus it is surprising Apple would go along with it. Apple could use 5G as a proposition for accelerating upgrades. However, it is less surprising if a 5G iPhone is not imminent. In addition, I am certain that Apple's 5G marketing communications will clear any confusion surrounding the not real "5G E." 

  
CONCLUSION:
In the US, 5G networks won't offer significant improvements on smartphones for some time given the amount & frequency of the spectrum. The challenges of building 5G into smartphones raise questions about performance and create a scenario of more expensive smartphones. For me, I would just rather have advanced LTE and prefer the carriers use spectrum for it, opposed to taking from it to dedicate to 5G.

The carriers have to start somewhere with 5G, and they are starting to dip their toes in the water. The pace of the rollout will be gradual opposed to the more aggressive pursuits we observed with 3G and 4G. 

For the iPhone- 
Not having 5G in 2020 is a risk because carriers will only promote devices that can run on their new network service, and won't recommend the devices that can't. I am not sure how strictly that will apply for the case of 5G (opposed to 3G & 4G). It's hard to know how far along carriers will be on 5G in a year's time  and how confident they will be in its service. In addition, carriers might not be aggressively promoting their 5G service if they are not charging more for it. The lack of promotion wouldn't cause a loss of iPhone users, but it could limit the ability to attract new users as well as spur upgrades if carriers aren't offerings promotional deals.  

All of this could be a different case internationally. 

There is a risk of having a 2020 5G iPhone. Users may delay upgrading if 5G iPhones are more expensive and have less battery life, along with other performance questions that typically surround the introduction of new generational wireless devices. And, if 5G coverage is sparse and data speed improvements aren't exceptional, there would be even less impetus to buy the first 5G iPhone.  

(AAPL): Update on Apple's Short Interest for 4/30/19

The number of Apple shares sold short declined 8.3M to 52.7M as of 4/30/19. Apple's short interest had been averaging around 40M shares until 2/28 when it spiked to almost 97M, increasing 56.9M in a two week period. This was a result from Apple's accelerated share repurchase program (ASR) that kicked off in February. I discussed the ASR and short interest back in March. Now that Apple reported Q2 results and filed its 10-Q, we have confirmation of the ASR and details of its size.

55M shares were delivered to and retired by Apple. This roughly lines up with the 56.9M share increase in short interest for 2/28/19. Since then, short interest has fallen by 44.2M shares. 

If we assume this was entirely due to the banks covering their short positions related to the ASR, then there would still be over 10M AAPL shares remaining to be bought as of 4/30. Of course, the short selling and covering is not solely on the part of the banks handling the ASR. 

If you think short selling was increasing, then the amount of shares covered for the ASR were more than 44.2M. If others were covering their short positions too, then the amount purchased for the ASR was less than 44.2M. 

In any respect, it appears that the initial delivery of shares was only 80% of the $12B purchase commitment, thus there will be more shares repurchased beyond the 55M. It's hard to know just how many more shares since the price of AAPL has run up, but could be as much as 10M more. The program is set to expire in August. 

The (possibly) 20M shares remaining for the ASR and Apple's own open market repurchases should continue to help support the AAPL's share price.
  

Apple (AAPL): Apple Pay Revenue Estimates and Future Potential

Since its launch 4 years ago, Apple Pay has seen strong growth in active users and transaction volume, but revenue has been relatively inconsequential. The challenge facing Apple Pay to impact the top line is straight forward: it is widely estimated that Apple only collects 15 cents for every $100 in credit card purchase value, thus it would require $1T (trillion) in PV just to generate $1.5B in revenue. Even then, one or two billion barely nudges the needle for a company with $260B annual sales. Annual transaction value for credit cards is over $3T in the U.S. and more than $10T globally. Thus, Apple Pay would have to capture a significant portion of global transaction volume and/or boost its percentage take in order to become a significant revenue contributor. Debit transaction volume is not quite as much as credit volume, but Apple likely collects less than a penny per debit transaction. It is possible the economics are more favorable internationally. 

APPLE PAY NON-REVENUE BENEFITS:
While revenue from POS (point-of-sale) transactions would still be modest with widespread Apple Pay usage, Apple stands to benefit in other ways. First, Apple Pay can increase platform loyalty and enhance the value of Apple's overall ecosystem. Second, AP gives Apple a foothold in the payment space from which it can expand into other verticals. Apple could move into a processing like PayPal, or become an POS (point-of-sale) acquirer like Square. We have already seen Apple expand into online payments as well as peer-to-peer payments with Apple Cash. Most recently, Apple partnered with Goldman Sachs to become a credit card issuer.  

Another benefit is Apple Pay places Apple at the beginning of the chain in the payment process. Being at the start of a process (or the gateway) is immensely valuable. Amazon dominates online retail because it's the first place (sometimes only) that a consumer checks for an item he/she needs. Google succeeds because anyone looking for something on the internet comes to them first. With the popularity of the iPhone, Google now shares billions to Apple annually because when users need to find something on the internet, they pull out their iPhones. To keep Apple from switching search engines or building one, Google pays to be the default search option. If Apple Pay becomes the standard in which consumers make purchases, Apple gains leverage over the card networks and issuers, as well as merchants.               

APPLE PAY REVENUE ESTIMATES:
Apple Pay has done $387M in total sales (1Q15-2Q19 ), $175M in revenue for FY18, and $242M in the last year. While Apple has not announced Q2 results yet, I am basing my estimates from the disclosure at last month's special event that Apple Pay has reached 10B transactions.

Apple Pay revenue is calculated from multiplying Apple's commission of 0.15% (or 15 basis points) by the total value of transactions where Apple Pay is used. We calculate total transaction value from multiplying the number of Apple Pay transactions by the average transaction amount.

1) # of Transactions   x   Average $ Value per Transaction  =  Total Transaction Value
2) Total Transaction Value   x  .0015 (commission) = Apple Pay Revenue

My estimates are based on management comments from earnings conference calls and other disclosures which are shown in the table below. I have the highest degree of confidence in the assumption for the Apple Pay commission (U.S. transactions), followed by the estimates for transaction volume. Last, the estimates for average transaction amount are guesses.

For a couple of quarters, Apple has given transaction volume figures and for most quarters it has provided year-over-year growth rates. Taking the two together, we work backwards to estimate transaction volume for earlier periods.

The industry average credit card purchase is higher than $50, but I believe Apple Pay is less. The only guidance we have for the average Apple Pay transaction amount is a comment from 1Q17:  "100's of millions of transactions and billions of dollars in purchase value." This implies that transaction volume was 200M or greater and that average transaction was $50 or less. This assumes purchase value was $10B or less, otherwise the comment would have been: "over $10B" or "10's of billions." I use $25 per transaction for my estimates.

The sum of the number of transactions since launch is slightly more than 10B which is consistent with Apple's recent disclosure of attaining 10B cumulative transactions. 

For FY19, Apple Pay revenue will reach $330M, and if growth can continue at 100%+ revenue will hit $775M in FY20. These estimates could be too high since I am assuming that all transactions are credit card payments. While the number is certainly not 100%, credit cards are the vast majority. I do not adjust for this since it is likely offset by the low estimate of average transaction value.  

IMPORTANCE TO APPLE MANAGEMENT:

It is apparent that Apple's ambitions for Apple Pay extend well beyond its revenue potential from contactless payments. If that were not the case, I don't believe Apple would talk-up the service as much as it does, nor continue to expend effort and resources on development. Surely, not all of that for a business that perhaps in the future only generates modest revenue. Practically on every earnings calls, management boasts about Apple Pay's success despite having little to no effect on the quarter's results, as they have occasionally conceded. Obviously, they believe the future holds bigger and brighter things for the service.

Just to highlight how serious Apple is about AP, look at the case of the new Apple Card. This is the credit card Apple is introducing in partnership with Goldman Sachs. As the issuer, Apple stands to collect 2%-2.5% (interchange fee) from the merchant. Obviously, the economics are much better as a card issuer. Apple offers cash back rewards of 2% on Apple Pay purchases and 1% for purchases where Apple Pay is not accepted and the card is physically swiped (inserted). After accounting for the cost of rewards, the economics look less attractive, but still much better than the Apple Pay transactions from 3rd-party card issuers. This is especially true for Apple Card transactions that Apple only has to pay 1% if Apple Pay is not used. One would think Apple would prefer Apple Pay not be used since those transactions are more lucrative. Since Apple is the card issuer, an Apple Pay transaction does not result in any additional revenue. So why would Apple spend 1% for the use of Apple Pay when there is no financial benefit? Obviously, Apple's goal is to increase Apple Pay usage and is willing to spend money for it. Naturally, the next question becomes "Why would Apple spend money to increase usage when even if Apple Pay becomes ubiquitous, revenues would still be relatively small?" I believe that is the crux. Apple sees AP as much larger than just POS transactions because it makes no sense to pay 1% to your card holders to boost a business that only collects 0.15%. In short, Apple's vision for Apple Pay longterm is ambitious and is therefore seriously committed to accelerating its adoption.

APPLE PAY GROWTH POTENTIAL:
Apple Pay revenue will continue to increase as merchant acceptance continues to grow and as the service expands into new markets. If Apple Card succeeds in attracting a large user base, Apple Pay usage will accelerate domestically.

International usage is much higher than in the U.S. as 80% of transactions occur abroad. The Apple Card addresses this gap. Domestic users don't have much motivation or incentive to use the service, and many are unsure and/or do not ask if the merchant accepts Apple Pay. For their entire lives, people have been in the habit for reaching for their wallets when making a purchase, not their phones. This will change for Apple Card users since they are essentially paid 1% of the purchase amount to use Apple Pay.

Payment card terminals that accept EMV (chip) are also equipped with NFC to handle contactless payments such as Apple Pay. EMV began rolling out across the U.S. a couple years ago and has become the new standard. Not only does this help Apple Pay since it increases merchant acceptance, it should also help lift usage on the part of the consumer. In general, the process of inserting and reading a chip card takes considerably more time than swiping. This is a situation where contactless payments provide a noticeable advantage to the user. Merchants that have busy checkout lines also benefit from a quicker transaction process.

Apple Pay has potential for online and in-app payments. Since these transactions do not involve physical cards, merchants pay higher fees for "card not present" transactions due to the increased risk of fraud. It is possible that the acceptance of Apple Pay reduces such fees since it decreases the risk of fraud. In addition, Apple Pay online payments is beneficial to users since it eliminates the need to have to enter credit card information as buyers can simply tap or click the Apple Pay button and be done with it. Merchants benefit as it reduces the friction in the checkout process moving the customer from product selection to sale with fewer steps increasing the likelihood that more transactions reach completion which also helps merchants capitalize on impulse purchases. Personally, I have encountered situations where I went to purchase an item to later discover my wallet was not nearby causing me to abandon the purchase.

The full potential of Apple Pay is not currently clear. Apple firmly believes Apple Pay has vast potential as evidenced by its continued efforts and the introduction of Apple Card.