[exelius]

I'm curious how much, if anything, Apple makes off of this. It's pretty clear they're not displacing anyone in the existing merchant payment value chain (which is the mistake most other companies have made) but it's not clear how Apple makes any money off of this.

I have a hunch that Apple might not be making any money at all off of Apple Pay. Apple operates their business very differently than many tech companies. The vast majority of Apple's profit comes from the ridiculously high margins on their hardware. They develop services to increase the capability of the hardware platform; and any money resulting from the operation of those services is secondary.

When Apple initially released the iTunes store, they operated it at a loss. The entire iTunes store and all the payment systems, etc. that go along with it were built in order to sell iPods.

There's a very real possibility that Apple looked at the mobile payment market and said "Shit, there are way too many entrenched interests for us to insert ourselves in the value chain and take a cut. But having a superior mobile payment system will help us sell more iPhones, so we'll do it anyway." Those entrenched interests are what have kept every other mobile payment company from making a real dent in the overall payments ecosystem. Unlike with iTunes where Apple made demands about how the store had to function, they placated the industry while coming up with a solution that worked for both end users and the industry players. We'll see if it catches on, but I expect it will.

[gambiting]

>>The vast majority of Apple's profit comes from the ridiculously high margins on their hardware.

I am not saying you are wrong, but could we see a source for that please? I always assumed that no matter what they do, the profit margin on hardware cannot be THAT large, because the costs of R&D and marketing for apple devices must be huge(they ship with their own in-house developed operating system,after all), so I always assumed that Apple makes most money off platforms like iTunes, not hardware profits. I would be very happy to be proven wrong though.

[exelius]

I don't have an explicit source; but we can back into the numbers. Apple only breaks out COGS for the entire company; not by division. But regardless, the iTunes division is dwarfed by the iPhone/iPad/Mac divisions. Apple's gross margins are right around 37.5% -- which is very high. The average for the computer/electronics industry is closer to 20%. If you look at historical trends through their past SEC filings, you'll see that margins have actually been declining, and that iTunes was only a significant percentage of revenue for the last couple of years. It was less than 1% of revenue before 2007, so it operated as a very small part of the company for the first 10 years of its existence. Online media direct sales are actually not as big of a business as you might think -- for example, Steam alone did more revenue than the entire online movie sales/rental business (not counting subscription services).

As a percentage of revenue, Apple's operating expenses (which include R&D and the operation of the Apple stores, servers, etc.) are pretty low -- less than 10%.

All of this info comes from Apple's 10-K: http://investor.apple.com/secfiling.cfm?filingID=1193125-13-...