Over the summer, Apple (NASDAQ: AAPL) acquired the bulk of Intel‘s (NASDAQ: INTC) smartphone modem business in a $1 billion deal that will accelerate the timeline for Apple’s in-house 5G modem. That transaction was precipitated by Apple settling its legal war with Qualcomm (NASDAQ: QCOM), which was followed by Intel announcing it was abandoning the 5G modem market.

The Cupertino tech giant is now the owner of numerous cellular standards-essential patents (SEPs). Any entity that owns SEPs is expected to license out the intellectual property (IP) on a fair, reasonable, and non-discriminatory (FRAND) basis. This week, Apple published a statement committing to doing exactly that.

The pros and cons of standardization

Even though Apple has settled with Qualcomm and inked new multiyear licensing and chipset supply agreements, it still seems that the Mac maker is taking jabs at the mobile chip giant.

“Standardization is beneficial when it advances marketplace cooperation and interoperability, allowing consumers to have confidence that products reliably interact with other products,” Apple writes. “Yet it can also lead to problems when companies use the power conferred by standardization to eliminate competition through selective patent licensing or discriminatory and excessive royalties.”

Apple’s initial complaint in early 2017 that kicked off the legal conflict with its longtime supplier focused very heavily on Qualcomm’s licensing practices, which Apple alleged were anti-competitive. “For nearly ten years, Qualcomm has failed to offer Apple a license for its cellular SEPs on FRAND terms,” Apple argued at the time.

Apple says that “the marketplace continues to suffer from a lack of consistent adherence” to FRAND licensing principles, especially when it comes to cellular standards.

“In light of Apple’s acquisition of the majority of Intel’s smartphone modem business, including a significant number of cellular SEPs, the time is right to reiterate Apple’s FRAND licensing principles on industry standards,” the company writes. “Consistent with evolving case law, Apple is committed to these core principles to promote fair, reasonable, and non-discriminatory licensing of SEPs.”

Bundling is bad

In the statement, Apple criticizes the practice of bundling patents together for licensing purposes. That’s another clear shot at Qualcomm, which offers licenses to a broad portfolio of SEPs.

From the original lawsuit:

Qualcomm’s licensing practices are premised on every licensee taking a license to a large, but unspecified, number of patents — an entire portfolio. By leveraging the “thicket,” Qualcomm attempts to avoid the patent-by-patent analysis that is ordinarily required for any licensing demand, instead hiding behind the sheer volume of its patent portfolio to extort royalties from potential licensees.

SEP licensors shouldn’t be able to force portfoliowide licenses on licensees, in Apple’s view.

Injunctions should be a last resort

At the height of the legal tensions, Qualcomm had pursued trade injunctions all around the world, seeking to block the import of iPhones since it alleged that Apple was improperly infringing its SEPs. Qualcomm was able to successfully secure injunctions for specific iPhone models in certain markets like China and Germany.

Licensors should never resort to such tactics “except in very rare circumstances,” Apple argues, since those types of threats distort FRAND negotiations. In cases of SEP infringement, Apple believes that monetary damages “provide a sufficient remedy.”

The Mac maker concludes, “As both an innovator and an implementer of standardized technologies, Apple remains committed to these core FRAND principles, now and in the future.”

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Buried inside Apple‘s (NASDAQ: AAPL) earnings conference call last week was an announcement that most investors and consumers probably paid little attention to. CEO Tim Cook announced that the Cupertino tech company is preparing to roll out a way for consumers to finance iPhone purchases with Apple Card, the credit card that Apple launched in partnership with Goldman Sachs (NYSE: GS) earlier this year. In characteristic hyperbolic fashion, Cook even went as far as to call the debut “the most successful launch of a credit card in United States ever.”

That might give the famed investment bank, which has been expanding into consumer credit, exposure to this $18.5 billion market.

Paying for your iPhone with the credit card that lives in your iPhone

The financing offer will be structured nearly identically to the installment plans that the major carriers offer to buy smartphones: Customers can pay off that shiny new iPhone over the course of two years with 0% financing. The service is designed with convenience in mind, offering a seamlessly integrated way to buy an iPhone while spreading out the cost.

It’s important to note that the offer won’t have a material impact on Apple’s accounting, as the company is not the one providing the financial backing. As the issuing bank for Apple Card, Goldman Sachs will play that role. That’s similar to the iPhone Upgrade Program that Apple launched in 2015; the company outsources the underlying financing of the iPhone Upgrade Program to Citizens One, a subsidiary of Citizens Financial.

In doing so, Apple is still able to recognize the related iPhone revenue up front without having to defer those sales.

Installment plans are a big business

Thanks in large part to T-Mobile‘s Un-carrier transformation, the domestic wireless industry has evolved significantly over the past five years, shifting away from the subsidy model of yore to installment plans that serve the same purpose. Carriers leverage installment plans as a potent tool to tether customers, as those outstanding balances come due if a customer decides to cancel their plan in order to switch to another carrier.

Carriers take those installment plan receivables, package them, and sell them to bond investors in the form of asset-backed securities (ABS). ABS rightly earned a bad reputation during the financial crisis, but there’s far less risk to the global economy when we’re talking about securitizing a $1,000 phone that will be paid off in two years compared to a $2 million home to be paid off over 30.

Verizon had the first public smartphone-backed bond offering back in 2016, and the market has been booming ever since. Securitizing equipment-related receivables helps carriers improve cash flow while isolating the credit risk and protecting corporate credit ratings. As of the third quarter, here are the equipment-related receivables that the carriers have on their balance sheets.

Data source: SEC filings.

The forthcoming offer could potentially hurt customer retention at carriers, to the extent that iPhone buyers choose to finance those purchases with Apple Cards instead of carrier installment plans.

The iPhone Upgrade Program didn’t seem to impact carriers much one way or the other. Let’s see if the new Apple Card offer does.

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The iPad was one area of strength when Apple reported earnings last month, with iPad revenue jumping 17% to $4.7 billion. CEO Tim Cook attributed the growth to “ongoing momentum of our wider lineup,” while CFO Luca Maestri added that the iPad active installed base had hit an all-time high. The Cupertino tech giant no longer discloses unit sales, so investors have to turn to third-party researchers.

This week, Strategy Analytics released its estimates on the tablet market in the third quarter, and Apple continues to lead the way.

Apple and Amazon lead the way

The market researcher believes that Apple shipped 10.1 million tablets in the third quarter, up 4% compared to a year ago. Amazon.com came in No. 2 with 5.3 million shipments, thanks to brisk sales during the e-commerce company’s Prime Day in July that spurred demand with promotions and discounts for a broad swath of Amazon’s devices. Amazon updated the Fire HD 10 tablet in October, which was after the third quarter ended.

Data source: Strategy Analytics. YOY = year over year.

The global tablet market shrank by 4%, according to Strategy Analytics, and many of the top vendors saw unit volumes sink. Apple still dominates the tablet market, recently adding more features to the iPad to improve productivity, including the revamped iPadOS.

“Apple released a slightly larger seventh generation iPad with keyboard support in Q3 2019 for the same price as the previous model, helping drive shipments 4% higher year-on-year,” said Strategy Analytics director of connected computing Eric Smith. “Larger revenue gains for the company hint at a strong mix of iPad Pros compared to the previous year, as Apple wholesale ASPs (average selling prices) rose by 9%.”

Much like other parts of Apple’s business, the company has been leaning heavily on higher prices to drive most of the segment’s growth, as demonstrated by a 17% jump in revenue on a 4% increase in volume.

President Trump’s ongoing trade war with China and the related ban on Huawei has hurt the Chinese telecommunications behemoth, in part because the tensions have severely limited Huawei’s access to Android and online services provided by Alphabet subsidiary Google.

“Huawei shipment volumes fell 18% as the US-China trade war restricts its ability to compete outside of the domestic Chinese market,” Strategy Analytics research analyst Chirag Upadhyay noted. “Its key issue is its inability to launch new Android models outside of China as Western consumers rely heavily on Google Mobile Services.”

The estimates differ from figures that IDC put out last week, which suggest that Apple shipped 11.8 million tablets and that the overall market returned to growth of 1.9%.

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Will the search giant end up pulling the trigger?

An offer is on the table

Reuters reports that Google has formally made an offer to scoop up the wearable tech company, sending Fitbit shares 31% higher by the close. CNBC also corroborated the news. The reports did not specify how much Google has put on the table, and the outlets’ sources note that talks could still fall through and an acquisition may not materialize.

Fitbit has struggled in its pivot to smartwatches, with some products resonating with consumers while others flop. For instance, the Versa Lite failed to meet sales expectations, resulting in Fitbit cutting its full-year 2019 forecast in August. That news sent shares to all-time lows, with Fitbit’s market cap briefly dipping below $1 billion for the first time.

FIT Market Cap data by YCharts.

Following the Versa Lite debacle, the company launched the Versa 2, and investors are awaiting indications from management on how that smartwatch is selling. Fitbit is set to report third-quarter earnings on Nov. 6.

Google needs to put Wear OS out of its misery

If Google were to move forward with the acquisition, it would instantly become the No. 2 player in the smartwatch market behind Apple after years of flailing with Wear OS. Third-party manufacturers have largely abandoned Google’s wearable platform in favor of proprietary operating systems like Samsung‘s Tizen, which powers the South Korean conglomerate’s Galaxy Watch.

Many were expecting Google to unveil a Pixel Watch this year as part of its growing hardware portfolio, but that device was reportedly axed years ago by hardware chief Rick Osterloh, which makes Google’s $40 million purchase of smartwatch technology from Fossil earlier this year all the more confusing. It’s still unclear what intellectual property Google bought from the accessory maker, but some employees were part of that deal as well.

Buying Fitbit would mean that Google would have two disparate smartwatch platforms. Fitbit had assembled its platform by cobbling together parts from Coin, Vector, and Pebble, three companies it had acquired over the years. If Google acquires Fitbit, it should finally kill off Wear OS once and for all and continue building on the progress that Fitbit has made with Fitbit OS.

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The bulk of that will be search ads.

Skipping Google and going straight to Amazon

eMarketer released fresh estimates this week on the U.S. search ad market, which is forecast to grow 18% in 2019 to $55.2 billion. Google will easily grab the majority with 73.1% of the market, while Amazon should trail as a distant No. 2. with 12.9%. Microsoft is expected to garner a 6.5% share; Amazon overtook Microsoft last year as the No. 2 ad platform in the U.S.

“Polling suggests that most product searches now begin on Amazon, causing the No. 2 search player to grow rapidly and steal share from its larger rival (though it is much smaller in comparison),” eMarketer writes. “In 2019, Amazon’s search business will grow nearly 30% over last year, boosting net search revenues to $7.09 billion.”

In other words, search ads should represent nearly two-thirds of the total ad revenue that Amazon will generate this year. It’s also worth noting that eMarketer is essentially echoing Schmidt’s comments from years ago. “People don’t think of Amazon as search, but if you are looking for something to buy, you are more often than not looking for it on Amazon,” Schmidt had said back in 2014.

Search ads for products are such a lucrative business for Google precisely because purchase intent is strong and Google knows exactly what you’re looking for, but now consumer behavior is shifting in a way that cuts the search juggernaut out of the loop.

Amazon’s search ad business will grow another 30.7% in 2020 to $9.3 billion, followed by another 26.2% jump in 2021 to $11.7 billion, according to eMarketer’s forecast.

“Amazon’s ad business has attracted massive increases in spending because advertisers can reach consumers during product queries, a time when they’re ready to buy,” eMarketer analyst Nicole Perrin said in a statement. “Amazon has also rolled out better measurement and targeting tools, making it even more attractive for advertisers.”

North America still represents the bulk of Amazon’s advertising business, but the company sees a lot of growth potential abroad as it makes those tools more broadly available. “A lot of the [advertising] tools that we’ve rolled out introduced in places like the United States aren’t available in many of the international regions,” Amazon head of investor relations Dave Fildes said in July.

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Kuo is moving that expected timeline forward.

Apple AR glasses could be just months away

In a new research note to investors (as reported by MacRumors), Kuo now believes that Apple is targeting an early 2020 launch for its long-rumored AR headset, potentially in the second quarter. That also means that mass production could commence as soon as the fourth quarter in order for Apple to build up inventory ahead of launch.

The gadget is expected to lean heavily on a paired iPhone, not unlike the Apple Watch. The paired iPhone would do most of the computational heavy lifting while also handling network connectivity and other functions, according to Kuo.

If Kuo’s prediction is accurate, then Apple may unveil the device even sooner, potentially at a product event later this month. It has pre-announced products in the past, including the Apple Watch. The company had first presented Apple Watch to the public in September 2014, even though the smartwatch wouldn’t launch for another seven months.

Even though Apple is notoriously secretive regarding new products, when it enters or creates entirely new product categories, it needs to give third-party developers time to create apps and content for the new device. For instance, the Cupertino tech giant proudly announced in November 2014 that developers had started designing apps for the Apple Watch.

Following Amazon’s lead

Amazon.com (NASDAQ: AMZN) made waves last month when it unveiled its first wearables, which included $180 Echo Frames that allow wearers to access Alexa by talking to their glasses.

To be clear, Echo Frames do not use AR in any way; Alexa is a primarily a voice-controlled platform and Echo Frames do not display information to the user visually. AR products overlay information on top of reality to provide a heads-up display like something out of sci-fi movies. Echo Frames are also a bit bulky, and offloading the processing to an iPhone should help Apple make the thinnest and lightest AR headset it’s ever made.

Bigger questions remain. How much will Apple AR glasses cost? What will they look like? Are mainstream consumers ready to socially accept face-worn wearables en masse? What killer AR use cases can Apple or third-party developers come up with?

The good news is that investors may not need to wait too long to find out.

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Apple‘s (NASDAQ: AAPL) $400 million acquisition of music recognition specialist Shazam closed over a year ago and having a rich corporate parent has helped Shazam become profitable. The subsidiary has filed financial results with the Companies House in the U.K., where Shazam is based, which show the company swinging to a profit in 2018. On top of that, Shazam annual active users are now approaching 500 million.

Here’s what investors need to know.

Swinging to a profit

Music Ally reports that Shazam’s revenue in 2018 actually fell by 23% to 31.4 million pounds ($38.9 million) yet was able to post a net profit of 123.9 million pounds ($153.6 million) thanks to being acquired by Apple. The decline in revenue is likely due to the fact that Apple removed all ads from the app after it finalized the deal in late 2018.

As part of the deal, Shazam recognized 157.7 million ($195.3 million) in income associated with selling its intellectual property assets and transferring employees to the Cupertino tech giant. Shazam had posted a net loss of 17.7 million pounds ($21.9 million) in 2017.

Additionally, Shazam finished 2018 with 478 million annual active users, up from 400 million in 2017. Shazam says it has expanded  distribution of its service with major companies. Converting Shazam users into Apple Music subscribers was initially seen as a key justification for the deal in the first place, although the company’s music recognition technology can also be leveraged to bolster Apple’s content discovery capabilities.

“Shazam has 150 million active users a month, and about 300 million to 400 million uniques per year,” early Shazam investor Nenad Marovac told Business Insider last year. “If you convert 1% to 5% of those users to Apple Music, the investment will pay for itself in spades.”

Apple first confirmed the proposed purchase in late 2017, but the deal required regulatory approval to ensure it would not hurt competition in the European digital music streaming market. The European Commission cleared the deal in September 2018, with Apple closing the acquisition later that month.

Apple Music is now growing faster

The regulatory filings don’t shine much light on conversion rates or how many Shazam users may be signing up for Apple’s music streaming service. However, it’s worth noting that the rate at which Apple Music adds subscribers has ticked higher over the past year.

Services chief Eddy Cue confirmed in June that Apple Music had hit 60 million subscribers, approximately five months after hitting 50 million. It had taken roughly nine months for the service to get from 40 million to 50 million. That acceleration probably isn’t entirely attributable to Shazam, but every little bit helps in the ongoing competition with market leader Spotify, which has 108 million premium subscribers.

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However, one analyst isn’t impressed.

5G improvement may be imperceptible

In an interview with CNBC this week, Goldman Sachs analyst Rod Hall expressed doubts that the average consumer will even be able to discern a difference in real-world data speeds. Hall also believes that Apple took a conservative approach this year when building up its inventory levels after ordering too many iPhones from suppliers during the last product cycle.

“This year, we reduced channel inventory for iPhone slightly more than last year and that is true in total, and it’s true for Greater China as well,” CFO Luca Maestri said on the July earnings call. “So we feel very good about our channel inventory ranges as we get into the September quarter.”

That could also explain recent reports that Apple is boosting production. The Nikkei Asian Review reported last week that the company had increased production orders at contract manufacturers by 8 million units, or a 10% increase, thanks to better-than-expected demand for the iPhone 11 lineup. Additionally, the tech titan may be looking to import more iPhones ahead of a new round of tariffs that is set to take effect later this year, Hall believes.

Memory pricing has been favorable this year, which has helped pad Apple’s margins. Hall says that will give the company some flexibility to include 5G in 2020 without margins taking much of a hit.

“We call 5G a brand, not a feature, because we don’t believe most consumers will notice a difference,” Hall said. “The latency reductions in 5G are beyond anything a human can perceive; they’re really designed for machines.”

Humans cannot perceive latency below 10 milliseconds, according to Hall, so the expected improvement with 5G in latency from 10 milliseconds to 1 millisecond “won’t matter to you at all.” Instead, the analyst believes that 5G will be more targeted toward other use cases like industrial automation, the Internet of Things (IoT), and autonomous vehicles.

Goldman Sachs maintained its neutral rating and $165 price target. The investment bank had cut its price target last month over concerns around how Apple would account for its Apple TV+ promotion, as the company is giving away a free year of the video-streaming service bundled with hardware purchases.

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Bundling is a powerful strategy to get consumers to open up their wallets even more. Apple (NASDAQ: AAPL) has been exploring the idea of bundling various services together for over a year. The Information had reported in the summer of 2018 that the Cupertino tech giant was interested in combining video, music, and news into a single subscription. Apple Music has been around for a while, but the company only launched Apple News+ in March, and Apple TV+ will debut next month.

Here’s why that bundle hasn’t been released yet.

Trying to get record labels on board

Financial Times reports that record labels are the primary hurdle to Apple releasing an all-in-one media bundle. Negotiations have started “recently,” and some labels are open to the idea, while others have reservations about dealing with Apple, according to the report. There could be various tiers of bundled services, as the tech titan has continued to introduce a growing array of first-party services.

Apple is widely credited with revolutionizing digital music distribution in the early 2000s with the iTunes Store, in part by convincing labels to unbundle albums and sell songs individually. That had cut into the industry’s profits, as many albums contained “filler” tracks in addition to top hits. Unbundling allowed consumers to just buy the most popular songs for much less.

Of all of Apple’s services, music streaming has the greatest variable costs because the company has to license the rights. Apple could bundle Apple Music and Apple TV+ for $13 per month without requiring lower licensing fees, according to FT. That suggests it may be willing to absorb the discount as opposed to trying to score lower fees from record labels. While Apple is investing billions in Apple TV+ content, those investments are largely fixed costs because the company owns the shows and films once they’re produced.

Licensing expenses are the biggest hurdle to scaling, a struggle that pure-play rival Spotify (NYSE: SPOT) is all too familiar with. The Swedish market leader’s pivot to podcasts is part of a multipronged effort to incrementally reduce its royalty burden, and gross margin ticked higher to 26% in the second quarter.

Record labels have been fretting about declining average revenue per user (ARPU) across the industry, a trend that has persisted for years as Spotify and Apple offer discounted plans for families and students. Bundling multiple services together could potentially add even more downward pressure. As a pure-play leader, Spotify’s operating metrics provide some valuable insight.

Apple’s growing portfolio of services offers numerous bundling opportunities. Allowing customers to mix and match, combined with a bundling discount, would dramatically strengthen the tech company’s services business and improve retention. Music streaming is a core service for many consumers, so getting the record labels to play ball will be an instrumental requirement for that effort.

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The consumer market for video-calling devices that may be potential privacy violations waiting to happen might not be all that big. Facebook (NASDAQ: FB) refreshed its lineup of Portal devices last month as part of its ongoing efforts to build a hardware business, despite widespread privacy concerns around the first-generation Portals. The social networking juggernaut is now looking to broaden the appeal of its Portal products.

Facebook wants to sell Portals to the enterprise.

Chasing the enterprise market

At Facebook’s Flow conference for business leaders this week, the company announced that Portal will soon work with Workplace, the enterprise collaboration platform that the company launched back in 2016. Facebook is adding features such as live video captions and the company’s Smart Camera technology, which intelligently tracks a speaker around a room. Many enterprise videoconferencing incumbents like Cisco offer similar technology.

Videoconferencing specialist Zoom Video Communications (NASDAQ: ZM) went public earlier this year to much investor fanfare, with shares nearly doubling relative to the IPO price. In its prospectus, Zoom projects its total addressable market opportunity is over $43 billion, citing IDC estimates on the parts of the unified communications and collaboration market that it plays in. Zoom’s revenue soared 118% last fiscal year, underscoring the growth potential that Facebook now wants a piece of.

Zoom also notes that some of its customers use Workplace integrations while acknowledging that Facebook represents a competitive threat since it has “in the past and may in the future also make investments in video communications tools.”

Of course, another elephant in the room is Microsoft, which offers a comprehensive suite of collaboration tools including Teams and Skype. Workplace remains a relatively niche player in enterprise collaboration, with just 3 million paid users, according to CNBC. Facebook had said in February that Workplace, which is priced very aggressively, had grown to 2 million paid users.

Hardware is hard

Consumer hardware, which would also include its Oculus subsidiary, remains a tiny part of Facebook’s overall business. That revenue is nested in the company’s “payments and other fees” segment. “Our other fees revenue consists primarily of revenue from the delivery of consumer hardware devices, as well as revenue from various other sources,” the company states in regulatory filings.

Payments and other fees revenue jumped 36% last quarter to $262 million, representing just 1.6% of total revenue. Still, the company has grand hardware ambitions for the future: It confirmed a year ago that it was developing an augmented reality headset. Facebook isn’t done making hardware — not by a long shot.

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