Apple: Building Verizon, AT & T, & T-Mobile, New Business Opportunity

Apple Store

Nikada / iStock Unreleased via Getty Images

Technology companies have involved into multi-trillion dollar enterprises dominating the market, and in that market, they’ve become massively competitive behemoths. Recent news came out that Verizon (NYSE: VZ) has begun informing customers that it’ll be tracking users by default, and there’s nothing Apple can do. AT & T (NYSE: T) and T-Mobile (NASDAQ: TMUS) have the exact same capability.

Unique Tracking

Apple (AAPL) has always been known as the privacy focused tech company, a unique business model in the technology industry. With their iOS 14 update, Apple reinforced this stance by mandating that all apps use an “opt-in” model for unique user tracking rather than an “opt-out” model which has a much higher success rate.

The blow is expected to be massive, although the details aren’t out. The estimated second half of the year revenue change alone for large technology companies is expected to be almost $ 10 billion. Snapchat (SNAP) reported bad earnings as well because of the changes, although as discussed here, we still feel they’re a good investment overall.

The benefits of unique tracking are enormous to advertisers. Using AI and other technology it allows them to build a unique model of what you’re most likely to respond to, thereby serving you much more effective advertisements.

Advertising Revenue with Tracking

A classic example of the revenue potential here is Google’s (GOOGL) payment to Apple. Apple’s popular default Safari browser, another privacy focused browser from the company, doesn’t have a default search engine (since Apple doesn’t operate one). , the most successful search engine in history saw a massive market opportunity to achieve new customers for its ads.

The net result has been, as Apple grows, Google has been paying Apple a steadily increasing amount to be the default Safari search engine. For 2021, that number is estimated to be $ 15 billion. At almost pure profit, it’s a valuable part of even a large company like Apple’s earnings. More so, it highlights the value of targeted advertising to Apple’s customers.

Worldwide Digital Ad Spending

Digital Ad Spending –eMarketer

Given that digital ad spending is already enormous, and expected to continue growing, buoyed by people staying home from lockdowns, this number and the opportunity size can only be expected to continue growing. Digital ad spending is expected to grow from ~ $ 450 billion in 2021 to almost $ 650 billion by 2024 representing $ 200 billion in new advertising revenue to be grabbed.

A growing share of a growing market is the place to be.

The Opportunity

The opportunity here is based on what we see as telecom’s unique ability to bypass Apple, the massive financial incentive to do so, and Apple’s hardened privacy stance.

Verizon customer experience

Verizon “Custom Experience” –IN C

Verizon has recently texted users about a “custom experience.” The new feature is opt-out for customers, the same way Apple’s privacy settings previously were, and while they’re not sharing significant details on the specifics of what it’ll mean, to start with the tracking based on “more relevant offers” seems to be a copy of what ad-IDs once were.

Verizon customer experience plus

Verizon Customer Experience –The Verge

As you delve into what that “Customer Experience” plus means, again with default opt-in, you can see that it’s using a “CPNI” identifier to track you in the same way that the app and advertisement identifiers Apple has now blocked once could It’s clear from here that they should be able to get all the same information about you.

The opportunity here is that, with Apple likely unable to go back on its “privacy” word, and billions in lost revenue for major social network companies, the telecom companies now have the ability to give these networks the exact same set of data they were gathering before. In fact, they could potentially pass improved data due to their ability to track cross-app.

That means a massive pool of data, which using Apple’s Google deal as a benchmark, is worth at least billions every year. For perspective, Apple has 588 million customers worldwide and AT & T has roughly 170 million customers. That’s a massive customer base that AT & T and other telecom companies can now track across apps.

Excluding the fact that US based customers are much more valuable to advertisers than average worldwide customers (Facebook makes 6x on the average US user versus international user), that still implies that AT & T’s data alone would be worth roughly $ 2 billion to Facebook alone (when adjusting) for Apple’s 47% smartphone market share).

Across the three major telecom companies we see the potential of $ 5 + billion in almost pure-profits for each one, especially AT & T and Verizon which have other businesses that require them to sell ads.

Investment Thesis

For starters, we don’t expect this development to change anything for Apple. Apple can continue talking about how it helps maintain your privacy, and even if its efforts are less effective, they’re still more significant than other company’s efforts. The company taking a strong stance on privacy matters not just for apps like Facebook, but across the board.

However, we see this as a potentially massive opportunity for the three largest telecom companies (Verizon, AT & T, and T-Mobile). Out of these three, we see AT & T and Verizon as the best positioned due to their existing media and ad divisions (Verizon, AT & T, and T-Mobile). Verizon through its internet properties and AT & T through its media properties).

For these three companies, as discussed above, with their scale of Apple users, they could see billions in additional revenue each. More so this revenue comes with very minimal additional cost, turning it almost all entirely into profits. That means, across the boards. , for the Telecom companies, the potential for 10-15% in additional FCF growth.

The timeline and size of the market remain uncertain, but it’s another source of potential reliable future shareholder rewards. We’re already a large fan of investing in AT & T (discussed here) and this helps to cement the thesis and the opportunity.

Thesis Risk

The risk to our thesis is that this is an incredibly new market for the telecom companies, and Facebook, or other large advertisers, obviously don’t want to be handing out billions. This opportunity could be gone before the telecom companies ever pick up on it.

Conclusion Conclusion

Verizon’s new text message to consumers is a potential indication of a new business path the company is taking. The company is looking to gather user information, skipping past Apple’s new privacy restrictions in a way that Apple can’t stop. In fact, with cross -app tracking and more, telecoms might be able to get even more data.

That data, as witnessed by recent quarterly results and discussions, has the potential to be incredibly valuable to social media giants and other companies with large advertising businesses on their platforms. That could add billions in additional revenue, with high profit margins, for the largest telecom companies, helping to cement their investment case and make them undervalued.

Leave a Reply

Your email address will not be published.