|Europe I 2012
|Who will win the mobile wallet and payment standards war?
|co-founder and Managing Director
Graham Friend is the co-founder and Managing Director of Coleago Consulting. Over the last nine years Mr Friend has carried out projects for many telecoms operators including MobileOne (Singapore), Hong Kong Telecom CSL (Hong Kong), One2One (United Kingdom), BT (UK), Cable & Wireless (UK), Digifone (Ireland), Paktel (Pakistan), Optus (Australia) and Telfort (Netherlands).
Graham Friend graduated from Trinity College Cambridge with an MA in Economics before going on to gain an M.Phil.
Many companies are now vying to become the dominant mobile wallet and payment standard; from operators and operator alliances to companies in the telecoms and technology space, as well as those from the financial services industry.Google may have a first mover advantage but other organisations cannot be ruled out at this stage.The stakes are high. Standards wars frequently end in a ‘winner takes all’ scenario.
A new war to establish the mobile wallet and payment standard is looming, with some of the biggest players in the market trying to take possession of the crown. Consortia of mobile operators such as Isis in the US and individual operators like Everything Everywhere in the UK along with the likes of Google, Square and PayPal have all announced new mobile payments initiatives – demonstrating that the battle has already begun. Mobile payments are well established in many developing markets but in developed markets with well-established banking systems mobile payments remain relatively small. Often in a standards war the results end in a ‘winner takes all’ scenario making it a risky game to play. Yet with analyst firms predicting mobile payments will be worth anywhere between US$147 billion (Frost & Sullivan) to US$1,130 billion (Gartner) in 2014 it could be a very lucrative risk to take.
Mobile payments are seen as a new way to increase profits, thus generating interest from a wide range of heavy hitters. Google has already shown its hand and now has a first mover advantage. However there are lots of other firms that are readying themselves to become the dominant standard; from operators to companies in the telecoms and technology space, as well as those from the financial services industry.
Mobile operators have also begun to form alliances in order to create a mobile payments standard. For example Orange and Barclaycard launched a partnership in May 2011 and AT&T, Verizon and Deutsche Telekom’s T-Mobile USA have created a mobile payment consortium called Isis which is partnered with Visa, MasterCard, American Express and Discover. Financial service firms have also thrown their hat into the ring. May 2010 saw Visa launch mobile payment trials in Poland and Turkey. MasterCard has also been active with Near Field Communication (NFC). Apple however has not been vocal in their ventures into mobile payments, although it already has a billing relationship with millions of iTunes account holders. An NFC iPhone would enable these accounts to be used to purchase outside of iTunes, leading to another player in the battle and so many were surprised when the iPhone 4S did not feature NFC.
The standards war
Apple aside, the large number of players taking an interest in the market is leading to a standards war. Standards wars arise when two or more firms, offering incompatible technologies, compete to become the de facto standard in a market. For those that are successful in establishing the standard, such as Microsoft Windows with the PC, the returns can be staggering. But the losers end up with significant loses. Although it is still too early to be able to tell who will win this war, there are seven key assets that will be fundamental, as defined by economists Hal Varian and Carl Sharpio in 1999. The assets to best determine the winner of a standards war cover a variety of conditions. These include; control over an installed and loyal customer base, an ability to innovate, first mover advantage, manufacturing abilities, strength in complementary products or services, strong brand name and reputation, and intellectual property rights and the ability to enforce them.
Initially, the players with the largest, most loyal customer base that face high switching costs in moving to another supplier will be best placed to promote the adoption of their standard and to block others from promoting theirs. While Android is rapidly moving ahead of all other operating systems such as Apple, or RIM in terms of popularity and Google’s Android Marketplace is doing a good job in establishing a billing relationship with its customers, it probably still does not compare favourably to the close relationship that Apple has with its customers.
Apple has sold over 120 million iPhones and iPads and has over 160 million iTunes account holders with an already well-established billing relationship. So although Apple does not compare to Google on the quantity of customers it has a higher degree of loyalty. That said, mobile operators can have even stronger billing relationships with consumers which could be used to good effect in the standards war.
In developed and some developing markets mobile penetration rates often exceed 100 per cent. If mobile operators were to create a payment consortium, the combined customers within a country could exceed that of Google and Apple. Loyalty would also be less of an issue as consumers switching networks would be switching to another operator within the consortium.
In a standards war there are often significant benefits of being the first mover rather than a late entrant. Google is the first player to have actually launched its mobile payments solution and is already speeding ahead of the competition with its partnership with MasterCard, which is also soon to be available with Visa, American Express and Discover cards. However the remaining players are not planning to launch any large scale propositions until 2012, with Isis announcing plans to launch its ‘e-wallet’ service in Salt Lake City, Utah and Austin, Texas in the first half of 2012 for example. Other players such as those in the financial services industry have trialled mobile payment solutions but are yet to announce any concrete initiatives. Apple has been silent on the matter so far, but with their ability to innovate and move into a new market they should not be ignored just yet.
The ability to create future innovations is also important for establishing long run dominance as a standard. Google is famous for its ability to innovate and to move quickly which will no doubt be seen with its Google Wallets. Apple also has a strong background in innovation. Indeed, its very reputation has been built on its ability to innovate. However their lack of activity in the area of mobile payments could put them on the back foot. Mobile operators and financial institutions meanwhile are not famous for being nimble and creative, often making it difficult to create new initiatives. A strong brand is vital in a standards war. It is not only the companies that take a risk during a standards war, but the consumer also. Customers do not wish to invest in a product to find that soon after it is no longer supported, as in the example of Betamax cassettes losing out to VHS. So when it comes to convincing customers of the longevity of a product, brand and reputation are crucial. However with mobile payments brand loyalty may not be enough, as the consumers have to trust the brands to handle their money. With this in mind it is likely that financial bodies and mobile operators will have a better opportunity to continue to build upon their strong monetary relationships with the consumer. However Apple also has a strong relationship as a trustworthy brand thanks to the relationship its customers have built up with iTunes. This relationship has also been helped by its strength in complementary products and services.
A complementary product is one where if the demand for one product increases the demand for another product also increases. For example, the more iPhones sold the higher the demand for mobile applications. However Apple is still yet to show its intentions. Google has stated that it does not intend to gain any revenue from its mobile wallet offering. However it plans for the Google Wallets to be pre-configured with the coupon service ‘Google Offers’, creating complementary products in order to strengthen its position.
Most of the players are currently focused on the device in the consumer’s hand and therefore on the software aspects rather than the hardware at the point of sale. Lower cost devices will allow for a dominant position in the war as it means companies are able to use penetration pricing to promote the adoption of the solution. Google is currently best positioned for this as it currently provides Android OS to a wide range of device manufacturers, whereas Apple has only a couple of mobile devices to offer the market. Mobile operators also have a broad range of handsets to offer consumers. However it is unlikely they will be able to achieve the penetration of Google.
Due to numerous high profile patent lawsuits it is highly unlikely that any of these large institutions would become involved with a standards war without having in place all the correct patents. With this is in mind this is the only area where all competitors are matched.
So who is best positioned to win the standards war? To date, Google has made the most dramatic moves to create a leading position for itself. A mobile operators’ alliance is currently best placed to challenge Google. However it is unlikely that they will be able to move fast enough in this space. If this is the case they should look into negotiating to work with Google like financial institutions have done already. Apple is still yet to show its hand but it should not be underestimated, based on its ability to constantly reinvent everyday products with great success.
Without the ability to see into a mobile payments crystal ball, only time will tell who will take hold of the reins – though whoever the leader, it is important to remember that the biggest challenge will be in promotion and mass market adoption of their solution.