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Battle Continues for Control of NFC Phones as Samsung Weighs in

At least two-thirds of NFC phones that shipped last year packed embedded secure chips and that share is expected to hold fast this year.

As an executive with one of the major payment networks put it to me last fall, when I asked him how he thought these millions of embedded chips would be used: “There are weapons; they are going to be used.”

That analogy is apt, given that Visa’s announcement last week of its global partnership with Samsung Electronics seems likely to heat up the battle for control of NFC phones.

The deal calls for preloading Visa’s contactless application, payWave, on the embedded chips in Samsung’s new NFC mobile devices, which probably will include the forthcoming Galaxy S4. Banks could then have Visa’s TSM, Oberthur Technologies, provision their customers’ Visa accounts on the chip or use their own TSMs.

And the deal is not exclusive, so Samsung also could work with MasterCard or other application providers, and it would be technically possible to pack a PayPass or other applet on the secure chip alongside payWave. In fact, MasterCard is believed to have discussed preloading PayPass on the Samsung embedded chips, and it might well have been MasterCard announcing the global partnership last week, not Visa.

Whether a preloaded payWave applet gets personalized with an actual Visa payment account—or the embedded chip gets activated to begin with–will depend on the market.

Competition for Telcos
But in certain markets, the Visa deal with Samsung will pose real competition to the SIM-centric approach being taken by mobile operators for their NFC rollouts–more so than Google threatens operators with its struggling Google Wallet, at present.

The deal enables banks that want to introduce NFC mobile payment to avoid the telcos’ SIM cards and instead deal with Visa and Samsung.

Much will depend on the amount of clout Samsung wields in various markets and whether it is willing to challenge operators in those markets where telcos subsidize Samsung’s phones.

It hasn’t done so in the past when it comes to its NFC phones. Samsung has put an embedded chip in pretty much all of its NFC smartphones and smartphone-tablet hybrids since the middle of last year, including the 40 million-plus units of the Galaxy S III it has sold.

But the device maker has dutifully deactivated the chips at the request of operators or allowed telcos to effectively block them in active NFC-SIM markets, such as the U.S. and Western Europe. Outside of supporting the Google Wallet in some of its phones sold by No. 3 U.S. telco Sprint and on the Galaxy S III distributed by a couple of smaller U.S. telcos, nearly all of the Samsung embedded chips have gone unused to date.

That could change with the deal with Visa and others Samsung makes for use of its chip. As NFC Times has reported, the device maker last year formed a mobile-commerce unit at its South Korea headquarters, in part to market the chip.

“I think that the game has not been decided,” Michael Baumann, general manager for payments development at Commonwealth Bank of Australia, told NFC Times, who also said the bank is eager to have fewer parties to deal with to enable its application to run on NFC devices. “Who is more powerful, Samsung or the telcos? If you talk Apple, you don’t have to ask the question.”

Samsung, at least up until recently, has been assuring operators and their big trade group, the GSMA, that it is different from Apple and will continue to support operators.

“Of course, it’s for Samsung to decide what they will do, but Samsung has been doing tremendously well over the past year or two years, partly out of the fact that it’s very flexible and quite operator friendly, GSMA director general Anne Bouverot told NFC Times last September, when asked about Samsung’s embedded chips. “And I meet with (Samsung mobile chief) JK Shin regularly and other Samsung officials, and they’re very clear that this is part of their differentiation from other established, leading handset manufacturers .”

By other established leading handset manufacturers, she meant Apple. But that was last fall, and since then Samsung has continued to be on the ascendency, while Apple’s mystique, despite strong sales of the iPhone 5, has diminished.

Chip Activation is Key
Of course, the irony of Visa, with Samsung, announcing their deal to use embedded chips at the GSMA-organized Mobile World Congress–at which telcos were showcasing SIM-based NFC, was probably not lost on the SIM-centric telcos planning NFC rollouts this year.

The operators continue to argue that they, not Samsung, Google or Visa’s TSM, are the parties best positioned to handle problems that could sour the experience for consumers using NFC services. And telcos contend the removable SIM is the best secure element to use to cancel or transfer applications if the phone is lost or stolen.

Samsung is still not talking about where it will activate the chip, but at a minimum it seems likely it will promote the secure element in markets in Asia and Eastern Europe, where telcos don’t control the phone distribution channels; and perhaps to second-tier operators without their own SIM-based NFC strategies.

“In terms of how and when that’s (embedded chip) going to be turned on, I’m going to be careful not to talk for Samsung,” Bill Gajda, Visa’s head of mobile, said last week. “I think they are looking at markets that may not have heavily subsidized models (by operators) or the market is open to multiple secure elements,” he said.

Samsung is no friend of the SIM, Klaus Vedder of SIM supplier Giesecke & Devrient and long-time chairman of the ETSI SIM standardization body, told NFC Times. He said Samsung has been acting a lot like Nokia did five or six years ago when the latter was top of the heap of handset makers–that is, trying to curb the powers granted to the SIM.

Offering More Services
But rental fees to use the secure chip probably isn’t what’s motivating Samsung to promote the embedded chip. Some mobile operators are already questioning the revenue-producing ability of their SIM-rental models and are focusing on other opportunities, such as building NFC-based mobile commerce platforms and seeking to earn fees for delivering coupons and other promotions.

Samsung probably wants the services on the embedded chips to add to the features its devices offer and keep customers coming back. Its embedded chip strategy is not likely tied to its recently introduced wallet app for the Android platform.

Competing handset makers probably have the same idea, and HTC, LG Electronics and Sony are putting embedded chips in at least some of their Android NFC devices, and BlackBerry included an embedded chip in all of its NFC-enabled phones.

HTC enabled an NFC payment application in China on one of its devices last year.

But these device makers need the good will of operators much more than Samsung does, so they are unlikely to challenge their SIM-based NFC plans.

Google Still Interested in Embedded Chip
Google also is expected to continue to use an embedded chip for its Google Wallet and has asked for support for the GlobalPlatform 2.2 standard for the chips running its Google Wallet and in its Nexus devices, say chip makers. This could indicate Google wants be able to enable more services, which could be managed independently of one another, using the standard.

Meanwhile, telcos might use embedded chips in certain markets themselves–not only Sprint in the U.S., which plans its own wallet and has an embedded chip strategy–but operators that issue SIMs also could gain access to embedded chips by cutting deals with handset makers.

Big telcos, however, will continue to promote their SIMs as the only secure element in the NFC phones they sell in most markets.

If Samsung decides to promote its embedded chips in some of those same markets, the battle for control of NFC phones and the mobile wallets they support would far from over.

 

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