We’ve been told recently by some big NFC players that the industry is focusing too much on applications that use card emulation, that is, those that enable the phone to act like a contactless card to do payment, ticketing and access control.

Google software engineers the past week at the company’s I/O developer conference in San Francisco were the latest to downplay card emulation, while talking up NFC’s other two communication modes, tag reading and peer-to-peer. Don’t expect tools for Android developers to build apps for card emulation anytime soon, they warned.

That follows Nokia’s declaration of a new focus on “open” NFC last month, with the handset maker even predicting that tag-reading and P2P apps would generate twice as much revenue as card emulation over the next two years.

The first NFC smartphones from Google and Nokia, the Nexus S and C7, respectively, do not support card emulation–at least not yet for the Nexus S. And the chip supplier for both phones, NXP Semiconductors, has also seemed to be playing up tag reading and P2P the past few months. NXP even developed its own Android app to enable users to write content to NFC tags.

These key players say tag reading and P2P modes can yield cool and compelling applications that could be rolled out quickly. Users could tap their phones together to play a game or exchange a video clip, for example. They could touch a smart poster to download a coupon or check in with their social-networking sites.

On the other hand, card emulation invariably requires applications to be stored on secure chips in the phones and a broad infrastructure of contactless readers in the field. Service providers have to form commercial relationships, often with mobile operators.

Google’s Nick Pelly told Android developers last Tuesday attending his session, “How to NFC,” at the I/O conference, that Google thought “very hard” about putting application programming interfaces in the latest version of Android to support card emulation, but decided against it. 

“If we were to build these APIs, the applications are going to have a really inconsistent experience as they’re deployed to different Android devices,” he said, having minutes earlier shown demos that enabled Nexus S users to tap their phones together to play the fruit-slashing game Fruit Ninja and to share the application with others. “This is going to encourage viral app sharing,” he said gleefully of the P2P exchanges.

Secure Elements Already Ordered
I have little doubt, however, that card emulation will be available soon in Android and Nokia phones, both Symbian and, later, Windows Phone devices. BlackBerrys from Research in Motion will also come with support for secure elements and so will some feature phones.

Notwithstanding Nokia’s vague projection that 68% of NFC revenue through 2013 will come from “open” applications, the revenue model for NFC revolves around the secure element. And whomever controls it, controls most of that revenue.

That’s why the same device makers and mobile operating system providers that are talking up tag reading are preparing for card emulation by ordering embedded chips for their phones and shopping around for trusted service managers to securely deliver applications to those chips. That includes Android handset makers, Microsoft and no doubt Google and Nokia, as well. Analysts looking at the subject say a majority of NFC phones will pack embedded chips this year. 

The secure element is key to their strategies for controlling revenue for applications downloaded from their app stores and, in general, for securing a greater slice of revenue from this valuable piece of real estate in the NFC phones.

The revenue model for mobile operators, which will order most of the NFC phones that hit store shelves, revolves around the secure element, as well–but usually one embedded in SIM cards they will issue. This sets the stage for a battle in some markets between operators and device or mobile platform suppliers over control of the secure elements in the phones.

The telcos plan to either rent space on their SIMs or strike other deals with service providers to load and manage applications on the SIMs in exchange for fees. That’s why mobile operators have also been interviewing trusted service managers. Some have already hired TSMs for their projects.

For example, Germany-based Deutsche Telekom has recently appointed France-based Gemalto as TSM for its mobile wallet program in Europe, I’m told. Gemalto is also a supplier of NFC-enabled SIMs.

Card-Emulation Projects Launching Soon
The Deutsche Telekom NFC wallet program is to launch in the first two European countries, Germany and Poland, before the end of the year. A rollout is planned even sooner–by early summer–in the United Kingdom by mobile operator Everything Everywhere.

These and other operators, including all three major telcos in France, are already ordering phones that can do card emulation, using the hardware-based single-wire protocol connection to their SIM cards.

MasterCard Worldwide recently certified SIM cards from Gemalto to carry MasterCard’s PayPass application, and the first use of the certified SIMs is likely to be part of the UK launch by Everything Everywhere with a PayPass application issued by Barclaycard.

The vast majority of the roughly 150 NFC trials held to date have involved payment or transit applications stored on secure elements–either embedded chips or SIMs. MasterCard and Visa Inc., along with issuing banks, would insist their applications be stored on secure chips. So would transit authorities for anything but low-value ticket purchases, as would enterprises and hotels that plan to put digital door keys on NFC phones.

And while Google’s NFC engineers may be discouraging the strong focus on card emulation, the Web giant’s mobile-commerce team has been busy talking to banks in North America and Europe, trying to recruit them to be part of Google’s NFC mobile wallet and mobile-commerce rollouts. Trials could begin this year.

Google–Needs Secure Chips for M-Commerce
Google is building an m-commerce infrastructure that will enable advertisers to deliver targeted offers to consumers when they are at or near the physical point of sale. This would include cloud-based apps that know the preferences and buying patterns of consumers who opt in. Offers would be delivered over the network, perhaps initiated by consumers tapping their phones on smart posters. They could redeem coupons or points by tapping their phones on contactless point-of-sale terminals.

A key piece of the process is the payment, which Google might be involved in, but not as a payment-service provider. That is why the Web giant is recruiting the banks. And it doesn’t make sense for Google to enable consumers to tap to redeem points or coupons at the check-out counter, then require them to pull out a card to pay.

Former Google CEO Eric Schmidt said as much when he described the “mega-scale opportunity” Google sees with Android NFC phone users tapping to pay after being directed to stores offering discounts on products the cloud knows they are looking for.

Android’s Hidden Access to the Secure Element?
And despite the statements of the top NFC software engineers, Google might already be preparing to support card emulation and the embedded secure chips in its Nexus S phones, according to one Austria-based NFC researcher, who has monitored the NFC support in Google’s Android operating system.

He said the latest version, Android 2.3.4, contains commands to access the embedded chips. And he believes that Google itself wants that access.

“It’s an internal API, an API that is not public to anyone but limited to a certain group who has access to this,” Michael Roland, research associate at the Upper Austria University of Applied Sciences in Hagenberg, Austria, told NFC Times. “I think this group is limited to Google.”

If Roland is right, Google plans to open up the embedded chip that is already a part of the Nexus S soon–but probably to a small number of application developers. 

I don’t think anything really deceptive is going on here. Google developers, such as Pelly and his colleague Jeff Hamilton, who questioned whether NFC is ready for card emulation, were really expressing doubts about whether it would yield a compelling experience for users.

Without a compelling user experience, much-hyped NFC technology could fall flat, just like WAP did for mobile browsing more than a decade ago.

Tag reading and P2P applications that instantly pair devices–for example, letting someone tap to transfer a video running on his phone to a television screen or to exchange content or apps with a friend, offer what Pelly and his ilk call the clean, low-friction, zero-click “magic” of NFC.

Google, Nokia and another handset supplier, Sony Ericsson, recently joined in the launch of the “MobiSocial” computer lab at Stanford University, in Silicon Valley. There, students and faculty are creating apps that enable users to exchange links, photos, videos, drawings, music and games among their various devices, without going through social networking sites. They’ve dubbed the NFC applications “partyware.”

Card emulation, on the other hand, is messy. There will be interoperability problems between standard NFC phones and older readers in the field. There will be some NFC chips and secure elements that cannot support contactless protocols used by service providers for their applications. And there will be commercial disagreements among service providers and operators.

But there has already been too much invested in card emulation–including by the companies now promoting the so-called “open” NFC concept–to delay its introduction for too long.

So, expect NFC-based payment and ticketing on secure elements to launch at the same time as tag reading and P2P applications–or not long afterward.