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Report: Google and PayPal Challenge UK Joint Venture Plans

Google and PayPal have reportedly expressed concerns to European antitrust regulators, saying they fear that if major UK mobile operators are allowed to form their proposed NFC mobile-commerce joint venture, they would have too much power to control secure elements in NFC phones, the Financial Times reported Sunday.

The publication said that Google and PayPal, as well as IBM are “concerned about the market power that could potentially be gained by rivals controlling the use of a key microchip.”

They expressed the fears “in confidence” to members of the team in the European Commission's competition agency that is weighing the antitrust implications of the planned joint venture, dubbed Project Oscar, according to the article.

The European Commission announced April 13 that it would expand its preliminary inquiry into an in-depth investigation into the proposed venture by the UK’s three largest mobile operators, Everything Everywhere, Telefónica (O2) UK and Vodafone UK.

The commission in its announcement said that the preliminary investigation had revealed “potential competition concerns” because of the combined market share the three telcos hold. That could possibly limit the launch of competing mobile wallets and mobile advertising and restrict access to related data analytics.

According to the Financial Times (registration or subscription required), Google submitted comments after receiving a “non-binding request” from the commission.

Google: Consumer Choice Needed
A Google spokesman would only confirm that it did make the on-the-record comment cited in the article: “We hope that however this fast moving market develops, there will be lots of choices for consumers."

Google has already butted heads with another telco NFC joint venture, Isis, made up of three of the top four U.S. mobile operators. At least one of the Isis operators, Verizon Wireless, has tried to block the Google Wallet from Google's own Galaxy Nexus Android phone, which Verizon put on sale late last year.

A European Commission spokesman told NFC Times he could not confirm that the commission had asked Google in particular to comment as part of the commission’s investigation into the proposed joint venture.

“As part of all merger control cases, the commission conducts market investigations or requests information and comments from other market participants,” he said.

Google, which is itself under investigation by the commission for possible antitrust violations, has its own critics when it comes to the openness of its mobile wallet.

Among them are the wallet’s own co-founding engineers, who quit the project earlier this year in part because Google decided not to open the wallet platform to outside app developers, sources have told NFC Times.

NFC Times has learned that Google has been talking to banks and other mobile-commerce players in the UK and elsewhere in Europe, as well as in Asia, as it seeks to expand the Google Wallet outside of the U.S.

But observers say that Google is receiving a cool reception from large operator or operator groups in the U.S., Europe and Asia, because the telcos have their own NFC wallet plans.

Google had planned to launch the wallet in at least one major European city during the first half of 2012, a goal it is not likely to hit.

Google launched its wallet last September largely in five U.S. cities, but has been struggling to add merchants, service providers and NFC phones to support the wallet.

Meanwhile, PayPal is seeking to expand its online payment service to the physical point of sale and is exploring a range of technologies that could one day include NFC. Like Google, it also would not like to see telcos in too dominant a position.

PayPal reportedly said that it believes “consumers should be able to choose from a wide range of payment methods.”

Increasing Scrutiny of Oscar
The joint venture plans of the UK telcos have come under increasing scrutiny from Brussels, which have foiled their earlier plans to have the Oscar platform up and running by now.

Probably more damaging to the plans than the concerns reportedly expressed by Google and PayPal is the strong opposition Project Oscar has faced from another UK telco, Three, or Hutchison 3G UK. Three is concerned that the joint venture would put it at a disadvantage with respect to its larger rivals in rolling out mobile-commerce services.

The commission in its announcement two weeks ago noted that it routinely clears the “vast majority” of proposed mergers and joint ventures. It has only five other phase II investigations underway, like the one it is conducting on the Oscar joint venture. The commission is due to announce a decision Aug. 27.

A rejection of Project Oscar by the commission would call into question other proposed m-commerce joint ventures in Europe, including those in the Netherlands, Germany, Sweden, Denmark and Hungary. Like the UK venture, the other groups plan to build a common platform for NFC services, and in some cases to hire a common trusted service manager. Most of the groups are led by telcos.

Besides setting technical specifications and business rules for NFC payment applications, Project Oscar would provide a “single contact point for advertisers, media agencies, retailers and brands,” the telcos said in a recent statement, in which they noted that service providers would be able to “book advertising space and create campaigns across all opted-in mobile users, affording economies of scale that they could not ordinarily achieve.”

They insist their platform would be open to all mobile-commerce players, including other operators and wallet suppliers.

But the UK telcos also have made no secret of one of their main reasons for wanting to form the joint venture–to ward off the likes of Google and other so-called over-the-top players–a list that might one day include Apple.

Controlling Embedded Chips
According to the Financial Times, investigators are focusing on the UK telcos’ control of secure elements in NFC phones, especially the SIM. This is the secure element the UK telcos plan to use for payment and other secure mobile-commerce applications running on the common platform the telcos’ intend to build.

But the article said that even for embedded secure elements, European regulators believe the joint venture might hinder competition, if operators refuse to subsidize or sell the phones running competing wallets.

The European Commission spokesman declined to confirm that it had made such a statement.

But in its announcement April 13, the commission said that the proposed UK joint venture and its member telcos “may have the technical and commercial ability and incentive to block future competitors from offering their own mobile-wallet services to customers in the UK, or to degrade the quality of these competing mobile wallets so that they become less attractive.” It added that the second phase of the investigation would determine “whether these initial concerns are confirmed or not.”

If they control the distribution channels of phones, operators could potentially make it difficult for Google and other competing wallet providers to access secure elements. All NFC payment applications require a secure element to safeguard the encryption keys.

Google has used embedded secure elements for its wallet applications in the U.S., though it said it could also use SIM cards issued by operators in Europe or elsewhere to anchor the wallet.

The sole operator partner Google has announced for its wallet remains Sprint, the No. 3 U.S. carrier, which is allowing the Web giant to access embedded secure chips in Android phones it sells. It recently introduced three more wallet phones, in addition to Google’s Nexus S 4G model, which had been the only model to support the wallet for months.

Google last week announced that it would sell a GSM version of the phone directly to consumers from its Google Play Web store. That would enable subscribers of the two other Isis partners, AT&T and T-Mobile USA, to use the wallet with the model. Google is able to introduce the wallet to its Galaxy Nexus on U.S. networks other than Sprint because it controls the embedded chip.

Verizon, AT&T and T-Mobile were not required to seek permission from U.S. antitrust regulators before forming their joint venture in 2010.

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