U.S. Telco Joint Venture Now Looking for Phones, CEO

Major U.S. mobile carriers planning to launch an NFC-based payment service have been ramping up hiring and are preparing to order NFC phones, but are still looking for a CEO, sources told NFC Times.

The three mobile operators, Verizon, AT&T and T-Mobile USA, which have formed a joint venture, could ultimately sink hundreds of millions of dollars into the NFC-based services if they roll them out nationally, said sources. One source, citing a projection from one of the carriers, put the total investment at potentially more than $1 billion. 

At present, the telcos and their reported partners, Discover Financial Services and the U.S. arm of big British bank Barclays, are preparing for precommercial launches in three to four cities, expected during the second half of next year. 

"It’s not just talk–there is money in the bank; they are hiring people," said one source who is involved in the project. "This is a major priority for all parties involved. They recognize the phone is the next major opportunity for payment."

The parties are declining to comment on their planned m-payment scheme, which would compete with Visa Inc. and MasterCard Worldwide.

High on Android
The mobile carriers are expected to launch the trials with at least two to three full NFC smartphone models each, said sources. That could mean together the telcos will order three to six models, since they likely will not all use the same models. That is especially true because one of the telcos, Verizon, now operates under a different network technology, CDMA, than the two others and would likely not use NFC phones supporting applications on SIM cards. Sprint, the No. 3 U.S. mobile operator, earlier dropped out of the project, which NFC Times was first to report.

There are few NFC phones available today. But sources with knowledge of the telcos’ plans say one or more of the smartphone models for the pilots will support Google’s popular Android operating system. Earlier, NFC Times reported that handset makers could introduce several Android NFC models next year. An NFC-based BlackBerry model is also possible for the trials, with BlackBerry maker Research in Motion already having ordered NFC chips to incorporate in one or more of its models next year, said sources. A Nokia smartphone supporting the Symbian operating system is also possible for the project, since Nokia in June disclosed plans to start shipping some Symbian models packing NFC next year.

Apple in 2011 might include NFC in its next iPhone version, as well, although observers doubt Apple could be counted on to provide customized phones for the pilots like other handset makers probably would. But AT&T, to date the exclusive iPhone distributor in the U.S., and Verizon, expected to also sell the iPhone next year, could offer mobile payment using NFC-enabled iPhone attachments.

And the three U.S. carriers might use some other NFC bridge technologies for the trials, as well, such as SIMs with flexible antennas or contactless microSD cards, to supplement the full NFC phones.

Besides ordering NFC test equipment and planning to buy phones for the pilots, the joint venture and its member telcos have been hiring of late, said sources, though it’s hard to tell how many employees have signed on so far. One source put the total at only a few dozen. The telcos are said to be hiring both for their consortium and also separately, including consultants.

They are building the payment scheme and an NFC technology platform for other NFC-based services, as well, such as mobile loyalty and couponing. That includes plans to appoint a trusted service manager to handle the downloads and updates of payment applications for all three telcos.

Still, the carriers are developing their mobile wallets for these and other services separately.

If the carriers were to work together too closely, they could run afoul of antitrust laws. That is not happening so far, said some sources with knowledge of the situation. On the contrary, the mobile carriers are said to be finding it difficult to communicate with one another much at all.

CEO Post Vital
That rings true, given the shots the two largest operators in the group, Verizon and AT&T, often take at each other in their television commercials and other advertising. And it’s all the more reason, say industry observers, that the telcos need to hire a strong CEO for their joint venture, and to do it as soon as possible.

"If they are going to do this, there’s a powerful need for a third party to be the intermediary between these operators," Nick Holland, senior analyst for U.S.-based Yankee Group Research, told NFC Times.

"I think (former United Nations secretary general) Kofi Annan is a good candidate for CEO," he quipped.

The telcos are said to be looking for a very senior executive to lead the initiative, perhaps a current or former CEO in one of the industries the joint venture will cover. Their recruitment effort, however, has already lasted months.

Even precommerical service will not be easy to launch by next year, said Patrick Gauthier, a consultant and former Visa senior vice president for innovation and head of corporate venture and strategic alliances. The longer the joint venture goes leaderless, the harder that launch becomes.

"The CEO of the venture is a critical hire: He will have to bridge payment and telecom cultures, deal with a complex set of governance and potentially antitrust issues and execute flawlessly," Gauthier told NFC Times. "Any one of these tasks could be complex on its own."

Perhaps one of the biggest tasks for the CEO will be to gain the support of big U.S. merchants for the new scheme, noted consultant Todd Ablowitz, president of Double Diamond Group. So far, no names of big chains have surfaced supporting the carriers’ initiative.

"They (telcos) need to grasp the nuances of payments and have the charisma to bring the retailers along–no easy job," he said. "I would make sure the CEO has the respect of the retailer community, ideally someone with instant retail cred(ability)."

Most industry observers expect the joint venture to lower interchange in order to attract merchants, which often complain that transaction fees based on interchange set by Visa and MasterCard are excessive.

At present, fewer than 100,000 merchant locations accept contactless payment in the U.S., not counting vending machines, according to estimates. Most terminals that accept contactless applications from Visa and MasterCard, also take Discover’s Zip contactless brand, along with ExpressPay from American Express. Presumably, the mobile operator scheme will use Zip, although that is not certain.

Huge Investment Required
In any case, the number of Zip merchants is not enough to support a successful NFC mobile-payment rollout, most observers agree. Their opinions differ, however, on whether the mobile carriers and their partners will have to subsidize merchant terminals to expand acceptance.

Regardless, if the telcos and their financial-industry allies roll out their payment scheme nationally, the investment required will dwarf what they’ve put in so far. Estimates for a national deployment run into the hundreds of millions, with at least one estimate reaching $1 billion and another, citing a projection by one of the carriers, coming in at between $1 billion and $2 billion. The estimates, however, come from individuals involved in the project but not necessarily with direct knowledge of long-term budget projections.

It seems likely, though, that the budget will include subsidies for merchant terminals, in addition to the subsidies for NFC phones. Then there is the cost for building the rest of the infrastructure for payments, couponing and other services.

But most of the money would go for expenses to make consumers aware of the payment service and to get them to try it.

"The financial figure means big consumer marketing," said Thomas Noyes, former head of channels for Citigroup’s global consumer group, when told of the estimates.

The investment will need to include merchant and consumer incentives, for example, giving consumers $5 or more apiece in free prepaid value to encourage them to sample the NFC service, he said. That assumes the telcos introduce a prepaid payment application.

With the big investment required, the telcos are interested in more than just the payment market, with the low margins they would earn collecting part of the transaction fees from merchants, believes Noyes, a partner in consulting firm Starpoint.

"Where they’re finding this incentive is in the (projected) $100 billion mobile-advertising market," Noyes said. For example, Verizon could sell access to its large subscriber base to advertisers, which could reach consumers directly in the store on their NFC phones. The payment tie-in is important, but not nearly as lucrative as the advertising fees. "They’re (Verizon) going to go to mass marketers (and say): 'I’ve got the eyes of 100 million Americans, what’s the marketing spend you can direct to my channel?' We’re talking billions."

All this assumes a successful rollout by the telcos. But while the joint venture is the “most potent effort to date to bring payment into the mobile,” Gauthier, now head of consulting firm SMC Advisors, told NFC Times the odds of success are still long.

Besides the difficulties in building a new organization, the carriers and their partners will have to give consumers a reason to use their smartphones as payment devices, instead of pulling out their cards to pay. They will also need to establish the new payment brand alongside their own brands and avoid getting into trouble with antitrust regulators, he said.

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