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Thursday, February 03, 2011

NFC will be about free "interactions", not monetised transactions

One of the mobile operators' big problems at the moment is their inability (or unwillingness) to deal with Freemium-style business models. The sheer "weight" and complexity of operator infrastructure and bureaucracy makes it ill-suited to managing events that are unbilled and non-monetisable. This is especially true in circumstances where free calls/sessions/events massively outweigh paid ones. It's a problem exacerbated by many vendors selling them boxes or software based on usage tiers.

This is almost certainly going to be a problem for operator appstores. A large % of Apple downloads, and a huge % of Android downloads are for free applications. People wanting clients for Facebook, Twitter or a million advertising- or brand-led apps. The implicit (and irretrievable) costs of managing, uploading, storing and delivering free applications is likely to be a significant part of the business model for Apple, Google and others. It will be interesting to see how telcos cope with this challenge.

This problem is likely to arise again with NFC. I suspect that once Apple and Google and RIM and Nokia expose NFC/contactless APIs to their developer communities, there will be a huge rise in the number of transactions that don't involve any form of payment. Many of these will not need the "secure element", which is the focus of much of the political wrangling around NFC.

If someone walks out of a restaurant, and taps their phone on a theoretical Facebook-branded "Like" terminal on the way out, there isn't really a need for an uber-secure back end system. Same deal if I tap my phone at a gig, to get added to a band's mailing list. Or a million other applications and use cases.

The net result is that an overwhelming % of all NFC connections will probably be non-financial. Not mobile payments. Not mobile ticketing with a pseudo-Oyster. Not peer-to-peer money transfer. They will be inter-actions, not trans-actions. Not only that, but these apps will appear much faster, assuming that readers are affordable and easy to use (more on that in a moment).

I know I've been very skeptical about NFC in the past, but that's because the focus was on payments or convoluted operator-inclusive value chains. Not just simple "tap to do stuff" apps - basically similar to 2D barcode use cases but much simpler and far less geeky. In other words, it finally looks like we'll get offline applications for NFC - something that's been key to virtually every handset innovation in recent years.

All of which makes the operator business model around NFC rather tricky, in terms of justifying any additional subsidy or promotion, or somehow taking a margin. All the complex mobile-money, transportation ticket and government projects are huge systems integration and IT minefields, likely to need $$$ being spent with IBM or Accenture and taking years to implement.

The big question is around readers and how they are connected. For big complex projects (eg integration into retailers' point of sale terminals), telcos may have a role to play. But for the Facebook-style touch-to-like concept I mentioned above, it should be possible to get USB-connected standalone readers hooked into a PC for a few 10's of dollars.

I have a hunch about this. Sooner or later (sooner?) Apple will put not just the NFC chip into phones, it will put the *readers* into next-gen iPads. I've already had an experience in a restaurant where the host came around with an iPad for people to enter their email addresses for the mailing list. Touching the phone could be to a tablet (or a USB-connected reader to a PC) should be a no-brainer, especially if it allows the user to decide whether to provide specific information sets (name, email, phone-number.... or just a Facebook ID or even a pseudonym).

The question will then be how operators manage to regain relevance for their role in NFC transactions (which will come later, if at all), when the first trillion NFC interactions will have bypassed them.

My guess is that Apple and Google will (initially at least), focus on using NFC as just another tool to entrench their developers and extend their ecosystems. Apple isn't especially bothered about really monetising apps - its own profit on the Appstore is peanuts - it just uses it as a way to add utility to its hardware and sell more units. If NFC-capable iPhone 5's and iPad 2/3's help it sell another 50 million units @$300 gross margin a time, it really doesn't need to care about slicing 2% off of the handful of financial transactions it might facilitate. And Google, Facebook or others could subsidise readers for a variety of advertising / marketing purposes.

So what should operators do about this?

One thing is to have some "skin in the game" in terms of interactions as well as transactions. That will mean acting just like all the other developers and exploiting the NFC APIs on all the various handset platforms. Potentially, they could act as an interaction clearing-house, or even adding value through other internal APIs and assets. They should NOT assume that the key identity layer is around the SIM card, but should look to develop OTT-style applications that can be downloaded to any handset running on any operator's network.

I have other thoughts on this as well, but I'll reserve those for other channels and paying clients. This is my own freemium strategy....


CEO said...

Yes, many of the transactions won't be payment but pure interactions; to trigger info retrieval, to mark reference, to mark location, etc.

But I believe both Google and Apple will become TSM as wells, putting themselves on the middle of payment transactions, and bypassing carriers who continue to battle for that spot and precludes everyone else from advancing....

Good to see you turning around on NFC ;-) I knew it would happen sooner or later ;-)


Dean Bubley said...


Thanks for the input.

My main issues with NFC have been:

- No way for OEMs to justify the extra cost/time to integrate NFC
- No obviously good way to link NFC with native apps & browser
- Cost of readers & back-office infrastructure, especially legacy integration with major IT systems like retailers EPOS
- General doubt over viability & usefulness of mobile payments
- Total disagreement with the "mobile wallet" concept

If Apple can create a developer-led NFC ecosystem with small, localised use cases based on cheap-and-easy readers, then I can see it might succeed.

Similar deal with Google, although it then has to help/persuade its OEMs to take the pain of NFC integration without any obvious payback for them. What will HTC or LG *really* get out of NFC? Maybe there's a behind-the-scenes deal with Google.

BlackBerry will probably work with the carriers' NFC business models. Nokia isn't clear, but may be carrier-centric on NFC as it probably doesn't have the nerve to do a fully Ovi-centric philosophy.

Gareth said...

@ julliean, calm down, I think Dean is pretty spot on with this article also, but won't be able to fit in the same room as him at this rate ;-).

Business Development UK said...

"But I believe both Google and Apple will become TSM as wells, putting themselves on the middle of payment transactions, and bypassing carriers who continue to battle for that spot and precludes everyone else from advancing...." Interesting discussion.

Nicolai Schaettgen said...

Agree to a wide-extent, although I believe enabling payment will still "at the core of NFC" as it enables scale and wide usability and with the push of MC and Visa we will eventually see it. With this, it is crucial to get this right. The consumer will though not care about technology and will demand a ubiquitous payment solution, just the way MC is going with their latest launch at MWC.
I though don't strongly doubt that operators are going to maintain a key role in this. They are just too slow... Look at what Bankinter has done in Spain - putting the SE in the cloud and completely cutting out the MNOs and degrading them to pure dumb pipes. So this might turn into another app store experience for operators...
Google and Apple getting in the middle of the payment transactions? Why? There is no money in payments unless you are able to cut MC and VISA out, which both are not likely going to achieve...