Yesterday, Google (GOOG) announced the aptly named “Google Wallet”, a new application for its dominant mobile operating system Android that will permit faster shopping and new ways to deliver discounts to consumers when it is rolled out this summer. The software’s functionality will eventually go well beyond enabling quicker lines at Starbucks (SBUX), as Google plans to include features like digital receipts, e-coupons, loyalty rewards, store-activated promotions, event and transit ticketing, gift-card balances, and targeted local ads, some of which will be run through “Google Offers” an upcoming deal-of-the-day website the company announced in January.
Google has obvious monetary incentives for facilitating transactions that may not have otherwise occurred. Apart from the potential revenue streams generated by its various mobile discount platforms, it hopes retailers and advertisers will be attracted to the virtual treasure trove of consumer data the app can collect and the strengthened customer relationships that information can fuel.
The company’s current chairman and former CEO, Eric Schmidt, has expressed confidence that Google will be a hub of new-age retailing. During the Mobile World Congress in Barcelona, Schmidt presented a rather bold vision for Google-enabled smartphone transactions and the short-range wireless data protocol that makes it all possible, Near Field Communications, calling it a “mega opportunity” and suggesting the following scenario:
“I'm walking down the street and I need pants. My phone has an NFC chip. It knows where I am. It tells me about two stores, one to the left with a 20% discount and one to the right with a 30% discount… It is programmed to know I am cost conscious so it points me to the right and the store knows what pants I want.”
Google’s vice president of commerce, Stephanie Tilenius also seems convinced the company’s product will take off, stating rather matter-of-factly "Your phone will be your wallet...just tap, pay, save." If this is, in fact, true, a host of companies stand to benefit considering Google Wallet is an open platform and management has welcomed all comers to join its efforts including banks, payment processors, telecom carriers, handset and IC designers and manufacturers, and Mobile OS developers.
This list includes members of Isis, a strategic alliance that was founded last fall by AT&T (T - Free AT&T Stock Report), Verizon Wireless (VZ - Free Verizon Stock Report), T-Mobile’s parent company Deutsche Telekom (DTEGY), and Discover (DFS) in a different attempt to extract cash from consumers' retail transactions. The group recently adjusted its strategy after changes in the banking laws (Dodd-Frank financial reform) made payment processing less profitable by restricting fees that retailers have to pay banks and payment networks. Discover has now been put on the back burner because the telecom carriers need Visa's (V) and MasterCard’s (MA) economies of scale. Notably, MasterCard has teamed up with Citigroup (C) to support the transactional functionality of Google Wallet.
The telecoms still hold tremendous sway over the smartphone industry and will need to be paid some sort of fee for allowing these transactions to take place on the phones they so heavily subsidize and provide voice and data service for. Therefore, it seems possible that Isis will simply join forces with Google, or team up with Visa and another mobile OS developer to make a smartphone app of its own.
The obvious candidate for such a task would be Apple (AAPL). That company has yet to voice its plans regarding the inclusion of an NFC chipset in the upcoming iPhone or an “iwallet” application in the next version of its iOS, but we think Apple will address the issue at its Worldwide Developers Conference, which starts on June 6, 2011. Although Apple has been known more as a second mover, this technology may be one it can’t afford to wait on. Despite the fact that iPhone owners have proven extremely loyal (approximate 90% renewal rate), more people may become motivated to switch to an Android handset due to the appeal of Google Wallet’s functionality.
There’s lots of evidence that Apple will eventually include NFC functionality in its handsets. The company has applied for numerous NFC-related patents and hired an NFC expert, Benjamin Vigier, as its new mobile commerce product manager. Also, it certainly doesn’t want to be perceived as less innovative than the competition. Finally, with payment processors and banks starting to come on board, it would be difficult to argue that the payment platform is not commercially viable yet.
Apple’s decision to include NFC or not should affect the stock price of NXP Semiconductor. That company boasts “Intel like” share (i.e. ~75%) of the NFC chipset market and is rumored to have supplied silicon to Apple for NFC prototype phones. The company has only been public for 10 months, and its stock price has nearly doubled since December 6, 2010, the day Google announced it was using NXP’s software stack to make NFC chipsets compatible with Android. It is also supplying Google with a new chipset for Sprint’s (S) upcoming Nexus S 4G phone, the only handset currently known to be including the IC. The silicon (NXP PN65 NFC mobile transaction solution) incorporates the NFC radio controller, the embedded “secure element” and NFC software in a single device.
Although NXP Semiconductor’s NFC revenues of $10 million were flat sequentially during the first quarter, it expects to make progress in the second half of 2011, if not sooner. It said ZTE (China's No. 2 telecom equipment maker) recently announced plans to include NXP-based NFC solutions across its entire Android-based portfolio of handsets. Too, the company cited design win momentum at a number of other major OEMs and added some color by saying “every time we talk to our friends at Google they tell us to double the numbers for the Android expectations.” NXP admits device delays could prove Google’s outlook aggressive, so they are keeping estimates relatively low at 70 million chipset shipments in 2011. We think this may prove conservative and are more inclined to believe iSuppli’s recently elevated predictions of 93.2 million chips sold worldwide in 2011 (16% higher than its December forecast), and 411.8 million in 2014 (nearly twice as many as its prior call). At $1-$3 per chipset, this implies meaningful improvement over the current run rate.
Stand-alone NFC chipsets take up significantly more motherboard space, and cost up to five times as much as integrating NFC technology onto a single system on a chip. This is why we think the more basic transmit and receive functionality will eventually be integrated into Broadcom (BRCM), Texas Instruments (TXN), Intel (INTC – Free Intel Stock Report), or Qualcomm (QCOM) connectivity chipsets much like other wireless protocols (Wi-Fi and Bluetooth) now being designed into existing and planned solutions.
This would explain rumors that one of these companies may buyout NXP. That concern’s CEO said he was not interested in selling the company unless given a deal similar to the one Texas Instruments recently offered National Semiconductor (NSM), which implies an 80% premium to NXPI’s current share price. The more pressing debate may be whether NXP can hold on to its share of the software and security elements of the chipset. These parts of the IC are more technologically sophisticated than the radio controller. Notably, NXP’s secure element self destructs if someone tries to hack a transaction, which arguably makes the system safer than conventional swiping, and may lead to reduced insurance premiums for retailers.
NXP Semiconductor’s stock price will likely take a hit if Apple decides to go with competitors like Sony (SNE) or STMicroelectronics (STM), but we believe it will be able to maintain decent market share on design win momentum from mobile handsets running Android. At Google’s I/O developer’s conference in early May, a representative told presentation attendees, “we do know personally of dozens of phones in the pipeline for 2011 that are going to have NFC. So don’t worry, they will come.”
Nokia (NOK), meanwhile, has been a supporter of Near Field Communication technology for years, and Research in Motion (RIMM) has also voiced its intent to include it in upcoming handsets. Although Motorola Mobility (MMI) has not made public comments about NFC, it is a principal member of the NFC Forum, a non-profit industry association charged with promoting the technology and setting key standards. The forum was founded by NXP Semiconductor, Sony, and Nokia, and now has dozens of members across multiple industries.
One of those is VeriFone, which currently boasts around 65% of the 150,000 contactless readers (1% penetration rate) currently deployed in the U.S. (Federal Reserve). Google said it is partnering with the company to conduct field trials in New York and San Francisco. It’s also working with competing new-age point-of-sale terminals from Hypercom, Ingenico, and VIVOtech. VeriFone’s CEO indicated that currently deployed readers containing Visa's contactless payment platform PayWave and MasterCard's PayPass can be upgraded with NFC functionality and all new equipment will include NFC technology. It does not plan on giving away the units for free and thinks new entrants like telcos, banks, mobile OS developers, and payment processors should foot the bill so “they can have a say in how it works” and easily facilitate software maintenance.
No NFC discussion would be complete without including the all important retailers. Google mentioned a laundry list of companies that are participating in the new “single tap” experience including: Macy’s (M), Foot Locker’s (FL) Champs Sports, Walgreens (WAG), Radio Shack (RSH), Subway, and Duane Reade. Although the list is far from exhaustive, we point out that the majority of retail transactions take place at the top 200 retail outlets.
Google provided some examples of the type of deals it will offer consumers, such as a 20% discount on a new pair of boots discovered on a Google search ad, $5 off check-in offer received upon entering a store, and a “deal of the day” offering a $20 lunch for $10 at a local restaurant.
As much as Google likes to think it can tell people what they want in a smartphone, demand for the technology is still unproven. We think application developers will need to make useful and entertaining content-sharing smartphone apps to give mobile device designers additional incentive to include NFC chipsets in upcoming smartphones. As an example, Google’s “Sticky Notes” app lets users leave each other notes by touching their phones together.
With all the crucial elements for mass adoption seemingly in place, we believe that NFC technology presents a favorable investment opportunity. We find NXP Semiconductor and VeriFone to be the most targeted, risky, and potentially rewarding ways to play the early stages of NFC adoption. Both have valuations reflecting unproven revenue streams. At the same time, current chipset and POS terminal forecasts may well prove overly cautious. Conservative investors may find less-risky Google and Apple shares to be the preferred method of gaining NFC exposure.
At the time of this article's writing, the author did not have positions in any of the companies mentioned.