Wake up, Google! Part 2

April 9, 2012 | by Cherian Abraham

Editor's note: The following is part 2 of a post from Mobile Payments Today blogger Cherian Abraham. The entire post was first published to his blog. The original post is long, so we have broken it into three parts. Part 1 is available here and part 3 will be published on April 12. Readers who would like to see the post in its natural habitat can visit Mr. Abraham's blog here.

What does this have to do with GoogleWallet? Well, the choices Google made along Android’s development led to a limited role at the end of the day with carriers. And carriers — at risk of becoming dumb pipes, seeing existing revenues coalesce around data plans while appstore revenues failed to materialize, and while costs escalated along with subsidies, capital expenditures and 4G network investments — found their calling in NFC. In a climate fraught with mistrust carriers found an unlikely ally in financial institutions who themselves were searching for a partner less likely to turn out to be a disintermediator down the road. (Lucky for carriers, the U.S. hasn’t had its own share of O2/Telefonica & Rogers) Out of that uneasy relationship, a partnership to control the Secure Element emerged, and carriers found a new revenue stream.

Why couldn’t Google control the Secure Element? For anyone interested in learning how a smartphone comes in to being, you should read the story on Engadget hereWhile elsewhere in the world, handset manufacturers utilize a wide range of marketing and distribution channels to reach customers, MNOs in the U.S. exert a near complete monopoly in available sales channels and force handset manufacturers into submission. Further, through the allure of favorable subsidies, MNOs can closely dictate what ends up on the handset, or subsequent ownership of it – such as in the case of Secure Element.

It was inevitable that, with the carrot of favorable subsidies, carriers can always impress upon handset makers the need to hand control over the SE to carriers and not to platform providers, in this case Google. And (apart from Apple, a possible exclusion) this scenario is expected to play out elsewhere too, for Blackberry as well as WP7. For Google to expect a different outcome, it will have to pay handset makers a portion of its Android profits. Just by looking at the sorry state of Android generated ad revenues for Google (somewhere between $1.70 to $10 annually per device, and most likely closer to the lower of the two) it cannot sustainably or profitably keep Android running while paying out enough to OEMs to guarantee SE ownership. Carriers, who were already in a fight for survival (to find additional revenue streams), won the battle for the SE. (Except maybe with Apple)

But Google’s missteps did not end there. It was also unable to win over any issuers other than Citi. Coming in from a lost battle over control of the SE, Google started out with a disadvantage against issuers who saw chinks in its armor. Google’s extended olive branch, its desire to leave its share of interchange on the table, was not met with reciprocal affection as banks blanched at handing over customer and transactional data in return for a slightly bigger interchange slice of an already shrinking pie (via Durbin, Reg E, Card Act etc).

I see this as the newborn arrogance of potential disruptors, who continue to believe that disruptees will not see them coming. (It is not that they don’t see them coming, but the moats disruptees end up digging are ultimately ineffectual to the enemy within).

Forward-looking banks (Oxymoron alert!), though late to this realization, had already deemed interchange a thing of the past and were already looking at leveraging customer/transactional data to build the next card and merchant offers platform. Realizing that partnering on Google Wallet would amount to letting Google be the proverbial fly on the wall on every transaction, issuers passed on the opportunity. This outcome would have been different if Google had brought along any existing advantages in offine commerce, which it had none. Two reasons: Though Google shoulder-surfs along the bulk of our browser sessions, and can predict with reasonable accuracy our product and brand affinities, it has no such leverage in retail/offline commerce. Gaps along the last mile in offline commerce — where it has no visibility or role, where we still hand out our paper coupons to merchants or pay with plastic at the point of sale – aggravate and inhibit Google’s "seers" from measuring its impact in local retail commerce. 

Though Google has an unparalleled ability in solving the problem of scale, or driving traffic to a merchant, it continues to be hobbled in making its presence felt in retail commerce. Further, smartphones are a new cog in the wheel of offline commerce, one that merchants are still treating with plenty of suspicion. Google Wallet came along on a time when Google was still proving itself to retailers and it was too early to leverage this relationship to make a case with banks.

That is not to say that Google Wallet did not have a retailer friendly strategy. These are still early days in mobile commerce, but I would be remiss if I did not say that Google had the customer experience at retail, front and center to its wallet experience. But there was no sizable merchant segment it could bank on, at launch or since then, that could have proven to an issuing bank, that a Google Wallet partnership was the right step forward. Being first to market afforded none (or barely any) of the advantages to Google, while it still took the brunt of the criticism – deserved or not.

Coming up: Part 3 - So what will happen to Google Wallet?

Topics: Carriers / Operators , Contactless / NFC , Mobile Apps , Mobile/Digital Wallet , Mobile Payments , Retail

Cherian Abraham / Cherian is a Mobile Payments Advisor with Experian Global Consulting. He is also an advisor to ModoPayments. As a mobile payments veteran and founder of Drop Labs, Cherian has worked with leading banks, retailers, mobile platform providers and startups in this space. Opinions expressed here are strictly his own, not that of Experian.
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