Just As NFC Gains Impetus, An Analyst Casts Doubt on Supply of Phones

With companies like Google Inc., Visa Inc., MasterCard Inc., and the major wireless carriers talking in recent months about near-field communication projects, observers could be forgiven for concluding that NFC-based mobile payments are poised for a breakthrough in the U.S. market. There could be just one problem: no NFC phones.

“Nobody is ordering [NFC-equipped smart phones],” says Stela Bokun, a senior analyst at Pyramid Research, a Boston-based firm that follows telecommunications. In a blog post this week headlined “An Order of Smartphones, Hold the NFC,” Bokun throws cold water on the optimism about NFC that has developed in recent months after years of stalemate between carriers and financial-services companies over business issues like sharing of transaction fees.

Bokun forecasts 17.5 million shipments of NFC-equipped smart-phone shipments worldwide in 2011, up from an estimate of 11.5 million in April but still well below other estimates. Most of the sales, she says, will stem from the growth in shipments of smart phones overall, with only a portion attributable to “a few recent events” that have kindled interest in mobile payments. She cites Sprint, which has begun offering the Nexus S 4G, an NFC-equipped model, and the expected arrival in the U.S. market later this month of the Galaxy S II NFC phone.

Bokun minces no words in describing why handset manufacturers are so slow to ship phones equipped with NFC chips. The root cause is that a very important business issue still hasn’t been ironed out for the mobile carriers: how to make money from NFC, a short-range, two-way communications technology seen as ideal for mobile payments and marketing.

“While there is still much ado about NFC services in the mobile world, particularly after the launch of Google Wallet in the U.S. and the announcement that it would be launched in Europe in 2012, mobile service providers are not yet sure where the money will come from if they start offering NFC-enabled services and, more importantly, how much they will earn from these services,” Bokun says in her post. As a result, budget-squeezed operators are reluctant to invest in the technology. “The NFC market has come to a standstill,” Bokun says, in the face of an uncertain return on investment.

Still, there may be reasons for optimism beyond 2011. Isis, an NFC-based mobile payments venture formed by the three largest wireless carriers in the U.S., expects to launch its first service in Salt Lake City, Utah, next year, followed by another in Austin, Texas. It has already signed up Salt Lake’s transit agency as its first merchant.

And Bokun does forecast increasing shipments of NFC phones in the years after 2011, with volume closing in on 350 million units by 2015, indicating that the carriers will likely work out the kinks in the NFC business case.

The wild card is the arrival of Google in this market. The Web search giant, which in May announced an NFC-based payments-and-offers blitz based on its Nexus S handset, has the potential to spark investments by both carriers and financial-services companies, if only to stay competitive. Indeed, Bokun sees Google’s entry as reason enough for telecoms and mobile-payments backers to act faster on NFC. “Shake hands, guys, and hurry up,” she advises. “The almighty Google is coming.”