Verizon Versus Google Wallet

The U.S. carrier just happens to have a competing service in the works

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Steven Cherry: Hi, this is Steven Cherry for IEEE Spectrum’s “Techwise Conversations.”

If you want to pay for coffee with your smartphone in Canada, you can walk into a Tim Hortons and put your Samsung Galaxy Nexus phone near a shiny new device on the counter. It’s right over there—no, over there, right next to the one less technologically advanced patrons use to swipe their credit card. If you want to pay for coffee with your smartphone in the U.S., you can walk into a Dunkin’ Donuts and, well, tough luck. You’ll have to pay the old-fashioned way.

The Galaxy Nexus is the first phone to use the Android 4.0 operating system. Journalists are calling it the flagship of the Android fleet, and one key application, from Google’s point of view, is Google Wallet, a way of paying for stuff on the go, without swiping. The phone makes a secure near-field communications, or NFC, connection with the store’s payment device.

That connection is apparently not secure enough for Verizon, the only carrier in the U.S. currently selling the Galaxy Nexus. It asked Google to disable the Google Wallet app. According to The Wall Street Journal and a report in Reuters, Verizon believes that Google Wallet, quote, “needs to be integrated into a new, secure, and proprietary hardware element in our phones.”

Some observers, though, think Verizon had another, less altruistic, motive. Verizon is a founding member of a consortium called ISIS, with AT&T and T-Mobile. Back in August, the three carriers sunk [U.S.] $100 million into ISIS, which competes directly with Google Wallet and is expected to launch later this year.

My guest today is Barbara van Schewick. She’s an associate professor of law and electrical engineering at Stanford University, and she’s the author of the book Internet Architecture and Innovation, which was published by MIT Press.

She’s also the author of a recent letter to the chairman of the U.S. Federal Communications Commission in which she asked him to look into whether Verizon’s blocking of Google Wallet violates Verizon’s license to use its radio spectrum. She joins us by phone from Palo Alto. Barbara, you’re our first guest in 2012; happy new year, and welcome to the podcast.

Barbara van Schewick: Happy new year, Steven, and I’m happy to be on the show.

Steven Cherry: Barbara, Google isn’t without some heavyweight partners itself, namely MasterCard, which has a mobile payment scheme called PayPass that Google Wallet uses. Why not just let these two competitors fight it out in the marketplace? Why did you see a need to write to the FCC?

Barbara van Schewick: To me, this isn’t really about two big companies fighting it out and fighting for control of the handset or what applications get on the handset; this is an example of a much more fundamental problem about how we can make sure that the wireless ecosystem remains open for innovation and useful and beneficial for consumers. And many people have this under the heading of wireless network neutrality, so the idea here is that if we want users to benefit as much as possible from the Internet on wireless devices and networks as well, we need to make sure that they can use the applications of their choice without interference from network providers. And if that’s not possible, then if carriers can decide what applications can get on the phone, that first hurts consumers, but it also makes it less likely that we will get innovation in the future because innovators with a great new application look at what’s going on in that space and say, “Well, I’m not sure I really want to develop this application if my carrier can later block it and make it impossible for me to reach consumers.” And similarly, I know from many investors that they have the same concerns: They don’t want to fund an application that then gets blocked and never sees the light of day. So this is an important example of what happens if a carrier blocks an application. We have this new innovative payment application, Google Wallet—it’s the first application to market in that space—and Verizon, which has 35 percent of the wireless market in the U.S., more than 107 million customers, makes it impossible for this application to reach its users. And so this raises exactly the concerns that mobile innovators, investors, and users have been worried about, and therefore I think it’s a key case that will determine the future of mobile Internet openness in the U.S.

Steven Cherry: I gather you think Verizon is trying to keep Google from quickly dominating near-field communications payments while it works to get its own scheme up and running. What do you make of Verizon’s claim that Google Wallet isn’t like other applications and needs special security?

Barbara van Schewick: I think there is no basis for claims that there are security problems here. Verizon says Google Wallet needs to be integrated into a secure and proprietary element on the phone, and that’s true: Google Wallet needs access to a chip called the secure element, which stores people’s credit card information and loyalty points and other offers they want to store on their phone. And that is very important because it makes sure that your credit card information is safe. But this secure element is available on the phone. Every hardware piece—the secure element, the chip, and the near-field communications antenna—have been integrated on this phone and have been made to work with the Google Wallet application because Google and Samsung have developed this application together. We also know that there are no security problems because an earlier version of the Galaxy Nexus, the Nexus S, has been operating with Google Wallet on the Sprint network since, I think, early in the fall, and there haven’t been any problems. And so this argument that there is a security problem here sounds like an argument that’s meant to deflect criticism but that doesn’t seem to have any substantive basis.

Steven Cherry: Yeah, I noticed that there are two carriers just to Verizon’s north, Bell Canada and Virgin Mobile in Canada, that already have the Galaxy Nexus on the market, and two other carriers are going to have it up there later this month. There seems to be a lot at stake here; in your letter to the FCC, you note that analysts predict a $56 billion market in mobile payments by 2015. Tell us how it works—how does Google make a sliver of that money when people use Google Wallet?

Barbara van Schewick: So, that’s an interesting question because there are some differences between the way Google Wallet will make money and Isis will make money, and these things have been changing rapidly, so especially when I talk about Isis I’m not exactly sure whether that’s still how it works. So when you pay at a merchant with your Google Wallet application, Google doesn’t get a cut of that revenue. But Google hopes to make money from integrating other offerings into the phone. It’s integrated with Google Office, so you might walk past the coffee shop and as you walk past, an offer appears on your phone and says, “Come in and get $2 off a café latte,” and so you go in, you tap your phone once, you buy the café latte, and with one single tap you get both the offer and the product, and it’s assumed that Google will charge merchants for participating in Google Office. Or if you’re Walgreen’s and your customers can use their rewards card or purchasing point on the Google Wallet application, that would probably also create fees. If you look at Isis, it seems that the carriers want to get a cut of the payment fees for every payment you make, and so for them if we talk about more than $56 billion in mobile payments, that might be a very significant chunk of money. And I’ve read a lot of reports by industry analysts that speculate that the carriers are really desperate for additional revenue streams, so they don’t want to lose control over this revenue stream. And in addition, they also want to make money integrating loyalty applications or rewards programs or offers into Isis, and people assume that they will charge for that as well. But so if you look at it from the perspective of a merchant, I’m not totally sure who gets the payment fee, but the carriers would get a chunk of the payment fee, whereas Google would not.

Steven Cherry: Well, you’ve cleared up a little mystery for me, by the way: Over at Google, the same unit that does Google Maps and Google location software and services also does the coupon stuff, and I never quite understood why that was, but now it makes sense. And Spectrum will actually have a profile of the head of that unit, Marissa Mayer, in March. Let’s talk about this question of whether Verizon is violating the conditions of its license. Besides the question coming up with Google Wallet in your letter to the FCC, you noted that earlier this year Verizon blocked tethering applications, and that too may have violated the conditions of this license. So let’s talk about the tethering and what those tethering applications are and how these things might violate the license.

Barbara van Schewick: So Verizon operates under very specific licensing conditions which say, as a carrier if you operate in this part of the spectrum, you’re not allowed to deny, limit, or restrict users’ ability to use the applications or devices of their choice on this network. There are only very limited exceptions. If the application or the device creates problems for the integrity of the network, that might be a reason for the carrier to block it. So if you look at what Verizon did with the tethering applications, it asked Google to remove these applications from the Android app store. As result, it was made much more difficult for users to get access to these applications. It’s not totally impossible—if you are a technically savvy user, you might find this application elsewhere and side-load it on your iPhone, which is the process of installing applications on your Android phone without going through the app store, but that’s really a process that would not be available to most users because it’s too complicated. And as a result, Verizon’s behavior made it more difficult for people to use the applications of their choice, which would violate the licensing condition. In the case of Google Wallet, we don’t know exactly what’s going on, it might be that Verizon is disabling Google Wallet’s ability to access the secure element, in which case this would violate a part of the licensing conditions that says you can’t disable hardware functionality on the phone. It might also be that Verizon just told Google not to include the application in the app store, not to make it available online, and not to install it on the phone. In which case it’s basically impossible for users to get the application through official channels, to get the application from Google, which would also limit, deny, or restrict users’ ability to use Google Wallet and would violate the license condition. I should say that with respect to Google Wallet, we don’t know exactly through which path Verizon has made it more difficult or impossible for users to use Google Wallet, and that’s part of why the FCC should investigate. They need to get the information, to understand what’s going on, and they need to make a determination about whether this violates the conditions or not. But given that this is the only part of the spectrum that is subject to strong protection for users and innovators, it is very important that the FCC send a signal to the market that these conditions will be enforced. And a repeated lack of action following these repeated violations will show that, even though there are protections on the books, innovators and users are ultimately at the mercy of the carriers.

Steven Cherry: You know, there seems to be a broader point to be made here. Whether Google wins this fight or Verizon, the issue really still comes down to almost the same thing, that consumers, users of the Android phone, are sort of at the mercy of one gatekeeper or another, and in the iPhone world this is even more obvious because really there is no other path to getting an app other than the Apple App Store. So leaving aside the specific network neutrality rules that govern the mobile broadband, there seems to be something much bigger to be concerned with here.

Barbara van Schewick: Yeah, I think that carriers’ control over the handsets or other actors’ exclusive control over the handset, as you note in the example of Apple with the iPhone, creates potentially huge problems for innovation and users in the mobile space. Traditionally, in the wire-line Internet, we had never thought about this problem because it was totally normal that you can download every application that’s available on the Internet to your PC and then run it. PCs were general-purpose devices that were controlled by users. And so when we started talking about network neutrality, nobody really thought about the problem of, that you might not be able to run an application because someone is messing with your PC. In the mobile world this is a key problem because even if the network is open, if you can’t download the application to your phone or if you can’t use the application on your phone, you won’t be able to take advantage of all the benefits the mobile Internet has to offer, and mobile innovators will not be willing to develop applications for phones. And just as an empirical observation, I’ve talked with quite a number of application developers who develop applications for mobile phones, and they now always develop for Android first. Because, they say, “We develop for Android, we get users, we start making some money, and then we can start developing for the iPhone because with the iPhone we don’t really know whether we’ll be able to get to users. We might get stuck in the review process that Apple has imposed. We may not be able to get on the phone at all.” And so even though we don’t have large-scale empirical studies on this yet, my personal observation seems to be that developers start to really prefer the open environment of Android over the closed environment of the Apple iPhone. That’s all nice, but it doesn’t help us with carriers like Verizon who if they want to exert control over the phone no matter who offers that phone.

Steven Cherry: Yeah, so I think this is going to be a big topic for us in the immediate future. Cory Doctorow, the coeditor of Boing Boing, recently spoke out about what he calls “the coming war on computation.” It’s the same issue that Jonathan Zittrain wrote about in his 2008 book, and it’s pretty much the topic of your book, which was written in 2010. So I think on behalf of listeners, I need to thank you for fighting the good fight and thank you for joining us today.

Barbara van Schewick: Thanks, Steven. This has been a pleasure.

Steven Cherry: We’ve been speaking with law professor Barbara van Schewick about Verizon’s battle with Google over mobile payment systems and who controls the phones in our pockets and purses. For IEEE Spectrum’s “Techwise Conversations,” I’m Steven Cherry.

Announcer: “Techwise Conversations” is sponsored by National Instruments.

This interview was recorded 5 January 2012.
Audio engineer: Francesco Ferorelli
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NOTE: Transcripts are created for the convenience of our readers and listeners and may not perfectly match their associated interviews and narratives. The authoritative record of IEEE Spectrum’s audio programming is the audio version.