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Google Wallet Repeats Company's Past Mistakes

First Posted: 05/26/11 08:17 PM ET Updated: 07/26/11 06:12 AM ET

Google Wallet Features

Google's latest product marks another attempt by the Internet giant to launch a new business that will help it move beyond its highly profitable (and decade-old) search engine.

So does Google finally have a winner? Or is it repeating the same mistakes that doomed its other ventures?

The new service, Google Wallet, uses near-field communication technology to enable users to pay for purchases, redeem coupons and track loyalty points by swiping their smartphones over readers at registers.

Google will not take a cut of transaction fees. Rather, the company aims to leverage the information it collects about what consumers buy, where they purchase and how frequently in order to sell ads, coupons and loyal reward programs to local retailers via its Google Offers service.

In essence, Google aims to apply its success with online advertising to offline activity in the physical world.

Google Wallet is just the latest in the company's long line of ambitious product launches, which have spanned everything from social networking to e-commerce.

Many of these efforts have been ignominious flops: Google Buzz fizzled and led to a settlement with the FTC over "deceptive" privacy practices; Google Wave, the "email killer," proved far too complex for most users; Google TV has failed to make inroads into the living room; and Google Music lacks the simplicity and record label deals to compete with Apple's iTunes.

Time and again, Google has unveiled products that seem far better suited to Silicon Valley labs than to the marketplace, announcing half-baked, still-in-beta services that appeal to early adopters but lack the ease-of-use of other devices and products.

Google Wallet could prove to be no different, though much will depend on Google's success in wooing not only industry stakeholders, but also retailers and shoppers, to trade plastic for phones.

With Google Wallet, Google seems to have learned some lessons from past missteps and has rallied others in the payment industry to join in its mission to make wallets obsolete.

Whereas Google Music launched without the support of music studios, Google Wallet had the blessing of Citibank, MasterCard, First Data, and Sprint, each giants in their field and integral in processing credit card payments via phones. Executives from all four companies joined Google at its press conference in New York Thursday to praise the effort. Citi executive Paul Galant noted that Google Wallet marked an "important milestone in digital and mobile banking."

"This shows some increasing maturity on Google's part," said Forrester analyst Charles Golvin of Google's partnerships. "They did a good job of making sure that they partnered with the key players in the industry and that what they released was aligned with those partners' interests and business models."

Yet Google seems to have made less progress convincing retailers to get on board, which could be dangerous. Over 100,000 merchants in the United States have terminals that enable them to accept contactless payments via phones and other devices, but Google announced that, so far, just 15 merchants will participate in its Offers program to present coupons, loyalty credit and other perks via the Wallet app.

In this sense, Google Wallet looks a lot like Google TV: once again, the company has the infrastructure but lacks the goods.

With its television product, Google worked with Logitech and Sony to produce the hardware that was necessary--just as Google has convinced Mastercard, Citi and others to support the payment system Google Wallet depends on. But it failed to win over the networks that control access to must-see TV, just as Google has, to date, been unable to attract more than a handful of retailers to provide discounts and perks.

"I think there's a huge issue about having the sufficient critical mass of merchants--and merchants you want to shop at," said Alistair Newton, a research vice president with Gartner, a research firm. "The merchants that will sign up for this sort of thing can often be merchants who are desperate for sales, not necessarily merchants I go to make purchases from."

Google, known for innovative but not always intuitive products, also faces the challenge of convincing consumers to toss their wallets for a product the company itself has noted is still in its early stages.

Analysts warn that consumers may have little tolerance for a work-in-progress service, especially one that integrates sensitive credit card information and involves something as basic and crucial as paying. Who wants to arrive at a store, try on clothes, wait in line, then discover they're unable to pay because of technical difficulties with a product still in its beta form? The potential inconvenience Google Wallet could cause far outweighs carrying a three-inch piece of plastic.

Google Wallet may also have what proves to be a crippling number of exceptions: It isn't available for every credit card, on any smartphone, in every city in the nation or at every retailer. In fact, Google Wallet will launch in just two cities and on one phone, the Nexus S 4G.

"There are a lot of underlying questions whose answer is 'not very many,'" said Golvin. "How many phones are there that people can use it with? Not very many. How many card issuers out there let you put existing payment credentials in there? Not very many. How many merchants can you pay with this technology? Not zero, but in the grand scheme of all merchants in the U.S., not very many. You have to ask yourself, what's the value? Why would a consumer be motivated to not pull out a credit card and use a phone instead?"

Yet Google's greatest advantage may ultimately come from the forward-thinking nature of this product. Analysts note that the company's past failures have often been services that tried to compete with existing brands, such as PayPal, Twitter and iTunes. Google Wallet is the first service of its kind, and it plays to Google's strengths collecting and leveraging vast quantities of user data to sell lots and lots of ads.

Google's control over smartphones--its Android operating system powers a lion's share of smartphones in the U.S.--may also it give the company the leverage it needs to convince additional partners to bring NFC technology to more and more handsets.

"Google doesn't do well when it tries to replicate someone else's business," said Nick Holland, a senior analyst at the Yankee Group, a firm specializing in tech industry research. "Whereas the other initiatives were frankly copycats, [Google Wallet] is new... No on else is doing this, there's no one else out there in the U.S. with a digital wallet that can store credit cards on a mobile device."

No one else for now. Apple is rumored to be developing its own digital wallet solution.

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