Will Mobile Payments Become a Format War?
It is called a “Format War.” Two or more companies with different products compete for your attention. Of course, as a consumer, you get to choose the product you want. If you don’t like it, certainly you are free to switch to another product. However, since companies know this, they can make it incredibly cumbersome for you to do so.
Mobile Payments could be heading toward a format war, and the first casualty could be consumer privacy. On one side are all of the mobile wallet and mobile payment products that are based on the existing payments system in use around the world today. On the other side are alternatives to the existing payment system, which could bypass the processors or schemes that are the backbone of the payment system.
The next three to five years will determine the type of technology that most of us will end up using for at least the next decade.
Because one of the biggest components in a format war is the “price” of switching. If you make a choice to purchase one format versus the other, and it costs a lot of money when/if you realize you made a mistake, you’re more likely to live with your mistake rather than incur a new cost associated with switching. The risk, of course, is that if the other format is truly superior and it does not get the support it needs to survive then that format may go away, and we all lose the advantages it offered.
HD DVD VS. BLU-RAY
Take the recent format war between Blu-Ray and HD DVD. Did you kill the HD DVD? All you had to do was buy a Blu-Ray Disc player. Chances are, once you chose Blu-Ray, you never gave the HD DVD format a second thought. If you were a Blu-Ray buyer/HD killer, then job well done. You chose the better product. The Blu-Ray had 66% more capacity than HD DVD with the theoretical limit of 200 GB compared to HD DVDs theoretical limit of only 60 GB. The Blu-Ray could even record and playback at the same time off of its rewritable disc; the HD DVD could not. The Blu-Ray was not first to market, and was more expensive than HD DVD, but it was hands-down a better product. It was only in 2008 when the hefty backers of HD DVD – Toshiba, NEC, Sanyo, Microsoft, NBC Universal, Viacom – admitted defeat and declared the Blu-Ray standard the winner. That’s when the consumer choice finally became clear. However, during this nine-year format war, the misinformation circulating about both formats was significant. There were outdated reports, misleading marketing, and misinformed salespeople. Also, there was no shortage of bloggers, commentators, and pundits all actively voicing their opinions on each format (some opinions based on fact, and others based on something else).
APPLE VS. MICROSOFT, PART 1
Although the competition between Apple and Microsoft continues as of 2010, the format war that took place between these two companies around the time of their origin and through the 1980’s is a classic example of something consumers generally want to avoid: An inferior product beats a superior product so badly in the marketplace that the superior product vanishes entirely from the marketplace. Obviously, Apple did not disappear from the marketplace, but it came awfully close. Microsoft started its operations focusing on software, and eventually began to develop the complex “disk operating system” also known as DOS. Apple, on the other hand, began its operations with computer hardware before developing its groundbreaking operating system that at the time was known as the Apple Lisa. The main innovation with Apple’s Lisa operating system was the ability to use a pointing device (which we now call a mouse) to move a cursor (which we still call a cursor) and click a button on the mouse to select a specific function– this was also known as “point and click.”
After developing Lisa, Apple set out to create a new personal computer. Initially, this device was internally nicknamed SAND for “Steve’s Amazing New Device.” Another name for this device was the now famous “Macintosh”.
Apple knew that it needed productivity software to allow the Macintosh to compete in corporate markets, a sector which represented the majority of personal computer sales at the time. To do that, Apple partnered with a competent little software company called Microsoft.
At the time, Microsoft was working on its own operating system, but soon after working with Apple developing software for the Macintosh, Microsoft realized that the Apple operating system was far superior to anything that Microsoft had, or was likely to have in the near future. So, using what they learned from Apple, Microsoft began to develop a new operating system called Windows.
After the public introduction of Apple’s Macintosh in 1985, Bill Gates contacted Apple’s CEO, John Scully, in an effort to allow Microsoft to license Apple’s new operating system both to Microsoft and two other companies, ostensibly to attempt to create a new standard in personal computing. Unfortunately, Bill Gates forgot to mention to John Scully that Microsoft had used its early access to Apple’s Macintosh technology, and Apple’s Lisa operating system with its point-and-click functions.
Here is where Apple was both right and wrong at the same time. Scully rejected the request from Bill Gates with the assertion from the Macintosh product manager, Jean–Louise Gassée, that the Macintosh was more than a generation ahead of the rest of the personal computer market from both a graphics standpoint, and a user interface standpoint, which was without question an accurate statement at the time. However, both Scully and Gassée believed their products to be so much better than other personal computer products, that the Macintosh would not have any serious competition in the foreseeable future, and it could rely on the higher-margin hardware sales that it was enjoying at the time.
At first, Apple appeared to be right. Microsoft released Windows 1.0, which appeared to not be a threat. However, some of the features were obviously “borrowed” by Microsoft from its experience over the prior few years developing software for the Macintosh. Including: a menu-bar at the top of the screen that was nearly identical to the one found on the Macintosh. Also, the Windows operating system included a word processing program called Write, and Paint that could perform simple drawing functions. The Macintosh, of course, also included strikingly similar products.
Then, Microsoft released Windows 2.0. Apple immediately recognized it as a significant improvement over Windows version 1.0, which included a host of additional features that were exactly like the Macintosh, such as: overlapping windows, multitasking, and the use of icons to identify folders, programs, and other functions within the computer. In addition to a much better operating system, Microsoft also wrote two important new programs for its window 2.0 system: Word and Excel. These two immensely popular productivity software applications are still in wide use today. Finally, while Apple continued to hold the development of its software very closely, and continued to focus on the sale of hardware as its main profit driver, Microsoft had simultaneously convinced other major software companies of the time to write their software on the Windows 2.0 format. These companies included Corel, Microtek, and Aldus.
Of course, a famous lawsuit followed in which Apple sued Microsoft for breach of its licensing agreement. But, on July 25, 1989 Judge W. Schwarzer ruled that, of the 189 claims of infringement by Apple, 179 claims were ruled as allowed by Microsoft within the licensing agreement that Microsoft signed with Apple. Also, the remaining 10 disputed items were classified as not infringements on the licensing agreement.
And that was the end of Apple’s Macintosh. The Macintosh never achieved 5% of the market share, even after the explosion in the personal computer market in 1987 when the market doubled in size in just two years. And, by 1989, Windows–based virtual computers exceeded 80% of the market, while the Macintosh still floundered at roughly the same number of annual unit sales, which by this time represented only 2% or 3% of the market. It was not until Apple introduced the iMac almost 10 years later in 1998 that Apple began to return to profitability.
Windows had won the first-round of the battle with its Windows 2.0 product built on the innovation of the Apple team. Think of what would have happened if Apple did not survive the difficult years between 1989 and 1998; there would be a host of products that would either be absent from the marketplace today, like the iPod, the iPhone, the iMac, and other popular Apple products all because we, the consumer – you and I – chose the Windows based format as instead of the Apple format.
At the time, nobody could have anticipated the contribution that Apple would make in later years, or, how the Microsoft Windows 2.0 malfunctions and errors would continue for another 20 years. The marketplace was convinced, and hopeful because they had already spent their money, that Microsoft would figure out how to stabilize its operating system before the next version of windows appeared.
If you purchased a computer in the late 80s, would you have chosen a Windows–based machine if you thought it would lead to the demise of one of the most innovative companies in history? Had you known about the superiority of Apple’s modern products, would you have supported them in their infancy?
The answer to those questions is up to you, but the message is loud and clear. This is the choice you have right now for the SmartPhone wallet.
YOUR CHOICES MATTER
If you choose inferior products, and use services based on marketing campaigns, or what is easiest, and not through quality, you could be giving up a future line of products, money management tools, security features, convenience, and power that none of us can imagine today. As you hear more and more about the social and economic impact of new products that will be introduced over the next 20 years, remember this: these advancements really are possible, but they will be based on the market success of the products that you are introduced to over the next three–to-five years.
One of the biggest lessons learned in all the “Format Wars” described is that it caused many people to not to choose at all. Millions of consumers chose to wait it out for one of the players to emerge victorious before they made an investment or commitment.
If mobile commerce becomes a format war between the traditional credit card system versus the new breed of payment companies, then many (if not most) people will be wary of both choices and much less likely to participate in mobile commerce at all. That means we all have to wait longer for the benefits that mobile commerce has to offer.
The best way to decide which format is better for you is to try different products in both formats, and remain willing to switch products over time. Be willing to try different SmartPhone Wallet services as they become available, and do not get hooked on the first service you try – it may not be the best.
This article is an excerpt from the book, The SmartPhone Wallet – Understanding the Disruption Ahead.
© 2011 David W. Schropfer
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