Why PayPal, Yelp, and Foursquare Should Be Net Neutrality’s Biggest Supporters
Why PayPal, Yelp, and Foursquare Should Be Net Neutrality’s Biggest Supporters
Why PayPal, Yelp, and Foursquare Should Be Net Neutrality’s Biggest Supporters

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    Last week, Verizon, AT&T and T-Mobile announced their intention to enter the $170 billion electronic payment market by turning your smartphone into a “mobile wallet that ultimately eliminates the need for consumers to carry cash, credit and debit cards, reward cards, coupons, tickets and transit passes.” The new system, called Isis, is a joint venture of the three carriers, who control the vast majority (73.8%) of the US wireless market. These network operators now have 170 billion reasons to block, slow, and otherwise discriminate against any competing mobile application that facilitates financial transactions.  Without strong wireless net neutrality rules, why on earth wouldn’t they?

    Mobile payment is the future; there is simply no need to carry a plastic card when your account information can live on your smartphone. The benefits of using your cell phone to pay for things are obvious, so there has been no shortage of companies interested in getting in the game. Boku allows customers to pay online with their cell number instead of a credit card number and address, and confirm the payment via text message. PAYware and Square sell dongles that attach to a smartphone and enable the phone to accept credit cards. A company called Venmo even allows smartphone owners to exchange money with $0 in transaction fees (the service is free for consumers, but Venmo does charge businesses to participate).

    There could not be a more vibrant and competitive market than mobile payments, with a huge concentration of innovative startups. Indeed, mobile payments are expected to be a $630 billion market within five years.

    Closely related to the mobile payments market is the domain of companies that allow users to “check-in” with their phone to a location. In addition to allowing reviews and comparisons of stores, these services often allow business owners to offer special deals and coupons to customers who are nearby, or are repeat visitors. These companies include Foursquare, Facebook Places, Yelp, Gowalla, SCVNGR, and others.

    Unfortunately, almost all location and mobile payment services share a potentially fatal flaw. They depend on cell phone networks to transmit their data, whether through a downloaded application or a mobile website.

    The carriers’ Isis represents a seismic shift in the relationship between applications and the networks they depend on. Until last week, Verizon, AT&T and T-Mobile benefited from the success of mobile payment services like Square and location applications like Foursquare and Yelp.  The more uses a smartphone had, the more smartphones and data plans the carriers could sell. Innovative commerce applications were a rising tide that lifted all carrier boats; that era is now over.

    The stated goal of Isis is to “provide an enhanced, more convenient, more personalized shopping experience for consumers.” If another mobile application facilitates or adds value to a commercial transaction, it now competes with Verizon, AT&T, and T-Mobile. But how can a service compete when it is also completely dependent on these three networks to transmit its data? These three carriers have 220 million users, a vast majority of all subscribers in the US. If Verizon blocks Yelp from the Verizon App store, and/or AT&T blocks or slows traffic to Yelp’s mobile website, Yelp is done.

    If a carrier did decide to block a competitor, it would not be the first time.  Verizon has already shown a willingness to block competing music stores and long distance voice services. Verizon, AT&T and T-Mobile form a goliath with enough market power to suffocate emerging markets and innovative business models in their infancy.

    Carriers have nothing to gain from enabling their competitors, and they certainly have no plans to allow competitors to use Isis. In order to use the Isis platform, applications must be “downloaded from app stores to their smartphones”, where “a trusted service manager would download and manage the secure part of the applications on smart card chips in the phones.” The carriers have announced no plans to open the platform to outside innovators, and I’m not holding my breath.

    The Isis business model only intensifies the incentives for anti-competitive network discrimination. Most mobile payment and location commerce services do not require the installation of physical hardware by vendors, and thus do not require much investment. Isis is predicated on convincing merchants and businesses to purchase and install physical hardware to interface with the proprietary Isis system. Every viable alternative a merchant has to Isis makes purchasing an Isis machine a worse investment and a harder sell.

    As Skype and Slingbox have discovered, cell phone companies do not play nicely with competitors who rely on their networks. This is not to say that AT&T is evil. Many businesses would love to prevent consumers from interacting with their competitors; only cell carriers have the capability.

    What’s the solution? It is up to the FCC to ensure that e-commerce remains a competitive market, and strong Net Neutrality rules for wireless Internet are the only option. In its 2009 Notice of Proposed Rulemaking, the FCC suggested several rules to protect an open Internet. These rules included prohibitions against preventing “any of its users from running the lawful applications or using the lawful services of the user’s choice,” and banned attempts to “deprive any of its users of the user’s entitlement to competition among network providers, application providers, service providers, and content providers.” Without these rules, mobile payment will be another innovative industry strangled by incumbents.