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NFC: the next stage in the evolution of wireless technology?

by Arndt Polifke , 15.12.2011

Today, in countries which are highly subsidized, smartphone* sales exceed those of mobile-feature phones**. In an age where consumers are constantly on the lookout for the latest technology, it is now important for retailers to look ahead and ask questions such as; what trends and new features will sustain this momentum in the future?

A key innovation that is set to stimulate the success of the smartphone is Near Field Communication (NFC). Particularly in Asia, operators are hopeful this technology will eventually transform the mobile phone from an ordinary communication device to a mobile product that enhances everyday life.

What is NFC?

Put simply, NFC is a form of wireless technology that enables the transmission of data from one electronic device to another. Functioning within a range of approximately 4 to 5 centimeters, it can act as a travel pass for public transportation and allows users to execute financial transactions and access digital content. By inserting chips into the latest smartphones, manufacturers and operators are aiming to change the way consumers go about performing these routine tasks.
On the surface NFC may seem very new age and revolutionary, but in fact, the technology is merely an extension of Radio Frequency Identification (RFID), which has been used in a variety of countries since 2004.

Existing Technology

At the moment, FeliCa is the main form of NFC-like technology. Developed by a Japanese manufacturer of consumer electronics, it is primarily used in Japan for E-Cash and train passes. Cards containing an integrated circuit (IC) chip and an antenna allow authorization and data reading and writing whenever the card is within range of a reader/writer.

Mobile FeliCa is an alteration of FeliCa chips for use in mobile phones. A leading mobile operator in Japan adopted this concept and used it to develop the “wallet” phone – a mobile phone version of the FeliCa card.

This technology has been a prominent within the Japanese Telecommunications industry for the last four years and the latest GfK sales unit figures show how heavily it features in mobile handsets (insert chart with latest data).
In 2007, the number of mobile phones with FeliCa technology was considerably high, especially in the fourth quarter, with 73.9% of all models sold containing a built in microchip.

This trend continued over the next three years in Japan but started to decline after 2010 because of the rapid growth of smartphones (quarter three results from 2011 have revealed that these devices currently account for more than 40% of all mobile phones). As smartphones grow in popularity, feature phones are being simplified, hence the share of FeliCa within these devices is dropping. Consequently, FeliCa features of all mobile phones declined in 2011.
Until recently, the smartphone market was dominated by non-Japanese brands with no Felica technology. However, now that Japanese brands have introduced smartphones, the share of products with Felica is starting to increase.

This year, while overall results for smart and feature phones experienced a slight dip, the Japanese market is still leading the field in what is expected to become a global trend – NFC. Comparing Q3 2011 with the same period in 2010, there was a decrease of 6.4%, but, with other major countries across the world lacking in such technology, the presence of FeliCa in Japan is still impressive.

The sheer power and influence of operators in the mobile and smartphone market is the underlying reason for this.

Operators dominate the market

In Japan, there is a very unique sales structure - at present, 99% of all handsets sold are contract, with operators purchasing from manufacturers and selling models under their own brand. For example, an operator buys handsets from a manufacturer and sells them in its own store. Because of this sales channel, there is virtually no inventory risk for manufacturers and large mobile operators are able to dominate the industry.
Five years ago, major income for these organizations was accumulated by voice and data services. However, as these features became saturated, operators needed to up their game and find a new revenue source for their mobile handsets - this is why they ordered manufacturers to install FeliCa chips into devices.

NFC: The way of the future?

While NFC is not a standard specification at the moment, it has the potential to expand on what is already being done with Felica as NFC is compatible with existing RFID services, with many NFC tags working with RFID tags. Although it has a much shorter range (accepting and transmitting data within centimeters, whereas RFID goes beyond a few meters), it is an easier and more secure means of exchanging information – users only interact with devices when it is intended and the risks of data falling into the wrong hands are significantly lower.

In collaboration with a Korean company, the aforementioned Japanese operator has started producing more smartphone handsets with NFC chips inside. These “hybrid” phones, which are capable of working with basic NFC and FeliCa technology, are evidence that NFC is becoming more than just a work in progress.
This is an early indicator for retailers that the smartphone could make the transition from a luxury product to a commodity good. If all goes well in Japan, consumers will no longer need to carry multiple cards for travel, in store payments or memberships as their “wallet” phone will.

Outside of Japan: Where is NFC?

In order for NFC to truly set the Telecommunications sector alight in other regions, there must be an operator or manufacturer willing to take charge.
The idea of “touch and go” commerce was able to prosper in Japan because mobile operators took control and ensured other companies (operators, manufacturers, payments providers, travel businesses, shops etc.) participated in using the technology. The most recent example of this can be seen in China, where two of the country’s biggest mobile operators have just signed up to “support and implement” SIM-based NFC services.
One of the reasons why NFC has up until now struggled in places such as Europe and North America is because no single organization has been prepared to lead the way and share success with others. As well as this, Government support is necessary for this technology to thrive.
Japan has the advantage in that attitudes and behavior are more geared towards advancing technologies - there is already a solid NFC system in place and users are always willing to accept new innovations, whether they are in the Telecommunications or Domestic Appliances sector. Persuading people from Europe and America about

NFC has often been considered a more challenging task as many other forms of payment are preferred. Arguably, it has not been in the retailer’s best interest to introduce NFC services.

Japan to lead the way

With the demand for NFC devices expected to grow in 2012, retailers will be keeping a close eye on the technology’s progress over the coming months in the hope that it will gain momentum and become the next “must have” feature. The expansion of this technology in Japan could soon become a template for Telecommunication businesses worldwide.

Across Europe for instance, more and more products with NFC are now entering the markets. Leading mobile operators in Germany are beginning to recognize the importance and potential of this technology and, in order to speed up the development of mobile payment, are installing NFC chips into their devices. This has inspired the launch of “mobile wallets” within the region.

Major German operators believe that by 2014, consumers will be able to buy products from most retail outlets with a mobile device and that purchasing items with a phone will be a standard part of the shopping experience.
* Smartphones are devices which have a full Touchscreen and/or complete keyboard (Qwerty/Qwertz) plus an open operating system (open OS), eg. Symbian OS, Palm, Windows Mobile, Android
** Feature phones are all devices which are classed as smartphones by definition