Mobile Commerce Is Finally Living up to Hype

For more than a decade, technology prognosticators have called mobile phones the next frontier of shopping.

Consumers would, one day, routinely use their Internet-connected phones to buy products like DVDs, airplane tickets and digital music.

Even bricks-and-mortar stores could capitalize. With the help of geo-location technology, retailers could send digital coupons to people who happened to be in the neighborhood, as an enticement to come inside and shop.

Until recently, mobile commerce’s promise was far from realized. Yes, a modest number of early adopters used their phones instead of going to the mall. But the market was miniscule—at least in the United States. If people wanted to buy something online, they generally did so from a personal computer.

Today is a different story. The growing popularity of smartphones like Apple’s iPhone, coupled with changing consumer behavior, has transformed mobile commerce into a hot sector.

Forget about the gloomy economy. This year, U.S. mobile commerce sales are expected to reach $2.4 billion, double the amount spent by consumers in 2009, according to ABI Research, a technology research firm in New York.

The rapid growth hasn’t escaped the attention of venture capitalists, who have invested in myriad mobile commerce-related startups over the past year. The niche, they say, is about to blossom into the mainstream.

“It’s a huge market opportunity—and it’s not just in the U.S.,” says Susan Mason, a general partner with Onset Ventures who has invested in two mobile commerce startups: mobile payments company Obopay and 1020 Inc., the parent of location-based ad service Placecast.

But the investment fervor comes with several dangers, including soaring startup valuations. Furthermore, a proliferation of me-too companies raises the question of whether many will eventually be shuttered or sold off at fire sale prices.

Mobile commerce’s evolution is following a different path than the original e-commerce boom of the late 1990s. There simply are no mobile-only equivalents of Pets.com or eToys for investors to sink money into.

Instead, established retailers like Amazon.com, eBay, Apple iTunes, Best Buy and Wal-Mart dominate. For them, mobile is just one of multiple sales channels.

As a consequence, venture capitalists have to take a more indirect investment tack. Rather than funding retailers, they are funneling money to startups that do things like mobile payments, distribute mobile coupons or build the software and databases that make mobile commerce possible.

Global mobile payment transactions are expected to grow from about $69 billion in 2009 to $633 billion in 2014.”

Generator Research

Pay Up

Mobile payments is perhaps the most active area of investment. A legion of such startups has received seed or venture capital funding.

For instance, Zong, a mobile payment company in Menlo Park, Calif., received $15 million in April from Advent Venture Partners, Matrix Partners and Newbury Ventures. In August, Payfone, a New York-based mobile payments service, landed an $11 million Series B round from BlackBerry Partners Fund, Opus Capital and RRE Ventures.

In general, such companies allow consumers to make purchases from their mobile phones without having to type in a 16-digit credit card number and personal information on a small screen. Users simply enter their phone number followed by, in Zong’s case, a pin code that they receive in a confirmation message.

Usually, the transaction is billed to the consumer’s monthly mobile phone statement.

The challenge is that mobile payment startups must go up against PayPal, the eBay-owned payment service that already has a formidable user base from its years of handling regular e-commerce purchases. Moreover, the number of startups trying to tackle payments is overwhelming, making future industry consolidation virtually guaranteed.

“The question is whether these different payment providers can offer something that is unique and usable,” says Bernardine Wu, chief executive of FitForCommerce, an e-commerce consultancy in Short Hills, N.J.

But for a successful company, the potential payoff is huge. Small fees collected on millions of individual purchases daily could be a goldmine. Mobile payment transactions totaled $68.7 billion globally in 2009, according to Generator Research. In 2014, the amount is expected to jump to $633.4 billion.

Mobile commerce’s rise is largely fueled by the increasing adoption of smartphones, which make browsing the Internet more convenient than their predecessors. In the United States, 49.1 million people had smartphones during the three months ending in May, according to comScore, up 8.1% from the corresponding period ending in February.

If anything, the United States is playing catch up. In Japan and much of Europe, consumers have embraced mobile commerce to a far greater degree for routine purchases.

Venture capitalists also point to the developing world as a big opportunity because, for many people, mobile phones are the primary onramp onto the Internet. Home PCs are hardly the norm in countries like India.

They’re Watching You

People have to pay attention to the experience as much as they focus on making the greatest-performing technology.”

Bob Borchers

Another popular area of venture capital investment in mobile commerce is location-targeted coupons and rewards, which are intended to lure shoppers to nearby stores. Consumers receive the marketing messages only when it is determined—based on geo-location information collected from mobile phones—that they are in the neighborhood.

A person entering the parking lot of a shopping center may get a message offering a 20% off on a flat screen television. In theory, only consumers who sign up for the messages would receive them.

A variation on the theme are reward programs that encourage consumers to use their mobile phones to scan bar codes on store products. People who earn enough points by doing so can redeem them for a gift.

1020 Inc., the parent company of Placecast, enables retailers to make location-based offers. It has received two installments of Series B funding over the past year, for a total of $8 million from Onset Ventures, Quatrex Capital and Voyager Capital. Shopkick, which also offers a location-based rewards program for people who walk inside stores like Best Buy, raised $15 million in a Series B round in July from Greylock Partners and Kleiner Perkins Caufield & Byers.

They compete against the likes of Foursquare, an increasingly popular service that invites its 3 million users to check-in, or disclose their location, via mobile phone. Although it casts its services as entertainment, it also makes special offers available from 15,000 retail stores.

In June, Foursquare closed a $20 million round of funding from Andreessen Horowitz, O’Reilly AlphaTech Ventures and Union Square Ventures.

Lauren Freedman, president of e-tailing group, an e-commerce consulting firm in Chicago, says location-based ad companies are “a work in progress,” although she adds that the more relevant an ad is to a potential customer, the more successful it is. Onset’s Mason says success will depend on continuing to keep consumers in control of the special offers they receive because they will shun retailers that send spam. For its part, Placecast allows people to set the time they’re interested in receiving messages.

Under the Hood

A third niche that venture capitalists are focusing on is the software and infrastructure that powers mobile commerce. Usually, retailers license much of what they need instead of building it from scratch.

One example is the parent company of Digby, a mobile commerce software company in Austin, Texas, that received $2 million from four unidentified investors in July.

Venture capitalists consider companies that provide the picks and shovels of e-commerce as less risky than consumer startups. Marketing costs are lower, they don’t have to spend money on experimentation and aren’t dependent on having a hit product.

“I’m much more bullish on those guys because it takes the risk out of who is going to win,” says Bob Borchers, a general partner with Opus Capital and a former Apple iPhone marketing executive.

The question is whether these different payment providers can offer something that is unique and usable?”

Bernardine Wu

Whatever the niche, Borchers says that picking a mobile commerce startup to back is complicated these days by the number of companies and the speed at which consumers can change their behavior. A company’s years of work could easily be rendered obsolete.

“The challenge has grown in the last 12 months, especially if you are an early investor,” says Borchers, who has invested in Payfone. “There’s a lot of noise and a lot has already been done.”

So far, venture capitalists have been unable to cash in big on the mobile commerce frenzy. Exits have been few.

Only a small number of companies have been sold, and in any case, most of those startups were so tiny that they were operating solely on seed investment. Initial public offerings are out of the question for the near future because most startups in the sector lack the financial heft.

Among the few venture-funded mobile commerce-related companies to be sold is WAY Systems, a maker of software for merchants that want to offer mobile transactions. VeriFone Systems, a publicly traded payments company, made the $9 million acquisition ($6 million upfront and another $3 million if certain performance targets are met) in September.

WAY Systems had received $50 million in funding from Austin Ventures and Bessemer Venture Partners. Given the size of the investment, it’s unclear whether those venture capitalists made a profit in the sale.

Mobile payment companies appear to have the biggest appetite for acquisitions, albeit for small seed funded competitors. Online advertising firms, along with major online retailers, are also considered potential buyers.

In June, eBay paid an undisclosed amount to buy RedLaser, an application, from Occipital, a seed funded startup. The RedLaser app allows consumers to use their mobile phones to scan product bar codes in bricks-and-mortar stores. Users can then compare store prices with those offered online.

Of course, investing in a dud is always a risk when investing in a new technology trend. To be sure, mobile shopping companies aren’t failing en masse, but there have been some flops.

In 2007, Opus Capital invested in Hingi, an Israeli startup that developed a service that automatically recognized music played on the radio and television, so that users could then buy the songs on their mobile phones. The company is now defunct

Borchers says Opus had invested only a small amount of money in Hingi as part of a seed round and that it was done prior to his joining Opus. Mobile payments, he says, weren’t advanced enough at the time to make the service convenient for consumers.

The lesson, Borchers notes, is that the user interface of mobile services must be well thought out, especially given the small screens on mobile phones and limited patience people have for typing on a tiny keypad or touch screen. Nobody wants a hassle when they try to buy something.

“People have to pay attention to the experience as much as they focus on making the greatest-performing technology,” Borchers says.