Google And Verizon May Be Fighting Over Hardware, Not Mobile Wallets

Why won't Verizon let users install Google Wallet on its soon-to-be-released Galaxy Nexus phone? It might be that Verizon is defending its ISIS partnership and the mobile wallet it will roll out sometime next year. But there's a simpler explanation: Only one mobile wallet can control the NFC Secure Element that stores payment-card data. If that's Google Wallet, then it can't be ISIS or any mobile-payments scheme that Verizon controls directly.

And although there's nothing to stop Verizon from adding the necessary hardware for lots of mobile wallets, that's not likely to happen unless Google opens its own corporate wallet.

On Tuesday (Dec. 6), Verizon said Google Wallet won't be built into its new phone and that Google's mobile wallet app also won't be available for download to the phone—even though the phone comes with a near-field communication (NFC) chip and Google Wallet is the only NFC-based system that's currently used by any substantial number of U.S. retailers.

That led to a cascading series of statements from Verizon and Google—neither of which actually said very much—and much more ink spilled as everyone from bloggers to Bloomberg and The Wall Street Journal tried to parse the tight-lipped statements.

Actually, along the way Verizon spilled the beans about exactly why it wouldn't let Google Wallet be installed on its phones. The statement was just so terse—and lacking any technical explanation—that few people understood it.

Here's what Verizon said in a statement: "Google Wallet is different from other widely available M-Commerce services. Google Wallet does not simply access the operating system and basic hardware of our phones like thousands of other applications. Instead, in order to work as architected by Google, Google Wallet needs to be integrated into a new, secure and proprietary hardware element in our phones."

That's the NFC "Secure Element" (SE) that's used by Google Wallet (and every other NFC-based payments system, including ISIS) to store encrypted payment-card data. It's built into the Galaxy Nexus phone, and there's no technical difficulty in Google Wallet grabbing control of the SE to secure the payment information it uses.

Here's the problem: Only one mobile wallet can control an SE. It can allow other apps to use the SE to store information, but somebody's got to be in charge. If Google Wallet controls the SE, then it can't be controlled by ISIS or any mobile-payments scheme that Verizon controls directly.And if Verizon hands over control of the SE built into its phone to Google Wallet, it would have to add another SE to run ISIS or its own payments system.

That's not actually such a big deal. A report earlier this year from ABI Research said that by 2016, almost half (41 percent) of NFC-equipped phones will have more than one SE inside. Some of those will be built into the phones; others will come in the form of SIMs or microSD cards. All the SEs can use the same NFC chip, and (unless someone botches the software) there's no reason any of them should conflict with the others.

But there's only one SE in the phone Verizon is about to ship. And Verizon isn't likely to just hand over the keys to Google.

At the same time, Verizon can't just refuse to deal with Google. That would open the door to the sort of ugly fight—and probable government scrutiny—that neither Verizon nor Google wants right now. That's why Verizon also said this week that it's "continuing our commercial discussions with Google on this issue." That's "commercial" as in "money can't buy happiness, but it can probably buy a second SE."

Is Google likely to cough up cash for control of a Verizon phone's SE? It might be. Verizon can actually put an SE on the SIM that goes into the phone, and then use that when ISIS goes live sometime next year. That would free up the phone's built-in SE for Google. Or Verizon might prefer (or be contractually obligated) to keep the built-in SE available for ISIS, which would mean it would take a lot of Google cash to break the logjam.

(Putting Google Wallet on this Verizon phone would have been a lot simpler for Google if the phone's designers had built a microSD slot into it, so yet another SE could be easily installed. Unfortunately, the Galaxy Nexus has no microSD slot. Who was responsible for that oversight? This phone was designed by Samsung—and Google.)

In the end, there probably won't be a big battle over Verizon's phone and Google Wallet. With enough technology and enough money, there's plenty of room on these phones for both Google and ISIS. And they've both poured enough resources into their mobile wallet efforts that they can't afford to annoy customers or regulators—or retailers—any more than necessary.