A Great Momentum for Mobile Commerce

By Olga Kharif | Businessweek

Mobile commerce is gaining momentum as consumers get comfortable with ordering all sorts of products by cell phone and companies such as Papa John's watch sales climb.

It's never been easy making mobile-commerce predictions. Researchers who tried to forecast how much we would spend on goods and services via cell phone came up with all sorts of projections that were wide of the mark. Early in the decade, published reports cited forecasts that by 2006 more than one-quarter of U.S. cell-phone users would use the device to buy content and physical goods.

Turns out that by the end of the second quarter, only about 7% of U.S. consumers bought goods or conducted financial transactions via cell phone, according to a Nielsen Mobile survey of more than 90,000 people.

Yet, m-commerce may finally be hitting its stride. And some analysts who in recent years became more conservative in their forecasts are now having to make upward revisions. In January, consultant ABI Research projected North American sales of physical goods ordered via cell phone would reach $544 million this year, up from $346 million in 2008. Now, Mark Beccue, senior analyst at ABI, is considering updating his 2009 forecast to $800 million. "I thought hockey-stick growth was going to come in 2010, but it looks like it's already a hockey stick," Beccue says. "Next year, it will double again."

From Ringtones and Apps to Physical Items

Beccue and other industry watchers are becoming more bullish on m-commerce thanks to the experience of companies such as Papa John's International (PZZA). In mid-2008, the pizza chain began letting customers order food and drinks on a Web site tailored to a cell phone's small screen. By December, customers had used their cell phones to order $1 million in Papa John's products. Papa John's says mobile sales now are rising at an annual tenfold pace. "We continue to be amazed at the velocity of growth," says Jim Ensign, a Papa John's vice-president.

Consumers for years have been placing orders right from their cell phones for such downloadable items as ringtones and games sold directly from service providers including AT&T (T) and Verizon Wireless, owned by Verizon Communications (VZ) and Vodafone (VOD). More recently, they've begun using mobile phones to purchase downloadable applications developed by third-party programmers for use on smartphones such as Apple's (AAPL) iPhone and Research In Motion's (RIMM) BlackBerry.

And now, thanks to the growing popularity of smartphones with rich, detailed Web browsers and easy-to-use keyboards, consumers across the country are finally using wireless devices to buy physical items—not just pizzas and sodas, but also books and clothes and the sorts of things typically associated with in-store browsing or online shopping via personal computer. Retailers that make it easy for customers to place mobile orders and purchases stand to gain, assuming they can ensure the security of transactions and information. So do wireless carriers that make Web surfing part of their monthly service bundles—though they need to ensure networks can handle the extra traffic generated by m-commerce.

Retailers Catching On

Much recent m-commerce growth can be traced to eBay (EBAY) and Amazon.com (AMZN), which last year accounted for about 70% of all mobile sales of physical goods. In September, eBay said its iPhone application alone facilitated $380 million in sales this year. The tool lets cell-phone users search and bid on auction items, receive alerts when they are outbid, and to pay for goods via eBay's iPhone application. At Amazon, which doesn't release mobile sales figures, phone shopping "is becoming more popular all the time," says Howard Gefen, director of the Amazon Mobile Payments Service, which lets consumers pay for purchases via mobile.

Other retailers are getting the m-commerce religion, too. By the end of 2009, about half of established retailers may have mobile Web sites, up from less than 20% in 2008, Beccue estimates. "Really, it's us keeping pace with our customers," says Mike Dupuis, a vice-president for marketing at apparel retailer American Eagle Outfitters (AEO), which launched its mobile Web site in September. "We believe this is a critical place for us to focus our attention."

Mobile content stores' sales are rising at double and triple digits as well. Apple's App Store, which began selling games, e-books, and productivity applications for the iPhone and iPod Touch more than a year ago, in September passed the milestone of 2 billion app downloads.

Smartphone Penetration Increasing

Retailers such as Pizza Hut and Starbucks (SBUX) are using apps to goose sales, too. In mid-September, Starbucks debuted an app that lets customers replenish and check their Starbucks card balances and pay by phone at 16 stores in Seattle and Silicon Valley. This and another new app, which allows fans to find the nearest open Starbucks and to browse its menu, were downloaded more than 500,000 times in their first week, says Starbucks Chief Information Officer Stephen Gillett. "We've seen a very, very high interest from customers," he says. The coffee chain is developing applications for Research In Motion's BlackBerry and Nokia (NOK) phones as well.

A big m-commerce driver is increased adoption of smartphones capable of Web browsing. In the second quarter, 28% of all handsets sold in the U.S. were smartphones, up from 19% a year earlier, according to consultant NPD Group. And more Americans will be able to gain access to the mobile Web soon. One-third of consumers without a Web-enabled phone plan to purchase such a device within the next year, according to a survey of 3,305 U.S. consumers conducted in March by comparison shopping site PriceGrabber.com. The site plans to release its own iPhone app by the first half of 2010.

Many consumers use their smartphones for shopping when they are nowhere near a PC or a physical store, such as during the work commute, while waiting in line for a cup of coffee, or while taking the dog for a walk. "It just allows them to do more during the busiest part of their day," says Laura Conrad, president of PriceGrabber.com.

Visa Rolling Out a Mobile App

Others are moving away from PCs. "A large portion of the customer base is totally replacing their online experience with mobile," says Ensign of Papa John's. "We think a lot of the times they were customers of Papa John's [before] but ordered from other restaurants, too. But now there's a new convenience with Papa John's, and we are getting a greater percentage of their purchases."

To succeed at m-commerce, retailers and carriers need to persuade consumers they can be comfortable giving sensitive information over mobile phones. "The biggest hurdle is privacy and security," says Paul Kultgen, a director at consultant Nielsen Mobile. "Consumers haven't embraced supplying their credit card." Many carriers let users charge purchases to phone bills. Payment providers such as eBay's PayPal and Amazon are trying to make mobile purchasing more convenient. On Oct. 5, Amazon introduced its Mobile Payments Service, which helps mobile app developers and mobile Web site owners let customers pay using shipping and credit-card information stored on Amazon.

Credit-card companies are working to make using cards via mobile device more convenient as well. Later this year, Visa (V) will release an app that stores a user's credit-card information on a mobile phone and, when a consumer goes to a retailer's mobile Web site to pay, "pre-populates" the payment field, says Tim Attinger, global head of product innovation at Visa.

Carriers Must Boost Capacity

M-commerce success will also hinge on reliability and affordability of wireless broadband. U.S. wireless carriers' networks are getting overloaded as users adopt bandwidth-thirsty devices like the iPhone. In an Oct. 9 note, Sanford C. Bernstein analyst Craig Moffett notes that the iPhone is "morphing into a kind of predator parasite on the wireless network, sucking out the value and leaving networks gasping for air."

AT&T, the U.S. iPhone carrier, has taken steps to improve the reliability of its network. It and other service providers will need to ensure their equipment can continue to handle what's likely to be much greater demand as consumers make more transactions via mobile phone.

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Kharif is a senior writer for BusinessWeek.com in Portland
Source: Businessweek