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Gp Bullhound Research   Mobile Payments Its Payback Time   June 2011
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Gp Bullhound Research Mobile Payments Its Payback Time June 2011

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With over 5 billion mobile phones users globally (vs. only 2 billion who have credit cards), mobile payments are poised to eclipse all traditional forms of payment....

With over 5 billion mobile phones users globally (vs. only 2 billion who have credit cards), mobile payments are poised to eclipse all traditional forms of payment.
While this technology has been around for nearly a decade, it is only recently that mobile payments have emerged as the ‘next killer app’.
GP Bullhound, the Technology Investment Bank, yesterday organised a breakfast roundtable to discuss the future of mobile payments. After an introduction by Julien Oussadon and Amanjit Dhami from GP Bullhound the attendees were treated to an in-depth talk given by James Patmore – Managing Director, EMEA, of boku, one of the leaders in the mobile payments industry.
The rise of social networks in the western world, alongside the popularity of online, social and casual games has created a large and growing opportunity in the mobile payments space. Furthermore, the proliferation of mobile across the emerging world has also led to the uptake of peer-to-peer mobile payments services. These markets are skipping a payment generation and aligning themselves with the Western world. It seems that, due to this new model, everybody is trying to get involved from mobile ad network InMobi’s SmartPay solution to Visa’s hotly anticipated mobile payment service.
As James Patmore commented, mobile payments are ideal for those without credit or debit cards. Surprisingly, credit/debit card penetration is still low even in Western Europe whereas there are 5 billion mobile phone users globally. They also provide a more immediate means of payment, allowing users to transact at the point of purchase decision.
James Patmore added “m-commerce will eventually supersede all other forms of payment from cash to credit cards and is potentially a trillion dollar industry”.

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    Gp Bullhound Research   Mobile Payments Its Payback Time   June 2011 Gp Bullhound Research Mobile Payments Its Payback Time June 2011 Document Transcript

    • SECTOR UPDATE   MOBILEMOBILE PAYMENTS – IT’S PAYBACK TIMEMobile Payments Entering the MainstreamThe rise of the social networks in the western world, followed by their flooding of online,social and casual games has created a large and growing opportunity in the mobilepayments space. The desire to monetize these games as they started to gain industrywide traction in 2009 led to the development of micro payments to suit social gamingplatforms. These payment systems had to be implemented as the likelihood of using acredit card to transact on a micro transaction was unlikely. This then led to theestablishment and growth of a new age of mobile payment pure play providers.There are around two billion people globally who have credit cards, but five billion withmobiles – the mobile opportunity is larger and has the potential of cannibalising anestablished payment method. The proliferation of mobiles across the emerging worldhas also led to the uptake of peer to peer mobile payment services. These markets areskipping a payment generation and aligning themselves with the western world. Thisgives mobile payment providers a global landscape to penetrate.Consolidation Wave Looming for Suppliers and CustomersThe mobile payments landscape is attracting the attention of a large number of playersfrom different sectors, resulting in a fragmented market today with only a handful ofplayers with scale. We expect M&A to naturally follow, with market rumours that bothGoogle and Apple have been bidding for US mobile payments specialist Boku. TheFrench mobile payments business of online media group Hi-Media has also beenformally announced for sale, with the current market appetite and interest being a keytiming factor. It has been reported that Zong is pushing aggressively to expand itspartnership base, trying to connect in as many geographies as possible. In order toexpand globally, resources and the best management teams will be required. Wetherefore believe that the weaker players with limited financial power will suffer.Payment platforms naturally suffer from commoditization (to differing degrees), withmobile payments being no different. However, in order to avoid this margin pressure,scale along with direct operator relationships will be important. The transition frompurchasing digital goods through the mobile to physical products such as train / concerttickets will also fuel consolidation amongst platform providers. Furthermore, merchantssuch as Bigpoint and Habbo (both gaming companies) have had to partner with multiplevendors in order to ensure that their payments solution has sufficient geographiccoverage for their user base. This offers a key opportunity for consolidation – merchantsare already pushing for this today.In this report we aim to delve into both the remote mobile payments space, along withthe mobile banking / peer-to-peer space – arguably the most developed areas where weexpect to witness the greatest innovation and consolidation over the next few years . Important disclosures appear at the back of this report. GP Bullhound LLP is authorised and regulated by the Financial Services Authority
    • Market Fundamentals Advancing Growth The mobile payments sector has emerged as a fast growing segment in the mobile data industry, with volumes growing at a CAGR of 56%, from $108 billion in 2010 to $633 billion 1 in 2014 . This rapid growth has predominantly been fuelled by the social gaming phenomena where revenues are generated from the sale of virtual goods, lead generation offers, as well as advertising. Revenues from virtual goods accumulated to $510m in 2010 2 in the US alone, with revenues set to reach c. $650m in 2011 and over $790m in 2012 . EXHIBIT 1 - MOBILE MARKET FUNDAMENTALS Source: GP Bullhound Technology and Consumer Behaviour Driving Diverse Mobile Use There are a number of technology trends which have surfaced and resulted in a more favourable environment for the development of mobile payment services. Firstly, we can consider the rise of global mobile handset shipments, which is set to reach 1.8 billion in 2015, up from 1.3 billion in 2010, representing a CAGR of 6% (Exhibit 2). EXHIBIT 2 – MOBILE HANDSET SHIPMENTS – W ORLDW IDE 2,000 1,752 Mobile Handset Shipments (million) 1,688 1,600 1,600 1,482 1,375 1,308 1,166 1,200 800 400 0 2009A 2010A 2011F 2012F 2013F 2014F 2015F Source: Portio Research Ltd.1 Source: Portio Research Ltd .2 Source: eMarketer GP Bullhound LLP
    • The smartphone has also risen as the handset of choice. This has resulted in users havingaccess to Internet on the go and through high quality usable interfaces. The number ofglobal smartphone shipments is set to grow at a 2010 – 2012 CAGR of 45% (Exhibit ). EXHIBIT 3 - SHIFT IN MOBILE PHONE TECHNOLOGY TO SMARTPHONES 700 Global Smartphone Shipments 619 600 500 447 (million) 400 295 300 191 200 145 100 0 2008 2009 2010 2011 2012 Source: Portio Research Ltd.Market information also tells us that the number of mobile Internet users is set to exceedthe number of desktop Internet users by 2014 (Exhibit 4). Therefore, as people spendmore time browsing the Internet and transacting, the ability to be able to pay for goods andservices via mobile will become increasingly important. EXHIBIT 4 - MOBILE INTERNET USERS OVERTAKING DESKTOP 2.0 Internet Users (billion) 1.6 1.2 0.8 0.4 0.0 2007E 2008E 2009E 2010E 2011E 2012E 2013E 2014E 2015E Mobile Desktop Source: Broker ResearchThe iPhone and other smartphones have enabled the consumption of diverse media overmobile, such as music, games, banking and shopping. It can be seen that iPhone andother smartphone users represent 22% and 16% of total US mobile subscribersrespectively who are conducting personal banking on their mobiles (Exhibit 5). As theemergence of viable mobile payment solutions occurs, we will see a large number ofsubscribers using their mobile also for commerce. GP Bullhound LLP
    • EXHIBIT 5 - DIVERSE CONTENT CONSUMPTION ON MOBILE DEVICES 70% 65% iPhone 61% 58% 60% 52% 48% 48% Smartphone % of US Mobile 50% 43% Subscribers 40% 42% 40% Average mobile 40% 35% 31% user 30% 23% 22% 21% 16% 18% 20% 14% 15% 14% 14% 12% 12% 12% 9% 9% 10% 3% 4% 4% 2% 0% Music Games Social Web Search Instant News Video Personal Restaurant Online Networking Messaging Banking Guides Shopping Source: Broker ResearchThe emerging markets present a large and growing opportunity due to the sheer growth ofmobile subscribers (Exhibit 6). Africa and Middle East is set to grow at a 09-15 CAGR of10.4%, as opposde to 2.0% in the western world. This proliferation has led to the uptake ofmobile related services such as peer to peer payments. It is very likely that these regionsmay skip a payment generation. This will be especially true in emerging markets wherecredit card fraud is a real issue. Mobile payment providers have a truly globallandscape to penetrate. EXHIBIT 6 - MOBILE SUBSCRIBERS - REGIONAL 8,000 7,352 7,038 Mobile Subscribers (million) 7,000 6,675 406 6,263 395 382 630 5,787 623 6,000 368 613 687 5,255 352 601 664 638 563 5,000 4,656 335 585 608 557 1,228 560 549 574 1,156 314 541 1,076 4,000 538 535 531 989 494 518 889 785 3,000 500 678 3,838 3,644 2,000 3,417 3,156 2,857 2,521 2,132 1,000 0 2009A 2010A 2011F 2012F 2013F 2014F 2015F Asia Pacific Africa & Middle East Western Europe Latin America Eastern Europe North America Source: Portio Research Ltd. GP Bullhound LLP
    • The development of infrastructure, along with the uptake of mobile devices has meant thatthe mobile payments market now represents a compelling sector for investors andstrategics to monetize. This market is set to grow at a CAGR of 56% between 2010 and2014 to represent a $633 billion opportunity by 2014 (Exhibit 7). EXHIBIT 7 – MOBILE PAYMENT VOLUMES – W ORLDW IDE 700 633 Mobile Payment Volumes (USD 600 500 416 billion) 400 300 270 200 171 108 100 69 0 2009A 2010A 2011F 2012F 2013F 2014F Source: Portio Research Ltd.The number of mobile payment users is set to grow at a CAGR of 43% between 2010 and2014, representing 490 million users by 2014. This correlates to a penetration of 8% inmobile payments in 2014, demonstrating the upside that still exists in this market place(Exhibit 8). EXHIBIT 8 – MOBILE PAYMENT USERS AND PENETRATION – W ORLDW IDE 700 9% 7.8% 8% Mobile Payment Penetration (%) 600 490 7% 500 5.6% 6% Users (million) 400 5% 4.1% 341 300 4% 3.0% 237 2.3% 3% 200 1.8% 166 116 2% 100 81 1% 0 0% 2009A 2010A 2011F 2012F 2013F 2014F Source: Portio Research Ltd.Certain commentators are predicting that companies which already have masses of storeduser payment information such as PayPal, Amazon and Apple are likely to dominate interms of market share. It is our belief however, that the early winners will be those pureplay companies who are specialized in the payments field with a strong installed directoperator network. As we have witnessed in many other mobile sub sectors; establishingand managing direct operator relationships and the associated revenue share, servicequality and end user data will be critical to establishing scale and profitability. Whenpayment transactions are concernced, time will be a critical factor affecting the userexperience. We note with interest that a number of the leading players, such as Zong, GP Bullhound LLP
    • 3 Bango, Neomobile and Mindmatics, have a legacy business which has already established much of the infrastructure required for a successful mobile payments business. Those starting from scratch will have a steep learning curve ahead as they establish their operator relationships. Similarly to SMS, mobile payments might over time become a commodity leading to the erosion of margins. Again, we believe only companies which have secured strong and direct relationships with the operators, and are processing large volumes will be able to defend their dominance and price points. The mobile payments landscape is rapidly taking shape with numerous emerging venture backed payment providers positioning against a small group of established players. All participants are jostling to secure prominent and sustainable positions by diversifying their offerings. The mobile payments market consists of various subsectors with very different value propositions to the end user. We have mapped out the key sub sectors in Exhibit 9. EXHIBIT 9 - MOBILE FINANCE TAXONOMY Remote Mobile P2P Mobile Payments Payments Mobile Finance Providers Handset Contact Mobile Banking Mobile Payments / Zetawire Source: GP Bullhound Remote Mobile Payment Providers – this involves using the mobile phone as a channel to make payments online with the resulting charge applied to the end user’s mobile phone bill, credit / debit card, specified account etc. This area has seen rapid growth due to the ability to transact online without the need for a credit card, along with the boom of virtual goods. Mobile payments in this space are generally used for micro transactions, i.e. transactions below a unit value of ~€40. Key players in this space include Zong, Boku,3 Neomobile is a current GP Bullhound client GP Bullhound LLP
    • Neomobile, Mindmatics, PayPal Bump, ebay and Google checkout amongst others. Thisarea receives the most analsyst attention due to societies continuing fascination anddeeper integration into the Web 2.0 Digital Media landscape. There are a multitude ofuntapped digital media monetization opportunities, which will ensure rapid growth forplayers acting in this space.Peer to Peer Mobile Payment Providers – involves sending money from one mobileaccount to another. This has applications in emerging markets where it can be used as apayment transfer method between individual buyers and sellers. Key players in this spaceinclude Obopay, KushCash and Luup. It is our belief that strong double digit growth in thissub sector will continue to be driven by the developing markets where the mobile offers theonly viable route for secure payments due to the great deal of credit card fraud.Mobile Banking Providers – provide a new interface between customers and their bankaccounts, utilizing mobile phones in order to complete simple transaction requests such aschecking account balances and making payments. This has become popular in emergingmarkets, specifically around preventing account fraud. Key players include Citi Mobile,JPMorgan and Wells Fargo amongst others. Mobile banking has been slow to take off indeveloped regions, but stands to gain in the emerging markets where often the best formof identification for a banking customer is their mobile number, as opposed to their homeaddress.In Store Mobile Payment Providers – This allows users to scan their mobile phonesagainst devices at a merchants’ points of sales terminal in order to finance the purchase ofphysical goods. Key players in this space include Mocapay and Mobile Lime. Theconvenience of this payment route from an end user perspective will further erode thecredit card foothold and will mark a key milestone in the maturity of the market – when aconsumer is frequently using their mobile device to purchase physical goods in tandemwith virtual ones. However, the expensive and current primitive development of technologyand services in this space means that this area of payments will require significantinvestment over the coming years.The micropayments market has seen the most media hype and attention, with companiessuch as Zong, Boku, Neomobile, Allopass and Mindmatics offering a variety of services.In most of Europe, mobile payment companies are only allowed to bill for digital items thathave a value of up to ~€40 – i.e. micropayments. The definition of “digital” goods howeveris often pushed by mobile payment providers from the usual gaming virtual goods to itemssuch as concert and public transport tickets (i.e. into the realm of the credit card). Virtualgoods or items which have a marginal cost of production will remain popular for mobiletransactions. All of these payments go directly onto the consumer’s mobile phone bill, i.e.constitute “on operator” billing.As the market matures, will we ever be in a situation where one can buy anything, andcharge it to one’s mobile phone bill, e.g. a TV from Amazon? Can the mobile phone billmerely become another means by which to do one’s shopping? A mobile operator wouldultimately require additional infrastructure both in forms of technology along with supportpersonnel and billing capabilities to be able to facilitate payments for larger items from avariety of sources. Compliance, risk systems and regulation would be necessary to allow GP Bullhound LLP
    • high value transactions to take place. Mobile operators are not however, likely to movelightly into the business of physical goods, which is a substantial deviation from their corebusiness, unless the ultimate benefits far outweigh the operational, logistical andregulatory challenges which lie ahead. However, the micropayment market does representa significant opportunity for operators who are looking to offer value added services due tothe slowdown in their core voice and traditional data business. In Sweden, ~40% ofoperator revenue is currently generated from micropayment purchases of publictransport tickets. This is possible in Sweden, as the travel companies are being charged~7% by the operators for this service (the cost is not passed onto the end users).From a physical goods merchant’s perspective, the ultimate payout they receive wouldhave to be much higher than is currently on offer to entice them into offering customers themobile payments option. This however, we believe will happen over time with the westernworld converging to the higher payout models of Asia.We believe the only way for operators to be able to take a share of the macro paymentsmarket would be through the establishment of a credit card like system between the globaloperators. This nearly took place, where in February 2003, T-Mobile, Orange, andVodafone formed a new Mobile Payment Services Association (MPSA). This associationhad the goal of delivering an open, interoperable and commonly branded solution forpayments via mobile phones, designed to work across all operator networks. In June2003, the consortium re-branded itself as SimPay. In February 2005, Amena andProximus joined the consortium. SimPay planned to create a pan-European frameworkwhereby merchants and content resellers would be able to charge for products andservices directly to a subscribers bill. However, in June 2005, SimPay decided, "followingthe decision of one of its founding Members not to launch SimPay for the foreseeablefuture,...not to pursue its activity on a pan-European scale as originally planned." Activitieswere put on hold effective June 24, 2005. In spite of this, the UK SimPay foundersVodafone, Orange, Three, o2 and T-Mobile started work in 2005 on a project called"Payforit" which was launched in 2007 to provide similar services in the UK.Regulators in developing countries appear to be more relaxed around mobile billing fornon-digital goods. Mindmatics issued a press release in 2010 stating that they can bill fornon-digital goods in 28 countries (mainly developing). However, there are currently nopractical applications for physical goods billing in those markets since operator payoutsare often well below 50%.Social Networks Driving First Wave Growth in the MicropaymentMarketSocial network application developers have been successful at enticing users into theirservice through free models (freemium), and creating revenue streams through sellingsubscriptions and virtual goods. Given the reported conversion rate through mobile of upto 10x that of credit cards, take up of the services by the merchants has been rapid. Beforethe explosion of the social network and social gaming companies, mobile payments wereonly used to pay for ringtones, logos and pictures, i.e. where the consumer waspurchasing mobile goods and services. With the success of online gaming and socialnetworks came the success of the mobile micro payments landscape which grew around GP Bullhound LLP
    • the desire to purchase virtual goods. Early pioneers in this payment channel includedZynga and Playfish.It is clear that mobile micropayments will ultimately remain the dominant payment methodfor social networks and gaming companies due to its ease of use, high conversion ratesand mobile savvy demographic.While 2010 was shy of optimism, we see 2011 as the year when new payment channelswill start showing ROI on the hundreds of millions that have been invested so far.  Within the financial services industry, BNP Paribas and Visa launched a mobile payment pilot in France to test contactless technology  Earlier last year, Barclays partnered with Orange to offer a mobile payments service. In the US, AT&T, Verizon and T-Mobile partnered with Barclays and Discover card to launch a mobile payments services  In 2009, Citi India launched a P2P pilot based on Nokia’s Obopay technology  Most recently (January 2011), Fifth Third Bank announced a partnership with CashEdge to offer mobile payments to its customers. This service enables its customers to make payments from their Fifth Third online banking account or cell phone to any person who has an email address, a cell phone number or bank account number. Fifth Third Bank envisages its customers will be using this mobile payment service to pay babysitters, landlords and such likeWhile the technology has been around for more than a decade and the user perceptionhas remained the same, the threat of disintermediation cannot be discounted as newentrants such as PayPal and Google make their way into mobile payments. As a result,banks and telecom operators are taking a closer look at alternative payment technologies.It is our belief that the credit card might ultimately suffer.Japan and South Korea have been among the earliest adopters of mobile payments andhad their fair share of disappointments before mobile payments became popular only inthe past five years.Retail financial markets are heavily regulated and more focused on ensuring privacy andsafety. On the other hand, the telecom sector is relatively young and in comparison a richsource of technology innovation. Developed markets have reached saturation in bothsectors, hence it is important that the technology and service can foster new customers /business lines without cannibalizing their existing revenue streams.Market PotentialEmerging market leader Safaricom, a Kenyan mobile operator, posted 40% higherrevenue over last year on the back of mobile money initiatives like M-Pesa and M-Kesho.M-Pesa was originally conceived by part owner Vodafone and the UK Government bodyDFID as a micro-finance initiative for repaying P2P loans. The absence of a competingpayment infrastructure and having SMS technology, drove fast customer adoption whichspurred competition among African central banks to launch mobile payment services,resulting in opportunities from mobile payment vendors like Fundamo, mBlox, Mi-Pay andSybase. GP Bullhound LLP
    • In developed markets, online retailers such as Ocado, Argos, Nike and Net-A-Porter.comhave seen success with a mobile payment option for orders on their mobile sites. Mobileticketing has been used by event management, food, retail and transport companies, andthey are also starting to introduce mobile payments to provide a true on-the-go experienceto the customer.Mobile Internet and SMS-based payments have achieved strong growth and penetrationowing to their ubiquity, implementation ease and the growth of mobile commerce.Contactless mobile payments look promising; however, issues with technologystandardization, capital investment, competing infrastructure and security mean this doesnot present a compelling business case to POS merchants as well as banks.Technology & Security Developments Critical for Next Phase ofMarket GrowthSMS and mobile Internet payments do not store any user credentials on the mobile device.Companies like mFoundry, Firethorn, Monitise and Boku enable mobile Internet or SMS-based payments through either a preloaded money wallet or by linking paymentinstructions to a bank or debit/credit account. These payment channels can be easilyintegrated with the existing infrastructure, and do not require huge investments or anysignificant change to the business process.Contactless technology-enabled mobile phones store the application information anduser’s credentials on a secure element attached or embedded inside the device. SIMvendors such as Gemalto, Oberthur and NXP are working closely with devicemanufacturers like Nokia, Sagem, Samsung and Motorola on contactless enabled phones.Nokia has promised that all of its future smartphones will be NFC-enabled. Thecontactless value chain has also created space for companies like Venyon, Cassis andViVOtech, which provide OTA (“Over-the-air”) provisioning of NFC-enabled (“Near FieldCommunication”) SIM phones. From the acquirer standpoint, contactless readers like VisaPayWave and MasterCard Paypass are required to read the contactless device.Mobile payments require additional security, authentication and fraud managementbecause the mobile device could be stolen or the network itself could be hacked.Payments processors such as Equens, Vocalink and Metavante have developed mobilepayment platforms for both issuers and acquirers. The lack of critical mass has meant thatthe price points for contactless payments will remain high and hence prohibitive.Boundaries Blurring Between Key Players in the EcosystemGSMA has identified 79 live mobile money deployments worldwide, in reality it should bedouble this number, since most bank-led deployments have not been counted. Successfuldeployments in the UAE, UK, India and Central Europe have been missed. Telecomoperators followed closely by mobile payments technology vendors have been the mostactive partners in consortia-led deployments. The global development organization GGAP,supported by the World Bank and over 30 government development organizations, seesmobile payments and banking as a necessary tool for bringing financial inclusion to thebillions of unbanked people across the globe.It is becoming difficult to distinguish banks from telecom operators, and vice-versa.Banxafe, supported by leading Belgian telecom operators and RaboMobiel, owned by GP Bullhound LLP
    • Rabobank in the Netherlands, provides special SIM cards enabled with a banking accountthat allows users to buy from vending machines, pay at restaurants or pay parking usingSMS or NFC. To overcome financial regulations, non-financial companies have beenknown to buy banks. China Mobile bought Shanghai-based Pudong Bank to expand itsmobile payments business. Western Union and MoneyGram have found that working withseveral telecom operators and merchants in emerging markets offers them a wider reachand quickens the money remittance cash-out process.Direct Billing – a Key Evolution in the Customer ExperienceThe arrival of the application stores provided consumers with access to a vast array ofdigital content via a new channel. Direct billing which was pioneered a few years agoessentially provides a real time payment experience with a great degree of flexibility. SincePremium SMS (PSMS) is an offline model, which is essentially by nature a messagingprotocol, not a payments protocol, the direct billing method stands to gain as it gives theuser a similar experience to an ecommerce purchase online. It also gives the merchant areal time experience which allows them to prevent bad debt which often accumulatesthrough PSMS payment methods. Direct billing can be seen as the evolution of microtransactions going forward.There are a number of drivers which will ultimately lead towards the increased traction ofdirect billing methods. Firstly, operators would like to offer users a one click paymentexperience similar to that which exists in application stores already. Operators also feelthey have been cut out of Apple’s value chain, and are simply being used to provide theinfrastructure. Therefore, mobile operators have seen wholesale revenues decrease onboth PSMS and WAP based billing, and are urgently seeking measures to strengthen theirposition in the ecosystem. In order for direct billing to be a real challenger, it will essentiallyneed to evolve to accommodate the purchase of physical goods alongside digital goods.Certain payment providers have charged €100 on a mobile phone bill and not had anycomplaints from the regulator. Therefore, it is their view that the payments landscape willevolve to allow for these higher value transactions. In the UK the operators allow billing ofphysical goods already up to a limit of ~£30.In the direct billing scenario, payment companies have successfully pushed for higheroperator payouts due to the lack of revenue leakage which occurs through PSMS.Consumer Uptake - Credit Cards are Not Always the AnswerCredit card details are considered as highly confidential, and with online credit card fraud areal possibility, entering one’s details for micro transactions has not been popular. There isalso a time value associated with transacting using a credit card, as it means reaching forone’s wallet etc. Being able to complete transactions by entering your mobile number isquick and easy, and generally distracts a person from thinking too hard about theparticular buying decision – the goods in question are of a low value. The easier it is tomake a purchase, the more likely it is that people tend to spend on impulse.Moreover, the target demographic for mobile payments include both young persons whocurrently do not have credit cards, along with those who have credit problems. There are GP Bullhound LLP
    • around two billion people globally who have credit cards, but five billion globallyhave mobile phones.Users are already accustomed to being charged on their mobile phone bill, or buying creditin the shop, i.e. associating payments with their mobile. Therefore, using their mobilenumber to then make payments should come as a natural extension.Higher Conversion Rates Driving Merchant BehaviourOne of the key selling points for merchants to entice them into the mobile payments spaceis the higher conversion rates, i.e. users who successfully transact. Merchants GPBullhound have spoken to discussed conversion rates of 5-10x higher whenoffering mobile payment methods as opposed to traditional credit card input.Conversion rates are also linked to operator coverage. A mobile payments company canonly offer coverage of a user base that is accessible through their operator relationships.This is a key point for merchants to bear in mind when choosing a payment provider.Sustainability of Revenue ModelThe mobile payments value chain can be thought of as shown in Exhibit 7. The mobilepayments provider ultimately connects the merchant with the end user, handling all thecomplexity associated with multiple aggregator / merchant partners on one side, andmultiple mobile operators on the other side. The operator payout differs greatly dependingon the geography, as it is directly linked to the mobile market dynamics of the country inquestion.Speaking with a number of mobile payments providers, it is clear that the operatorrecognizes the fact that they need to increase payouts both in order to remain competitive,and also to promote growth of the volume of mobile payments which will ultimately benefittheir own income. Developed market operators have seen a decline in their core voice andbasic data business, pushing them towards looking at mobile payments offerings seriously,and being dynamic with payouts which have reached ~85% already in some regions. Thedeveloped mobile markets in Asia already have payout ratios around the 90% region and itis likely that western developed markets will reach the same level over time. EXHIBIT 3 – MOBILE PAYMENTS VALUE CHAIN n n and Revenue Players Delivered and User Delivered Charged Service Users Service Shared 1 1 Mobile Mobile n Merchant Aggregator Payments Operator / Users n Provider Web Brand Source: GP Bullhound GP Bullhound LLP
    • Revenue Share in Developing Markets following a Similar Path tothe Western MarketsIn the developing markets such as India and Brazil, mobile operators are spoilt byincreasing mobile penetration and growth of both basic voice and data services. The valueadded services market is not one they appear to place focus on, due to the ever increasingrevenue streams and high margins they are already generating. The incremental benefitsof offering value added services do not outweigh the implementation of such services, andoperators are also not currently prepared to share their margins on these products.Operator payouts in these markets tend to be sub 50%, thus detracting merchants fromusing such services. Individual market dynamics also need to be taken into considerationwhen offering mobile payment services, with markets such as Brazil imposing additionalgovernment taxes, which mean the operators need to offer higher payouts in order toattract merchants.As the subscriber base of operators increases, and price competition occurs in themarket (as has been seen in developed regions already), emerging market operatorswill look to offer alternative services and mobile payments will become a key focusarea.Innovation Required to Avoid CommoditizationLike any payments business, mobile payment companies will see their margins comeunder pressure over time unless they have a clearly differentiated offering.In order to win in the long term, providers will need to have direct operator relationshipsand a large volume of transactions going through their platform, or offer a value addservice on top of the payments piece. We are seeing a number of the leading playersoffer integrated services where they combine the core offering with consultancy,user acquisition and service design to lock in clients and enhance margins .Consolidation in the mobile payment market is accelerating. VC-backed company Bokucontinues to fuel its growth with the acquisitions of Paymo and Mobillcash. The deals werelargely a way for Boku to gain customers and technology and expand its global footprint. Itis critical for mobile payments companies to achieve critical mass in order to emerge fromthe plethora of rivals to establish themselves as credible leaders. Rumours have alsosurfaced that Boku was in the middle of a bidding war from giants Apple and Google for areported five times revenue.The mobile payments business of online French media group Hi-Media has also beenformally put up for sale, with the current market appetite and interest being a key factor inthe timing of the sale. While consolidation is currently happening at a micro level, weexpect that the two or three leaders of the space will ultimately be acquired by a largerstrategic acquirer (e.g. Obopay/Nokia).While Apple is managing its development through its iTunes platform, it is our belief thatother players such as Google, Nokia, RIM, Microsoft, Palm and Facebook will be morelikely to acquire than build so as to catch-up with Apple. GP Bullhound LLP
    • Neomobile acquired OnebipNeomobile acquired Onebip to strengthen their position in the m-commerce space. Byintegrating Onebip, a leading m-payment solution for game publishers, social networksand online merchants, Neomobile becomes a “one stop shop” for web merchants in themobile world. The acquisition will create one of the Top 3 mobile commerce players inEurope. Onebip offers a user friendly mobile payment solution to monetize digital goodsand services. Onebip also allows users (more than 2 million accounts as of transactiondate) to make online payments through mobile carrier billing as a powerful and simplealternative to the credit card or other payment options. The technology developed byOnebip coupled with Neomobile’s relationships with mobile carriers, especially in keyEuropean and LatAm markets, will deliver value to international merchants.PayPal acquires Fig CardPayPal recently acquired Fig Card Corporation (April 2011), cementing its focus on mobilewithin the payments landscape. Fig Card Corporation provides mobile payment solutionsfor merchants in the United States. Its solutions allow customers to purchase goods usingtheir mobile phones. The company was founded in 2010 and is based in Boston,Massachusetts. According to the PayPal blog, they were attracted to Fig Card since it had"developed an extremely easy way for merchants to accept mobile payments in stores byusing a simple and very low cost USB device that plugs into the cash register or point-of-sale terminal." Once the merchant added the USB device, the customer simply needed theapp to make a mobile payment.GoogleGoogle has made further inroads into the mobile commerce space with the acquisition ofCanadian start-up Zetawire. Zetawire offers an NFC-based wallet service called Walleto,and was acquired in August 2010. Although the acquisition was small, it plays into a muchlarger market. Google also acquired California based Jambool in August 2010 for $70million. Jambool provides a virtual economy by offering a payment API that provides a wayto enable micropayments in an online game or social network application.Google has interests in mobile advertising with Admob; transaction processing withGoogle Checkout and Location Based Services with applications such as Google Maps,Places and Latitude. We see Google acquiring further assets to orchestrate its offering forthe mobile device.Nokia acquires Obopay IndiaIn December 2010, Nokia announced the acquisition of Indian mobile payments solutionprovider Obopay India. This is following on from an acquisition of a 38% strategic stake inthe US topco Obopay, which was completed in March 2009. Obopay helps consumers andbusinesses to purchase, pay, and transfer money through their mobile phone, usingObopays mobile application, text message, mobile Web, widget, or Obopay.com. Thecompany has raised $137 million in funding to date. GP Bullhound LLP
    • The acquisition follows on from a strategic relationship in India which was developed overthe years, where Obopay was able to utilize Nokia’s long term relationships with banks,telecom providers and merchants in order to offer their service.Sybase acquired PayBox SolutionsIn December 2008, Sybase completed the acquisition of German mobile payment softwareprovider PayBox for $11.4m. PayBox allows users to purchase goods and services onlineusing their mobile, as well as conduct mobile banking and mobile peer to peer moneytransfer. The price tag again is small for a company of Sybase’s size, but the strategicvalue is large. Sybase will be able to use its existing mobile infrastructure to expand andexplore the field of mobile payments. Sybase are looking to become a major enabler ofmobile commerce.Belgacom acquired TunzIn March 2009, Belgacom completed the acquisition of a 40% stake in Tunz, the Belgianbased mobile payments solutions system. Belgacom in combination with Tunz went on tolaunch a combined micro payment brand called pingping which went live in March 2009.Belgacom provides the national infrastructure for the service, with Tunz being responsiblefor the technology. GP Bullhound LLP
    • Selected Private PlacementsDate Target Investor(s) EV ($m ) Target Business Description Provides a suite of softw are and hardw are for applications inMay-11 NeoMedia Technologies Yorkville Advisors, LLC 0.5 mobile marketing, couponing, ticketing and paymentsMay-11 Pagatech Goodw ell Investments - A consumer mobile payments service Develops and markets identity-based mobile paymentMay-11 Mobio Identity Systems, Inc. - 3.7 solutionsApr-11 Fig Card Corporation PayPal - Mobile payment solutions for merchantsApr-11 PayCommerce Inc. - - Cloud-based universal business payment solutionsApr-11 My Mobile Payments Limited - 11.3 Mobile payment services in IndiaApr-11 C-SAM - 15.0 Mobile payment technology solutionsApr-11 MobileBest - 50.0 E-payment applications Shanghai Handpay InformationMar-11 Junsan Capital - Mobile e-commerce and mobile payment solutions Technology Payment solutions for car w ash, ticket printer, vendingMar-11 Uphill AinaCom - machines, parking, and door opening applicationsMar-11 ViVOtech Incorporated Motorola Solutions Venture Capital - Develops NFC payment softw are and hardw areFeb-11 Mobile Commerce Ltd. Fiserv - Mobile banking and payment servicesFeb-11 Rfinity Horizons Ventures 4.0 Designs and develops mobile payment transaction systems Provides digital permit and mobile payment solutions for theFeb-11 NOW! Innovations Estonian Development Fund 2.1 parking and transport sectors North Bridge Venture Partners; GeneralFeb-11 Paydiant 7.6 Mobile payment solutions Catalyst PartnersJan-11 Ezuza - 0.8 Mobile payment solutions Offers softw are applications enabling a mobile business toDec-10 Mint Wireless Ltd. - 0.5 process credit cards and other forms of paymentNov-10 Fig Card Corporation - 1.0 Provides mobile payment solutions for merchants in the US Provides softw are that enables mobile access to personalNov-10 Vipera Plc - 1.6 financial services Designs and develops technology for mobile payment andOct-10 Pin-Pay SAL Middle East Venture Partners - mobile banking solutionsSep-10 XIPWIRE, Inc. - 0.5 Operates an online mobile payment platform Provides online payments services to pay for virtual andMay-10 Boku Andreessen Horow itz - digital goods w ith the mobile phoneApr-10 Zong Matrix Partners 15.0 Offers One-off Payment Service Provides mobile payment gatew ay services and diversifiedMar-10 Palmpay China - 5.0 mobile value-added services in China Offers electronic parking services including cashless mobileJan-10 Parkmobile USA Fontinalis Partners, LLC - payments GP Bullhound LLP
    • Selected M&A EV/LTM Date Target Acquirer EV ($m ) Revenue Target Business Description Apr-11 Fig Card Corporation PayPal - - Mobile payment solutions for merchants in the US Mobile payment provider for online game publishers, social Mar-11 Onebip Neomobile - - netw orks and w eb merchants Offers payment solutions for car w ash, ticket printer, vending Mar-11 Uphill AinaCom - - machines, parking, and door opening applications Feb-11 Mobile Commerce Fiserv - - Provides mobile banking and payment services Dec-10 Obopay Mobile Technology India Nokia Corporation - - Mobile payments solutions in India Oct-10 iControl Mobile Payment Solutions RingGo - - Mobile payment to the parking industry Oct-10 MobiCash Payment Solutions Labour Investment Holdings - - Provides mobile payment solutions through Mobipay brand Aug-10 WiWallet Mobile Payments UCS Group 16.3 - Provides mobile payment platform solutions Multidisplay Comercio e Servicos Develops mobile technological platforms, pre-paid cell phone Aug-10 Cielo SA; American BankNote 51.5 - Tecnologicos recharge and mobile payment platforms Jul-10 Nimbus Systems Redknee Solutions 14.7 - Provides billing softw are and mobile payments solutions Jul-10 Trivnet Gemalto 40.0 - Provides a transaction management engine Provider of mobile payment solutions and value added Jun-10 Kincaid Show Verde Unipessoal 9.8 - services (VAS) Jun-10 LinQpay Stakool 0.5 - Provides global and mobile payment services May-10 M2 Europe Muscato Group Inc. 2,026.8 - Provides prepaid card and processing solutions including Provides content management, publishing services, hosted Apr-10 WIN plc IMImobile Europe 19.6 0.3x mobile applications and mass market billing mechanisms Provides mobile payment and transportation automation Apr-10 VeriFone Transportation Systems VeriFone Systems 33.3 - solutionsSource: Capital IQ, GP Bullhound GP Bullhound LLP
    • GP Bullhound is a research-centric investment bank headquartered in London. Per Roman Hugh Campbell Manish Madhvani Founder / Partner Founder / Partner Founder / Partner Christian Lagerling Alec Dafferner André Shortell Founder / Partner Partner / Head of US Partner Guillaume Bonneton Antony Northrop Frank Schmitt Partner Senior Advisor Director Claudio Alvarez Julien Oussadon Carl Bergholtz Vice President Vice President Vice President Sasha Afanasieva Amanjit Dhami Remy Valette Associate Associate Associate Justine Chan Florent Roulet Malcolm Ferguson Associate Analyst AnalystDisclaimer: Information contained in the document does not constitute an offer to buy or sell or the solicitation of any offer to buy or sell anysecurities. This document is made available for general information purposes only and is intended for professional investors who have ahigh degree of financial sophistication and knowledge. This document and any of the products and information contained herein are notintended for the use of retail investors in the UK or any other territory. Although all reasonable care has been taken to ensure that theinformation contained in this document is accurate and current, no representation or warranty, express or implied, is made by GP BullhoundLLP as to its accuracy, completeness and currency. This report contains forward-looking statements, which involve risks and uncertainties.Actual results may differ significantly from the results described in the forward-looking statements. In particular, but without limiting thepreceding sentences, you should be aware that statements of fact or opinion made, may not be up-to-date or may not represent the currentopinion (whether public or confidential) of GP Bullhound LLP. In addition, opinions and estimates are subject to change without notice. Thisreport does not constitute a specific investment recommendation or advice upon which you should rely based upon, or irrespective of, yourpersonal circumstances. Use of this document is not a substitute for obtaining proper investment advice from an authorized investmentprofessional. Potential retail investors are urged to consult their own authorized investment professional before entering into any investmentagreement. Past performance of securities is not necessarily a guide to future performance and the value of securities may fall as well asrise. In particular, investments in the technology sector can involve a high degree of risk and investors may not get back the full amountinvested.GP Bullhound LLP is authorised and regulated by the Financial Services Authority in the United Kingdom and is registered in England No.OC352636Registered office: GP Bullhound LLP, 52 Jermyn Street, London, SW1Y 6LXhttp://www.gpbullhound.com, info@gpbullhound.com, +44 20 7101 7560GP Bullhound LLP is or has been engaged as an advisor in the past twelve months to the following companies mentioned in this report:Avito. GP Bullhound LLP