Features & Columns

The Physical Web

With ecommerce and information domination a done deal, the Web's next conquests are brick-and-mortar retail and the physical objects we use every day
Monopoly

At Tokyo's busiest rail hub, men with briefcases and women with purses surge forward, swooshing their billfolds past a scanner.Tickets or tokens make no appearances.

"They were just waving their purses, waving their wallets and passing through," Mohammad Khan, a man obsessed with the way people spend money, recalls about that moment in the Shinjuku Train Station. Eventually, all anyone will need to pay their bills, Khan realized, is a mobile phone. Khan had just seen the future: the extinction of cash and credit cards.

That was nine years ago. The future's now here. The network jumped out of our computers and into our wallets and phones and cars and household appliances. The transformative effect on the physical landscape will likely mirror the destruction of legacy communications technologies and information media during the past decade. And the spoils will accrue to the companies (or company) that can straddle multiple influence and transaction points: the research query, the RFID chip in the sticker on the plate glass window, the device in your hand and the checkout station on the counter.

Google Wallet

Since last week, the tech world has buzzed about Google Wallet, a new app created by the Mountain View–based advertising, media and search giant. For the first time in America, consumers now have the ability to use their smart phones as credit cards—if they own the right phone.

With a Samsung Nexus S 4G, people can leave their billfolds behind and buy anything from taxi rides to prescription drugs. All they have to do is hold the phone within an inch of a specialized scanner. A chip in the phone sends a signal to the scanner, which then passes the payment information on.

"Empowering the consumer by putting a phone in their hand has become extremely important to daily life," says Khan, now sitting in his office across the street from Santa Clara University. "I saw that [in Japan] and said, 'This is the technology we're going to use.'"

A Pakistani who immigrated to the United States in 1983, Khan is the president of ViVOtech, a company that has partnered with Google to redefine the way cell phones are used. More than half of the card readers—which are required to use Google Wallet—are made by ViVOtech.

In the two decades before he went to Shinjuku, Khan helped his former Silicon Valley company, VeriFone, another company in the new payment scheme, expand from a four-person shop to a multinational corporation. HP bought VeriFone in 1997 for $1.2 billion.

When he saw that people were using technology that allowed them to pay for transportation by holding a card up to a scanner, rather than sliding or inserting a ticket, Khan had his answer.

"It's more of hassle to type into your phone," he says. "Why not do touch? Instead of pulling out paper coupons, I'll just pull out my phone and make a payment with one touch."

digital wallet CONTACTLESS PAYMENT: Digital wallets and special scanners, like those from ViVOtech, could someday make credit cards and cash unnecessary.

It's possible that just a few years from now, phones will be a cross between an electronic Swiss Army knife and a magic wand. One's driver's license, credit cards, medical insurance ID, house keys and gym card will all be bundled inside the plastic, glass and circuitry of a mobile device. With the digital wallet, Google has created a new form of commerce—packaging search, marketing and advertising, coupons— and now transactions.

Google has not, however, done all this out of the goodness of its corporate heart. "The quest on Google's part is not to make our lives simpler," says Greg Swanson, CEO of Itz Publishing, a digital consulting firm in Portland, Ore. "The quest on their part is to have more data on how to push the stuff to us that we might buy."

Google and Foursquare, the leader in check-in social networking, are currently plastering tags on business windows in beta-launch cities across America so people can use their phones to search reviews, check in and access digital coupons. Other companies, such as Earthmine, in Berkeley, are pioneering "visual browsing," which allows people to point their phones at actual stores and products and see pop-ups with similar information.

The World Wide Web is making a subtle shift to the real wide world. Objects linked to the Internet are starting to share information not only with people but also with each other.

"Not many people get it, but the digital world is coming to the physical environment," Khan says, adding that phones aren't the only items that are being built with specialized computer chips and sensors.

In the future, everything will be chipped.

Groceries will contain chips that identify an object, its price and expiration date. Shoppers won't even have to stop at a checkout line. The store will recognize that a person has walked out with a gallon of milk and automatically transmit a signal that sends a charge to that person's phone. Ten days later, the refrigerator will note that the milk has gone bad.

The web will live in almost every object—dormant, in a state of hibernation just waiting to be activated. Data will no longer sit inside a desktop or laptop computer; it will now be all over the room, on the streets, in our cars, on our bodies.

digital wallet PAY AND GO: Mohammad Khan held fast to the vision that the future of payment would go through mobile phones.

The Race

A race is taking place among Silicon Valley tech companies big and small to harness two of the most important forms of technology of the future.

Near-field communication, commonly referred to as NFC, has been around for the better part of a decade, but in the last year it has become the focus of a cluster of start-ups as well as industry mainstays. Smart phones, such as Samsung's Nexus S 4G, are now being built with specialized NFC security chips that store and pass information with the help of receivers in close range.

NFC-enabled devices allow their owners to share contact information, websites, music and YouTube videos by putting the phones within a few inches of one another. Going beyond peer-to-peer sharing, NFC is now capable of making payments with Google's digital wallet.

This technology is still in its infancy, but Google is providing the most concrete example yet of how smart phones will supplant credit cards and cash. Drew Weinstein, CEO of Redwood City–based Sequent, a pioneer in near-field communication technology, says the ultimate goal for NFC is to modify consumers' daily routines.

"Payment is a means to an end," Weinstein says. "While it's such an innovative moment in time, it's certainly not the most fundamentally disruptive use case for NFC. For us, that is a fundamental change in physical behavior."

Weinstein's business partner, Hans Reisgies, is a burlier bundle of energy who sports a shockwave of blond hair and eats, sleeps and breathes NFC. Having headed business development at ViVOtech for five years, Reisgies is eager to share his encyclopedic knowledge.

Located across the street from Oracle's cylindrical towers, Sequent is a 40-person company created eight years ago to help smart-phone carriers and operating systems manage NFC. Weinstein and Reisgies, both in their 30s, formed Sequent with the stated goal of using the Internet to engage the physical world. NFC is one of the two ways in which this will occur.

RFID—radio frequency identification—is a closely related technology that will work hand in hand with NFC to facilitate this behavioral change. Thinner than a piece of paper and smaller than a fingernail, RFID chips are already installed in many credit and debit cards, making magnetic strip swiping unnecessary.

A simple tap or wave does the trick—the chips act as transmitter, receiver and antenna. Not long from now, RFID chips will begin to replace bar codes, as they are capable of storing far more information.

"RFID and NFC are very similar concepts, because NFC uses RFID signals to communicate," explains Reisgies, Sequent's business-development chief. "For the very first time, Internet devices are now interacting with the physical environment, and that crossover is what makes the technology so special."

The economic consequences for businesses promise to be massive.

"The idea is to have readers everywhere that will actually monitor the flow of merchandise," says Terry Allen, a computer science professor at San Jose State University who specializes in RFID. "There are companies that spend millions of dollars on inventory, and we could cut their costs in half and target any number of places."

Consumers will similarly alter their routines, a data point that isn't lost on cell-phone carriers, credit-card issuers and software companies.

Lewis Gersh, managing partner of the New York investment firm Metamorphic Ventures, says digital wallets are still several years off from being ubiquitous but adds that many companies are being lured into the chaotic scramble with dreams of a payoff.

Verizon, AT&T and T-Mobile have joined forces to create a consortium called ISIS, which hopes to unveil its own digital wallet early next year. Google has partnered with a variety of companies to take advantage of its popular Android operating system. And credit-card companies such as Chase have already developed apps designed to keep their customer base intact, while merchants like Starbucks have created their own tailored packages for phones.

Gersh compares the battle for dominating the NFC chip market to a hockey game, where the winners will be rich and the losers will fall by the wayside. "It's all about getting the puck," he says. "But are you going to see an empty net or a 6-foot-7 Russian with no vowels in his name who is going to take your fucking head off?"

Factions are forming, with each hoping to control the chip—known as the "secure element"—used in NFC-enabled devices. Google has come out of the gate first, but competitors are gaining.

Whoever wins will have access to consumers before, during and after a transaction, an entirely new phenomenon in the nation's $28.5 billion online marketing and advertising industry.

digital wallet SMART GUYS: Hans Reisgies (left) and Drew Weinstein positioned their company, Sequent, to capitalize on the huge interest in NFC technology.

Google vs. Everyone

Phone manufacturers and carriers, credit-card companies, banks and merchants all want a piece of the action. The proliferation of smart phones, which now constitute 35 percent of all phones in America, is projected to skyrocket in coming years, and the mobile advertising industry will correspondingly surge.

When Google announced at a tech conference in May that it was throwing its considerable influence into the expansion of NFC technology, the world took notice. The company has broken into the space where financial transactions take place. And Google was offering to partner with anyone—Google Wallet, for now, is tailored to work with a Citi Mastercard.

There are concerns, however, that Google is reaching too far, and much of this stems from its core product, the search engine. Before acquiring Motorola last month so it could begin manufacturing its own smart-phone hardware, Google was already the global leader in search, advertising and smart-phone operating systems. As Google acquires companies and patents, industry experts and government entities are beginning to fear that a monopoly is in the making—or, worse, has already been formed.

"They control search, and they have used that control to suppress competition they would otherwise have," says Gary Reback, Silicon Valley's pre-eminent anti-trust lawyer, who won lawsuits against Microsoft in the '90s and is now one of Google's biggest critics. "Because Google has a monopoly in search advertising, it means every business that buys a search ad on the Internet pays more than they should in a competitive market."

Reback adds that Google's power inhibits the expansion and growth of worthwhile competitors. "Better technology goes out of business eventually, and users are left to contend with a reality that there is literally no alternative," he says.

Google's announcement last week is just the first blow. The digital wallet war is far from over.

Realizing the threat posed by Google's Android operating system, the ISIS consortium made a bold move this summer by partnering with Visa, MasterCard, Discover and American Express.

Paypal also plans to enter the mix and has showcased a peer-to-peer transaction program that allows people to pay one another through NFC. Established banks are still carefully considering their options.

"This is a battle that will be fought on many fronts," says Richard Crone, a 30-year veteran in the payment industry who runs his own consulting firm. "Merchants, banks and brand new intermediaries—like ISIS and Google—will all be fighting to enroll the customer."

Having constant contact with a smart-phone user will allow companies to entice customers into a purchase through search or ads, facilitate the transaction with NFC and then make follow-up suggestions on similar or supplementary offers.

"The one who enrolls a customer for a mobile wallet will control the upside for advertising opportunity, the marketing and the cost to process the payment," Crone says.

Crone Consulting predicts that within a few years, 75 percent of all American dollars spent at a cash register will move through mobile technology. "That's game-changing," Crone says matter of factly.

Whether it is through mobile search, ads or social networking, companies that corner even a tiny fraction of the $6.2 trillion spent each year in America will reap major rewards, Crone says.

Lewis Gersh, who started exploring the potential growth of mobile payments seven years ago, says each group vying for control over NFC has its advantages and drawbacks. But Google, he says, is in a unique position.

"If you're Google and you can actually get installed on these devices with a mobile wallet and GPS, you'll know exactly where someone was and when they were there," Gersh says. "That's worth an enormous amount in user data."

The question, he says, is whether Google is "looking to expand a $50-billion ad market or tap in to the $2.4 trillion offline market. If it's the former, that's incredibly short-sighted."

Google's ultimate goal is to reach the local advertising market and have an "enrolled base," according to Crone. "Those are two things they want," he says. "A known geography and a registered user."

That data is the reason Google joined the social network fray recently with Google+. Search only made IP addresses identifiable, while Google's users remained anonymous. Meanwhile, Microsoft, a stakeholder in Facebook, developed Bing, which provides search results tailored to a person's social network. When looking for a restaurant, Bing not only calls up Yelp reviews; it tells a person which restaurants their friends love or hate.

"This is how Bing thinks they're going to beat Google," Swanson says. "So what did Google do? They launched Google+. They needed a way for you to tell them who your friends are."

If Google+ doesn't catch on, Google could be at a disadvantage compared to players who are standing back, saving their money and watching as others take the costly steps of developing and implementing NFC.

"If I'm Facebook, Foursquare, Twitter—I stay away," Weinstein says. "My expectation is a bunch of these guys are going to cherry-pick, leveraging stock in the physical world."

Many experts believe the winners and losers of the digital-wallet war are going to be determined in the next year, even if it takes five to 10 years for a final outcome.

"All the interesting, behind-the-scenes games are playing out right now," Weinstein says.

What Do You Like?

Earlier this spring, Facebook users noticed a strange welcome screen when they logged into their accounts. Instead of their friends' update crawl, Facebook redirected people to a security screen. The landing page requested users' phone numbers, explaining that it would provide an extra layer of security.

The social network was offering to contact users by phone if there was unusual activity. But Facebook is also keenly aware that smart phones are the remote controls of the future, and possessing that piece of contact information for 750 million people would extend its franchise.

Anything posted on Facebook—photos, personal bios, messages, chat logs, fan pages—becomes part of the social network. And Facebook shares that information with its partners and advertising customers. That's why, if a user likes a band's fan page, banner ads will start plugging upcoming CDs and concerts by that band. If a person just turned 50, AARP ads will begin to appear.

Google similarly targets users with ads, either putting sponsored links above organic search results or draping display ads on pages based on a user's search history.

Both Facebook and Google understand that this highly specific data is priceless to the marketing and advertising industry, which wants nothing more than to contact blue-chip customers in the physical environment.

"I think we look at Google and Facebook, and they're so dominant," says Gersh. "They both probably have the longest-term staying power. But for Google, it will be hard to stay that way, especially when you have so much information being devoured by Facebook."

Because its core niche is search, Google falls short of Facebook when it comes to personalized data. The intentions of Google+ are obvious. Facebook is the biggest threat to Google, and the two are racing to accumulate as much information about their users as possible.

Delivering a more useful and enjoyable experience to the consumer is the best way for these companies to keep people coming back and make money. If Google or Facebook can tell that someone enjoys pizza but likes PETA based on their online activity, the chances of local offers for veggie combos being forwarded to that person's phone will increase. NFC-enabled smart phones, along with the help of GPS, will allow people to seamlessly check-in and be targeted for discounts from proximate businesses.

There is reasonable concern that people are giving away too much information. For some, the tradeoff is worth it.

"The fact of the matter is we are all creatures of habit, and the more information a marketer has about you, the more likely you are to respond to it," Swanson says. "There's a huge privacy issue. But I think many people think trading privacy for convenience is fair and reasonable." Intrusive marketing campaigns can also be added to the list. But some experts predict ads will be sent on an opt-in basis.

"As the noise from advertisers increases, the tools we will have to turn that noise down will increase as well," Swanson says.

Rudy Rucker, a former SJSU professor and author of 30 science fiction novels, is known for crafting stories, in which cyberpunks fight oppressive regimes, moon aliens and even machines. Rucker says there is something unnerving about the pervasive manner in which personal data and technology are being intertwined, and, as a result, serendipitous experiences become fewer and further between. "It's not so much virtual reality; it's augmented reality," he says. "It changes the way you relate to the physical world, in a way that's not entirely good."

There is a sense of security that is lost when digital wallets replace cash, and money is no longer exchanged for goods, Rucker says.

"When you hear about the phones bumping things, and your money is taken out, it makes you a little queasy. But they'll find a way to make it work. Thirty years ago, when credit cards got introduced, people were worried they were going to get robbed."

According ViVOtech's Khan, there will be hurdles along the way to ubiquity for full-service digital wallets. But the security benefits of NFC, RFID and a remote control for the real world, he adds, will far outweigh any short-term concerns.

"I do believe the phone of tomorrow is going to get bio-metric," Khan says. "You scan your finger to open your wallet or phone. This phone is going to continue to be so powerful that you can access all of your assets, all of your data, and that means this is going to become very critical in a security point of view."

Most phones already can be programmed to require a code to unlock. The Google Wallet currently requires a four-number PIN, and it will shut down if entered incorrectly five times in a row. If a phone is lost or stolen, it can easily be deactivated.

Smart phones can sync to computers or have data stored virtually through cloud computing. Replacing a phone and regaining all of its information requires just one stop at an Apple store or carrier retail shop. (Apple is also working with NFC, but few details are known.) With a digital wallet, the inefficiency of canceling credit cards, getting a new license from the DMV or having new insurance cards mailed out becomes a distant memory. The Internet will be ever-present and able to act in an instant.

"It's become a layer of the world that's not going to go away," Rucker says. "And if it's not going to go away, we might as well enjoy it."

A New World

Peter Hirshberg, chairman of the San Francisco–based Re:imagine Group, estimates there are now a billion transistors—the heart and soul of any electronic device—for every person on the planet.

"And the exciting thing is that all of these devices will soon be able to communicate," says Hirshberg, whose firm works to find ways in which digital connectivity can improve life on a personal and global scale.

"Twenty years ago, only a million people were on the Internet," Hirshberg says. "This year, there are 4.3 billion Internet connections, but about 2 billion of that number is people, and the rest are things."

Cars, phones, TVs, toys—all of these are already being chipped or sensored so people can track their usage. The fluid exchange of information between what were once inanimate objects—whether by NFC, RFID or other digital sensors—is growing at a rate that's difficult to comprehend because it can only be counted on an exponential scale.

In 15 to 20 years, Hirschberg says, more than a trillion digitized objects will have access to the Internet, linking every object in a household, garage and even a garden to a home grid, where information will be stored and analyzed.

The cookie jar will know how many times it has been opened in a day. The lawnmower, unused for weeks, will expect the grass to be taller than usual.

"People will really efficiently manage their resources," Hirshberg says. "That's about to pop up in many different parts of our lives."

While much of the technology is being crafted with a consumer's personal use in mind, there are also global-scale consequences. Re:imagine Group has collaborated with the United Nations on technology that analyzes agricultural data and allows developing countries to anticipate food shortages. "We're excited because we think it's the next revolution," Hirshberg says.

The advancements also aid other basic human needs, such as housing.

Hirshberg and others are currently studying the way architects and contractors can use sensors to make offices and homes more structurally sound, as well as smarter in the way energy is monitored.

"Fifty percent of energy in America goes to buildings," Hirshberg says. "The Department of Energy thinks a third of it can be saved by thinking smarter. Programming lights and compressors, optimizing heating and air conditioning units—if we're able to both measure them and apply smart software, we'll make buildings more comfortable and more efficient."

Hirshberg also runs the Gray Area Foundation for the Arts, a collective of artists, hackers and coders who want to build social consciousness through digital culture. A healthier society, he says, is one of the most significant breakthroughs expected to take shape as the web establishes a physical presence.

Prescription pill bottles, chipped in the cap, or running shoes with sensors on their soles will produce traceable data. The more people interact with the Internet, the more they will want to monitor their progress, Hirshberg says.

"Americans are nuts about managing their weight or their health," he says, "and anything that helps in measuring those incentives is going to be a big part of our lives."

We'll save computerized bionics for another article, though.