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This Q&A article is a modified version of the one published in the May 2009 issue of Cards&Payments.
Rémy de Tonnac took over as CEO of France-based Inside Contactless in early 2006. He has raised an eye-opening 60 million euros (US$81 million) in venture capital and has tripled the head count to more than 160–all on the promise of continued growth in the contactless chip market, including the global rollout of mobile phones supporting Near Field Communication.
That rollout is delayed, and growth is sputtering for contactless cards in Inside's prime U.S. market. As would be expected, de Tonnac, a former venture-capital executive himself with roots in the smart card industry, remains optimistic.
The company he heads shot to prominence by helping fuel the rollout of contactless bankcards in the United States that started around 2005. Inside parlayed its early patronage from card organization Visa, which de Tonnac helped to recruit, to reach a dominant position in the market, supplying millions of low-cost and well-functioning chips for cards issued by U.S. banks.
The company had hoped it would be starting to do the same by now with more-expensive chips for NFC phones, a highly touted technology that backers say will bring mobile payments, ticketing and couponing to the masses. Inside had the earliest samples of NFC chips complying with standards favored by mobile operators that would hook directly into SIM cards. That had given the company a leg up on chief rival NXP Semiconductors, a co-inventor with Japan's Sony Corp. of NFC technology.
But global delays in the rollout of NFC likely will allow NXP and other competitors to catch up with Inside to also offer chips supporting NFC-enabled SIM cards.
Meanwhile, the economic crisis is cutting demand for contactless bankcards in the United States, and Inside soon will get more competition there when NXP enters the market for the low-cost contactless chips. That could send prices and margins for the chips even lower. Thanks in large part to the U.S. market, Inside's revenue doubled last year to more than $50 million, according to the company. But de Tonnac projects U.S. revenue will be flat this year.
And Inside does not yet have a chip ready for its outsourced semiconductor fabricators to produce to help it tap the market for more-secure–and more-expensive–contactless EMV cards in Europe and Asia. These chips must sport two interfaces–one contactless and the other enabling cardholders to insert their cards into readers.
While Inside cofounder and former CEO Jacek Kowalski laid the groundwork for the company's technology, Inside's private equity backers called on one of their own in de Tonnac to lead it to market growth and eventual profitability. De Tonnac, then Inside board chairman and a partner with major Inside investor Vertex Management, replaced Kowalski as chief executive in April 2006.
De Tonnac has built Inside into a major player in the contactless market. But how long will its investors wait for the promised profits and payback? De Tonnac answers this and other questions in a recent one-on-one interview with Cards&Payments:
Q: You've said many times that Near Field Communication is the future of Inside Contactless. Some might say you've bet the farm on it. But NFC rollouts are delayed. When is NFC going to become a market reality?
A: Second half of 2010. Commercial handsets will be released in the second half of 2009, the first models from Samsung, LG, Nokia, Sagem and a few of the, I think, Chinese ODMs (original design manufacturers). And you add another 12 months, and you should see some volume rollouts by then. You see, I'm not telling you this is going to happen by the end of the year.
Q: But there is strong interest among some mobile operators, especially in such places as France, the UK and some Asian countries, which would prefer to have the payment and other secure applications on the SIM cards they issue. Inside has had the first NFC chips that support initial standards for NFC SIMs. Why haven't we seen a commercially available handset with your chips inside?
A: Because we always think it will go faster than the reality. As for us, remember we had been putting chips into contactless smart cards most of our life, so I think we underestimated the kind of the cycle time it takes to get a chip into a cell phone. We did look at a few of the technologies for connectivity chips that made their way into the cell phones. And even if you think about 3G, it's a mainstream technology that is powering cell phones and is growing, but the first 3G hype happened in 1997. The same happened with GPS, the same happened with Bluetooth. Bluetooth is now in 75% of the phones, but it took eight years for Bluetooth to penetrate the cell phones.
Q: So when will you get some big orders from handset makers?
A: If I had one, I would probably not be able to tell you. I'm still shooting for the end of the year that we get ourselves a large order for a cell phone that will be put on the market in the second quarter of next year. Not to my knowledge does any of them (phone makers) have a large order from a given (mobile) carrier. But they may decide on their own to put it in the field and to test the applications pairing devices or service discovery with tags that do not require a large infrastructure.
Q: Your most important source of revenue is supplying chips for contactless cards issued by U.S. banks, a market you dominate. But with the banking crisis hurting demand, new competitors planning to enter the market and contactless-chip prices commoditizing, will you have to make cutbacks, including layoffs, if delays continue for NFC rollouts?
A: We are monitoring the situation very carefully. We are still shooting for revenue that will be about the same as last year. We do think, you know, the common saying that it is in a crisis time that you get leaders to emerge. Of course, if things were to worsen drastically, we are not stupid. We will take measures, but this is not what we see today. We see the U.S. market flat roughly versus last year, and there are pressures on prices, as you know, but there are other opportunities for us to utilize our contactless microprocessor platform–for transportation, access control and the beginning of the NFC. So this is when you need to keep the direction of the boat. In stormy (weather), we have to hold the cap, and even if we may not have seen the real bottom of this crisis, we probably have the most difficult part behind us.
Q: You recently announced an exclusive three-year agreement with First Data Corp. to supply chips and related components for contactless stickers that First Data will market to U.S. banks and big merchants. How promising is the market for contactless stickers, and can it help reinvigorate the U.S. contactless payment market?
A: It's a big initiative from First Data. There has been a lot of validation through field trials, and people love it. So it is definitely one of the [wild cards] for this year to get to see some growth in the market if First Data is able to deploy at very large volumes. We have to see how consumers will adapt to it. Again, all validation that they have done is very positive.
Q: Why lock yourself in for three years with First Data, which is behind on its rollout of its Go-Tag sticker? Don't you stand to lose business from other banks or issuers?
A: It's true that each time you make this kind of decision you tend to lose other guys. I do not see many other players the size of First Data with the level of commitment that we have validated with them. So you have to pick your camp. If there is an opportunity in a given geography or vertical that First Data is not going to push or where First Data does not have an intention, we have a right to team up with the (other) guys.
Q: You have some high-profile investors in the mobile industry in your latest funding round–the investment arms of Motorola, Nokia, Samsung and, more recently, Qualcomm. The advantages are obvious. But is there a downside to having all these high-profile mobile-industry investors, which compete with each other?
A: Absolutely zero downside. Well, obviously the only downside is you sometimes have to manage carefully some of the discussion we have in our board of directors because some of these guys are observers on our board. And we have to make sure we don't disclose anything that is confidential. For the rest it is only beneficial.
Q: But perhaps they dictate your strategy to primarily target your NFC chips for mobile phones and not to other devices, such as handheld readers, PCs, USB keys and televisions. We've seen the difficulties of getting NFC phones rolled out.
A: It is our choice, not because of them, to make it the primary target because there are more than 1 billion phones versus fewer PCs or fewer TVs or fewer anything else. Having said that, it does not prevent us from targeting those other markets. It is just that they are of a lesser priority to us. But it is not at all because we have these big guys on the board. In fact, they are not on the board, they are just observers. They are investors. Remember, if you put all of them together you have less than 25% of the equity of Inside Contactless, so they cannot call the shots.
Q: Speaking of Qualcomm, is there any truth to the rumor that Qualcomm was seeking to buy Inside Contactless a year or two ago for a few hundred million dollars?
A: The rumors were not true. Qualcomm is a great company that is certainly the most powerful player in the wireless semiconductor space. Thus, the idea that they would be interested by Inside Contactless would be certainly positive.
Q: Of course, this isn't a good time for Inside to consider going public or trying to look for buyers. But how long will it be before your investors become restless for profits or other payback?
A: You'll have to ask them. Given the progress we have been showing over the past three years, I'm not saying we don't have pressure to get there. But this is not what is driving our strategy or the way we plan investment. No, we see a huge market ahead. We see we are making good progress. We have strong leadership, and the best part of the (growth) curve is ahead of us. We don't have that many questions. If we had to wait another four years, it would be a concern. But one year, two years, three years, we can continue investing. But things are going to happen much ahead of that. CP
Rémy de Tonnac, CEO of Inside Contactless, is a veteran of the smart card industry. De Tonnac, 50, worked 14 years with smart card company Gemplus, beginning in 1987 as one of the company's first employees, later heading up the card vendor's Asia-Pacific operations and then its Americas group. He then joined Israel-based venture capital company Vertex Management Funds in 2001 as a partner in Europe. Vertex, a major investor in Inside, gave de Tonnac a seat on Inside's board, and in 2002 he became Inside's board chairman. He replaced Inside co-founder and CEO Jacek Kowalski in April 2006. The company's private-equity investors were seeking new management to, as one said, take Inside to a "new phase" of growth. De Tonnac has a Master's degree in engineering and applied science from Ecole Centrale de Lille, France, and an economics degree from the University of Lille.
