NEWS / COMMENTARIES

When I wrote the last issue, my wife had a job interview the next day. Now, one week later, she has the job, and I find myself needing to move within two weeks! I will be relocating to a different part of Southern California, in Upland. This is about 60 miles from where I currently live, so it is somewhat of a distance. I still plan on publishing the newsletter through this all. There is a chance that I will not publish the weekend of August 23. This depends on how smoothly the move goes. Most everything will stay the same (web address, e-mail address, etc.) – Only my postal address will change. For those that are curious about the position my wife got, she is now a professor of chemistry at Claremont Colleges.

PRESS RELEASES

Smart Card Industry

MOUNTAIN VIEW, Calif., July 31 /PRNewswire/ -- Without any real surprise, the smart card industry continues its expected path of consolidation with Visa International and American Express joining with Banksys to create Proton World International. Each party had problems that the others could ideally solve in order to survive the next years of immense difficulty for the smart card industry. At the end of the day, what Proton World International will do is the following:

* Inject life back into the Banksys/Proton camp which was struggling with

lack of enough capital funds;

* Ensure that American Express remains a key player in chip card developments, just as industry observers were beginning to doubt

American Express' continued strength in this arena, and;

* Intensify and improve Visa's positioning against Mondex/MasterCard,

particularly in the battle of Java versus MULTOS.

What Will Banksys/Proton Get Out of the Deal?

Unlike other country-specific programs like Finland's Avant or Australia's

Transcard, the Banksys/Proton system was the only "small player" to have

maintained a strong position against larger players such as Visa and

MasterCard. Proton had issued the most cards (26 million) and was able to

implement full-scale roll-outs in Belgium, the Netherlands, and Australia.

Even so, the future of Banksys/Proton did not look promising: not only did

the Belgian player seem to have lacked the funds for the next years of the big dry spell in the chip card industry, but the Proton system lacked a technology roadmap to go beyond its present status as "just a stored-value card".

With the backing of two major bank card associations, however, Banksys/Proton will certainly receive the capital injection it needs to breathe easy again. Moreover, Visa's push to have Proton support the Java API (application program interface) and the Visa Open Platform will assist in Proton's movement to scale the Proton system beyond its stored-value status. Moreover, American Express will bring significant knowledge to Proton on multiapplication systems because of American Express' multiapplication card system trials with Hilton Hotels and Continental Airlines.

What Will American Express Get Out of the Deal?

American Express brings to the table the power of its bank-card image,

capital, and multiapplication card system trials experience. The company has

been known, however, among the analysts as the quiet player in the market.

Following a more cautious strategy than either Visa or MasterCard regarding

chip card technology, American Express had so far only invested minimally in

chip card technology. As such, what American Express lacked in the market

were two points: a serious chip card system image and a higher rate of chip

card issuance.

Industry analysts had almost written off American Express as a serious chip

card player. American Express, however, has played a good hand in the game: it allowed other players to pay for the up-front investment for market development, all the while knowing that it could jump in with full force when it wanted. With its stock acquisition into Proton World International, American Express will not only "buy" the necessary learning and experience curves for chip card implementation, but it also quietly shows the industry that the American Express cannot be counted out.

What Will Visa International Get Out of the Deal?

Certainly what Visa brings to the table with Proton World International is a

strong brand image, capital, and commitment to a long-term vision on chip

cards. In terms of project pilot launches, Visa far outruns its competitors.

What Visa lacked, however, are two things that Proton will be able to supply:

full-scale roll-out experience and another Java platform supporter.

The Java versus MULTOS Question

One of the major coups for Visa is that it has secured the third major smart

card system player Proton as a supporter of the Java API. The race between Java and MULTOS (the operating system of Mondex/MasterCard) has been a hot topic of speculation thus far in the industry. Now it would seem that Visa is leaping ahead of Mondex/MasterCard.

Even so, the commercial viability of both the Java Card and the MULTOS card has not been proven. Trials for both cards will take place in late 1998 and beyond, but the business case of the cards have not been proven. As Andy Grove of Intel once commented, "The technology disappears within the

application." In the same way, the major issues facing end users has very

little to do with whether Java or MULTOS technology is better -- the end users are concerned with more fundamental questions regarding card co-branding and real estate ownership as well as responsibilities for lost or damaged cards.

Even so, to look beyond the horizon, it is very unlikely that either Java or

MULTOS will be the final answer to multiapplication cards. Java and MULTOS, however, do both point to the paradigm shift that is about to strike the industry, namely that proprietary operating systems such as Gemplus' MPCOS or Giesecke & Devrient's STARCOS will cease to exist within the decade. In the replacement of these proprietary operating systems will come the rise of the open platform systems on top of which applications will be written. The future generation open operating system will likely not be anything like today's Java Cards or MULTOS cards.

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Until Next Time,

Alan

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