Google wants to replace your wallet with its Wallet (but you still pay) by Seth Weintraub @FortuneMagazine May 27, 2011, 8:38 PM EDT E-mail Tweet Facebook Google Plus Linkedin Share icons FORTUNE — At yesterday’s Google Wallet/Offers launch event in New York, Google GOOG laid out a very compelling case for using NFC-enabled Android phones to make payments at physical merchants. The company trotted out launch partners including the Container Store, Subway, American Eagle Outfitters and Walgreens WAG . On the backend, Google has enlisted heavy hitters MasterCard MA , Citi C and First Data to manage the money and data flow. And Google’s Wallet will also work at the thousands of existing Mastercard PayPass locations nationwide. Stephanie Tilenius, Google’s VP of Commerce. Image Credit Seth Weintraub In short, the whole ecosystem fits together extremely well except for one glaring omission: Almost no one has the Sprint [fortune-stock symbol=S] Nexus S phones, which bear NFC chips, needed to fully utilize Google Wallet. The Sprint Nexus S phone has been available for only a few weeks, but we already can gather it’s not going to be Sprint’s most popular device, Google Wallet or not. Primarily, it’s expensive by Android standards: $199 with a two-year plan. One incredible fact: Sprint revealed that over 75% of the smartphones it sells are Android-based. Latest figures put Android smartphone sales at around 50% for the whole U.S. market. With Sprint’s Google Voice initiative, the carrier is looking like Google’s U.S. flagship. Perhaps for good reason: With T-Mobile’s pending acquisition by AT&T [fortune-stock symbol=T], and Verizon [fortune-stock symbol=VZ] still in the honeymoon stages of carrying the Apple [fortune-stock symbol=AAPL] iPhone, Sprint is a natural partner to Google. And Sprint, tiny compared to its competitors, was desperately in need of a partner that could help it differentiate its offerings in the marketplace. The Nexus S, by the way, is also available from T-Mobile. But a Google representative told me that T-Mobile’s version won’t initially support Wallet. Why? Google says T-Mobile hasn’t yet agreed to offer the service, but there is no technical reason why T-Mobile’s Nexus S can’t do the same things that Sprint’s version does, at least in this regard. The bigger problem for adoption is that the Nexus S is the only U.S. smartphone with NFC technology. Google’s solution to get its Wallet in more customers’ pockets? Stickers. Google claims users of any Android phones can slap an NFC sticker on and get almost exactly the same Wallet experience as Nexus S owners. In sticker mode, the data flows a little differently: since the sticker can’t communicate with the phone, the payment processor, First Data, sends the transaction information out over the cloud to an Android app running on the bestickered smartphone. Transactions may not be quite as seamless, but stickers sound like they will be a passable (and necessary) workaround, at least until NFC-enabled phones are more widely adopted. (In a few months, Google promises that other manufacturers and partners will step up with new equipment. Sprint is hosting an event in a few weeks with Motorola’s [fortune-stock symbol=MMI] CEO Sanjay Jha which might include some more NFC devices.) So, for now, until Google releases those special stickers, just a few thousand people in New York and San Francisco who own Sprint Nexus S phones are going to be able to make purchases with their Nexus S devices on Sprint’s network with the following merchants: Google Point of sale locations But what about the Windows, Blackberry and iPhone users out there? Google appeared to be open to working with these companies, though the feelings are unlikely mutual. Each of the big players have their own plans for the potentially highly lucrative mobile wallet space. That won’t likely stop Google from trying to sneak their way onto other devices. For example, Google’s Voice product was denied by Apple for the iPhone when it debuted on Android and was relegated to a web app that ran on the Mobile Safari browser. By the time Apple finally approved the Google Voice app for the iPhone, there was little need for it. Google may take the same route, with NFC stickers, to circumvent handsets and carriers who don’t want to let their customers use Wallet. And the other carriers, namely AT&T and Verizon, are already tipping their hands: They’ve allied with a rival NFC alliance, ISIS and will probably release their own NFC system soon. Google Offers: The carrot The biggest hurdle to adoption will be consumers, however. While paying with your phone sounds cool, it’s hardly a must-have app. That’s where Google Offers come in. Offers is Google’s answer to Groupon and Living Social, and will work hand in hand with Google Wallet. Offers is an integral part of the Wallet ecosystem and the company clearly hopes it gives Wallet some momentum. It’s amazing to think about how different the Wallet launch would’ve looked if Google had been successful in its $7 billion bid to snap up Groupon. Offers will extend over to online purchases too, where all of this new mobile infrastructure will integrate with Google Checkout, its Paypal competitor. Speaking of Paypal, Ebay’s EBAY online payment leader wasted no time in suing Google over Mobile Payment secrets just hours after the announcement. Google executives Osama Bedier and Stephanie Tilenius came from Paypal, which alleges the pair took trade secrets over to Google and used them in creating Google Wallet. Wall St. analysts seem cautiously bullish on the Google Wallet announcement: Cowen’s Jim Friedland believes that Google Wallet is well positioned to become the leading platform because: (1) Google is not collecting any transaction fees, platform highly attractive to banks, credit card companies, and retailers; and (2)the platform is completely open. He adds, ” We believe it will take 2-3 years for to reach a critical mass of Google Wallet enabled phones and point-of-sale terminals, so material local commerce ad revenues are unlikely to kick in before 2013.” Citi’s Mark S. Mahaney sees the move as a modestly positive one for Google: Google Wallet is a unique way to push the Mobile Point Of Sale Payments market forward, and Google opting to not charge could drive quick adoption, as it did with its Android strategy. Monetization for Google will be indirect – this creates the potential for superior Ad Targeting based on closed-loop transaction knowledge. Good news – there doesn’t appear to be major new GOOG infrastructure spend risk. As for Google Offers, this seems like a natural extension of its Local and Social offerings. We don’t anticipate Google Wallet and Google Offers being material to GOOG’s P&L for the foreseeable future. Justin Post of Merrill Lynch, sees Wallet/Offers as a chicken or the egg conundrum getting off the ground but once so, as a benefit to Google’s current ad business. In a research note, he wrote: Google Wallet will have deep integration with Google Offers and potentially other new ad formats (like coupons in search results or geo-targeted coupons) which can help extend Google’s advertising reach to the local retail market, a market somewhat untapped by Google. From a local merchant’s perspective, these services and ad formats will enable direct marketing to consumers with offers and coupons based on search intent, consumer location, and previous merchant relationships allowing merchants to deepen customer engagement. It will be interesting to see what kind of deals Google can get to pull people in. At the event today Google hinted at half-price seats for baseball games. That’s a pretty good start, and if Google can really move major league teams to offer mobile offers of that caliber on the fly, it might have more people, including me, eyeing switching over to a Nexus S.