Many believe the future of tracking purchases and making payments lies with near field communication technology or smartphone applications, but this Kirkland, Wash.-based company is betting on something much lower tech: Text messaging.

“It’s not only because not everyone has a smartphone, but in a high-volume restaurant, or coffee shop, they don’t want someone fumbling around or holding up the line,” said James Sun, CEO of Pirq. “Text messaging is very fast, and it’s supported by all phones, including feature phones.”

Pirq became well-known this summer after announcing a partnership with Apple to bring an exclusive set of restaurant deals to all of its employees in Silicon Valley. But that was just a side deal to get the start-up some buzz. The company’s core business is in running loyalty programs for any small business. Many others are competing in the space, including Groupon, Belly and FiveStars.

Pirq takes a slightly different approach. For $50 a month, it gives each merchant an Android tablet to place on their counter. From there, consumers can scan a bar code using the Pirq application on their iOS or Android phone, or they can choose to send a text message to the short code displayed on the screen. Because they have a choice, consumers don’t have to take the time to download a new application, or even register — two big hurdles for adoption.

Merchants also have a choice on what to offer loyal customers. They can either reward consumers who hit a certain spending threshold, or they can send consumers a text message to promote a deal during off-peak hours, when business is slow. “There’s a big trend right now,” Sun said. “[Merchants] don’t want to discount the brand to the public. They are private deals for existing customers.”

Merchants pay $50 a month for the service, and from 50 cents to $6 for each reward redeemed. Costs vary depending on the service, ranging from cups of coffee on the low end to spa services on the high end.

The second round of funding was led by Rally Capital, and brings the company’s fundraising total to $3.2 million. The funding will go toward rolling out the company’s new text messaging program. Sun said that the service will be live in 70 stores in Seattle and San Francisco by the end of next week. The company plans to raise a larger round next year to hire sales people to expand nationwide.

Everyone is expecting change to happen in weeks or months, but it will take time, says Osama Bedier, Google’s VP of Wallet and payments. “We will have mobile payments,” Bedier said, speaking at the Global Mobile Internet Conference in San Jose on Friday.

There’s room for more than one player, Bedier said, but each has to solve an issue. “There’s a lot of ideas and not a lot of problems being solved,” Bedier said. “Credit cards already work pretty well if all you have to do is payments.”

Ultimately, the former PayPal exec said that mobile payments have to either save time, save money or both. Technology can do that, he added. On the technology front, Bedier said he remains a believer that near field communication technology (NFC) will be ubiquitous on both phones and payment terminals within five years. NFC will also find its way into many other places in the logistics chain. “NFC chips will replace bar codes,” Bedier said.

But many believe NFC will take a year or more to take off, especially now that Apple declined to embed the chips into its latest release, the iPhone 5. Other payment companies, like PayPal, have decided to find other avenues to enabling digital payments without it, and companies like Starbucks are relying on something as simple as a barcode.

Bedier said at least half of transactions will be mobile within five years, but remained short on details on how much volume Google Wallet is doing today. “The numbers are compelling,” he said, without revealing any of those compelling numbers.

A rival executive from Scvngr, which runs a payments service called LevelUp, recently tweeted somewhat hyperbolically that Google Wallet has five users.

“We have a lot more than five users,” Bedier said, though he wouldn’t say how many customers they have. He did say that the company doubled its transaction volume in the first few weeks after transitioning its Wallet transactions to the cloud back in August. Still, the company faces some obvious adoption hurdles because today Google Wallet is only available on NFC-capable Android phones through one U.S. carrier: Sprint.

“We’re seeing that trajectory continuing,” he said.

The other three carriers — AT&T, Verizon Wireless and T-Mobile — are backing ISIS, which is launching next week. Bedier acknowledged the lack of support from carriers for Google Wallet. “We haven’t yet seen eye to eye on a mobile wallet solution,” he said. “So far, they have said they want to do their own thing and we respect that.”

It baffles me why almost everyone uses the terms “mobile wallet” and “digital wallet” interchangeably, and why so many people further constrain the already-limited idea of a mobile wallet by equating it with Near Field Communication (NFC).

Let me be crystal clear on these two points:

• Your mobile phone won’t be the one device that will forever banish your leather wallet to the back of a drawer. It will, however, be an important access point to your digital wallet — which will live in the cloud and follow you wherever you go.
• NFC is a technology, not a strategy. It enables communication between two devices that are close to each other (hence the name). It is not the Holy Grail for mobile payments.

Why mobile wallets are not digital wallets
Simply put, the term “mobile wallet” refers to when the actual mobile phone, or other mobile device, becomes the wallet. All of your financial information, such as bank account and credit card numbers, are stored on the mobile device, and you need to have the device with you for the transaction to be possible.

Digital wallets exist in the cloud. They are not tethered to one specific device such as a mobile phone, but are accessible from a variety of devices (laptop, iPad, ultrabook, Xbox, etc.) and in a number of ways. Sensitive financial information is stored in the cloud, not on the actual device.

Already, at The Home Depot, you can pay without ever pulling anything out of your pocket at all. You can pay just using your phone number and PIN that directly connects to your digital wallet. But this is just the beginning of the revolution.

For example, let’s say you’re in your car and you want to drive through the local fast food joint. Instead of whipping out your wallet or looking for your phone, you “check in” to the fast food joint’s point-of-sale system (POS) using the digital wallet accessible from your car’s connected onboard computer. The restaurant immediately recognizes you from the image transmitted when you check in, and can look at what you’ve previously bought at that restaurant via your digital wallet. It’s able to not only ask if you want “the usual” but also to deliver special offers to thank you for your loyalty.

When you pull up and get your food, no money exchanges hands — you don’t even have to tap a device against a terminal. The meal is charged to your digital wallet. This is all technically possible today.

Why NFC does not equal mobile payments
Mobile payments break into two main camps — what we call “remote” and “proximity” payments. Remote payments happen when you don’t need to be in the same room as someone else to use your mobile phone to pay for something — buying an item on the eBay mobile app for example. This is huge today.

Proximity payments are when you need to be in the same room to make the payment. There are many technologies you could use to make a proximity payment. Bluetooth, RFID, even an audio signal could initiate a mobile payment from your phone — and yes, NFC could also do this. What most people don’t realize is that NFC is not a one-size-fits-all technology. It has different modes that do different things and have different levels of security. Let me tell you about two:

• P2P mode NFC: this is the simplest mode available and just allows a fast connection to be made between two devices. However, it just identifies and connects the two devices — the transaction happens “in the cloud” behind a secure firewall because P2P mode while easy, is not secure.
• Secure Element NFC: This is what most people equate with mobile payments. Secure element NFC puts a safety box in your phone, which stores all your financial information. One of the problems is that the safety box can be anywhere on the phone — the hardware, SIM card, you could in theory even pop it into the battery case. All the companies that touch the phone or the customer have potential access to the secure element but they all need to work together to make an NFC payment work. This is one of the many problems that is stifling fast adoption.

No retailer will have multiple NFC boxes to take payments from different networks, and the NFC terminals shipping today do little more than just transmit the card number and transaction size. They’re not equipped to automatically accept the complex coupons and offers that make the digital wallet so exciting. On the technology side, carriers are trying one solution, phone manufacturers another, and technology companies yet another. Meanwhile, the consumer is standing at the register thinking “really, how hard is it to pull out my credit card?”

Why would Apple want to step into that mess?

In spite of the technological advances that make digital payments possible, it will not be any one technology that wins the day for either the consumer or the retailer.

Sure, the technology needs to be great, and simple, and it should get out of the way of the user. The much more critical part of the equation will be what the digital wallet will offer beyond just another way to pay. It needs to remove complexity from your life, not add to it. Those digital wallets that are able to safely store your financial information — your credit cards, airline miles, balances, etc. — plus have the ability to receive relevant and real time coupons and offers that are tailored specifically to each user, will be the ones embraced by both consumers and the brands that want to reach them.

It’s inevitable that digital wallets will become an indispensable part of consumers’ everyday lives, and one that will save them time and money. The new iPhone 5 and its competitors will surely be one of the primary vehicles people will use to access their digital wallets while on the go, but when you ask the average person what is the underlying technology used to make that connection, the answer will be “who cares?”

Relevance to the consumer will be king, and the ability to act in a seamless and secure environment across any device or platform will be what matters most to that consumer. For this vision to be truly realized it will be digital wallets, not mobile wallets, that will rule the day.

Carey Kolaja is the head of product solutions for the Americas. In this regional role, she leads a team responsible for the creation of products and solutions that reflect the present and future needs of PayPal’s customers. Previously, Carey served as the chief of operations for global product, and prior to that, she held various roles at PayPal in product engineering, Information technology, and marketing.

That’s the impression that analysts at the research house IHS iSuppli got when they did just that: They took a Nexus 7 apart in order to see what components are inside, and to estimate what each of them costs. The early verdict, shared exclusively with AllThingsD, is that the low-end eight gigabyte model of the Nexus 7, which sells for $199, costs $151.75 to build.

The higher-end 16GB model, which sells for $249, costs $159.25, the difference being the cost of the memory chips inside.

Andrew Rassweiler, who leads the teardown team at IHS iSuppli, reckons that Google will break even on the 8GB model, and will turn a tidy profit on the 16GB model. “Like Apple, Google realizes it can boost its profit margin by offering more memory at a stair-step price point. It’s getting $50 more at retail for only $7.50 more in hardware cost, which sends $42.50 per unit straight to the bottom line.”

The IHS iSuppli cost estimate is about $30 lower than an early estimate put out last month by another research firm, UBM TechInsights. However UBM’s estimate was made without having first obtained the hardware for analysis.

The Nexus 7 is similar to Amazon’s Kindle Fire tablet in many respects, but it has some better features. For one thing, the Nexus has the Nvidia-made Tegra 3 processor as its main computing engine. It’s a four-core chip, meaning it has four main processing brains. The Kindle Fire has a two-core OMAP 4430 processor from Texas Instruments. TI, however, supplied two chips for the Nexus 7, one a power-management chip, the other a low-voltage transmitter.

But the Nexus 7, manufactured by Asus for Google, also has a better display, with a resolution of 1,280 pixels high by 800 pixels wide, versus 1,024 by 600 for the Kindle Fire. Rassweiler said the display uses a technology known as in-plane switching, and added $38 to the hardware cost of the Nexus 7, versus $35 for the display in the Kindle Fire, Rassweiler said.

The Nexus also has a camera that added $2.50 in cost to the Nexus, and which the Kindle Fire lacks. The Nexus also has a chip from NXP that supports near field communications (NFC), a close-range wireless technology that’s intended for wireless commerce transactions. Broadcom supplied GPS receiver chips to support mapping functions.

One other part caught Rassweiler’s attention: A gyroscope and accelerometer from InvenSense. While it’s common to see InvenSense gyroscopes, it’s rare to see it combined with into the same chip with the accelerometer. Both are used to determine position and movement of the device. The only other combined gyro-accelerometer seen before, Rassweiler said, was seen in Samsung’s Galaxy S III smartphone, and was made by the European chipmaker STMicroelectronics.

All told, IHS iSuppli figures that the Nexus 7 costs about $18 more to make than the Kindle Fire. But that’s likely to change soon. A New Kindle Fire with a better display arrives this fall.

Image: Courtesy IHS iSuppli

The company is launching TecTiles, inexpensive NFC tags that phone owners can use to automate various tasks. Via a free application, customers will be able to assign various commands to one of the stickers.

A tag outside a conference room could be set to silence phones or to join the Wi-Fi network.

Businesses could use a tag to allow customers to check in on Foursquare, or “Like” the company on Facebook.

Samsung will sell the stickers in a five-pack for $15 via the major cellphone carriers’ stores.

NFC technology is built into a number of Samsung phones, including the Nexus S, Galaxy Nexus, and its newest smartphone, the Galaxy S III, which is just about to go on sale in the U.S.

But a month later, both PayPal and its parent company eBay say they have the depth of leadership necessary to execute its plan to enter the world of in-store payments.

In an interview, David Marcus, PayPal’s VP of mobile, made the case for why its mobile payments strategy will prevail in a market surrounded by incumbents like Visa, MasterCard and American Express, as well as new entrants like Google.

On the matter of Thompson’s departure, he downplayed the role of one executive.

“The strategy wasn’t one man’s thing,” he argued. “It was a shock for 24 to 48 hours, but we control our destiny, and it’s about execution now. So far, so good.”

In addition to speaking to Marcus and several other executives, AllThingsD got an exclusive look at the company’s newly constructed “Shopping Showcase,” which will be used to demonstrate to potential partners how it envisions next-generation payments will occur at the register.

From the ground floor of the company’s San Jose headquarters, it has built several realistic-looking facades, including a hardware store, a grocery store, a clothing store and cafe; users can walk from one experience to the next. I also tried out the experience of making a real purchase at Home Depot, where it is currently being piloted at many San Jose-area stores. (See the slideshow here.)

To be sure, Thompson’s departure was abrupt. He gave PayPal only 15 hours’ notice before the planned announcement that January morning by Yahoo.

But the company now maintains that its strategy for the next two years had long since been cemented, making it much easier to absorb the blow.

Over the next few years, PayPal will be trying to take its online relationship with 106 million consumers worldwide into the physical payments world, by extending its digital wallet services to cash registers at grocery stores, hardware stores and other retail locations.

It plans to do this through a series of different technologies, including PIN codes, credit cards and other services.

Meanwhile, other providers are trying to attack the market using near field communication, where users will tap their mobile phone at the register in order to pay.

Google, Visa, MasterCard and a consortium of wireless carriers, including AT&T, Verizon Wireless and T-Mobile, are all working on similar solutions, which will require retailers and consumers to upgrade their point-of-sale technology and mobile phones, respectively.

“Yes, NFC will be useful, and we’ll be there, but today we are trying to do more than replace swiping with tapping,” Marcus said.

He envisions shopping becoming a more fluid experience. Today, you pick out the items you want, place them in your shopping cart and then stand in line at the checkout.

But in the future, he asks, why couldn’t that change? What if you paid for items in the store’s aisles, or purchased them online before picking them up in the store?

NFC can be restrictive, because you have to be at a physical location in order to tap a terminal and pay.

The scenarios are possible, given how fast things are already changing.

Last year, PayPal exceeded its own expectations, reaching $4 billion in mobile payment volume. This year, it expects to increase that to $7 billion. One of those purchases last year was a $40,000 backhoe, which someone bought using PayPal on their phone.

“By the time NFC catches up, we will be in a world that will move away from the point-of-sales terminal,” he predicts.

As with PayPal’s traditional business, it expects to make money on fees, also called the interchange rate, which the retailer is responsible for paying. Its goal is not to provide a cheaper solution than the incumbents. Rather, it wants to provide other perks that will help retailers and provide incentive for the retailers to want to work with PayPal.

Such perks could include platforms that will allow the retailers to offer loyalty programs, shopping lists, credit options or coupons.

“If you add a payment method that adds 30 to 40 percent more volume [in business to the retailer], then the interchange doesn’t matter,” Marcus said.

Completed two weeks ago, the showcase is designed to woo major retailers and other potential partners that may be considering adopting PayPal’s mobile payments services.

The room includes several realistic-looking facades, including a hardware store, a cafe, a grocery store and a clothing retailer.

In each scenario, it demonstrates how it uses a mix of new technologies, offers and loyalty programs to make it faster and easier to and pay and stay engaged with the retailer.

What you won’t see is demonstrations of near field communications, which is a technology being used by many of its competitors. (To learn why it is not using NFC, read an interview with PayPal’s VP of Mobile David Marcus, coming later today.)

I also visited Home Depot in San Jose to buy something using my PayPal account. The service is now live at many of the Bay Area hardware stores.

Today, PayPal is one of the leading online payments companies, with 106 million users worldwide; but this year, the eBay-owned company is attempting to move offline, by partnering with retailers like Home Depot and other major chains to be announced later this year.

Here are the photos from the Shopping Shopping Showcase and Home Depot shopping visits:

View the slideshow

Gupta joined the company 18 months ago after Google acquired Jambool, a virtual goods payment platform where he was a founder and CEO. More recently, he’d been one of the leaders on the payments team, overseeing Google Wallet and reporting to Osama Bedier, Google’s VP of Payments.

“I can confirm that Vikas has left Google and we wish him all the best in his future endeavors,” a spokesman said.

Jambool’s product, Social Gold, was rolled into Google’s payment products and is being used for in-app purchases on both Android Market and Google+ Games.

According to Gupta’s LinkedIn page, he joined Google in August 2010 and held the title of head of consumer payments. Jambool reportedly was purchased for $55 million before any additional earn-outs. Prior to founding Jambool, Gupta worked at Amazon.

Gupta’s departure is the second management move made in the Google Wallet ranks over the past week.

A spokesperson declined to say if the division was undergoing a wider restructuring, but last week, I reported that Google’s VP of Commerce Stephanie Tilenius was moving into a more global position. And, as part of that, Bedier will be taking on a larger role within Google Wallet, though his title will not be changing.

The Wallet is Google’s mobile payments strategy that allows users to tap their phone at the register to pay using near field communication technology. The company has already successfully formed alliances with both banks and retailers, and is leveraging its vast install base of Android users.

Today, it is live with some merchants, although it does face some challenges.

Currently, it only works on one phone from Sprint, and both consumers and merchants will most likely have to upgrade their hardware for it to work. Additionally, some carriers, such as Verizon Wireless, have decided to disable Google Wallet on phones they are shipping. Other carriers, which are part of a mobile wallet joint venture called ISIS, are expected to follow suit, effectively limiting access for many U.S. consumers.

More than six months after hosting a flashy launch event, the business may be getting a lot harder than it originally looked.

In a note sent to investors today, Gil Luria, an analyst at Wedbush Securities, was the first to disclose the relationship between the eBay-owned company and Home Depot.

“We speculate that Home Depot may be one of the first retailers to roll out PayPal at the point of sale,” Luria said.

In a statement, a PayPal spokesperson confirmed the partnership: “We frequently run trials with our retail partners. In this case, PayPal and The Home Depot are engaged in a limited pilot program for new POS technologies. The pilot is currently being run in five stores and involves a small number of PayPal employees.”

Home Depot is obviously a huge win for PayPal, which until now had only provided online payment solutions to customers.

The pilot, which went live in December, allows employees to pay for items at the register using a PayPal-issued credit card or by entering their mobile phone number into the point-of-sale device at the register. Neither solution uses near field communication, which can be a limiting factor for adoption.

More pilots are expected to take place early this year, but PayPal has been reluctant to name its partners, because it wants the retailers to be the ones to make the announcement when they are ready.

On Wednesday, Yahoo officially announced that it had hired PayPal President Scott Thompson as its new CEO, shocking executives at eBay, including CEO John Donahoe.

In an interview, Donahoe downplayed Thompson’s role in the company’s emerging mobile payments business by saying that the whole team participated heavily in the 2012 plan.

Wedbush’s Luria concurred: “We do not believe Scott Thompson was instrumental to the Mobile Payments vision. It is our impression that although ‘Paypal at the POS (point of sale)’ was led by PayPal management, the holistic mobile payments vision was driven at the eBay Inc. level.”

On Wednesday, eBay’s stock sank nearly 4 percent to close at $30.16. Today, it closed at $30.63.

Luria has an “outperform” rating on the eBay stock, and a 12-month price target of $48 a share.

The investment marks MasterCard’s first in the mobile payments space, and follows similar moves by both Visa and American Express.

Neither company is releasing terms of the round, but mFoundry said MasterCard was the lead investor. Intel Capital, Fidelity Information Services and Motorola Mobility also participated. Previous investors include PayPal, Bank of America and Ignition Partners.

Consumers will most likely recognize mFoundry for developing the Starbucks mobile application, which displays a bar code that can be scanned at the register to make payments from a prepaid account.

MasterCard’s SVP of Mobile James Anderson said he was more interested in mFoundry’s relationships with 600 banks and credit unions.

For the past five years, the company has been focused on the mobile banking space, by developing applications for banks that enables users to check their balances and conduct other financial services from their phone. He said millions of customers at banks, such as Citi and Bank of America, use the applications three to four times a week on average.

Going forward, MasterCard wants to work with mFoundry to enable those applications to make payments at the register using MasterCard’s near field communication (NFC) technology called PayPass.

Near field technology allows a consumer to tap their phone at the register to pay for items. By integrating with these banking applications, the purchase could be deducted straight from a person’s bank account, and without the need to carry around a wallet.

MasterCard is also working with Google Wallet and ISIS, the wireless carrier-led initiative, but it views this partnership as a third approach. “Some consumers will see value in Google; others will want to use their telco provider, and then some will trust their bank,” Anderson said. “At some level those options will be competing, but we believe the choice is up to the customer.”

MFoundry’s CEO and founder Drew Sievers said the relationship is not exclusive, so his company will be free to work with Visa or others, but MasterCard will naturally have a head start since they will be the first ones integrated into the application. Deployments will occur as soon as the middle of next year.

MasterCard is not the only payments provider making investments in the mobile payments space.

Earlier this year, Visa made a large investment in Square, and American Express has opened up an office in San Francisco and created an intimidatingly large $100 million investment fund to make sure it doesn’t miss out on any opportunities.

Sievers said for companies in the mobile banking and payments space that are gaining traction, there’s not only venture capitalists eager to invest, but a ton of companies looking for strategic investments.

In fact, he said, “there’s fewer opportunities to invest in than there are companies willing to invest.”

In fact, an increasing number of Americans seem willing to pull out their phone and snap a picture to get more information. Some 5 percent of Americans — and 15 percent of smartphone owners — have scanned such a code in the last three months, according to new figures due to be released on Monday by Forrester. A year ago, only 1 percent of Americans had been willing or able to do so.

Bar codes have become a staple in magazine ads, on products and in stores.

Marketers still have mixed feelings about their effectiveness, but bar codes provide an efficient and cheap means to link the online and offline worlds. Other technologies, such as near field communications (NFC), also hold promise, but lack the accessibility of QR codes, which can be read by any smartphone with a camera. NFC, while potentially more elegant, requires special hardware in both the phone and whatever is being read.

Plus, the distinctive look of bar codes also makes them almost an advertisement for themselves. See a bunch of dots, whip out your smartphone — at least for the 5 percent of the population currently willing to do such a thing.

The most common of the codes are standard QR codes with their pattern of black dots, but Microsoft has also been pushing a rival approach, known as Microsoft Tag, that generally consists of multicolored triangles in various patterns.

Others, such as Digimarc, are pushing methods for embedding the codes into the page so that they don’t disturb the visual layout. The challenge, though, is that it is harder for readers to know that there is more content available.

The codes are also growing more personalized. Historically, they’ve tended to be generic, applying to all users and viewers. Now some folks are trying to see if it is worth the trouble to create individual codes for each unit. An early example of this is Seattle-based Bakon Vodka, which is putting a QR code and unique serial number on each bottle, in an attempt to create an online community for connoisseurs of its swine-infused swill.

Bakon’s program will allow customers to earn various badges for buying new bottles, or for giving the product to someone who then takes it to a new location.

“It’s kind of a Foursquare for products,” Bakon Vodka co-founder Sven Liden said in a statement.

It is clear that the efforts are starting to catch on, at least in some cases. ScanLife, which tracks such codes, says the number of active users in its system has increased 300 percent from a year ago. However, most of those gains have come from the increase in the number of QR codes, rather than in increased adoption. ScanLife said the average number of scans per bar code is up a far more modest 39 percent from a year ago.

The best campaign in its system had more than 427,000 scans in a six-week period, ScanLife said.

The launch comes on the heels of PayPal unveiling its competing digital wallet strategy last week in Rancho Palos Verdes, Calif.

PayPal believes it will reach a larger segment of the population faster, because it is not relying on as much technology.

Meanwhile, Google Wallet customers will be restricted to those with a Citi MasterCard (or prepaid card) and an Android-powered Nexus S from Sprint. Additionally, the merchant will have to have a MasterCard PayPass-enabled payment terminal.

PayPal anticipates having at least one major pilot by the end of the year, with a more major rollout slated for April; Google had previously pegged summer for a mobile payments launch.

In an interview, MasterCard’s head of mobile, Mung Ki Woo, defended the search giant’s approach to the market.

He said MasterCard already has 300,000 PayPass-enabled terminals worldwide, of which half are in the U.S. That number is growing, Woo said, but there is still a long way to go to upgrade all 30 million in existence.

Besides eBay-owned PayPal and Google, dozens of companies are rushing into the space, including American Express; Visa; the wireless carriers, through an intiative called ISIS; and start-ups, too, including Square.

But it’s not clear how quickly consumers will flock to change payment technologies, especially near field communication. which, according to some, will take at least three years to become widespread.

“Very much so, yes, we are in favor of NFC,” Woo said. “It’s going to take a little bit of time. Consumers will need to change handsets, but at the same time, they do it quite frequently now. And we also expect the number of locations equipped with PayPass will increase.”

At a recent MasterCard event in New York, the company demonstrated a number of scenarios for mobile payments. One of the examples that resonated best with people, Woo said, involved vending machines. ”They don’t accept credit cards, so they thought this was very cool,” he said.

Other areas of focus are everyday items, like gas, groceries and other necessities, including bus or train tickets, where the headache of standing in a line can be eliminated. Google already allows you to search for businesses in your ZIP code that accept the system. A quick search in Seattle shows a number of nearby fast-food restaurants and pharmacies that will take it.

Woo said that although there may be some lag as the infrastructure gets up to speed, he had two comments on PayPal’s approach to the market.

Last week, PayPal said one of its strategies was to allow people to enter their phone number and PIN at the terminal to pay, which would eliminate the need to carry a phone or a wallet.

Woo said, “It looks like a slow and clunky experience. Today, you can swipe your card; tomorrow, you will have to enter a phone number on the keypad. It seems to be slower than simply tapping your phone.”

Additionally, he wonders how much work the merchant will be required to do on the back end, so that users only have to enter their phone number at the terminal. “PayPass is compatable with existing back-end processes. There’s a real question as to whether, in trying to avoid any change on the front end, you are pushing everything to the back end.”

Another big difference between the two is that PayPal will be making money by charging for payments, whereas Google will be providing the service for free and making money from coupons that are offered to consumers, a la Groupon.

Woo would not say when Google Wallet was launching, though he allowed that “it’s going to be very soon.”

In addition, he said that after the launch, the ecosystem will expand quickly. “You’ll see a lot of merchants coming online, and a lot of announcements.”

Ironically, the event took place at Terranea, which was the same resort where Google demonstrated its Wallet and Offers platforms at the D Conference only three months ago.

Since then, not only has the space heated up, with all the major players announcing their plans, but so has the rivalry between the two Bay Area companies. PayPal filed a lawsuit against Google for stealing trade secrets and key employees, and now they will compete for the attention of merchants and consumers.

In an interview, PayPal’s president, Scott Thompson, explained how the online payments leader was different, and why he believes the space will take off “faster than you ever imagined.”

In demonstrations earlier in the day, PayPal showed me a number of different scenarios, including using a phone number and PIN code to replace swiping a credit card at the payment terminal. It is also integrating check-in capabilities to its mobile application and location-based services to identify nearby stores or restaurants. What it won’t be doing is relying on near-field communication technology or implementing an offer network, unlike Google’s approach to the market.

Thomson, in his thick Boston accent, was eager to share his side of the story, after hearing so many other competitors go before him. Here are some highlights from the interview:

What problem are you solving?

Thompson: An offline merchant today is seeing slow to no growth. It’s tough. E-commerce companies are still growing, and if you have both, you are seeing slow to no growth.

First, we know merchants are worried about consumers coming to you from all different ways — online, in-person, mobile, etc. Multichannel retailing is real for them.

Second, retailers are asking “Who is the customer?” If you visit the site, we know. There’s a wealth of information about them. In offline, they don’t even know you are in the store.

You are battling the competition with your hands behind your back. The question is “How do I close the loop? How do I know that Tricia’s here?” Our solution does close that loop.

What about NFC? In the four presentations I saw, it wasn’t used once.

Thompson: We are not embracing technology, we are solving the problem of what can I do today. It’s hard for me to speak [about NFC] until there are standards. You can’t ask retailers to implement three to five standards.

We can’t be so bold or arrogant to think that you’ll adopt to the standards we’ve created. If we said “Throw away your terminals and get a new one, or buy a new phone” — no one has that level of influence and pull to say “You’ll have to adopt to the standards we’ve created.” … We will work with the new and the old.

If we only built something that worked with this phone, this bank, and this network and NFC, you might address 50 people out of the 350 million people in the U.S. We hope that all 350 million people use what we are doing today.

You boldly predicted recently that by the end of 2015, digital money will be accepted everywhere in the U.S. Some people think you are nuts!

Thompson: This wave is going to happen faster than you think. If every consumer can pay with PayPal with a mobile phone number and a PIN, then I don’t ever have to reach and find this [Thompson pulls his money clip out of his pocket].

Why is that a possibility? There’s lots of reasons!

The value to the merchant is compelling, and the other thing that’s true is that there’s been a lot of compression of credit. A whole lot of people don’t have credit cards, and there’s a higher number of debit transactions. That’s an important change, if your debit card is compromised. The bad guys will get your money. I need more security than ever before. So, will it happen? Will it be fast?

It will be faster than you ever imagined. The one that wins will be the wallet that lives with you everywhere.

How important is this intiative to PayPal? It has spent hundreds of millions of dollars in acquisitions to get to this point.

Thompson: At analyst day, we said we would double our business by 2013, and those numbers don’t take into account any revenues from this point-of-sales initiative we are working on. This is going beyond to the next three-year commitment.

We’ll see revenues next year, but we are planting the seeds now [for 2014]. We said revenues would total $6 [billion] to $7 billion in 2013. To continue to grow at the same rate in 2014, you better do things now. We see an opportunity. We see technology changing, and now is the time to invest.

Just because you aren’t using NFC right away, doesn’t mean you won’t have a steep adoption curve. You’ll have to sign up offline merchants and get consumers on board.

Thompson: Our work is hard, and the relationships we’ll forge will be hard, too. You’ll see next year, when we formally announce our partners, that they are very big merchants.

[On the consumer side] If merchants see value, and integrate it and push it, consumers will use it. It will become a natural thing for you to use it in the grocery story or the pharmacy. You’ll be able to use it for everyday spending — that’s age-old logic. If the companies with the most foot traffic use it, it will be adopted.

So, it’s not for the mom-and-pop coffee shop?

Thompson: It’s where you are most frequently visiting.

Let’s talk about the competition. There’s American Express, Visa, MasterCard, Google and others, like Square, all coming up with different mobile payment strategies.

Thompson: I love it! I actually do!

It reinforces that the opportunity is big. I find it humorous that they find it a novelty. It wasn’t long ago — after all these years of them saying that no one needed a [digital] wallet — that they are saying that the wallet is now important and we better have one.

Besides, this is not unique to PayPal, but we play better the more sophisticated the competitor is. It’s remarkable how competitive our organization is.

Other payment providers are rolling out wallet technology for the chance to offer coupons or offers to the consumers — which could be a lucrative local advertising strategy. Will you be doing the same?

Thompson: In subsequent releases, merchants will be able to do things in the wallet, like offer coupons, but it is not our intention to compete in offers. We are doing payments.

I talked to a major retailer recently that said they’d find it a conflict if the payments provider offered discounts, rather than the retailer being the one to own the relationship with the consumer.

Thompson: That’s where we are different. The others are about coupons and advertising. We are about payments. That’s where 110 percent of our focus is. I believe we have this right. This will be a really big phenomenon in the multichannel world. We are in the business to help merchants grow their business. We are not trying to take the customer relationship away from them.

If we do our job right, all of our businesses will grow.

VeriFone CEO Douglas Bergeron told Bloomberg that his company anticipates acquiring one company a year at roughly $500 million to $700 million, along with several smaller transactions. In all, its purchases could add up to as much as $1 billion annually.

The San Jose, Calif.-based company is eyeing emerging markets. such as Turkey and Brazil, and is seeing investment opportunities by teaming up with Google and other players. Google Wallet enables Android phone users to link their bank accounts to their phones and use them to pay for items in a store, using near field communications.

The move to mobile payments may still be in its infancy, but as a major maker of credit card terminals, VeriFone must consider new entrants — such as Google –very disruptive. Earlier today, I wrote about how Apple products are becoming fairly mainstream at retail locations, and may increasingly reduce the need for registers.

In March, VeriFone lashed out against Square, the San Francisco start-up that has been getting a lot of press for offering a mobile-phone-based payments solution to small merchants. VeriFone claimed that the devices Square was handing out to anyone looking to accept credit card payments were not secure, but many considered the attack a sign of VeriFone’s insecurity in the market.

Since then, Square has started adding an additional level of encryption, and VeriFone has unveiled its own copycat product, which will allow retailers to use an iPad or Android tablet for in-store checkout. It also has other handheld devices for sale, along with iPhone-based swiping solutions.

VeriFone did not provide any hints as to what it may be interested in acquiring. However, Bloomberg suggested that VeriFone could be looking into adding distribution in Asia through an acquisition of a major terminal maker. Likewise, it could also be interested in a payment processor in countries where credit card penetration remains low but is growing. A payment processor would get VeriFone closer to merchants in those markets, and could enable it to offer additional services, such as coupons, daily deals and other loyalty programs.

To do so, subscribers enter their phone number and a PIN code at checkout, rather than entering a 16-digit credit card number. The service will work for shopping on any Internet-connected device, including a PC, phone or tablet.

Subscribers will also have to sign up for a Serve account through American Express, which is very similar to a PayPal account and can be funded by a bank account or a credit card.

While the system is designed to make checking out more simple, it could take awhile for consumers and merchants to adopt it. Not only will Verizon subscribers be required to have a Serve account, but online retailers will also have had to integrate Serve as a payment mechanism.

“Yes, they have to be Verizon and a Serve customer, but we are preloading a number of devices — smartphones or tablets — with the Serve app, and when you preload there’s a much greater uptake,” said Dan Schulman, group president, Enterprise Growth, American Express. “They’ll be able to simply or easily transact for any size good, whether it’s a virtual good or hard good.”

Schulman declined to say how many customers have signed up for Serve since it launched in April, but said that the deal with Verizon Wireless is not exclusive, meaning it could partner with other carriers in the future.

Despite these hurdles, this may be a logical intermediary before we see people using their phones to pay for items in the store using near field communication. A number of companies are scrambling to become a player in the digital wallet space, including Google, PayPal, Square and the credit card and payment providers, so this will be one of many options consumers will be able to choose from.

Verizon Wireless has also formed a joint venture called ISIS with AT&T and T-Mobile USA that will launch a near field communication trial next year.

A number of companies have also pursued carrier billing as an option, but convincing carriers to allow large payments on the bill for physical goods has proven difficult. Companies that fall into this bucket include BOKU, BilltoMobile and Zong, which was just acquired by PayPal.

Up until now, the items most often charged to a carrier bill are ringtones, or virtual goods that are purchased inside online games.

Greg Haller, Verizon’s president of enterprise and government, said its partnership with American Express is not designed to compete with carrier billing or its ISIS joint venture. “We’ll still allow virtual goods to go on the bill, but the real opportunity now going forward is that a customer won’t have to go in a shopping cart and enter a 16-digit number. This really turns it into a one-click process. The benefit is the simplicity for the customer, who can now buy it on their phone, by entering their mobile number.”

Over time, additional services will be added, such as coupons and loyalty programs. One partner is vente-privee.com, a French-owned flash sales site that partnered with American Express to enter the U.S.

“We are pleased and we are deploying with more and more functionality all the time,” Schulman said. “We’ve announced a number of partnerships, all of which are being integrated, this being the largest and most strategic that we have. We’ll start to integrate and be in market [with Verizon Wireless] by the end of the year, and we have high hopes for it spurring mobile commerce.”

American Express and Verizon Wireless are also working with Payfone, a New York-based company that the two companies backed financially in the spring. Payfone is running all the authentication in the background to ensure that the phone number entered is valid and corresponds with the correct account.

Using a technology known as “near-field communications,” or NFC, consumers will be able to buy items simply by passing their phones in front of a sensor at the checkout counter. Though NFC isn’t available in many phones yet, a number of companies, including Google Inc., are close to rolling out programs.

By 2014, 70 percent of U.S. consumers will have smartphones and 52 percent of those will be NFC-capable, according to estimates by payment consultancy Mercator Advisory Group. Already, app developers, wireless carriers, banks and card companies are racing to shape the potentially lucrative mobile-payments ecosystem.

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New investors Singapore’s EDBI, SingTel Innov8, and Motorola Solutions Venture Capital join a handful of existing investors, including Alloy Ventures, Citi Ventures, Draper Fisher Jurveston, DFJ Gotham, First Data, Miven Ventures, Motorola Mobility, Nokia Growth Partners and NCR.

To date, the company has raised $90 million.

ViVOtech’s near field communication technology is being used by Google to enable Android users to tap their phones at registers to make a payment.

Google unveiled its mobile payments and offers initiative last month, and since then a lot of interest has poured into the space, with other companies, such as Square, American Express, Visa and others coming up with several alternatives.

The 10-year-old Santa Clara, Calif.-based company is providing the NFC-enabled point of sale readers to merchants also participating in Google Wallet. So far, the company has shipped more than 600,000 readers in the U.S., which are all capable of accepting Google Wallet payments.

The new funding will be used to expand internationally beyond the 35 countries it serves today.

Among the technologies that are quickly moving to the mainstream are a new, lower power form of Bluetooth along with Wi-Fi Direct, which lets two devices talk to each other over Wi-Fi without the need to first connect through a router. Also moving from the fringes to the mainstream of the smartphone market is support for so-called Near Field Communications, technology that is most noted for allowing mobile payment, but can also provide a quick means of authentication and sharing of other types of data.

“We’re seeing a huge interest for NFC,” Broadcom Senior Vice President Michael Hurlston said on Wednesday, speaking to a group of reporters in San Francisco.

Broadcom, as CEO Scott McGregor told AllThingsD back in February, is also hard at work on chips to power both low-cost Android phones as well as on technology to improve location-based services indoors, where satellite-based approaches work less well.

The sub-$100 phone market is being further fueled by new players like China’s Huawei and ZTE that are building less expensive phones that can be sold under the carrier’s brands. “Android has certainly been something that has leveled the playing field,” Hurlston said. That trend has helped Broadcom grow its business in China, where it had been less of a strong player.

Hurlston noted that more of its business is still at the high-end of the smartphone market, an area where brands like HTC, Motorola and Apple are seeing strong growth. “The high end of the market is still growing like crazy…but that low end seems to be eating a lot into the feature phone and basic voice [phone market] and that’s very good for us as a business.”

Although battery life is a concern for Broadcom, Hurlston said that one of the challenges is that it is not as high on the request list from the wireless carriers, who have a huge role in dictating what goes into the phones, since–especially in the U.S.–they are the ones buying the phones from device makers.

“What they are most interested in are these new features,” Hurlston said.

Wi-Fi Direct, Hurlston said, should become much more common by the end of the year. “We definitely expect to see a large percentage of phones by year end become Wi-Fi Direct enabled.”

NFC and indoor location services should start to take off toward the end of this year and into the first half of next year, he said.

Another thing that is surprisingly low on the feature request list from carriers, Broadcom executives said, is demand for better voice quality, even though new 4G networks could support using some of that extra bandwidth for improved calling. “What we are not seeing is a lot of pull,” Hurlston said.

However, while consumers will have the capabilities this year, the research firm finds that mass-market adoption is still years away, and the category will be crowded with players, ranging from financial services firms, card networks, mobile operators, device makers, point-of-sale terminal vendors and start-ups.

Sure enough, in the past few weeks, we’ve seen reports of Google; Sprint; a coalition of carriers excluding Sprint, PayPal, Visa, MasterCard, American Express; and a host of start-ups that are all jumping into the space.

The report, authored by Thomas Husson, defines mobile payments broadly as any transaction that is initiated using a mobile phone–in the browser or by tapping the phone against a terminal to pay in the store.

Husson writes that while adoption may still be years off, what we will see in 2011 is large shipments of near-field communication devices from large handset makers that will make these tap-and-go transactions a reality.

The first NFC-compatible Android device is Samsung’s Nexus S (pictured here), which is now shipping. But Forrester estimates that manufacturers will ship between 40 million and 50 million NFC-enabled devices in 2011.

Still, the vast majority of purchases that are being made with mobile phones today are not physical goods, but rather digital content, such as applications and music.

But smartphones are routinely considered a threat by retailers, who fear that consumers are using their stores as showcases to decide what they want to buy, then using their devices to scan bar codes and conduct price comparisons in the store–and ultimately buying online for less.

Adoption of these features, however, is still fairly low. In the U.S., Forrester said, eight percent of survey respondents said they used their phone to compare store prices with online prices. About half of those people said they purchased an item on their phone that was not available while they were in the store.

Overall, the survey found that 12 percent of U.S. respondents said they had used their mobile phone to buy a product.

Forrester made a few recommendations for catapulting consumer adoption of mobile payments. It recommended making NFC-capable terminals more widely available, including in mass transit scenarios, and creating incentives for consumers to adopt the technologies by integrating loyalty awards and coupon redemption into the process.

VeriFone makes what are called point-of-sale terminals that stores across the country use to process credit card payments. As part of the potential tie-up with Google, VeriFone’s terminals would be able to accept payments from mobile devices that are embedded with technology called near-field-communication, or NFC, this person said.

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“I hope at some time in the future they will be [willing] to choose Android again,” Schmidt said in a roundtable discussion with a small group of reporters following his keynote speech at Mobile World Congress in Barcelona.

Schmidt said that he and Android chief Andy Rubin had talked quite a bit with Nokia and that the company understood its operating system well, but declined to say how advanced the talks with his company had gotten. “We did talk to them,” he said. “I would rather not go into the details.”

Nokia CEO Stephen Elop told Mobilized on Tuesday that Microsoft will pay billions of dollars for the right to have the company cast the “swing vote” in favor of Windows Phone 7.

Asked whether he agreed that the Nokia-Microsoft partnership makes the smartphone business a three-horse race, Schmidt said, “They’ll have to deliver.”

Separately, Schmidt said regarding near-field communications that Google intends to build a business, but won’t be getting into the credit card or terminal business, but is interested in delivering offers to NFC-equipped devices.

He also reiterated that the company isn’t looking to get into the media business.

“It’s important not to get into businesses you don’t understand,” Schmidt said.

Rubin did say that, having gotten into the business of selling apps, Google is also exploring what other kinds of digital goods it might sell, but had no comment on whether it would sell music or publications.

Asked by Mobilized whether the company needs to do more on the social front, Schmidt said that the company isn’t as interested in building products to compete with Facebook as it is to have the social signals it needs in its core products. However, he said that the Facebook “Like” button or something akin to it is important because what you and your friends like is a key to delivering personalized search results.

On the EU front, Schmidt said that company has had some conversations with regulators and looks forward to more in order to address any concerns.

While paying by mobile phone has been around for years–with consumers charging ringtones and other mobile content to their bill–it’s been only in the past few months that it has become viable for other expenses.

In fact, over the past couple of weeks, a substantial milestone was reached and went almost completely unnoticed, said David Marcus, the CEO of Zong, a mobile payments provider.

He said Facebook stopped adding a surcharge when customers buy Facebook Credits via the mobile phone. And it’s not just Facebook–other companies have been following suit when it comes to digital and virtual goods.

What’s more, there’s an even bigger change coming very shortly.

Carriers will lower the amount it charges even more for physical goods.

It won’t be enough for everyday items that have extremely low margins, like groceries or gas, but it will open up mobile payments to e-commerce. Most notably, Marcus said, consumers of high-margin items, like group-buying vouchers from Groupon and LivingSocial, will be able to participate.

The process makes sense. Users should be able to be notified about offers via the phone, purchase the deals on the phone and then walk into a restaurant or bar to redeem them using their mobile phone–instead of logging on to a Web site from a computer and printing out paper vouchers.

“Our sales force is actively working on it right now, and by the end of the second quarter, we’ll be processing physical payments,” he said.

Zong is not the only one in this red-hot space.

In fact, it’s chock-full of competitors, including PayPal, Boku, mopay and BilltoMobile. They all want to make paying for virtual and digital goods on the phone as seamless as possible.

Additionally, another class of company is going about it in a whole other way: Using your phone to charge payments to your credit card at the grocery store, gas station or other location. Usually this entails waving the phone in front of a point-of-sales device using RFID or near-field communications.

The mobile-payment providers are not in that space, but several incumbents are, including Visa, MasterCard, PayPal and even the carriers, through a joint venture called ISIS. Another company, Square, is coming up with a way to replace the point of sales machine with a cellphone.

But Marcus said the really exciting stuff is right around the corner.

And, right now, most of the momentum is from the carriers dropping the revenue splits to closer to 10 percent, from 40 percent more than a year ago. “The carriers won’t go below 10 percent for digital or virtual goods, but they will lower their rates for physical,” he said.

Removing these sky-high surcharges has sent payment volumes skyrocketing.

In fact, after Facebook and others were able to lower the rates, Zong got a nice lift.

Marcus said across their its network, its daily payments volume jumped by more than 50 percent in the first week of January, compared with the same week last December.

Marcus keeps track of the company’s payments volume from a flat screen on the wall of the company’s Menlo Park, Calif., offices. When countries turn red, it’s a good sign.

He expects more good signs in the future as it prepares for another bump from physical goods coming in the next few weeks.

Hughes, the former Verizon Wireless VP of business development and partnerships, joined the organization only four days ago, we have learned.

Isis is a joint venture between AT&T, Verizon Wireless and T-Mobile that will try to get a piece of the huge payments market. When the JV launched in November, it had announced only the appointment of Mike Abbott as CEO.

Abbott’s background includes working in credit card services and for GE Capital, so Hughes will bring his expertise from the wireless industry.

The Isis initiative will be going up against a host of other players–some of which are direct competitors, while others, taking a slightly different approach, could act as partners.

For example, Square is trying to turn the cellphone into a point-of-sale machine for small businesses, Boku and Zong have been primarily focused on selling digital goods that get charged to your carrier bill, and others–ranging from PayPal to Visa and MasterCard–have strategies, as well.

Isis’s initial focus will be on using near-field communication–or NFC–chips to enable customers to make purchases in a store by waving a phone over a compatible reader.

Hughes’s appointment is part of the organization’s initial ramp-up. Once the management team is in place, it will be officially based in New York, with offices in Atlanta, Dallas and Seattle to be close to its carrier partners.

Hughes will feel right at home at Isis, having been part of the original team at Verizon Wireless that helped hatch the joint venture behind closed doors over the past two years.

In order for it to be a success, Isis will need the participation of the carriers, handset makers, merchants and banks.

Hughes said they are open to working with everyone and is optimistic about all of the suppliers working together–even the fiercely competitive carriers. ”It’s going to happen faster than any of the pundits think it will happen, for near-field, in particular,” he said.

Over the next 18 months, the organization has the goal of introducing its service in a few key markets.

Abbott added that meeting its goals will have a lot to do with relying on standards and technology that already exist. NFC has been around for years, and already the likes of Google is integrating it into its next version of Android.

The longer-term vision is that it won’t be just about payments, but about the whole wallet–by combining coupons, location check-ins, loyalty points and cards in one place.

Abbott declined to provide specifics on how the organization is funded, other than that it’s supported by a substantial investment from the carriers involved.

For now, Sprint is the only one missing from the list of major U.S. carriers.

Hughes admits that the initiative will likely need as many carriers on board to get enough scale.

Back when he was representing Verizon Wireless, he thought it was impressive enough to say that he covered 90 million consumers when talking to banks or merchants. “But we were told frequently, and more often than not, ‘That’s a lot, but I don’t want to do this three or four times [for each carrier].’”

The deal, which occurred as far back as August, is being reported by Ben Kolada, an analyst at the boutique research firm the 451 Group. Kolada is characterizing it as a relatively small deal and remarks that the company’s only valuable asset is a patent awarded by the U.S. Patent and Trademark office. Google confirmed the acquisition to eMoney, but wouldn’t provide any more details.

The patent could potentially tie in nicely to Google’s near field communications (NFC) technology, which was announced last week as part of the release of the new Nexus S smartphone. Google’s Andy Rubin demonstrated the NFC technology live last week onstage at our event D: Dive into Mobile.

The patent encompasses technologies around mobile banking, advertising, identity management, and credit card and mobile coupon transaction processing. The company also occasionally goes by the name Walleto.

According to LinkedIn, the CEO and Founder of ZetaWire/Walleto is Alex Hertel, who started the company with his brother Philipp in March 2007.

11:48 am: Joe Belfiore gives a quick résumé. Windows Media Center, Zune, etc.

11:49 am: Walt: Why so late?

Belfiore: We’ve certainly been doing phones for a long time. A lot changed in the industry with the iPhone. Belfiore says Windows Phone 7 tries to respond to what Apple has done with the iPhone and Google with Android.

11:50 am: Walt: What makes you think you are right up there when you don’t have a lot of things?

Belfiore: (Points to Andy Rubin’s comments that Android is really for tech enthusiasts.) Belfiore says he agrees and that Windows Phone is built more for everyday people, to do the key tasks average users do and do so in an elegant way. “There are certainly some functionality shortfalls, and we are going to work to address them,” he says.

Copy and paste coming in “early 2011,” he reiterates.

As for multitasking, he says some tasks are there, such as background fetch of email and Web pages. Music playing works (but only if you are using Zune).

Walt points out that is where iPhone was when it launched and it got away with it because it was so different from what was on the market.

11:53 am: Belfiore says that some of Windows Phone 7′s features are worth the tradeoffs. As an example, he cites a feature that takes a picture with one click even if the phone is locked.

“We’ve focused on valuable scenarios that are different,” he says. “Some set of users will choose the value of those scenarios.” Belfiore says that Microsoft still aspires to fill the gaps.

Walt: How many have you sold?

Belfiore: We’re not talking about numbers yet.

Walt: Other people do.

Belfiore: We’re four weeks in. At some point we’ll get to that. “It’s just too soon to talk about numbers.”

11:55 am: Talk shifts to Microsoft’s ad campaign that suggests Microsoft’s phone provides at-a-glance information so that people can go back to their “real” life.

“Being late to do this type of experience,” Belfiore says, allowed Microsoft to go back and see what was working and what wasn’t with existing software. “Can people accomplish the most common tasks more quickly?”

That, he says, is how the company was led to the dedicated camera button. Another good example, he says, is Live Tiles–icons that can update with notifications, photos or other data.

11:58 am: He’s talking more about the Live Tiles and the fact that you can have a tile for the people who are most important to you and then contact them in any way you want (text, photos, call, Facebook).

12:00 pm: Walt: How many apps do you have?

Belfiore: I think the marketplace now has between three and four thousand.

12:02 pm: Walt: (Google Android chief) Andy Rubin said that parts of Windows Phone 7 have been around a long time. Is it old or new?

Belfiore: It’s mostly new. It is true we have kernel code that has been around for a long time.

But that’s not a bad thing, he says. The code has been tested, the bugs have been fixed. It’s true on the desktop with Windows. It’s true of Linux as well.

It’s probably true of Android, since it is Linux-based, which is based on Unix.

But a lot is new, such as Silverlight and XNA, in which developers build their apps. “He implied we were encumbered by legacy…I don’t think that’s true.”

12:06 pm: Walt: Why not build your own phone?

Belfiore: Our view is that both Microsoft’s core capabilities and our ability to affect more people would be greater with third parties building diverse hardware.

But, Belfiore says, the company recognized the challenges that come when you don’t make both software and hardware. In the past, Windows Mobile was wide open. This time around, Belfiore says, the company aimed for “the right amount of specified variation in hardware and the right amount of specified sameness.”

12:08 pm: Over time we expect to increase the variation that you see. “We are trying to get the benefits of constraint,” such as better user interface and making things easy for developers while still giving choice to consumers.

12:09 pm: Walt: How long will it take you to again become one of the big players in terms of market share.

Belfiore: It will certainly take some time. He points out that current Windows Phone software runs on only about 10 phones, all high-end devices. Over time, they want to get to lower price points.

Walt: So, how long?

Belfiore: I don’t know how long it will take.

Walt: Months?

Belfiore: It will probably take longer than that.

Walt: A couple of years?

Belfiore: Yeah, maybe.

Walt: Who will be the leaders three years from now?

Belfiore: It’s certainly the case that there are a lot of people building good products. My personal feeling is things won’t change that dramatically that quickly.

I do assume we’ll be in it. The question has to start with whether you have a great product….I think we have that so far. We’ll see how this plays off. BlackBerry has done that in the past. Nokia has done that in the past. We’ll have to see about the future.

12:13 pm: Walt: What about tablets, an idea Microsoft has championed for a long time. But what is the strategy? Seems to be desktop Windows is not a variation of the Windows Phone.

Belfiore: Historically, Microsoft has tried to adapt Windows for other uses (e.g., Media Center, tablet).

So far we’ve continued down that path.

The work we have done on the phone has been focused on very small-screen devices.

Walt: Why not just scale up? Both Apple and Android are working from their phone OSs in doing their tablets.

Belfiore: We’re four weeks out of introducing this new thing. The state of the world today is Windows, is our broad operating system. Runs on same screen size as tablets.

12:15 pm: On to Q&A

Q: How can phone makers really differentiate beyond apps and things like a keyboard and a camera?

Belfiore says the company aims for elegant co-existence. Dictates certain screen sizes, three buttons, four-point capacitive multitouch. “We really want all users to get a great touch-typing experience.”

There’s no upper limit on what they can add in terms of hardware features. For example, a hardware maker could add near field xommunications or some other peripheral not already supported.

12:17 pm: Joshua Topolsky from Engadget asks about tablets again, says last answer a bit of a cop-out. “You can’t possibly be this blind” that Windows 7 isn’t going to work on tablets in the way you want it. Is that really the strategy?

Belfiore hints that the announced strategy focuses on Windows for tablets, but says the company will evaluate that going forward.

Topolsky: Courier?

Belfiore; I wouldn’t count on that.

Last question, from a mobile video calling app. As of today, no native access for developers that need things like native access to the camera.

Belfiore: Individual software makers don’t, but phone makers and operators do, so software makers could work with them. He reiterates the platform is new and the goal is to open things up.

Goal is that all of these creative things can be built. “We’re going to move as fast as possible.”

12:21 pm: Walt: One last question on carrier craplets. There’s a limited number of tiles on Windows Phone 7. On the two phones I saw, some of the space I saw was taken up by carriers.

Belfiore: I really like our approach. I think it is really well considered. When AT&T sells a phone it is AT&T selling the phone. Makes sense for them or hardware makers to be able to showcase their differentiation. Both phone makers and carriers can create tiles, but the user can choose to remove the tile or even uninstall the app.