Best investment play in hot mobile payments market?

Will your cell phone soon become a proxy for your credit card?  Facebook’s new virtual currency business, coupled with Apple’s erupting iPhone/Apps/iPad sales, will energize merchants’ ability to reach the world’s 2 billion mobile phone customers.

My Take . . . Amazon (AMZN) is well poised to capitalize on the growth in mobile payments and represents the best overall investment play in this exploding sector.  Look for AMZN to approach $200 by Christmas.  Upstart Zong looks promising – but there’s no investment play with this innovative startup until there’s an IPO or rumored takeover by eBay’s PayPal.

Despite heavy competition from well-backed BOKU and Obopay, Zong has emerged as a leader in alternative payments.  As Facebook builds its virtual currency business, Zong looks to be an early beneficiary. Facebook likes them so much they made Zong the mobile payment provider and one of three payment options available for Facebook Credits.  Zong began as a company supporting secure online payments in Facebook games and lets users of Facebook and other sites buy virtual goods via cell phones.  Zong claims it converts shoppers into buyers at 10 times greater than traditional payment methods.

A Palo Alto startup, Zone just landed a $15 million venture investment.  The money could be used to propel Zong to be a true competitor to eBay’s PayPal, particularly in the emerging mobile payment markets. Zong currently has partnerships with 174 mobile carriers that cover 1.5 billion customers and partnerships with the major credit card networks.  While Zong obviously won’t reach all those customers, if it can merely reach a fraction, it stands to be one of America’s hottest tech startups.  There’s also speculation PayPal may acquire Zong, or enter into a major partnership.  Whether a PayPal tie-up or a path of independent growth lies in store, the rapid global growth of mobile Internet devices and smart phones puts Zong in the sweet spot.

Mobile payments have been hyped for years and, although they’re popular overseas where fewer people have credit cards, they’ve been slow to catch on in the U.S.  In the past, purchases were tallied on your mobile phone bill and you then paid your carrier.  But because the carriers take a cut along with the payment provider, the cost of transactions is sometimes prohibitive for merchants.  However, sellers of virtual goods – which cost almost nothing to produce – currently account for 80% of mobile payments.  As more users sign up for Zong-like services, the hope is more merchants will, too.  But the greater draw for merchants is that they’re no longer paying a cut to the mobile carriers.

The bigger question is whether startups like Zong stand a chance against payment and ecommerce giants like eBay’s PayPal and Amazon’s PayPhrase. PayPal’s CEO recently their strategy clear: “Payments is a winner-take-all business.”  Amazon recently launched PayPhrase which allows consumers to simply enter a username and PIN that can also be used on outside merchant sites like Buy.com and DKNY.com which use Amazon’s checkout service.

Zong is already thinking about moving beyond purely digital goods to content like music and movies, or any online services that have a cost of goods sold.  With Zong, all you ask your customers for is their mobile number.  With credit cards, you have to ask the card number, the security code, the expiration date and the billing address.  Unlike other payment services, Zong doesn’t require any end-user registration.

Nevertheless, my money is on Amazon (AMZN).  I see AMZN hitting $200 by Christmas. There will of course be more than one winner in this sector.  But Amazon is already well entrenched in content as well as all types of hard goods and consumer durables.  And I see no real barriers to Amazon’s new PayPhrase also adopting all the consumer-friendly bells and whistles now touted by upstart Zong.  Plus, Amazon is enjoying strong international growth, especially in Europe where embedded “chip-and-PIN” smart credit card technology is widely embraced.  This bodes particularly well for mobile payment service providers like Amazon.

Add to this mix Apple’s endless expanding universe of Apps, iPads and iPhones (iPhone’s smart phone U.S. market share is currently 25.4%, according to comScore) – as well as Google’s Droid – and you have a huge gravitational pull on consumers to embrace mobile payments in a big, big way.