'Nickel and diming' across the Internet
First came paper. Then plastic. Will digital replace them both? No, this isn't a story about the evolution of shopping bags; it's about money.Skip to next paragraph
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Plenty of online shoppers have used credit cards and online services such as Pay Pal to buy everything from cars to computers to airline tickets. But one issue that has kept the shift toward digital cash from becoming more of a reality involves micropayments - small purchases of $5 or less.
Fees charged by credit-card companies - about 25 cents per transaction plus a percentage of the total price - have held micropayments in check. A $1 purchase, for example, would leave a retailer with about 70 cents and little room, if any, for profit.
But some observers say that the online equivalent of the dollar store has arrived. New demand for low-cost digital products combined with new technologies that cut transaction costs finally may make micropayments viable.
Micropayment advocates point to the success of iTunes.com, the Apple website that lets users download individual songs for 99 cents each. The site has sold more than 30 million songs since its launch last April and has spawned several imitators. "Micropayments get lots of traction when you start hearing success stories," says Thomas Frey, a futurist and executive director of the DaVinci Institute, a think tank in Louisville, Colo. "Certainly iTunes is a success story that is catching a lot of attention."
A September report from the Online Publishers Association termed the growth of micropayments to its members over the past 18 months "dramatic," rising from 2.6 percent of all single- payment revenues in the first quarter of 2002 to 8 percent in the second quarter of 2003. Hoping to cash in on that growth, new companies are offering micropayment systems that they say make tiny transactions easy and secure. One such firm, BitPass in Palo Alto, Calif., expects to process more than 1 million micropayments by year's end.
"It's a matter of getting the timing right," Mr. Frey says of micropayments. Many companies over the past decade have tried to design workable systems, but have had little success. "There's a lot of people who are saying that it just feels right now for the micropayment world to take off," he says, in part because nearly every aspect of e-commerce has become cheaper as the cost of computing continues to drop.
Once tiny transactions become cheap and easy, "innovation is going to take hold," says Robert Kiburz, president and CEO of Peppercoin, a software company in Waltham, Mass., that has developed a micropayments system. We'll see "people coming up with things you and I haven't thought of" to make use of the system, he says.
Peppercoin charges 7 to 9 cents on a $1 transaction. BitPass charges 15 percent for purchases up to $5. PayPal, an established online payment system owned by eBay, with 40 million users, said recently that it would lower its fee for large-volume music sites from 2.2 percent plus 20 to 30 cents per transaction to 2.5 percent plus 9 cents per transaction.
Peppercoin cuts costs by aggregating tiny purchases and spreading the transaction cost across many purchases. Most micropayment plans require buyers to set up an online fund with their own money, which they draw on to make small purchases online.
Such prepayment plans discourage buyers from using them, Mr. Kiburz says, because they are unsure if they will make future micropurchases. Peppercoin asks only that customers provide their credit-card number once when they sign up. This "pay-as-you go is a powerful model" to get consumers used to microbuying, he says.
A survey commissioned by Peppercoin showed that 4 million Americans bought digital content for under $2 in the past year and that 30 million would be "somewhat likely" to buy content online for under $2 in the coming year.
Digital microbuys could extend to video as well. AOL has teamed with Movielink to offer, for a limited time, 99 cent downloads of recent Hollywood movies to its broadband customers.
Also waiting in the wings are newspaper, magazine, and other information websites that would like to charge for single stories, daily editions, cartoons, or archived material.