'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.

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.

"I'm guessing there's going to be a lot of cottage entrepreneurs springing up selling all kinds of information products," Frey says. His DaVinci Institute sponsored a Future of Money Summit last fall that looked closely at the concept of micropayments. He imagines, for example, someone selling thousands of type fonts ("a font superstore") or other graphics over the Internet for tiny fees.

People also could sell sheet music, cellphone ring tones, or photos for as little as a few cents apiece. Video-game players doing onscreen battles could upgrade their onscreen avatars with better weapons or fancier outfits (maybe a pair of cool digital sunglasses) for pennies. Blue-skying even further, Frey sees microinsurance policies that, for example, insure that what you buy on eBay works correctly when it arrives.

But not everyone is convinced that small is beautiful in e-commerce. Despite these innovations to lure consumers into making tiny transactions, micropayments are inevitably "doomed," says Clay Shirky, a professor at New York University's Interactive Telecommunications Program. "The problem with micropayments is that users hate them," he says in a phone interview. "We have a colloquial phrase, in fact, for micropayments: It's called 'being nickel-and-dimed to death.' "

Professor Shirky, who has written about the culture of the Internet, says the Web has always been a place where people find plenty of free content and have no incentive to pay. The desire of publishers and others "to believe in the magic pixie dust of micropayments is so strong," he says, that his "boring" position that things won't change is somehow "seen as quite radical."

Shirky cites as a counterexample the trend in telephone rates away from pennies-per-minute pricing to flat rates. Metered billing is being "blown away" by nationwide all-you-can-talk plans that are preferred by customers, he says. Even the pornography industry, which has led the way for much of the innovation in e-commerce, has failed to transfer the model of the quick 25 cent peep show to the Internet, instead opting for subscription payment plans.

Old-line publishers, he says, have failed to account for the "amateurization of publishing" online - the ocean of free information. They might be better off, he says, using what he calls the National Public Radio model: "periodic begging."

One-cent e-stamps: A spam solution?

The idea of tiny transactions as small as a penny whizzing around the Web has been talked about as a way to fight computer viruses and spam, the unsolicited junk e-mails that pile up in inboxes.

Microsoft's Bill Gates and others have proposed creating a system that would allow networks to charge senders of unsolicited e-mails "postage," just as people must pay to send a physical package.

Even a charge as low as a penny per message could deter spammers, who often send out millions of solicitations. Users could create "do not charge" lists for friends and business associates who e-mail them regularly. Money received from incoming e-mails could later be used to pay for outgoing messages.

Such a system would supply a need to "create conditions to make spammers pay for their follies," says Sonia Arrison in a report called "Canning Spam: An Economic Solution to Unwanted Email," issued by the Pacific Research Institute in San Francisco earlier this month. "A pay-to-enter plan eliminates the problems associated with current spam-fighting techniques" that either filter out too many or too few messages.

One company, Silicon Valley-based Goodmail Systems, is about to set up such a system of one-cent e-stamps through deals with various Internet Service Providers (ISPs).

But such well-intended e-stamp programs could have a hidden danger, says Clay Shirky, a longtime Internet observer and a professor at New York University.

If commercial interests pay to send e-mails, he reasons, they may feel as though they, not consumers, own the system. In other words, he says, e-stamps might reduce the worst kind of spams, but ironically they may also lead to the capture of the Internet by the spammers.

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