Digital content spurs micropayments resurgence
R. A. Hettinga
rah at shipwright.com
Tue Sep 7 09:41:52 EDT 2004
Digital content spurs micropayments resurgence
By Matt Hines
September 7, 2004, 4:00 AM PT
With its meteoric rise to success, Apple Computer's iTunes digital music
service not only changed perceptions about whether consumers were willing
to pay for online content, but it also highlighted the rising promise of
On Tuesday, 2-year-old BitPass, a payment company in Palo Alto, Calif., is
expected to announce $11.75 million in venture capital, along with the news
that former American Express Chairman James Robinson III will join its
board of directors. Robinson is also a partner in one of the firms
investing in BitPass, New York-based RRE Ventures.
The success of digital music sales has purveyors of micropayment services
humming a happy tune.
Bottom line:Micropayments have failed to become a macro-business, but the
increasing popularity of digital content could bring a cloudburst of
pennies from heaven.
More stories on micropayments
While credit card companies and online transaction specialists like PayPal
are ringing up bigger sales online, business models aimed at helping
e-commerce vendors facilitate smaller deals, or micropayments, are getting
a boost from digital content sales.
If this sounds familiar, it should. But the so-called Internet currency
vendors of the dot-com era, companies including Beenz, Flooz and DigiCash,
failed to generate enough business fostering micropayments to survive.
Fast-forward a few years, and news that iTunes topped 125 million downloads
last week is more evidence that digital content may hold the key to
unlocking the low end of e-commerce.
Micropayments are typified by the 99 cents that iTunes charges to download
a song or the $2.99 users might see on their Cingular Wireless phone bills
after buying a custom ring tone.
According to recent research published by TowerGroup, the total market for
Internet and wireless micropayments, led by demand for digital content,
will increase by 23 percent annually over the next five years to reach
$11.5 billion by 2009. TowerGroup, based in Needham, Mass., charted the
micropayments market at just over $2 billion in 2003.
Bruce Cundiff, an analyst with Jupiter Research, thinks the e-commerce
market is in its third or fourth wave of development of micropayment
technologies. The success of iTunes, coupled with continued growth of
broadband, will make digital content the catalyst that pushes the sector
forward rapidly, Cundiff said.
"What it comes down to is that there simply must be a viable transaction
model for smaller-cost products to make a dollar off e-commerce sales, but
I think with what we've seen already in digital media, it's clear that
people are figuring out how to make it work," Cundiff said.
Tuning up for takeoff
Web shoppers have historically preferred to pay with credit cards. But
because credit card companies typically charges fees for processing and
customer service on every transaction, credit cards can be an extremely
inefficient way of making a small purchase, with the fees often eating most
of the profit margin.
Still consumers have begun to get used to the idea of buying small items
over the Net.
Growth of the digital content market seems almost a certainty, based on
the projected expansion of segments including music services, Internet
publishing, and applications for mobile devices, such as custom ring tones
or games. Cambridge, Mass., analyst firm Forrester Research has predicted
that music downloads alone will become a $1.4 billion business by 2006,
accounting for nearly 10 percent of annual music sales in the United States.
Jupiter Research estimates that revenue from online content will reach
$3.1 billion by 2009, driven by an increasing number of broadband-ready
homes spending money on Web-based music services, games and e-books, among
other things. Industry experts agree that iTunes deserves a lot of the
credit for opening consumers' eyes to the option of buying online in
micro-size increments, and most seem to feel that digital content will
continue to dominate the market for small Web-based transactions.
"Micropayments don't just represent buying low-priced items. They can also
can be used to get people to test new products, or try out a service that
charges a lot more for a subscription."
--analyst Nick Holland, Mercator Advisory Group
According to Nick Holland, an analyst with Shrewsbury, Mass.-based
Mercator Advisory Group, growth of the micropayments market will be almost
completely dependent on music, ring tones and games, specifically, at least
for the next several years. The analyst estimates that such content will
constitute a $2.3 billion market in the United States this year alone, and
while Holland said subscriptions will remain consumers' favorite method of
payment for digital content, wider use of micropayments will increase
opportunities for vendors to lure new customers.
"Micropayments don't just represent buying low-priced items," Holland
said. "They can also be used to get people to test new products, or try out
a service that charges a lot more for a subscription. There's certainly
demand for downloads, ring tones and pay-as-you-go gaming, but it remains
to be seen how profitable this market can be using micropayments."
For officials at eBay's online transaction subsidiary, PayPal--who say the
company is already handling millions of low-dollar transactions--it is
clear that digital content represents the most promising opportunity for
immediate growth in micropayments. Peter Ashley, director of business
development for San Jose, Calif.-based PayPal, believes that with iTunes,
Apple drew up a template that many other companies will try to emulate.
"Once there is ability for more companies to facilitate smaller charges,
going as far down as pennies, nickels and dimes, without incurring the same
sort of credit card transaction fees you see today, new businesses will
open that simply could not exist in the past," Ashley said.
The executive envisions transaction systems soon allowing e-commerce
companies to process any transaction, no matter how small, letting people
creating new kinds of digital content, such as games or ring tones, to more
profitably market their wares. Ashley said that PayPal's role as an
established leader in online transaction processing will give it the
ability to watch other firms test the waters with different micropayment
systems before it begins more actively pursuing the market.
PayPal parent eBay is already piloting a program that lets a select group
of people auction digital music via its site, a test which could illustrate
how profitable it can be for individuals or smaller companies to execute
the smaller deals inherent to digital music sales.
"We've already had to develop a unique product for the music pilot, and
we're excited about seeing other areas of the market develop," said Ashley.
"The opportunity is huge, say, if you consider how many wireless customers
there are out there. You get an idea of how significant the demand for
content like ring tones or screen savers could become."
How the deal is won
The biggest question facing the micropayments market is just what method
of transaction will appeal to consumers while allowing vendors to slice out
enough profit to keep small-ticket sales lucrative.
Apple has admitted that iTunes is not a major source of revenue. It works
primarily as a sales tool for its iPod digital music players. Apple does a
majority of its business with credit cards but also offers payments methods
ranging from stored-value accounts to gift certificates. But smaller
companies looking to build their core businesses around marketing digital
content must have alternatives to credit cards--including subscriptions,
prepaid accounts, merchant charge aggregation and direct-to-bill.
In the wireless sector, direct-to-bill is expected to continue to lead.
Mobile-service providers encourage customers to download content onto their
devices, with the cost added to their wireless bills. Subscriptions remain
preferable for content providers in other areas because they allow
companies to more easily digest credit card transaction fees, because
monthly or annual fees are typically larger transactions.
"Subscriptions are what every vendor wants to sell, but you have to start
somewhere with the consumer, and the other types of micropayments can allow
companies to do get in the door with buyers," said Mercator's Holland. "A
lot of content companies are going to look at micropayments as a stepping
stone to future subscriptions."
""That first wave of payment technologies, the currency companies
especially, were too early in the development of e-commerce to succeed."
--BitPass CEO Michael O'Donnell
Among the vendors vying for a place on the micropayments landscape with
alternative payment technologies are firms including BitPass and
Peppercoin, which are taking markedly different approaches to the sector.
Peppercoin serves as a micropayment transaction aggregator that helps
vendors save money on credit card charges, while BitPass markets
stored-credit accounts and transaction processing to help facilitate both
buyers and sellers.
BitPass' system works much like the prepaid calling cards you can buy at
many convenience stores. Customers put money into debit accounts and can
use the funds at any site affiliated with the company. Vendors can begin
accepting the BitPass cards simply by downloading a free software client
provided by the company.
"That first wave of payment technologies, the currency companies
especially, were too early in the development of e-commerce to succeed, and
the content companies weren't ready to handle it either," said Michael
O'Donnell, chief executive of BitPass. "We're seeing an online payment
evolution moving from free content, to subscriptions, and now per-item
sales, with the options for vendors and consumers growing quickly."
At Peppercoin, the emphasis is placed squarely on e-commerce vendors. The
Waltham, Mass., company acts as a proxy between vendors and credit card
companies, allowing its users to aggregate their small-value transactions
into larger bills to cut down on the fees charged them by the credit card
Peppercoin signed a deal with the Smithsonian Institute last year to help
the organization begin marketing music files stored in its archives on a
per-song basis. The organization had previously struggled to do so, based
on the percentage of its income that was in turn headed back out to the
credit companies in the form of transaction fees.
According to Rob Carney, vice president of marketing at Peppercoin,
increased demand for digital content is driving short-term growth of
micropayments, but the potential for the market is far greater.
"Online digital content sales, specifically for music, are generating more
attention for micropayments than ever before, but it makes sense, because
what are you going to sell for dollars online that you have to pay to
ship?" Carney said. "Digital content is leading the way, but it's really
just the thin edge of the wedge when you consider the possibilities in the
physical world as well."
R. A. Hettinga <mailto: rah at ibuc.com>
The Internet Bearer Underwriting Corporation <http://www.ibuc.com/>
44 Farquhar Street, Boston, MA 02131 USA
"... however it may deserve respect for its usefulness and antiquity,
[predicting the end of the world] has not been found agreeable to
experience." -- Edward Gibbon, 'Decline and Fall of the Roman Empire'
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