Are Micropayments Promising or Penny-Ante?

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Online micropayment is an idea that just won't die…nor will it quite come to life. Attractive as it may sound to consumers and some publishers, the idea of spending $2 or $3 here or there for a song, an article, or a day of access to a site remains in a zombie-like state. Despite increased interest in the model and no shortage of firms with payment solutions (see EContent's April issue), users just aren't buying in.

The Online Publishers Association's spring report on the state of the paid content market found that, while content purchases under $5 did increase 707% in 2002, it only represented a seven-fold jump from practically nothing. Micropayments on content in 2002 still only totaled $9.6 million—a mere 1% of the online content revenues altogether.

A lot of people seem not to be getting rich very quickly off of the micropayment dream. Even since we last reported on the model just a few months ago, yet another wave of witch doctors have emerged trying to make this zombie walk and talk like a real live business model. Each solution boasts its own particular brand of voodoo, but in talking to the three services that launched in recent months—Peppercoin, Paystone, and BitPass—they all spout a familiar mantra about how Web audiences have changed substantially enough for micropayments this time…no, really.

With ad revenue trickling in, and some subscription models picking up, "à la carte is the missing third leg of the stool," says Rob Carney, Peppercoin's VP of sales. Both publishers and consumers are seeing that content must be paid for and Peppercoin makes it possible to literally pay pennies. The company has a proprietary technique for aggregating tiny online charges into larger ones that are more efficient to process with the credit card companies. This is supposed to allow publishers to package fee-based downloadable content in novel ways that can be priced down to nickel and dime levels.

Why should publishers sell their wares for pennies rather than the more substantial subscription model? Subscriptions "have met with dismal failure because conversions are so low," claims Kurt Huang, CEO and co-founder of BitPass. His company uses the prepay model that lets the user load money into an online account, which they can debit down to a penny at sites in the network.

Brian Roberts, VP of sales and marketing at Paystone notes that the micropayment model has gotten some good PR boosts recently, like Apple's much-hyped $.99-a-song iTunes launch. Paystone, a Canadian company, also uses a prepay model, but partners with banks so that consumers can send funds that can be debited by micropayments across Paystone sites.

All of these solutions do seem to offer better terms for publishers than credit card or phone bill alternatives. All three pass along more than 80% of purchase price to the partner, which will be wonderful if any of these solutions survives. Carney says that in order for Peppercoin to flourish, it has to present "a compelling value proposition to the seller…and eliminate friction in the market." But making micropayment cheaper and easier for publishers may not be the real problem here. Independent and small music labels (which seem to be the first partners for all of these services) see the sense in micropayments because they weren't making anything online before, so there's little risk in testing this model.

Ultimately, it comes down to consumer behavior and there are no signs that that has substantially changed yet. Sure, millions of people are buying $.99 songs at iTunes, but according to Apple, most are buying them in larger album packages rather than nickel-and-dime purchases. People do not buy content the same way they do candy. Some of these micropayment solutions themselves admit that their early customers are not loading more money into their accounts than they expect to spend on initial buys, which suggests that a significant barrier for this model remains. Without a big enough network of partnered content sites, consumers don't buy into the network and spend across multiple partners. And without this kind of consumer support, no one company can break through to be ubiquitous in the market and attract the major content publishers.

As Peppercoin was about to launch, it boasted about a dozen partners, while BitPass was poised to launch with six. Paystone claims 700 content outlets, but most seem to be small music and news vendors, and the company isn't promoting it as a network. Of course, everyone is "talking to the major players" about their systems, but as of this writing, no big- or even medium-sized content brand has signed on. No doubt the big boys are being sensible by sitting back and waiting for the category to shake out, but unless a major content venue steps up to let itself and its customers experiment with these micropayment networks, the category may not shake-out so much as stay zombie-fied, waiting for the right voodoo.