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Much attention has been focused on the promise of enabling large business-to-business transactions over the Internet -- and many corporations can testify to the Web's transforming power to streamline inventory management. However, there's a new revolution coming online, and it's called micro-commerce.
While some argue that micro-commerce defines purchases under US$1 and others expand the financial boundary to US$5, the analyst community agrees on one thing: These small purchases are going to make a big impact in the coming years.
What can you buy online for a few bucks or less? The market for micro-purchases is expanding, thanks to digital music downloads, ring-tones, video games, magazine articles and online garage sales that peddle used products for pennies on the dollar.
"Online marketplaces that gain critical mass, such as eBay (Nasdaq: EBAY) and Craigslist, already provide an infrastructure to link buyers and sellers cost effectively" said Jackie Fenn, vice president and fellow at Gartner (NYSE: IT).
"In the same way that eBay makes it economical for a person in Boston to locate and buy a $10 teapot from another state or country, the emerging mobile delivery and payment infrastructure will provide a framework for buyers and sellers to connect for new types of microservices," Fenn said.
Small Sales, Big Numbers
The market research on micro-sales is eye-popping. In-Stat/MDR estimates mobile games will grow to a $3 billion market by 2006, and the ARC Advisory Group has already seen cellular ring-tones eclipse $3.5 billion in 2003.
Forrester Research predicts digital music downloads will reach $3.2 billion in revenue by 2008. Gartner is forecasting micro-commerce opportunities for new products and services will generate $60 billion in revenue per year by 2015.
If that's not confirmation enough, consider that more than 14 million Americans age 12 and older have purchased digital content for less than $2 in the past year, according to market research firm Ipsos-Insight. That's a 10 percent year-over-year increase.
The 12-and-older demographic is one of the most promising boons for micro-commerce, but it also leads to one of the biggest obstacles, according to Nielsen//NetRatings retail 
analyst Heather Dougherty.
Kids Without Credit Cards
Dougherty told the E-Commerce Times that some of the most likely people to buy online music, video games and ring-tones are the least likely to have a credit card with which to pay.
"If someone could figure out the technology to allow young consumers to make online purchases in a cost-effective way and gain enough reach across various sites, then it would allow more of them to buy online," Dougherty said.
A savvy payment processor could strike a deal with an online portal like Yahoo (Nasdaq: YHOO), she said, to drive up the volume and get the processing price down.
Getting the processing price down is the ultimate challenge regardless of the demographic. Analysts said credit card companies' per-transaction fees still hinder the profitability of micropurchases. That's why some sites, like Apple's (Nasdaq: AAPL) iTunes, have made a way for parents to set up allowance accounts for their children.
Payment Technologies Come Online
Alternatively, companies like Peppercoin, Javien Digital Payment Solutions and Yaga are developing technology designed to lower transaction process fees and drive the micro-commerce revolution.
"Digital music and other electronic offerings have validated the business case and the need for an online small payments solution over the past year," Robert Kiburz, president and CEO of Peppercoin, said.
He added: "But the potential for the technology is even greater in the physical world. By investing in technology that can reduce the costs of processing small value payments, merchants and the payments industry can increase the number of card-based transactions and drive more sales."
Taking Micropayment Technology Offline
Matt Kleinschmit, research director at Ipsos-Insight, told the E-Commerce Times that his research shows an estimated 37 million Americans would use their credit, debit or charge cards for purchases of $5 or less.
"Our data suggest that the online micropayments market has grown significantly in the past 12 months," he said. "In addition, there appears to be some specific payments opportunities in the physical world that are ripe for a card-based small payments system as well."
Today, consumers are most likely to spend cash to purchase coffee/beverages, fast food, gas and at vending machines, according to Ipsos-Insight research. But consumers are interested in using credit, debit and charge cards to pay for a number of low-priced items, including parking meters and video games.
That opens up the best of both worlds of opportunity for technology vendors that can provide a payment solution to prohibitive credit card transaction fees. Of course, analysts said online payments are still the main driving force behind development of these new online technologies since children don't have credit cards.
"Certainly we'll see some vendor finally get micropayments right," Daugherty said. "This is a real opportunity for someone like eBay's PayPal. Small purchases online are beginning to reach a critical mass."
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