The Death of Micropayments?

A few years ago, micropayments seemed like yet another brilliant idea in the midst of the Internet revolution. To download content, consumers could pay in small increments, ranging from just under a dollar to fractions of a penny. Some industry watchers thought micropayments would replace Internet access charges or take the place of subscription fees.

Then the bottom fell out of the market. A bevy of micropayment firms struggled or went belly-up, including First Virtual, Cybercoin, Millicent, Digicash, and Internet Dollar (*correction).

Although many e-businesses in other industries have come back from the dot-com brink with stronger models and clearer goals, micropayment specialists have yet to make another splash. Companies like BitPass and Paystone Technologies may have survived the crash, but they have a much lower profile than their now-defunct predecessors.

Will the concept of micropayments fade into the footnotes of e-commerce history, or will this business model find new success in the future?

Bad Timing?

Despite the number of failed companies in this sector, advocates of the micropayment model still believe it can work. During the boom, they say, the concept was ahead of its time.

As Paystone vice president Brian Roberts told the E-Commerce Times: “In the days of the dot-com euphoria, Web sites did not have to generate revenue to increase their stock price.” As a result, no one needed to implement micropayments.

Now, the high-tech crash and subsequent rethinking have shaken out the industry in a good way, Roberts noted.

“Companies are desperate to generate revenue from their content,” he said. “In fact, the dot-com crash was a positive thing for the micropayment industry.”

Or Shaky Foundation?

Timing was not the only problem for the first micropayment companies. Many of them did not understand the basic rules of customer service, noted Scott McCloud, a comic book artist who now sells some of his work on BitPass.

“They all had different kinds of problems,” he told the E-Commerce Times. “Some were platform dependent or asked for unreasonable percentages of the take, or relied on putting everything on a centralized site, which would make them a portal. It seemed like every one of them offered a different road to hell.”

He noted that these early micropayment attempts had one thing in common: a lack of understanding about how consumers wanted to shop online.

“There’s a tremendous fragility to the first purchase,” he said. “When it’s an alien thing, this way of purchasing, it’s so important that the customer is treated correctly. They might want just one song, or one story, and let’s say it’s 25 cents. They want the middleman to take the quarter and give it to the singer or the writer and get out of the way.”

The problem, he explained, was that many micropayment companies did not get out of the way. Instead, they made transactions difficult or confusing and quickly lost potential customers.

Current Struggles

Even today, among the micropayment firms that still exist and are working hard to spiff up the industry’s image, challenges remain.

Clay Shirky, a technology columnist and adjunct professor in NYU’s graduate Interactive Telecommunications Program, told the E-Commerce Times that it is possible the micropayment business model is too flawed to work.

“Everybody who imagines doing micropayments is basically thinking about forcing users to pay a little here and a little there,” he said. “Literally, they’re nickel and diming them.”

He noted that the idea of this model is intriguing enough to stay alive, despite past failures and current problems. “It’s one of those things where technologists love a challenge, and this is a challenge. It looks like it will work, but it doesn’t because users just don’t like it.”

To become profitable, a site would have to elicit large volumes of transactions, which is very difficult, even for established e-businesses. Shirky pointed to the online porn industry, which has tried on several occasions to adopt a micropayment strategy akin to the 25-cent peep-show booths in the offline world.

“They can’t make it work online,” Shirky said. “And those guys are the e-commerce geniuses, so if they can’t do it, who can?”

Looking Ahead

Despite the rough road of the past and current potholes, micropayment companies still believe sunny days lie ahead.

“I think the future is very bright,” BitPass CEO Kurt Huang told the E-Commerce Times. “The music industry is doing us a great favor in validating the price point. That’s a huge opportunity for BitPass and other companies, because it means that it’s only going to get more important to have a cost-effective micropayment solution.”

Indeed, micropayment companies are carefully watching the pay-per-song battles currently being waged heatedly among Apple’s iTunes Music Store and its competitors. It is possible that similar conflicts will arise in the video game, publishing, and movie industries.

Huang noted that people who are comfortable spending less than a dollar for a song are more likely to pay small amounts for other content, too. That would translate into much more volume for micropayment companies — and could keep the Grim Reaper at bay.

“The market is poised to leverage the technology,” Huang said, “more so than back when the technology was first introduced. Before, the timing wasn’t right. But it is now.”

*Editor’s Correction Note: In the original version of this article, we incorrectly stated, “A bevy of micropayment firms went belly-up, including First Virtual, Cybercoin, Millicent, Digicash, Internet Dollar and Pay2See, and the remaining survivors struggled.” In fact, Pay2See is a going concern. We regret the error.

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