The Ovum View: A future for micropayments?

And does it belong to Microsoft?

Micropayments were hyped as the solution for content providers desperate to create a reliable revenue flow, but they have been one of the great disappointments of the internet. Marc Jacobson, analyst with e-Services@Ovum, asks whether they are fatally flawed, or just in their infancy. A micropayment is any electronic purchase costing between one cent and $10, often made for ad hoc content such as songs and images, or a ring tone for a mobile phone. Credit and debit cards are not suitable for small electronic purchases for three reasons. First, credit card companies often charge a small fee to vendors on a per-transaction basis. It will be near impossible for a vendor to achieve positive returns on a $5 sale if 50 cents are being passed on to the credit card company. Also, consumers are worried about the security of the internet. Consumers are still wary about sharing their credit card details over the web, even in a secure environment. This fear grows when the purchases are small and the consumer begins to question whether it is worth using their credit card for every small purchase they make Last, credit cards are not universal. In some major economies, particularly in Asia-Pacific, penetration is still very low. Yet from the outset, expectations for micropayments were set too high. They were expected to revolutionise the way ebusiness delivers content to end users. Many believed the web would rapidly change from a collection of useful free information to a pay-per-use resource where consumers pay a small fee for every page view on a premier content provider's site. The technology in this environment was imagined to be seamless, and consumers would be charged on their credit card bills, or perhaps on an invoice from their ISP. Although this vision may still become reality it will do so at a slower pace than was expected. There are three key problems that have inhibited widespread use of micropayments. There are several different payment service providers (PSPs) competing for position in the market, who align themselves with various content providers, who in turn agree to support the PSPs' technology. The result is a splintered market where a consumer needs to go through a different registration process with each content provider he or she is interested in. Vendors do not like micropayments. They see micropayments as instances of opportunistic, impulsive buying. Vendors are focusing their efforts on building up a long-term relationship, preferring the subscription model, which brings predictable revenue flows and hardened customer loyalty. Also, consumers do not like micropayments. Consumers are now used to the idea of the web being a conglomerate of free information. Why pay for an archived article when you can go to a different site and get a similar article for free? At first glance, the future for micropayments seems bleak, but the business case is still strong. Despite the fact that vendors do not see huge potential in micropayments yet, the market is undoubtedly there. As the online advertising market continues to contract more and more websites are moving towards subscription-based models. The Wall Street Journal has enjoyed success in selling online subscriptions for its service, which was previously offered for nothing. However, subscriptions are not the only answer. Before long, content providers will open up to the idea of selling individual articles or individual songs for download. For example, you can expect the embattled Napster to make a high-profile move to embracing some type of pay-per-use initiative. Although consumers cannot imagine paying for content today, in tomorrow's e-world, consolidation will dominate. High quality content providers will control the market, and the majority will generate a great deal of revenue by charging on a per-page basis, achieving the original vision of micropayments. Over the next five years, one or possibly two micropayment platforms will emerge and quickly dominate the market. The two companies that are best positioned to bring a micropayment platform to market are AOL Time Warner and Microsoft. No other companies are more intimately linked to the online environment. If either company embraced a solution, millions of users would quickly join up. Microsoft's 'Passport' e-wallet is a move in this direction, and developments in this space should be monitored closely. The road ahead for PSPs will be rocky, but the technology underpinning a successful PSP will be crucial to the future of micropayments. PSPs should continue to develop and perfect their technology. But concurrently they should also be considering exit strategies. A PSP that tries to 'go it alone' will be swimming upstream against a very strong tide. E-security providers should be watching the micropayment space closely. Any vendor that can bring security to financial transactions automatically brings value to the table. It could decide to secure the payment infrastructure, provide secure applications for secure payment, or embed its technology into multi-application smartcards to enable secure transactions. Although the future of micropayments does not lie with niche PSPs, by aligning with PSPs today, e-security vendors will build intellectual capital that can be leveraged with the micropayment system of tomorrow. Portals are desperately looking for revenue streams from content provision and commerce. A functioning micropayment system is key to achieving this, and portal operators with a large customer base such as AOL or Yahoo! are uniquely positioned to establish a system that could become the de facto standard. Portal operators should cooperate with PSPs, which can provide the technology and expertise, while the portal can provide the customer base, brand and (possibly) the investment required.