Mac Musings

Little Payments, Big Business

The Case for Micropayments, Part 2

Dan Knight - 2001.06.19 - Tip Jar

I remember back in junior high how a couple guys would bet each day whether a particular girl would be late to school. The next day was always double or nothing. Starting from a penny and doubling it each day, those numbers could get really big.

We're not dealing with that kind of growth with micropayments, but the principle of a little times a lot is the foundation of micropayments. This is even more true for the company that makes it work than for the individual businesses that will adopt micropayments.

The Micropayment Cash Cow

It wasn't too many years ago that display ads were a lucrative source of income, often selling for $10-40 per thousand impressions. Even splitting that with someone who sold the ads often resulted in an average income of over a penny for each page served.

That was then; this is now. With several ads on each page, ad income results in less than a penny per page - and that's before it's divided with a media company.

Let's take the case of a fairly successful website with a half-million hits per month. If they adopted micropayments and charged a penny per page for their content, $5,000 would change hands each month. Assuming the company handling these transactions collects 20%, the site still ends up with $4,000 at the end of the month.

For the publisher, that could be more income than they're currently receiving from ads. And they don't have to wait for payments to come in weeks or months later; the micropayments could be deposited to their bank account every week.

Little Payments, Big Business

But the company that makes the big bucks will be the firm that processes the micropayments. With thousands of sites generating thousands of dollars per month - well, let's just say it adds up in a hurry.

Assume 1,000 sites, each billing $5,000 in micropayments every month. This firm collects keeps 20% of that - $1,000 per site or $1,000,000 per month. And the potential market for micropayments if far more than 1,000 websites. There are potentially millions of sites, each serving thousands to millions of pages per month, which would be interested in receiving micropayments.

Let's look at this another way. If ten million people (a low number) join the micropayments program and view an average of 25 pages at a cost of a penny, each of them will pay an extra $7-8 per month. The micropayment firm will process about $7.5 million in funds, earning $1.5 million per month if they collect 20% of every transaction.

And that's not even looking at other types of online transactions, such as selling MP3s for a lot more than a penny.

Attracting Clients

Selling webmasters on the idea of micropayments won't be difficult once somebody has blazed the trail and proved it can work. But convincing Web users to pay for content is a different story.

The best place to start is probably Napster, which already has the infrastructure for dealing with massive numbers of visitors per day. Here's how that model might work.

Napster would contract with the record companies to make tracks available at a fixed price. Publishers would then put the tracks on their servers, Napster would sell MP3s for maybe 15¢ per cut. The micropayment firm would keep 3¢ from each sale and the record company would get their fee, leaving Napster with a few cents for each transaction they facilitate.

Instead of buying a whole CD for a few tracks, consumers could buy publisher quality MP3s at a greatly reduced rate and burn their own CDs or copy them to their MP3 players.

The record company has less CDs to press, encase, sell, and ship. They also have less risk, since they can serve up MP3 files as they are needed and never have to worry about surplus inventory when selling track via Napster.

Fully electronic transactions would also make it easier to track which bands and which tracks are selling, helping to assure that at least some of that money goes to the artists.

Would It Work?

Internet users have been sharing MP3 files freely for a long time. Would they be willing to pay for top quality MP3s?

I think so. People have several reasons for collecting MP3s, but the foremost isn't sticking it to musicians or record companies. The music may no longer be in print, the user might not want the whole CD, or this could be content they already own in another medium (tape, LP, etc.).

As Scott McCloud notes in Coins of the Realm, what matters is the music, not the piracy. Speaking of the old practice of dubbing a friend's LP to cassette tape, he says, "The interesting thing is that if we could have paid twice that 50 cents for our music - yet known it would actually go the the musicians themselves - every one of us would have done it in a heartbeat."

Of course, that's the problem. There is no simple mechanism for buying a specific track, and the new Napster model throws money at the record companies with no assurances that any of it will ever reach the artists. McCloud believes that micropayments could change that, eventually allowing bands to sell their own music directly to their fans.

But first we have to put a micropayment system in place, and there's currently no better candidate than Napster. Instead of a monthly subscription fee, or perhaps as an alternative, Napster could accept micropayments and sell specific tracks, helping the record companies assure they get credited to the right artists. (Well, we can hope.)

Give this a few months, and soon there will be a broad enough base of micropayment users for other types of sites to begin using the service. For instance, Amazon.com might find that micropayment make it worthwhile to sell mass market paperbacks at a discount. And then the content sites will follow. The early adopters will probably be news, sports, and financial sites, followed by search engines, then other content sites.

But first someone needs to see the vast potential profits in micropayments, discover a way to turn a small profit on lots and lots of tiny transactions, and then find a way to market the process.

Given time, I believe micropayments are inevitable. How big a role they'll play on the Web remains to be seen, but sooner or later someone is going to figure out how to do it.

Let's just hope it isn't Microsoft - they've already monopolized too much of the industy. ;-)

The Micropayment Series

  1. A Penny for Your Thoughts, an introduction to micropayments
  2. Little Payments, Big Business, the scope of micropayments
  3. Paying For Web Content, why you'll like micropayments
  4. The Ad-Based Web Is Dying, how micropayments can change the face of the Web
  5. Conclusion: Making Micropay Work
  6. Reader Feedback

Further Reading

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Dan Knight has been using Macs since 1986, sold Macs for several years, supported them for many more years, and has been publishing Low End Mac since April 1997. If you find Dan's articles helpful, please consider making a donation to his tip jar.

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