A serious barrier to the growth of online commerce are the transaction costs involved in making small payments. Credit card companies charge minimums of 25 cents on up to process a deal, so the overhead of selling anything for a buck or two is prohibitive. And selling for 10 or 25 cents is impossible.

Monday's Wall Street Journal (payment required) had an article on micropayments, the concept that people could buy material over the Internet for a few pennies per whack. This is not a new quest; techies have been searching for a good system with an avidity unrivaled since the Spanish explorers sought El Dorado, and the Internet, like the desert of the Southwest, is filled with bleached bones.

Nonetheless, the quest continues, and for good reasons: success is indispensable to the long-term health of the cyberworld, and whoever achieves it will be rolling in gold.

I share the view of Internet guru Jakob Nielson, quoted by the WSJ as saying: "We have been through 10 years of Dark Ages on the web, where useful services have stagnated because they couldn't charge their users."

There is simply no substitute for the market model whereby a producer offers something directly valued by the person paying the bill. In other models, the real product is the consumer. In advertising, for example, the content provider is selling eyeballs to a sponsor, not content to a viewer. How much are my eyeballs worth to a detergent maker? Not much, and this leads to lowest-common denominator programming that aggregates large numbers of viewers each of whom places low value on the content itself, which in turn leads to low-grade content. In contrast, every Sunday night I bless HBO for giving me the opportunity to buy the great shows Sopranos and Deadwood.

Consumers should want to be purchasers rather than products. Nor is a system that makes consumers into products in the real interests of the purveyors of goods and services. Google would be better off, IMHO, and so would its users, if it sold searches directly to consumers instead of developing crafty algorithms to sell eyeballs to advertisers. Search capability is valuable to me, and it is not to my benefit to have the capability limited by the amount that someone is willing to pay to get me to look at an ad.

Google is solving one problem because it is figuring out how to charge advertisers only for those eyeballs that are actually interested in specific ads, which will improve the fit between consumers' interests and the content available. But this advance still does not allow the consumer to adjust his payment to match the intensity of his interest in the actual search, as opposed to his value to someone who wants to sell him something connected to his search.

Micropayments are vital to the future of the content industries. Internet downloading is the wave of the future for movies and music, books and games and software. These industries are seriously threatened by piracy, and they cannot get straightened out until legitimate content is available on the Net at prices that seem fair to consumers, which is a level substantially less than the price of physical distribution. The transaction cost problem stands in the way of this. (For some thoughts on how Apple and other music services sell for 99 cents, see rentzsch.com.)

There are many explorers out seeking this El Dorado. WSJ mentions BitPass and Peppercoin, and other sources add eTelCharge, iPin, and microCreditCard. Other companies that now deal in larger amounts might enter. And of course it is unlikely that the credit card companies will sit idle while their business erodes..

So go to it, entrepreneurs. The fate of cybercommerce and the Internet rests squarely on you. (But, hey, no pressure!)

posted by James DeLong @ 11:22 AM | General

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