A Penny-Ante Business Worth Billions


By Geoffrey Smith For decades there have been predictions about all manner of electronic payment systems that turned out to be wishful thinking. Web-based "micropayments," of about $5 or less, have proven to be one such flop. But there is a glimmer of hope that micropayments can still become a money machine for a few big companies in the wireless world that have the ability to use them.

In 1998, tech visionary extraordinaire Nicholas Negroponte, then head of MIT's Media Lab, predicted that "you're going to see, within the next year, an extraordinary movement on the Web of systems for micropayments." The technology, he said, will move up to tens or hundreds of billions of dollars annually through the Web.

E-YEN. Negroponte was right. There was a big movement toward micropayments. But it was an almost unmitigated disaster. E-payments companies are failing this year almost as fast as they were launched after Negroponte made his forecast.

But while legions of companies have been foiled by the promise of micropayments, one company, Japanese wireless-phone giant NTT DoCoMo, may be the exception. The company offers thousands of Internet services on its Web-enabled cell phones, ranging from games to maps to photo sharing. Customers pay anywhere from 85? to $2.50 each time they access many of these services, and the charges show up on subscriber's monthly bill.

DoCoMo's use of micropayments appears to be a license to mint money. The company, which is the wireless unit of Japanese telephone giant NTT Corp., is raking in subscribers by the millions. It recently raised nearly $1 billion through a bond offering, and is targeting possible expansion in the U.S. through an equity stake in AT&T Wireless.

Still, the wireless model for micropayments appears to have no equal on the PC. The technology faces at least two basic problems.

HASSLE FACTOR. The major roadblock for micropayments is that people don't like them. Simply put, they're a pain. If something costs so little, such as a song that goes for 50 cents, is it really worth your time and effort to pay for it? Clay Shirky, a partner at technology investment firm Accelerator Group, argues that micropayments send conflicting signals to consumers. They want simple pricing, but "micropayments create anxiety and confusion," he says.

There are exceptions, of course. People are willing to micro-pay for access to articles in newspaper and magazine archives, for instance. But for other services and information provided on the Web, micropayments don't seem to be a viable option. When you're using a cell phone, your service provider can make sure you have no choice but to pay for any extra services you want to use. But on a PC with access to the Web, there is stiff competition, and no simple way -- yet -- to handle payments.

Micropayments face another big roadblock: the financial services industry. Credit-card companies, which handle most consumer payments on the Web, don't make a big profit on charges under $10 or $15, so they often don't accept them. And banks have largely avoided any Web-based electronic payment systems that allow money to be directly debited from a checking account. The reason: The fraud potential is too great. Unless e-payments go through the banking industry's complex clearing system, as do Web-based bill payments, they can be gamed too easily.

BURNT FINGERS. Some, including myself, once thought micropayments could be used to compensate musicians or artists who distribute copyrighted material on the Web. That idea has failed to catch on in part because there's no way to protect a copyright once a song or photo has been released on the Web. Numerous companies are developing encryption technology to solve that problem, but no stamdard has gained wide acceptance.

The industry is littered with casualties that have chased the dream of micropayments and other Web-based pay schemes. Cybercash, one of the pioneers in the field, filed for bankruptcy protection earlier this year. In January, Internet incubator CMGI shut down ExchangePath. PayPlace.com, another Web-payments company targeting micropayments, was sold earlier this month to eTime Capital, which is targeting e-payments in the corporate market. PayPal, which is popular with eBay users, has been unable to expand its business much beyond the online auction market.

Given the sorry state of the e-payments industry, is there still room for a broadbased payment system that simplifies online transactions and make micropayments look attractive? Send an e-mail to the address below and let me know what you think. Smith covers a wide variety of topics, including personal finance issues, from

BusinessWeek's Boston bureau. You can e-mail him at geoff_smith@businessweek.com


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