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Just Say No to Internet Micropayments

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Contributed by Adam Barr
January 8, 2002

Even though micropayments sound a lot better than the current Internet standard of no payments at all for a number of valuable services, in reality no one wants to make online purchases in nickels and dimes over and over again.

In This Story:

The Meter's Running

Nickel and Dime

Markup Madness

Bad Bundling

 Related Stories

One realization to emerge from the dot-com wreckage is that Internet businesses need sustainable business models. Unfortunately, many prognosticators have decided that the way to make money on the Internet is to charge a very small amount of money for a service, but charge it very often. This is known as "micropayments."

Micropayments are further proof that in the age of the Internet, an idea becoming technically feasible doesn't mean it will actually work economically. The theory is that users will pay a microscopic amount -- much less than a penny in some cases -- every single time they use an Internet resource, be it to listen to a song, reserve a hotel, or get a stock quote.

So rather than charge a million people $10 for a CD, you charge them 10 cents every time they listen to a song, and hope they listen 100 million times. This is brilliant theory except for a few flaws that come to light when it is played out in reality. The main problems with the micropayments theory is that people don't want to pay like that, companies don't want to charge like that, and the necessary infrastructure can't be funded like that.

The Meter's Running

Do you want to live the Web lifestyle with a meter ticking in the background? Local phone service used to be offered with per-minute charges, but that faded out in favor of a single monthly rate. Now the same trend is apparent in long-distance rates.

People like the all-you-can-eat buffet, the unlimited mileage rental car, the annual maintenance plan. You know what you have paid, you can budget for it, and you don't have to worry about being nickel-and-dimed to death.

Sellers, meanwhile, don't like micropayments because it adds more variability to their cash intake.

Of course, micropayments sound a lot better than the current Internet standard of no payments at all for a number of valuable services. But if you have a real business model you would much rather have people paying a lump sum up front. You can set your prices so you get just a bit more money than you would providing services a la carte.

Nickel and Dime

The extra charge is to pay for a new service that you can only offer in a lump sum model: "insurance" to users that their costs won't go up. Micropayments eliminate the possibility of offering this insurance as a service, and thus the extra revenue you can derive from it.

The infrastructure for micropayments won't work either. It is a fundamental truth that for the foreseeable future, any electronic payment system requires a central record of the transaction. That is why people trust credit cards, because disputes can be resolved by the credit card company, rather than degenerating into battles between consumer and seller.

So who pays for this infrastructure? The credit card companies do by charging a percentage of every transaction. This works when the typical credit card transaction is $100 or more. But it falls apart with a micropayment where the typical transaction might be less than a penny, but recording it requires just as many resources.

Markup Madness

Some systems running right now might be characterized as micropayment-based, in particular SMS messaging on wireless phones, which cost about 10 cents a message. But this is made possible by the astonishing markup on those messages. Since a typical wireless plan might offer 500 minutes for $50, we can see that a second of airtime is worth much less than a penny.

Furthermore, a 20-byte SMS message consumes much less bandwidth than a second of airtime. So the fact that SMS messaging makes money for wireless providers merely shows that micropayments work when the company providing the billing infrastructure can skive off 95% or more of the charges.

Wireless companies can get away with this nonsense because nobody understands their phone bills anyway, but I don't think the average third-party buyer or seller would accept such a high overhead from an Internet micropayment system.

People see the rise of free music sharing and deduce, correctly, that people may not want to spend $10 for a CD with 10 songs. Often you only want a single song, and don't want to buy the other nine.

Bad Bundling

This "bundling" evidently doesn't violate antitrust laws, but it is still annoying and is one of the factors driving people to Napster and its clones. But isn't it more logical to think that perhaps people want to pay $1 for one song and own a copy, rather than pay some small amount every time they listen to it?

It's amusing that people who complain about bad business models are touting micropayments. The only reason micropayments haven't been exposed as bogus is that they haven't been used enough for anyone to notice.

If anyone tries to roll out a micropayment system, they will once again learn that the Internet does not fundamentally change the relationship between buyers and sellers, and micropayments will be tossed on the scrap heap next to the free Internet.

Talkback Forum

Author's background:
Adam Barr worked at Microsoft for over ten years before leaving in April 2000. His book about his time there, "Proudly Serving My Corporate Masters," was published in December 2000. He lives in Redmond, Washington. He can be reached for response to this column by e-mailing him at:

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