Penny Wise: Micropayments are Big

(Published in The Express Tribune, May 16, 2011)

The idea of micropayments is as promising as it is difficult to implement. Micropayments are hinged on the idea that consumers (primarily online) should be able to pay pennies for digital content, subscriptions and online gaming.

In 2003, I recall the head of micropayments at Microsoft giving an internal company presentation touting it as the next big thing. At the time MSN and Hotmail had a massive user subscription base and Microsoft hoped to consolidate its publisher network under a single payment gateway – tied in with its single sign on system known as Microsoft Passport. However, the implementation was rife with insurmountable hurdles.

The audience comprised primarily of billing and business intelligence teams to whom it became inherently apparent that it was still too early for micropayments. The cost of processing transactions is too high compared to the total value of the payment. Worse still, handling refunds and customer support costs would further complicate the issue and raise the average transaction cost.

Microsoft ultimately morphed the micropayment platform to the Xbox Live Marketplace allowing users to purchase virtual goods using Microsoft currency. Other online virtual communities introduced similar models where users could buy points in bigger batches and use them within the game to purchase avatars or other virtual goods.

The whole idea of micropayments is hinged on the basic premise of providing users an al-a-carte system of making tiny purchases. iTunes has succeeded exceedingly well by allowing users to purchase songs, applications, games and books for as little as $1.

In the absence of such MicroPayments, users are forced to pay heavy subscription costs for monthly use. More often than not, users will not want more than one digital newspaper subscription, or maybe even two.

Knowing this, the smaller publications are forced to offer their articles for free, knowing that users are already tapped out.

Micropayments may have been ahead of their time when the idea was first floated, but it is finally starting to take root.