May 1, 2003 12:00 PM, BY OLIVER MASCIAROTTE

What ho, semi-loyal readers? This month, we're looking at the pebble in the shoe of online music commerce: micropayments. I'm sure you've all had the urge to actually purchase a song online. Trouble is, how the heck do you pay for it when all you want is one measly song?

Actually, paying for stuff online is easy, and a credit card works fine most of the time. But small-value items require a new way of payment when you can't — or won't — fork over some coinage, which was so last century. That's where micropayments come in.

Though the definition is fluid, I think of micropayments as being an ephemeral payment method, where no physical cash changes hands and where goods or services cost a dollar or less: downloading a song from a second-tier band for $0.85 or paying $0.07 to read an online 'zine article. Okay, fair enough, but how does one take advantage of such micropayments? Well, there are two methods: the wallet (a prepaid debit account) or the trusted intermediary, a bonded broker.

The wallet approach is simply an escrow account with electronic assess, authentication and low transaction fees. You deposit real dollars into the account, usually via credit card, and a vendor withdraws funds from that account. Examples are PayPal, Mondex and WorldPay.

The other approach to microtransactions, the trusted intermediary, is also straightforward. Bonded brokers are everywhere in commerce and a few micropayment schemes are basically intermediaries that are brokering your microtransaction. A good example of this is Peppercoin, founded to commercialize payment protocols. It's a well-thought-out method; although, at the time of writing, Peppercoin's founders had not yet deployed their system.

I believe that micropayments have floundered for several reasons. First, the point-of-sale infrastructure is spotty. Obviously, there are plenty of financial infrastructure vendors out there that would love to sell you their “solution,” but computing infrastructure is only half of the problem. One cannot be in front of a personal computer all of the time, and most solutions are PC-based. What about parking meters, newspapers, candy and other low-value goods and services outside the home that would benefit from a ubiquitous micropayment scheme? A possible solution is the smart card, like American Express' Blue product. Amol Deshmukh, field marketing manager for SchlumbergerSema's Smart Card and Terminals division, told me that, “Smart cards provide convenience and security for the consumer, while offering low-cost transaction authorization along with platform and application versatility for the seller.” Schlumberger developed the world's first memory card prototype and issued the world's first microprocessor-based smart card way back in 1981, so when Deshmukh mentions “platform,” he means a complete micropowered computer. Smart card technology is available in a variety of embedded forms besides the well-known credit card format, including cell phones, watches and USB fobs.

These days, if you're a frequent abuser of microgoods, you're more likely to use a subscription payment model. Subscriptions are easy and convenient for buyers. For merchants, subscriptions are highly desirable because they guarantee a reoccurring revenue stream and allow them to forecast profit and demand. When a business can plan ahead, it can control costs. If, however, you can't see what's down the road, you tend to either fall into a pothole of unanticipated demand and piss off your customers because of poor service, or you overbuild and die from debt burden. This brings us to the second problem with the current state of most micropayments: The profit model is questionable.

Though the majority of micropayment providers have either folded or been absorbed by slightly more profitable companies and then gassed into a comatose state, there are still dozens out there that'll gladly take your money in exchange for a, “…scalable, secure, real-time, carrier-grade network solution that enables service and content providers to monetize digital content resources and profitably define, deliver and bill for content-based services along the complete Internet content distribution value chain.” Say what? That little pile of verbiage is courtesy of Enition and is typical of the continuing mindset in the Web business community, where all customers are magically “partners,” and building massive organizations without the promise of reasonable revenues is still taken as a sensible thing (prospect?).

Granted, it can be expensive to gather the resources needed to build a viable Web-based company, but it doesn't have to be. Just look at Google. The real problem is that, when your overhead costs are larger than your profit, you can't stay in business and most current transaction fees are higher than the profit from any single microtransaction.

Another problem on the profit side is fraud. When the business model is based on a razor-thin profit, then how much cheating can you tolerate? Leon Schenkler, founder of micropayment company Internet Dollar, was asked in an interview with planetgold.com about problems with fraud. “Sure, we encounter a lot of fraud with credit cards, which caused us to stop accepting credit cards. Out of 100 deals, about 93 were fraudulent. We also encounter PayPal fraudulent activities and the usage of I$ (Internet Dollars, his service) to withdraw funds from hacked PayPal accounts.” Schenkler goes on to mention that high surcharges and banking fees eat up profit and banking overhead and cannot be controlled unless there's sufficient consumer buy-in to scale up the number of transactions. Schenkler says, “There is the chicken-and-egg paradox. No users of I$, no sites. No sites, no users,” which brings us to the third problem faced by micropayments: too many choices.

If, as a consumer, you had well over a dozen different wallets, each containing a small amount of a single, foreign currency that was only convertible at that country's local bank, you'd grudgingly put them all in a drawer to gather dust. The same goes for e-wallets: In the world of micropayments, choice can be a bad thing.

Russ Jones, business manager of HP's defunct MilliCent micropayment technology, agrees with the need for a standard markup language for a micropayment link. In a 1999 Wired interview, he said that, “Without any existing standard, each micropayment supplier has had to invent a new way to indicate the price of a URL…Standardized pricing markup will do for Internet content what the Universal Bar Code standard did for retail merchants.” Though it seems like most of the momentum for microtransactions dissipated during 1999, the Worldwide Web Consortium (W3C) finished its “Working Draft for the Ecommerce/Micropayment Activity” that year. In the ensuing months, lots of folks have been working on XML syntax and other necessary pieces of the infrastructure puzzle.

Consumers want value for their guilders, retention of established fair-use practices and, most importantly, they want convenience. Until there are two or, worst case, three competing micropayment systems worldwide, the concept will languish in obscurity. If payments are simple, priced right and perceived as secure, maybe there'd be more moola flowing into artist's pockets, along with less whining from the media conglomerates. Or, then again, maybe not.

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OMas provides finely wrought, opalescent jars of heady clue musk to savvy vendors and end-users alike. This month's rant was composed while under the influence of Zuco 108's chill, tropical Tales of High Fever and the classic sounds of Charlie Parker, Bud Powell, Dizzy Gillespie, Charlie Mingus and Max Roach's Jazz at Massey Hall.

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