Micropayments: the next big online revenue model?

When Google enters a new line of business, it’s a safe bet that this business will get a lot of attention from
the technology ecosystem. Micropayments, an already hot trend this year, got a further boost when Google announced two weeks ago that it will offer micropayment services through its Checkout system.

Micropayments are transfers of small amounts of money. Small may mean anything from several dollars to fractions of a cent. Such payments in theory should have a big potential on the internet, where they would fill the gap between free (or advertisement-sponsored) content and things that cost over several dollars. However, several individual areas notwithstanding (iTunes being the most prominent example), they are yet to be widely adopted.

For instance, newspapers are pinning high hopes on micropayments, in the anticipation that they will help the industry get more money for their content. Currently some newspapers run subscription services, while many are advertisement-based. Neither model is fiscally sustainable in the long run, especially as print sales decline. Making online readers pay for each article they read may bring in more money for the newspapers.

The problem with micropayments, though, is that such small sums are impractical for sellers and vendors to deal with. This is because payment processors like Visa or MasterCard charge relatively high fees for each transaction. (For example, for a typical transaction Visa charges about 1.5% of the transaction’s value plus $0.10.) An easy solution is to lump together several small transactions before actually processing them: if a reader views ten articles worth $0.10 each during a week, his or her account would be charged $1 at the end of the week.

While the technical challenge is easily overcome, not so is the issue of ubiquity. A MasterCard is accepted at “millions of locations” throughout the world, according to the company’s sales pitch. By contrast PayPal, an online payment processor that can also handle micropayment transactions, is not widely used outside its owner, eBay. Then there is a problem of trust: would you put your money to an account at an obscure payment processing company?

So Google’s announcement focused attention on the merits of micropayments, Google’s competitive position in this business and the robustness of Google Checkout as it currently stands. On the last count, some issues have been reported with ordinary payments through Checkout. More importantly, Checkout’s market share in online payments is just 11%, compared to 25% each for PayPal and Bill Me Later, another payment processor.

Google expects to give a boost to Checkout by striking a micropayment deal with newspaper publishers. If the deal goes through, it may in a classic blue-ocean fashion give Google access to a newly created market of pay-per-view articles. And why stop there? If Google has its way in a separate deal with book authors and publishers that would allow it to scan millions of books, pay-per-view books may not be far away.

Fundamentally, the advent of micropayments may bring about a new revenue model to the Web. Today advertising remains at the core of business models of many online outfits. Micropayments may offer new ways of extracting money from website viewers and customers—and pricing information along the way. While a pay-per-view Wikipedia is a faint possibility, imagine a medical Q&A discussion board where users ask questions and exchange advice. The most competent answer to a particular question can be priced by the author, who would profit from his or her knowledge. The experience of experts-exchange.com, a programming discussion board that charges subscription fees, suggests that users may be willing to pay for answers to their specific questions.

Now that would make the contribution of micropayments to online business worth more than two cents.