Business Impact


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Big Questions about Small Payments

The Web’s New Currency” (TR December 2003/January 2004) presents nicely the case for micropayments. However, contrary to the article’s implication, skepticism about micropayments is based not on general qualms about the spread of a new technology but rather on economics, psychology, and marketing.

Even if the perfect micropayment scheme were invented-cost nothing to operate, was perfectly secure, and required no special effort by consumers-I predict that it would not become widely used. Standard economic models show that sellers can derive more revenue from selling bundles, as in the Microsoft Office suite, than from selling individual pieces. Behavioral-economics factors show that customers’ usage drops dramatically when there is even a tiny payment, and that consumers are willing to pay more for simple pricing plans, especially flat rates. Micropayments are a neat technology, but they are likely to play only a minor role in the economy.

This story is part of our March 2004 Issue
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Andrew Odlyzko
University of Minnesota
Minneapolis, MN

The business model for the micropayment companies outlined in your article is not to replace or compete with an existing payment mechanism; rather, it allows valued content to be monetized and distributed. While none of us would pay 50 cents for a newspaper article from today’s paper over the Web, we may choose to pay for archived content that is on a subject of interest-especially if retrieving the content was otherwise difficult, time-consuming, or prohibitively expensive. Right now you must submit personal information and subscribe for a period of time instead of pay as you go. The fee (a percentage of the transaction amount) is irrelevant because the transaction amount is small, and the cost of providing the content is incremental.

Joseph C. Niederberger
Pleasant Hill, CA

What if i just want one article from a newspaper, and then six months later, one song download? I don’t know about you, but I’m not too excited about the need to wait until I have completed 100 or more transactions before I get charged on my credit card.

Raymond Collins
Miami, FL

If micropayment companies ever became large enough, established credit card companies would surely take notice. These companies could very easily introduce a competing micropayment scheme of their own just by slapping a new interface on their existing systems and cutting their prices. Once these giants enter the market, they’ll have an overwhelming advantage because they already have the critical mass that right now is Peppercoin et al’s biggest obstacle to success. Nevertheless, consumers and online merchants will benefit. Peppercoin’s competition will drive down the market price of online payments and make micropayments viable-even if the way we’re paying for them is through a credit card company.

Paul L. Mirer
Rockville, MD

Spontaneous Collaboration?

There’s one problem with Michael Schrage’s interesting idea that biotech innovation can be fueled by veterinary medicine (“Medicine Goes to the Dogs,” TR December 2003/January 2004): veterinarians, doctors, and scientists will not spontaneously collaborate. An organization should be established that provides a medium for interactions between veterinary and medical researchers.

Mark McCollum
Miami, FL

Innovation Backlog

In response to Kenan Sahin’s article (“Our Innovation Backlog,” TR December 2003/January 2004), it’s not so hard to understand the reluctance to invest in technology. Many people invested heavily in “Internet” without understanding what they actually were putting their money into; they did so because the Net had “flash” and “now” to it. Many of those dollars were absorbed in huge salaries paid to executives who had no clue as to where the value in their product lay, only that they were developing something cool. It is up to the innovator to make a clear path to value, and the investor to demand that path. Any investor who fails to do this has failed to do his job and has no one else to blame but himself if he loses money.

John Peters
Fremont, MI

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