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Mending e-commerce with micropayments

It is prevailing wisdom that users will not pay for content on the Internet. Even if one Web site charges for information access, there is always another site that will provide the same information free of charge. However, after years of letting users enjoy zero costs, companies now are tired of footing the bills. Financed by enthusiastic venture capitalists, the Web sites have gradually realized that they will eventually need to turn some sort of profit. The solution to this delicate online fee handling may be a revolutionary new form of transaction called micropayments.

Everyone knows how a newspaper makes its money: subscription fees and advertising. Because customers pay $4.80 a week for delivery of The New York Times and various companies must pay to advertise in the Times, the newspaper is subsidized as a result.

Online, a similar arrangement exists, minus the subscription fees. You visit to see the latest news, and the Times advertises on its site. Once again, you receive subsidized content.

But when the Times goes to sell ads to its newspaper advertisers, it has a lot of data it can use to persuade them of the value of their purchases. They know exactly how many copies they printed, sold and delivered. They also know where readers live and other household data that can be compiled depending on what types of forms readers filled out upon signing up for delivery.

On the Web, however, much of this data is not readily available. Information on page views and numbers of visitors is much less reliable on the Internet. And unlike a print medium or TV, numbers are much harder to audit.

On the Internet, many advertisers get demographics and user data from the same companies that sell them advertising, creating an obvious conflict of interest. Furthermore, many believe that online ads just don't work. Consumers often ignore them and so far the ads have not made an impact on generating revenues for the companies that place them.

These problems have surfaced in recent months as many smaller content-based Web sites - ones that relied on advertising revenue - have failed. Even some of the better-funded and well-respected content sites such as and Yahoo! have had to lay off workers and reduce their scope in order to survive.

One possible solution - an idea that has been batted around before - is the use of micropayments. A micropayment system would allow consumers to pay for the content they access in small, almost unnoticeable portions. A consumer would set up an account with the central payment system and authorize an online content provider such as the Times to debit an account. Each time a consumer read an article or viewed an image on, he or she would be charged an arbitrarily small amount, perhaps only a few cents.

Proponents of micropayment systems - mainly content sites that would like to be paid for their work - liken the system to that of a phone, gas or electric utility where consumers are charged small amounts for each unit consumed and billed at the end of the month. They argue that users won't think twice about paying one cent for a Web page with useful information. Micropayment advocates know that thousands (or millions) of users paying one cent a day, every day, quickly will add up to healthy revenues.

Perhaps they're right. One cent is not a lot to spend on anything, and quality content providers likely will be able to charge more than that. But there are some large problems that any micropayment system would have to overcome before it could become a viable solution.

The largest problem is that a micropayment system would be an entirely new kind of financial system - the equivalent to the development of the credit card. There would have to be a central company or organization on which users could set up accounts. It would have to be trusted by companies as well as individuals, especially since the company would theoretically have the ability to track every site and Web page a consumer visits.

A number of start-ups, including FirstVirtual and Digicash, thought they could solve these problems and failed, as they were not able to garner a sufficient reputation to receive funding. Reputable banks or credit card companies have better hopes of creating a standard form of payment, but neither group is famous for charging the type of low fees that would be necessary for the system to work.

Some subscription Web sites however, have succeeded. The Wall Street Journal Online has amassed a large readership of subscription-fee paying customers. Although it has the advantage of a powerful, established brand name and offline readership, it proves that people are willing to pay for online information if they consider it valuable.

Another large content provider that successfully charges fees is America Online. Even though they also provide Internet access, subscribers pay for the ease-of-use and incredible aggregation of content in addition to the connection.

The future of micropayments is questionable - without a credible central payment system, the other serious hurdles facing the idea cannot be addressed. It seems more likely that more sites will attempt to charge for their services. This might include further consolidation of various sites into larger networks that can charge for access more easily, as AOL does.