chloeveltman.com > features

Plastic flexes its muscles as dream of free content fades
15 March 2001

Show me the money: credit card
payments dominated the field and
nothing else had any traction

Is it only pornography websites whose customers are happy to pay? Chloe Veltman in San Francisco investigates how other companies are trying to charge us for our time online

AS valuable content becomes more widely available on the internet, the question of how to charge for it has become a pressing issue, as other sources of funding are disappearing fast.

With online advertising falling and easy handouts by venture capitalists long gone, internet companies are desperately trying to find a way to make us pay. The romantic view of the internet as the greatest free ride of all time is fading fast.

Take two high-profile cases - Stephen King, the horror writer, and Napster, the controversial music-sharing website. From the outset, Mr King published his e-book, The Plant, on the Net and asked readers to pay $1 per chapter in the honesty box. They could easily download without paying a buck, but Mr King appealed for honesty: cheques or a money order were to be sent to Amazon.com Payments in Philadelphia.

Remarkably, the author made nearly $470,000, after expenses, from just six chapters.

By comparison, Napster was totally free, which, not surprisingly, attracted an estimated 60m users to download music from the site. When the recording industry took legal action, Napster was forced to consider getting users to pay to subscribe to the service.

It is not only such high-profile cases that are likely to transform the Net from a free playground to a paid-for game. This transformation is particularly evident in print media such as The New York Times, which charges for use of its archive and the crossword.

Norman Guadagno, president of marketing at QPass, a Seattle-based digital payment solutions provider, says: "Before the internet, trying to get access to an article from, say, The New York Times archive cost a lot of time and effort. The internet streamlined the process and reduced costs."

As the number of individuals and businesses conducting transactions online increases every day, one might expect great things from the digital payment industry.

Indeed, a report by the American e-commerce magazine The Industry Standard predicts that online transactions will reach 40 billion annually by 2005. PayPal, currently one of the web's most widespread payment systems, has attracted a worldwide customer base of more than six million since it was founded in December 1998. It has just raised another $90m (£60m).

It is the porn industry that is continuing to thrive online after easily persuading its customers to pay for their X-rated service. One porn website, Danni's Hard Drive, attracted about 25,000 paying members last year, who fork out a monthly subscription of $24.95. By comparison, The Wall Street Journal online edition costs $59 for a year.

The history of digital payments has been anything but smooth, as Steve Crocker, a founder of one of the early internet payment companies, CyberCash, testifies. "At the time we started CyberCash, e-commerce was just beginning and the possibilities were limitless," says Crocker, who launched the business in 1996. "We imagined a vast market in which sellers would provide a wide range of digital goods - music, information, pictures, games - and customers would make small purchases over the internet."

Focusing on the "micropayment" market, Crocker and his team founded the CyberCoin service, "creating a new third-party service to handle the financial transactions on behalf of both buyer and seller." A micropayment is a "low value electronic financial transaction", according to The World Wide Web Consortium, an organisation that sets technical standards for the internet.

However, the volume of transactions remained low. "We thought micropayments would trigger an entire class of transactions which had not been available. As things turned out, credit card payments dominated the field, and nothing else had any traction," says Crocker, who left CyberCash in 1998 to start a back office software company. On March 2, CyberCash filed for bankruptcy.

Our old favourite, the credit card, remains the undisputed lifeblood of e-commerce. Internet payment companies simply have to accept that our flexible friend is here to stay, at least for the time being. Bill Densmore, co-founder of ClickShare, a Massachusetts-based platform for digital content purchasing, says: "No one is crying out for a new type of cash. What we need is a way of aggregating purchases so it becomes financially viable to charge credit cards."

ClickShare operates an interesting business model. Handling the payment systems for some local newspapers in America, the company attempts to reconcile the power of plastic with high credit card processing fees that usually make small purchases financially unfeasible for the vendor.

ClickShare links content providers such as newspapers with service providers such as mobile phone companies and internet service providers (ISPs). Densmore says: "The real key to increasing revenue on the internet is the ability to increase relationships with customers. Our technology links sites that have lots of content with sites that have consumers, creating a beautiful thing called commerce."

Unlike a payment system such as QPass, which bills the end user directly, ClickShare has no direct contact with the consumer. Instead, the technology allows a person to establish a ClickShare account through his or her phone company or similar service provider (assuming that company is ClickShare-enabled), and buy content from other ClickShare-affiliated websites.

ClickShare takes a cut of every sale it brokers and the consumer pays via the monthly phone or ISP bill. This aggregation system has become popular because it keeps credit card processing fees down while storing valuable information about each user's interests in one place.

As third-party systems such as QPass and ClickShare rely on their networks of content-providing partners, the biggest hurdle for digital payment companies is to forge enough business relationships to attract customers.

Bob Metcalfe, founder of the networking company 3Com, came up with a rule for judging the success of networks in the new economy. "Metcalfe's Law" states that the utility of a network equals the square of the number of users. The chances are that if a payment company's network enables the end user to purchase content from only a handful of websites, fewer people will be attracted to it. "As with all network systems, a critical mass of users, sellers as well as buyers, is required," says Crocker.

Many digital payment companies have invented imaginative ways of surmounting the hurdles imposed by credit cards. SplashPlastic, a UK-based shopping site aimed at teenagers, sends customers a card that can be topped up with cash at high-street shops or by standing order. Shoppers then use their pre-paid credit through the SplashPlastic website at online retailers such as TicketMaster and Blockbuster.

At Flooz, a gift-giving company endorsed by the actress Whoopi Goldberg, customers use their credit cards to buy virtual gift tokens called "Floozies". These can then be e-mailed to a friend, to be spent at any "flooz-enabled" shop. The company claims to have selected the shops for "style, selection and value".

Meanwhile, at Beenz.com, an international online currency company that claims its "beenz" are "like money, but better!", consumers are rewarded with beenz for browsing, registering or making purchases from affiliated websites. Beenz can then be spent online at beenz-friendly e-commerce outlets.

The problem with all these alternative currency systems is that the customer is restricted to the content providers and retail outlets offered by the payment company. You can have a buoyant bank account of floozies, beenz and other pennies, but they are worthless if you cannot spend them on what you actually want to buy.

Perhaps one of the most popular methods of paying for online content is via subscription. Clay Shirky, a partner at The Accelerator Group, an internet consultancy firm, and an outspoken critic of micropayment systems, says the psychological hurdle of paying for small pieces of content outweighs the technological merits of any micropayment system.

"I don't believe micropayment systems work because every financial transaction requires a mental transaction, which causes the buyer anxiety." He says that users "want predictable and simple pricing," and plumps for the "flat-rate pricing" associated with subscription schemes. "Paying a penny for a newspaper article is ambiguous. I gravitate towards a system that bundles things together," he explains.

The Wall Street Journal successfully introduced a subscription system for its online service in 1999. For $59 a year, readers can access any article on Wsj.com as well as purchase content through related sites including SmartMoney.com and Barron's Online.

Tom Baker, general manager of The Wall Street Journal's interactive edition, says: "We've always been interested in broadening our reach to include readers who may only want to use the interactive journal for a day or week at a time."

As the internet gravitates towards content financed by its users, Salon, an e-magazine, still provides daily culture, comment and news for free. Scott Rosenberg, its managing editor, says: "The trouble with charging for content - at least for a new brand like Salon that was not already well known - was that it made it very difficult to grow and establish a broad reach.

"Until this year, all winds in the internet marketplace were against charging for content. Conventional business wisdom suggested that the model of free content supported by ads was the most effective."

Times have changed. Salon has established itself and Rosenberg is beginning to explore ways "to generate revenue directly from our users". Like Napster fans facing their final free days, it may not be long before the meter starts ticking for Salon readers.

Earn while you click

Fancy getting paid to use the Net? Lots of companies are ready and waiting to pay for your surf time if you promise to click on advertisements or fill in marketing surveys.

For example, CyberGold, a US-based website, offers users hard cash to read online advertisements.

If you can put up with the lengthy registration process and are willing to have your every move on the network monitored, you can earn anything from $1 for playing free games to $25 for joining a sports betting site.

Payments vary depending on the material you surf and your personal profile - particularly your income. For example, an ad for a Porsche will be worth far less to a student than to a well-paid businessman.

CyberGold managed to more than double its accounts to about 10m last year, according to Pieter Hartsook, vice-president of marketing.

Although CyberGold has begun to flirt with the micropayment business, enabling its users to pay for goods through a CyberGold account maintained by a separate company called MagnaCash, the incentives side of the operation is proving to be more popular.

"We're focusing on the 'earn' side," says Hartsook.