The Big Trend
The nickel-and-dime economy. Apple (nasdaq: AAPL - news - people )’s success selling tunes at 99 cents a pop has given companies confidence that the holy grail of selling merchandise online for a few bucks or less has at long last arrived.
The market for Internet and wireless micropayments is expected to increase to $11.5 billion in revenue by 2009, up from $2 billion in 2003. But that’s just a fraction of the estimated 400 billion transactions of less than $5 made by U.S. consumers, a total market of $1.3 trillion.
A big boost has come from eBay's (nasdaq: EBAY - news - people ) PayPal service. Now comes Microsoft (nasdaq: MSFT - news - people ) with its “Microsoft Points” system, letting consumers buy points in advance (1,600 points goes for $20), which can be redeemed on the company’s “Xbox Live Marketplace” for content including new games and upgrades.
The Unconventional Wisdom
It’s hard to make money off small fry. Big consumer banks and finance outfits, gas stations, Las Vegas and Disneyland have long mastered the art of getting rich of off little crumpled wads of cash. Small transactions on the Internet, cashless vending machines and cell phone services are coming on strong.
The Misplaced Assumption
That cash will become obsolete. As unlikely to happen as the paperless bathroom. For all the technological hype, much of the economy--especially the underground part that consists of your gardener, your housekeeper and the souvlaki vendor on the corner--is based on cash. Mostly untraceable and out of the grasp of the Internal Revenue Service and the Immigration and Naturalization Service, cash is still king, especially outside the U.S. From 1994 to 2004, the value of currency in circulation increased 88% to $720 billion, an average annual growth rate of 6.5%, according the the Federal Reserve, with much of the increase due to overseas demand.
The Watch List
-- BitPass and Peppercoin: Internet payment start-ups that have raised a total of $24 million in their latest rounds of funding since September. BitPass works by creating user accounts, funded with credit cards, which can then be spent at cooperating merchant Internet sites for podcasts, music downloads, games and patent applications, among other small purchases. Peppercoin aggregates small payments so the transaction fees paid by merchants on batches of purchases are less than the cost and aggravation of processing individual payments.
The Bold Prediction
With more opportunities to spend their parents’ money on cell phone ring tones, Internet games, music downloads and other timewasters, college students and teenagers will continue to fuel profits among companies that have learned how to squeeze margins from tiny purchases. Google (nasdaq: GOOG - news - people ), Yahoo! (nasdaq: YHOO - news - people ), Amazon.com (nasdaq: AMZN - news - people ) and other content aggregaters will consolidate their market power over such purchases, increasing the workload of antitrust attorneys and envious competitors. Movie studios and broadcasters will realize that they make more money allowing individual sales of their content than they lose to piracy and will open the floodgates to selling low-priced content on anything that moves.