The Bigger Picture
New independent research suggests the barrier between fixed and mobile marketplaces is blurring, creating a strong demand for much broader micropayment solutions that fit into the larger context of digital commerce.
The positive example of Apple's iTunes online music store - which announced selling its 500 millionth download in July 2005 - has created new interest and excitement around online micropayments.
However, a new research report from Celent, LLC, a research and advisory firm serving the financial services industry, argues that merchants and vendors alike would do well to trade their singular focus on online micropayments for a much broader view of digital commerce.
Micropayments - transactions for digital goods and services less than $5 -can no longer be approached or discussed in isolation, according to the report, "Cents and Sensibility: The Marriage of Online Micropayments and Digital Commerce." Low-value transactions must be seen as part of an emerging digital commerce supply chain. The report further suggests the industry cease to use the term "online micropayments" altogether.
"Low-value digital goods are not equated with low-cost online transactions, and low-cost online transactions account for just 9% of all digital entertainment content that is sold online," observes Dan Schatt, Celent senior analyst and report author. "As it turns out, customers visiting the iTunes Website don't just purchase one song, they purchase several.Most digital media are purchased today in a variety of ways that facilitate larger payments or recurrent billing."
"As high processing costs associated with low-value transactions are not a major inhibitor to micropayments today, there is no need to create brand new "micropayment" instruments for this purpose," Schatt says. In his opinion the focus should be on solutions around innovative and flexible billing, content merchandising cataloguing, and distribution.
"Rather than try to become 'PayPals,' the most successful online micropayment vendors will help their customers to become the 'Amazons' of their domains, allowing merchants to promote and syndicate each others' content through a standardized billing and payments platform," he says. The growth of broadband, mobile penetration and digital convergence are combining to create a digital commerce marketplace that will ultimately require a common merchandising, billing and payment platform.
The way to market
To be successful, digital merchants need a comprehensive set of functionality that can help them with content organization, merchandising, access control and billing services. And it's not enough to have scope; the purchasing environment must also be seamless. "If the purchasing experience is not completely seamless, merchants will lose the customer midway through the check-out process," Schatt says.
Merchants will also run into problems if they don't choose the right path to market. Ironically, digital convergence and the creation of a digital commerce supply chain are developments that limit rather than liberate personal choice.
Celent has identified three dominant strategies, and discourages companies from going their own way. "It's still all about eyeballs," Schatt stresses. "If you want to sell goods online you have to follow one of these strategies. If you're not, then chances are you're not going to get noticed."
Put simply, merchants can 1) pay a search engine, which can direct traffic to their Website for a fee; 2) pay a bustling online marketplace a listing fee to have their goods available for sale; or 3) rely on the size and strength of a branded, well-known Website to generate sales.
In all three cases, Schatt says, there is a need to conduct online merchandising and promotions, catalogue and bundle various offerings, and provide access control and possibly digital rights management, as well as various customer service, data reporting, and digital delivery options.
Successful online micropayment vendors today are the "Intel inside" of digital merchants or marketplaces, Schatt observes. It's a group that includes Qpass, a provider Schatt says offers "the entire infrastructure to support this emerging digital commerce eco-system."
In his view, the future of online micropayments will revolve around how well new and existing vendors can fit into the larger context of digital content commerce: supplying digital marketplaces, portals, and merchant Websites with an entire array of digital goods and services infrastructure to be successful.
Celent estimates the digital media market in 2005 was $14.1 billion and predicts the market will grow to reach $50 billion by 2009. Celent further expects a full 10% of all U.S. consumers will have paid for some form of online digital content by 2007.
Against this backdrop, the online and mobile channels are ripe for convergence. This would enable online merchants to tap into a paid content market, that Celent estimates totaled $4.5 billion in 2005 (excluding pornography and gambling) and which it forecasts will exceed $30 billion by 2009. Online subscriptions will continue to account for 80% or more of all digital commerce for the next six to twelve months.
The natural evolution of digital commerce requires complete payment flexibility, Schatt concludes. "Online digital commerce is still clearly in its infancy, and we are witnessing the first offerings in the marketplace that can lay the infrastructure that will enable more dynamic digital offerings and marketplaces, which may soon spawn the next eBay of the digital world."