There has been a great deal of recent innovation in micropayment systems, in order to facilitate providing content for a fee over the Internet. Many payments are made with credit cards, but processing a credit card payment typically costs the merchant a fee with a minimum on the order of 20¢ plus a few percent of the amount of the charge.
These new micropayment systems are the result of an evolutionary process among Internet content providers. In the early days of the World Wide Web, content would usually be made available for free by organisations such as universities.
With phenomenal growth of the Internet people soon began to seek various means of earning money from content. Advertising is one such form of revenue. Content would be offered for free, with accompanying ads or links to sponsor sites. Other content providers have also experimented with subscriptions, where people would pay for access to content for some period of time. A third form of revenue comes in the form of donations solicited by the content provider.
Micropayments present a relatively recent innovation in the online revenue stream. The basis of micropayments would be to maintain and take advantage of the very high volume of viewers by offering content for a very low price. For example, a webcomic author would make his online comic book available for 25¢ (USD). Other variations on the idea propose charging fractions of cents (that is, smaller than the smallest possible amount of hard currency) for equally fractional amounts of contents, for example, a tenth of a cent per single web page in an online magazine.
In contrast, publishers of paper magazines and newspapers incur an additional cost to provide the publication to each additional reader. Some publishers impose a purchase price on that reader to defer the additional publication cost. Therefore, newspapers and magazines which must be purchased are not public goods and their publishers solve the free rider problem by charging for each copy of their printed product. Some magazines and newspapers are provided without charge. The publishers of these "free" publications obtain revenue only from sale of advertising. These publications usually have limited and narrowly targeted readerships which are most likely to respond to the advertising in the free publications. Also, publications which bear a purchase price may be printed on glossy paper and have attractive color photos and illustrations, whereas free publications may be produced at a lesser cost, omitting some or all of these features.
Many Internet sites have attempted to provide content as a free public good with the cost of that content paid for only by advertising. These sites provide a non-public good without charge. Because of bandwidth costs, this approach has often failed. Online content cannot be provided at a fixed cost, as with broadcast programs, because each additional person who accesses a particular web site imposes more bandwidth cost on the operator. Although the additional incremental cost could be very small (depending on the file size of the site's content), the cost may accumulate rapidly depending on the number of people who access the site. Therefore, many sites have suffered losses from high bandwidth costs disproportionate to available advertising revenue, since many people access the content, impose a bandwidth cost, but never respond to the advertising banners/pop ups. Many sites have failed for this reason, while others have resorted to charging subscription fees or increasing the ratio of advertising to the amount of content provided (reducing the overall quality of the site).
Proponents of the micropayment business model believe that micropayments will solve the free rider problem for sites that are attempting to depend solely on advertising, and, that such a system is a refinement for sites that have resorted to charging subscription fees.
On the other hand, detractors of the micropayment business model believe that the subscription-based system is preferable and that micropayments generate less revenue than advertising.
Numerous MMORPGs use this system to some extent, though the details of what can be obtained and at what price will vary depending on the game. Some of these games are: Starport: Galactic Empires, Cabal Online, Rappelz, Sword of the New World, Flyff, Silk Road Online, Maplestory and Daimonin.
Microcurrency is a kind of virtual currency, or scrip, that is purchased in bulk, frequently with greater discounts for larger purchases. The currency is then spent, in a separate transaction, on whatever items are available for purchase. Frequently, an online retailer or other provider will set up their own form of microcurrency; for example, Xbox Live Marketplace uses "Microsoft Points", which can only be spent in the Xbox Live Marketplace. One advantage of using microcurrency is that no financial transaction occurs when a consumer spends points; money is paid up front in a single transaction.
On Facebook, Spare Change has recently introduced a solution whereby users can charge $10 to their PayPal account to get spare change, and then redeem Spare Change on participating Facebook applications. This also allows Facebook users to give spare change to friends in their network, effectively enabling the youth market, or people who do not have credit cards or PayPal accounts.
Another working system employs a second account such as indieKarma to use for micropayments while credit cards are used to dump lump sums into the second account. This prevents the fiscal irresponsibility of charging micropayments to the credit card. It also allows customers a new layer of privacy by only letting one company (the second account) access to the customer's credit card information.
One additional strategy to deal with the overhead of the credit card fees is to consolidate multiple micropayment transactions within a particular time period into a single credit card transaction. This is the approach used by iTunes, which bills customers weekly.
Some online artists are strongly in favor of micropayments, as they offer a means of recouping the cost of online publishing, and if they are sufficiently popular, of making a profit. Currently, successful artists are punished by their popularity because this popularity requires them to pay for increasingly large amounts of bandwidth. The argument by artists in favour of micropayments is firstly that such schemes would free them from sponsorship and advertising, which allows more independence for their art; and secondly that the possibility of earning a living through their work would allow them to produce more and higher quality work.
The iTunes model is another popular example of a micropayment success story. Users are free to download and use the iTunes music software from Apple, but also have the option to buy individual songs or videos starting at $0.99. In January 2006 the music download average for iTunes was 17.56 million per week. iTunes works around the complaint that younger people without credit cards will be turned off, since parents can actually set a weekly allowance to how much music their teen can download. Furthermore, with videos, television, and audiobooks, the selection continues to grow.
Some MMORPGs have experimented with a micropayment system as an alternative to traditional subscription-based payment, providing the "basic game" for free, but requiring some features to be paid for with microcurrency that ultimately comes from real-life payments. In particular, Yohoho! Puzzle Pirates has seen considerable success with the system. The developers, Three Rings Design, plan on similarly implementing micropayments in their new game Bang! Howdy Other online games, such as Entropia Universe, Second Life, Roma Victor and the Korean GunBound, use a similar business model.
With the launch of the Xbox 360, Playstation 3 and Wii gaming consoles, micropayments are being pushed to a whole new level. All three gaming systems will feature micropayments as a way to generate income and also add value and content to the games and features they offer. For example, purchasing extra maps, levels, characters, weapons, costumes etc... is now commonplace. If you are playing a racing game and wish to drive the latest vehicle released a week ago, it will now be possible to pay a few dollars and download the car to the game system.
Thus the mental transaction cost critique is primarily aimed at, for example, many proposed pay-per-click schemes and "nano-payment" schemes such as the Digital Silk Road, and renders irrelevant savings in computational transaction costs in systems like Millicent.
Another criticism of Internet micropayments is the cost of exception handling. In the physical world, when putting coins in a parking meter or vending machine consumers have some expectation that the transaction may fail. Presumably people factor the odds of frustration into their purchasing decision. In the digital world, consumers expectations for quality service can far exceed the tiny price of admission. A single consumer complaint (or even a chargeback) may cost $1 to $20 to resolve, effectively wiping out a merchant's profit from dozens, or even hundreds of sales.
Almost all real-world examples touted by micropayment supporters actually involve a larger granularity than the traditional penny. The minimal granularity in Yoho! Puzzle Pirates is a "doubloon", which costs between $0.20 and $0.25. iTunes can be seen as a failure of micropayments since Apple chose a very large price granularity: ninety nine cents, far higher than the traditional granularity of one cent. This confirms a critic prediction that tolerable price granularity is somewhat larger on the Internet than in traditional markets because the average budget of the Internet shopper is higher, and such a shopper puts in less shopping effort per dollar. This effect will be reduced as more poor people get on the Internet (or more internet shoppers become poor) for services in which poor form a substantial part of an existing or potential customer base. The emphasis on potential being a general one referring to the quality of product argument from the above -- to wit artists and others who are not yet capable of supporting a Stephen King like granularity at $1 per chapter for a work in progress, may yet make some kind of living were the granularity reduced to some multiple of $.10 cents. Another argument might be that a given creator could qualify for a second or third-world audience were the equivalent monetary value seamlessly reducible by a factor of ten, to support for example largely English speaking India.
At least one critic has suggested that the mental transaction cost problem may be solvable in some circumstances, via innovative user interfaces that input persistent customer preferences. However, micropayment vendors have generally failed to address this problem, choosing instead to focus on what critics see as irrelevant reductions in computational transaction costs.
Another criticism is that minors and others without credit cards may be deterred; even in a developed country where credit cards are widely held, borrowing a friend’s credit card is a further inconvenience.