Apple's iPhone is leading the way in micro-payments
You may not realise it but your spare change is much coveted by retailers. They know the amount is small enough that you will spend it with little hesitation. They also know it is a large enough amount to give them a profit on the small and often disposable items they convince you to buy. In truth spare change is vital to survival for many businesses, big and small. It was only a matter of time, so, before an online equivalent – “micro-payments” – began to emerge.
“People have always been looking for other ways to turn the web into a business platform and this was one of the ways for doing that, the other being advertisements,” said Dr. Mads Haar, lecturer in Trinity College’s Department of Computer Science. “The idea is that people could deliver better content by charging a small amount than they would have if they offered it for free.”
Facilitating consumers to spend their virtual spare change has been a challenge facing developers for some time, too.
“Micro-payments was an area that was quite hot in the ‘90s because at the time Google had not taken off and people were still using banner ads that were quite intrusive,” says Dr. Haar. “People were looking for other ways to turn the web into a business platform and this was one of the ways for doing that.
“There were some very promising technologies that came out at the time.”
However many technical issues have held back the development of micro-payments. Put simply credit cards – the main currency of the online economy – are not designed to make small payments practical due to their automatic transaction fees, which are applied regardless of the amount spent. At the time of micro-payments’ initial development the internet was also a purely computer-based affair and these systems were developed within that context.
Today micro-payments are finally becoming viable however most of the action is taking place on phones and games consoles and it all looks very different to the plans laid over a decade ago.
iPod-maker Apple has arguably been the most successful company when it comes to micro-payments with its iTunes store now the biggest music retailer in the US. A large part of this success has been its flat-rate price model for songs and albums, although Apple says it just about breaks-even from the service due to the costs involved in running it.
Apple is likely to see more financial reward in its recently-launched App Store, which is designed for the iPhone and iPod Touch devices and offers thousands of home-made applications for the two machines.
“The iTunes App Store is probably one of the first truly successful micro-payment platforms and it’s interesting to just be a part of that,” says Patrick Collison, co-founder of Auctomatic and developer of a successful encyclopaedia application for the iPhone. “The biggest bonus is how little infrastructure you need to put a project up there – if I had to develop a payment processing system myself it would have been a lot of work but here it’s all done for you.”
The App Store system works quite simply. Developers – be they part of a large company or independent hobbyists – create a programme and submit it to the App Store, where it must be approved by Apple. The developer to sets a price and they can offer their software for free, for a couple of cent or for a few euro if they so choose. The application can then be downloaded directly to a user’s iPhone.
Mr. Collison’s application offers users the entire Wikipedia in download form, meaning it can be read even when the device is not connected to the internet. It currently costs €5.99 and involves a significant 2GB initial download to get started.
Apple CEO Steve Jobs has previously claimed that the App Store will not turn much of a profit for the company; instead it will just drive interest in the iPhone. Given the fact that Apple take a 30% cut of every purchase and there were 100 million downloads made in the two months following the store’s launch in July, this is somewhat hard to believe.
There is no doubt that someone will profit from the App Store but it is also true that there is much benefit to be had for consumers. Not only will they now have access to some weird and wonderful tools that big companies might not have bothered making, they are also being exposed to solid applications that were previously too expensive to develop.
“There are so many great applications out there that haven’t been made because it’s so hard to get it licensed and distributed,” says Mr. Collison. “Platforms like the App Store will change that and make it far easier for people to just put their product out there and see how it does.”
However the remaining issue with the likes of the App Store, and similar ventures undertaken by Microsoft and Google, is that they are all isolated.
“It would be very hard for a cross-company payment system to be development now as you would need the support of big players like Google,” says Dr. Haar. “If Microsoft were to put a micro-payment system into their next operating system it could work really well but I’m not sure why they haven’t done that yet.”
That said there is a good chance that things will shift over time, as companies expand their remit and forge partnerships. So is it possible, for example, that the iTunes App Store will eventually expand itself beyond the iPhone and into the world of computer-based applications in the future?
“To be honest I don’t know,” says Mr. Collison. “I would be very surprised if it’s not something they’ve considered, though.”
An edited version of this article appeared in Business & Finance magazine on the 4th December 2008.