Will nanobucks be the next big thing, or are we just talking pocket change?
__ SCROLL DOWN FOR THE MOST OFFENSIVE IMAGES AVAILABLE ANYWHERE!! And if unlimited access to the private collection of Crazy Larry's Roach Ranch - "The Most Obnoxious Site on the Web!" - doesn't appeal to you, there's always Doctor Bob's $5 Internet Guides. And A-Plus Dating, the Internet matchmaker where women get in FREE!! Or Astropet, with horoscopes for cats. And, for the truly intellectual, Quote Corner, where $1.95 will buy you a batch of four quotes destined to "inspire and lift the reader."__ If the Internet brings civilization to the mind in cyberspace, then you have just entered its fiea market. This is The InfoHaus, an electronic bazaar of digital dreck, where almost everything costs less than US$10. Inside you'll find a pulsating, mutating collection of unknown and unknowable merchants fulfilling the most disparate needs, from executive accounting systems (even if, as a Net wag might put it, there is no accounting for executives) to software for managing hazardous waste.
The InfoHaus is a curious alchemy of digital mercantilism operated by First Virtual Holdings Inc. of San Diego. It's a market where buyers trade money they can't grasp with merchants they can't see. For First Virtual CEO Lee Stein, it's a chance for every juggler in Jakarta or poet in Paris to quickly set up shop. "This is direct marketing,'' says Stein, a lawyer, accountant, and financial adviser to celebrities. "And it has come to the Internet.''
This online trading village is just one corner of the emerging world of electronic cash, but with a very important difference. It's the slice where the only cash that really counts is the coin. In the real world the lowest denomination is the penny, but out on the Net it could be a thousandth or, in the wildest conception, one ten-millionth of a penny. A nanobuck.
Electronic payment schemes may make it possible to purchase Web pages, paragraphs of text, or other digital goods for fractions of a cent. Click on anything and the meter could be running. Such "microtransactions" are well below the threshold of credit cards, where high overhead costs generally limit customers to purchases of $5 or more. Optimistic retailers say it's a multibillion-dollar market just waiting to be tapped.
Here's the tricky part: the cost of performing a transaction must be lower than the value of the transaction. When it comes to juggling hundredths of a cent, efficient use of communications channels and computing power will be key. Simply put, computers make nanotransactions possible.
Unfortunately, the world of nanobucks is not without its problems. When you're browsing in the electronic marketplace, you're shopping without a net (so to speak). If something goes wrong, there's rarely anyone around to solve a problem or settle a dispute. "The minute a person calls an 800 number and starts to talk to a human being, you start to run up the costs quickly and you can't get that down,'' says Doug Tygar, a principal investigator with the NetBill project, a micropayments design in development at Carnegie Mellon University. Telephone support lines could go the way of the dodo.
__ A stroll in the digital bazaar__
Anxious to explore the electronic emporium, I sign up for an account with First Virtual. I fill out an application, providing standard personal information. I await the return of my personal identification number, which is supposed to appear in my email box and is critical to getting started.
The next day my PIN arrives, along with an 800 number I must call to give First Virtual my credit card info. They also send the encouragement to "enjoy exploring the Internet with your First Virtual account.'' Seems more like an electronic charge account to me. We'll see. I head for The InfoHaus. Determined to buy whatever strikes my fancy, I spot the Psychic Friends of the Web and figure it's time to see what the future holds. I click on the link. Nothing. Am I psychically unsuited to the Web? Cyber-rejection.
I go window-shopping again. And there they are again: my Psychic "friends" are in the Sermon category. I try again. No better luck. There may be a storefront, but no store.
I am in the process of buying a house, so the link to InfoUSA catches my eye. "Innovative Home Mortgage Strategies to Maximize Your Wealth." I click. No response. I try again. Another dead link.
Next up: a promo for the Idiot Guide to Web Profit. If any of these idiots can make a profit on the Web, I want to know how. No response again. Twice.
At other times, Crazy Larry's Roach Ranch can't be contacted, either. His site displays an email address, but he never responds. Such disappearing acts are easy to pull off. Merchants set up shop by filling out an online application, sending in a check for $10, then simply disappearing. First Virtual automatically markets the goods, processes orders, and leaves the merchant alone to do other things. Encouraging communication between seller and buyer isn't part of the deal. Too costly.
I'm thinking that maybe the entire InfoHaus is down. But there's no one to ask. Even if I could, not even the mall operator knows the names or phone numbers of the merchants. I give it one more shot. I stumble upon Chatfield Software, offering "software and information for poets and business leaders.'' Such a contradictory combination is irresistible. I settle on a 10-page report on how to get poems published.
I fire off a short email message that includes my ID number and my request. The file arrives. I print it out. And, what's this, a little later a request that I confirm my order arrives, so my account can be billed. I've already got the goods, so I pause. But my conscience wins out. I agree to have the $2 charged to my credit card. Deed done.
__ Mouseclick magnates__
The idea that dollars can be drawn so effortlessly from digital customers you never meet can be a powerful lure to would-be czars of microtransactions. Attractive, too, is the math. Microtycoons spy a market that they believe could reach several hundred billion dollars a year.
In pure numbers, small cash transactions are overwhelming: 300 billion cash purchases are made each year in America, according to FutureScan, a research firm in Santa Monica, California. Visa International estimates that $1.8 trillion trades hands each year in transactions under $10. Newspapers, sodas, candy, cigarettes, sandwiches - the 7-Eleven economy.
But the cash economy in the digital world is not exactly like the real world. No one wants to buy Twinkies over the Net, says David Simons, managing director of Digital Video Investments, a New York-based money management research firm. Sure, they might cost only 69 cents, but the $2.50 shipping and handling charge quickly kills the desire for a sugar fix. Plus there's no instant gratification.
The digital economy will instead focus on products that can be shipped over the wired and wireless channels of the Net, says Marvin Sirbu, the other principal at Carnegie Mellon's NetBill project. The main lures are expected to be such intangibles as songs and other sound files, games, text documents, and Web pages. But instead of hot artists like Snoop Doggy Dogg, you get home-brewed audio files such as "Ask Dr. Dog!" where canine questions get answered. Or "Hi, I'm Ken, a Computer. Don't Hang Up" ($1 at The InfoHaus). In the microeconomy, Zamphir playing "favorite TV theme songs'' on his pan fiute is a big deal ($1 for 1 minute).
When the payment mechanisms get efficient enough, the theory goes, prices of individual items should drop well below a dollar. Surfers could be billed as little as a fraction of a cent for each Web page they click on.
Unfortunately, that's not the reality of current nanobuck payment schemes. NetBill will effectively handle purchases of 5 cents or more. First Virtual doesn't encourage sales of less than $1, because the transactions face the kinds of fees normally reserved for credit cards: 2 percent of the overall value of the purchase and a fiat fee of 29 cents per transaction. Then The InfoHaus tacks on a charge of 8 percent, to cover its promotional, computing, and administrative costs. Only digital goods, where copies can be endlessly replicated, can survive 39 cents of processing overhead on a $1 sale.
To get down to true nanobuck territory, the number of processing cycles between computers, the slices of communications bandwidth needed between points, and the maintenance of all this digital chitchat must be cut to thousandths, millionths, or someday billionths of a cent.
Yet the would-be barons of digital microeconomics believe that there is a huge untapped market for cash transactions on the Net. What is missing is the technology that would unleash it.
__ Brother, can you spare one-thousandth of a cent?__
Of the half-dozen or so proposals for handling micropayments, the most efficient to date may be Digital Equipment Corp.'s Millicent. The plan, which is still under development, promises to push the costs of Net transactions low enough to enable purchases of less than a penny.
But the DEC proposal requires a complicated infrastructure. Buyers and sellers in the Millicent world would use artificial money, called scrip (frequent-fiier miles and two-for-one coupons are types of scrips). A seller of audio files on the Net, for instance, would issue scrip to licensed merchants that could be used only to buy songs at its electronic store.
But no one wants to buy a different currency for every store they enter. So the Millicent economy envisions intermediaries, called brokers, who issue their own scrips. Well-traveled netizens would stockpile only a few kinds of scrips and deal with just a few brokers. The brokers deal in hundreds of scrips, which they buy from vendors in bulk at a discount.
Administrative costs are low, because customers do not have to open accounts with every vendor they meet. Vendors, in turn, also have accounts with only a few brokers, who handle the accounting.
The idea: aggregate the purchases of scores of customers. Turn many small sales into one big one, thus allowing the cost of processing the transaction to be less than the value of the transaction itself. Only then will be it be worthwhile for vendors to deal in goods that may be worth a fraction of a cent and still cover their costs.
Other schemes abound. Cryptologist David Chaum's DigiCash turns a user's hard drive into a purse. To obtain this digital cash, called ecash, you create a series of numbers that will represent a mixture of coins. The request is sent to the bank, which deducts the amount from an existing account. The bank then sends you an equivalent amount of ecash as an encrypted email message containing a series of numbers. Each number corresponds to a specified amount of money. For instance, if you send the bank $10, you get back a batch of "coins," different denominations now worth $10 in cash to DigiCash merchants, who have no idea who is sending them the numbers.
Easy to use in theory. Then reality intrudes. First step: Open account at the bank. Next: Download DigiCash's ecash software. Don't forget to read the instructions, bug report, and related pages on the DigiCash site. Already, I'm longing for the manual-less money I used to keep in a leather wallet.
Luckily, I am prepared for what comes next. I'd earlier obtained a user name and password from DigiCash. But this only gets me close to getting started. I have to create a string of at least 25 random characters to move onto the next step, which is to create yet another password, unrelated to the first one, so I can create my own private encryption key.
But the ecash software hangs. I enter the password, re-enter it to confirm, and then try a third time, when prompted to generate the private key. My password is rejected. This occurs no matter what password I choose. Nine times.
I don't think other would-be users would be nearly as patient. Why should they? The company explicitly says it does not want to talk to customers. It has only email for support. Who wants email support when it's already taken two hours to try to spend a dime?
Using DigiCash, a meter icon onscreen keeps track of how much cash is still stored on the hard disk. But storing numbers on the hard disk is risky. If you have a disk crash - or if your computer is stolen - you've lost your money. Just like losing your wallet. Result: users are likely to acquire encoded electronic cash only shortly before they intend to spend it and acquire only as much as they think they'll really need.
DigiCash's chief rival, CyberCash, tries to avoid this problem by letting the user's money stay in a special bank account until it is needed to pay for a Net transaction. CyberCash serves as a gatekeeper and bridge between the Internet and banking communities, linking the networks as needed. Transactions are anonymous, unless the seller specifically asks for the identity of the buyer.
Both NetBill's and First Virtual's approach resembles the smartcard system, in which money is stored and carried around on a chip in a plastic card. Smartcards are gaining footing in Europe and at events such as the Olympics in Atlanta. In this design, money is first deposited into a special account, commonly as a charge against a credit card, which, in effect, aggregates the purchases in advance. Transfers from a bank account are also possible.
With the account filled, it becomes a simple matter. NetBill allows a user to get a price quote from a merchant, whose database can determine whether the customer is, say, a retail buyer or a wholesale distributor. The "right" price pops up on the user's screen as a result.
First Virtual, by contrast, relies on PINs and electronic mail to establish and confirm transactions. So far, the company has signed up 138,000 potential customers and nearly 1,900 merchants (although you're likely to see only 240 hawking their wares on The InfoHaus at a time). The potential risk: hackers could put sniffers near email routers, pick off the identification numbers, the purchase orders, and the confirming orders, and start usurping the person's ID. The actual exchange of money, though, takes place off the Net, through an electronic payment network developed by Electronic Data Systems Corp.
Other mechanisms are on their way. Ron Rivest, the R in RSA Data Security Inc., which has commercialized the use of public key encryption, is developing a payment mechanism called PayWord that builds on Millicent's scrip approach. Bellcore and IBM are developing electronic check schemes that could handle low-denomination transactions; these checks - like their analog counterparts - would leave a clear trail from the purchaser, rather than the anonymity of cash. CyberCash, too, pledges to introduce electronic checks by year-end.
__ No, no bucks__
This array of micropayment systems could prove self-defeating. Each has limitations. Each requires its own conventions, completing applications, and possibly downloading software. Each is less convenient than cold, hard cash. Most important, each is largely unproven. Which is slowing down the acceptance of nanobucks.
Example: For 10 days in February, Mary Chadsey, director of marketing for Herndon Web Services in Herndon, Virginia, tried using First Virtual's scheme to sell 45-word Love Bytes at its community information site. Three thousand people visited the site. Herndon's take: $15, for 15 $1 transactions.
In a given week, David Bianco, a senior member of the technical staff at iTRiBE Inc., has about 140 visitors to his Digital Cash Shop, which accepts only DigiCash's ecash. But only about five people a week look at the order link for his lone product, a piece of Star Trek/Dr. Who-genre science fiction called Cyborged. Of those, he may get a single order, since he restricts purchases to ecash. "Most people don't actually have digital cash,'' he acknowledges.
And they won't until banks get involved in a big way. So far, those forays have been limited. DigiCash's only commercial banker in the US at this point is the little-known Mark Twain Bank in Saint Louis. The bank has signed up more than 200 merchants to use the DigiCash plan. They sell to about 1,000 users, who must deposit money in special non-interest bearing accounts.
Frank Trotter, a senior vice president at the Mark Twain Bank, believes the number of users could hit 10,000 as word gets around. But, it's chicken and-egg time. "This won't work if there's nothing to buy,'' he says.
Some fear that bigger, more conservative banks could be turned off for years if none of the mechanisms emerges as the dominant means of delivering digital cash. "That bothers some people a great deal,'' says Joe Pendleton, senior VP of electronic banking for Meridian Bank in Reading, Pennsylvania.
Others see no problem with many options. CyberCash and First Virtual, for instance, share the model of serving as gatekeepers between the Internet and the banking networks; yet First Virtual accomplishes the transaction by email, and CyberCash uses sophisticated client/server technology. DigiCash, on the other hand, stands outside the existing banking networks and offers complete anonymity. With each company carving out a unique service niche among businesses that want to offer online transaction services, there seems to be room on this ball field for all the players. "I don't think the multiplicity of options is going to slow this down,'' says David Wano, director of retail financial services for the Bank Administration Institute, a trade organization in Chicago. "It allows banks the chance to pick the best of the technologies out there.''
The slowdown is more likely to come from digital cash's own kinks. NetBill was supposed to have its first test system up and operating at Carnegie Mellon by the end of last year; now it hopes to begin commercial operation at multiple university campuses by October. DigiCash has landed only the Mark Twain Bank during a 20-month trial of ecash called CyberBucks. CyberCash, while a hot public stock, still has to deliver on its promises to unroll electronic cash and check systems on a widespread basis.
__ Wanted: one killer app__
Yet micromerchants remain optimistic about microtransactions. "They're going to be big,'' says Magdalena Yesil, vice president of marketing and technology industries for CyberCash. "But don't ask me to define big."
What the quarter-a-crack digital economy may need is a killer app, such as electronic mail, which spurred widespread use and interest in the Net. If that's the case, the most natural spur to electronic coin services could be videogames. First up is an alliance between CyberCash and Rocket Science Games, which promises to deliver 20 "classic'' - but still unnamed - 25-cents-a-pop videogames to Net users by the end of the year.
Such "spontaneous gameplay,'' as Rocket Science chief operating officer Jim Wickett promises, has been pursued diligently by outfits such as the struggling Imagination Network, which has offered multiplayer online games for years.
All of which leads to a not-so-vague sense that this path has been trod before. Electronic coins could be another technology, like videotext, looking for a problem to solve. And, as even Rivest says, costs on credit transactions will plunge over the next five years, making digital cash's useful life woefully short.
The rationale for a big market in microtransactions also has a familiar echo to it. Much of what NetBill will be offering to students at Carnegie Mellon will be "print" material such as text from science journals and light fare such as comics, of all things. So Sirbu, for example, likes to point to existing markets to give some idea of the size of the potential market for charging by the Web page for information. Upward of $20 billion a year, he notes, is already spent on online information from proprietary systems such as Lexis-Nexis.
Rocket Science's Wickett uses the same form of "market research'' to justify his foray into Net games. He figures if he can turn home computers and machines into "virtual arcades,'' at a quarter a whack, he can make megabucks from nanobucks. The existing arcade business, he notes, pulls in $7 billion a year.
But Lexis-Nexis, which accounts for $750 million a year or so of the $20 billion that Sirbu points to, is not so sure about the promise of microtransactions on the Net. Since last year, the company's Small Business Service has generated "well under $1 million" of revenue selling articles at prices between 95 cents and $4.95. Patrick Toner, director of enterprise information services for Lexis-Nexis, says it may make more sense to charge a monthly subscription fee, which could be billed, instead of messing with random $2 transactions. "Microtrans-actions are a 'supply-side' solution; they benefit those who are trying to sell,'' he says. "But there is no apparent benefit to the buyer. There is something fundamentally wrong with it.''
Indeed, stealing billions from existing markets sounds remarkably like the rallying call for another network technology that has yet to take off: interactive television.
Although Visa International has expressed interest in the NetBill scheme, it's telling that name brands like Time Warner or Wal-Mart have not joined the parade of grassroots merchants into the nanobuck bazaars. Clearly, it's too early to see much of a mass-market future in picking pocket change off the Net.
And retailers may be wondering if it makes sense to charge a millionth of a buck for every page of information someone clicks on. Selling screen space to a few large advertisers is a lot easier than trying to get - and keep track of - fractions of a cent from thousands of different customers. Particularly if those customers find it discomforting to pay for information they expect to be free. Such antipathy could drastically slow down the advent of microtransactions.
Until a dominant scheme for handling microtransactions emerges, there also won't be enough confidence among consumers to support micropayment protocols on a wide basis. Turnover among InfoHaus merchants is legion. Maybe low-cost digital bric-a-brac is just not much in demand.
The Millicent digital scrip plan, for instance, straddles a fence known to any technology pioneer. Unless there is a volume opportunity, brokers won't go into business. But unless brokers are in business, there won't be a volume opportunity. To create a volume opportunity, someone has to educate a mass market on what digital scrip is. Sometimes it's not exactly clear what the business advantages of nanobucks are. My struggles to go on a digital shopping spree proved that. Says Meridian Bank's Pendleton: "It's a realhead-scratcher.'' Firewalls monitor all in-coming and out-going traffic, serving as a "wall" to keep people
The Mechanics of Nanobucks __ First Virtual__
An off-the-Net approach to conducting small transactions. Buyers provide credit card info to First Virtual (www.fv.com/), which stores the information offline. Buyers then receive ID numbers, which form the basis for executing transactions. Orders are placed by email or on the Web, using the ID numbers. Confirmation is done through email. Actual transactions - where information is posted against a credit card account - are handled through a private communications network managed by Electronic Data Systems Corp.
Cost: 29 cents per transaction, plus 2 percent of the price of the goods sold.
Smallest appropriate purchase: $1.
Upside: Available; money transfer not handled on the Net.
Downside: Expensive; email messages can be purloined.
__ Cybercash__
Buyers establish special CyberCash (www.cybercash.com/) bank accounts that contain money designated for spending on the Net. Consumers issue instructions to purchase an item and money is transferred to the merchant's CyberCash account. Transactions are anonymous, unless seller specifically asks for identity of buyer.
Cost: Approximately 30 cents per transaction.
Smallest appropriate purchase: $1.
Upside: Safe design; credit card portion already in use.
Downside: Expensive; lacks anonymity.
__ Netbill__
Buyer puts money in a NetBill (www.ini.cmu.edu/netbill/) account, then draws off the sum. Accounts of both buyers and sellers are maintained on a NetBill server, to keep transactions off the Net and lower costs. Transfer of funds handled after a purchase is made. Digital goods are transferred to buyers in encrypted form. When NetBill has cleared the transaction, a receipt containing the key is sent to the merchant, then forwarded to the consumer.
Projected cost: 1 to 2 cents per transaction.
Smallest appropriate purchase: 5 cents.
Upside: Good security; accountability.
Downside: Costs not proven; limited testing.
__ DigiCash__
Hard drive as coin purse. DigiCash (www.digicash.com/) users purchase digital cash from a participating bank by credit card or a debit against a checking account. Buyer receives a mixture of electronic coins in different denominations, from pennies to more than $1, for precise payment. The serial numbers of the coins are maintained, so the merchant and bank can keep records of which coins are spent.
Projected cost: One-tenth of a cent per transaction.
Smallest appropriate purchase: 1 cent.
Upside: Anonymity; strong cryptography.
Downside: Anonymity (could allow money laundering); cost of strong crypto could be underestimated.
__ Millicent__
Two-step process using fake money akin to Geoffrey Bucks at Toys 'R' Us. Merchant creates own electronic currency, or "scrip," that is sold to brokers. Brokers then sell the scrip to buyers. Sellers deal with just a handful of accounts, spreading transaction costs over a large volume of purchases. Millicent (www.research.digital.com/SRC/millicent/) customers need to buy currency from only a few trusted brokers, not every vendor. Anyone can see the request and scrip as it is sent, but cracking the signature on the package is kept more costly than the scrip inside is worth.
Projected cost: One-tenth of a cent per transaction.
Smallest appropriate purchase: 1 cent.
Upside: Inexpensive; efficient.
Downside: Merchants can run off with money; lacks privacy, auditability.
