Thursday, February 08, 2007

Microsoft’s Micro-Payment System May Save Web 2.0

With the announcement last week that Microsoft is working on a micro-payment system for the web, it occurred to me that this might be the application that saves Web 2.0. One of the biggest problems facing Web 2.0 startups today is monetizing their services. Presently the best way to do this is to offer your applications or access to your website for free and then sell advertising to generate revenue, but with so many companies chasing the same revenue stream it is becoming even more difficult to make this work.

I thought about this while I drove 2 miles (round trip) to buy my daily cup of coffee; sure I could save money and make coffee at home but I have developed a routine that costs me roughly .32 cents a day in gasoline and $1.39 a day for coffee (I don’t buy Starbucks or it would be $4 a day for coffee) I’m sure if I analyzed my daily spending I would see many small transactions each day. When I look at how much my daily coffee cost me each month I’m amazed; I spend $51 a month because I’m too lazy to make my own coffee at home.

Now, lets look at Widget Makers, one category of Web 2.0 companies that are looking for a way to make money, these companies develop neat little apps for MySpace users, bloggers and website developers and most are giving away their stuff in the hope that they can generate enough user adoption to monetize the app with advertising and make some money; unfortunately most are struggling and coming to the end of their VC money. I don’t believe many of their users would be willing to pay $10 a month for these widgets but I can say with certainty a great many would be willing to pay from $1 to $5 each month. I can point out at least 2 that I would be willing to pay $2.50 a month for -- my Dizzler music player (I would pay for right now but I don’t have to) and the Blidget maker from WidgetBox is another. Check the sidebar for my Digital Napkin Blidget.

The payment systems we have in use today (Visa, Master Card, and PayPal, etc.) all charge a gateway transaction fee of from .20 cents to .30 a transaction in addition to a percentage of the value of the sale (from 1.5% to 2.9%). This makes a $1 payment very unattractive when just processing the transaction can cost up to 33 percent of the total. Enter Microsoft and their micro-payments where they remove the gateway fee and can work with a much more reasonable percentage of the total sale. Now Widget makers can charge small amounts and monetize their applications.

If you need an example of the validity of micro-payments, all you have to do is looks at Itunes. They only charge .99 cents for a song but users have downloaded over 1 billion so far. It is clear that micro-payments will bring hope to Web 2.0 companies the world over.