Online payment systems have been around since 1994, when the first generation micropayment systems appeared. Micropayment can be defined as an electronic transaction consisting of the transfer of a very small sum of money. The first such systems were eCash, MilliCent and CyberCoin and all of them disappeared slowly in the late 1990s. The current generation of micropayment systems appeared around dot-com boom in 1999-2000 to enable e-business.
Good micropayment system behind a business that sells information products can drive the growth of a company to a new trajectory. A good example of this is Apple. In their Q2/2006 financial results they report revenue growth of 34% and earnings increase of 41%. Their latest entrance to the music business (consisting of iTunes music store and iPod music player hardware) accounted for slightly more than half of Apple’s quarterly revenues of $4.36 billion with $2.199 billion — and considerably more than the $1.7 billion from computer sales. In February 2006 Apple announced that the iTunes Music Store had sold 1 billion songs. In march 2006 iTunes customers were buying about 1 million videos a week alone. Apple is not the only one driving a traditional market to a micropayment-based information product business.
Among the other successful players are Amazon (publishing), Skype (telecommunications), eBay (auctions), NetFlix (DVD rental) and Google (advertising) to name a few. The same can be done for every major industry. It’s clear that Apple is not really making profit with music players but to drive growth in their information product-based online music store, where the profit margins are much better in the long term and the system is easily scalable. It’s also evident, that the demand for music players will go down, as no one has really sold 8.5 million music players in a quarter before. When the market gets saturated by low-cost copy-cats manufactured in Asia, Apple will most likely focus on iTunes, where demand for low-cost information-based products will never decline.
They are utilizing their traditional business model and strong position in selling beautiful computer hardware to drive revenue growth in their new business area of information-based products. This is achieved by first making iTunes a consistent part of their hardware offering. First iTunes will drive growth in the physical product business but as the margins drop due to fierce competition, iTunes will take the lead.
It’s likely, this strategy will be implemented by several hybrid actors (hardware + information products) on the market: first drive physical product sales with an added-value online transaction system and when the time is right, use the existing business of physical products to drive sales of user-generated immaterial and digital products where the margins will be much better. Based on this value proposition, selecting the right strategy for online payments based on micropayment systems is critical. In Finland and maybe in the whole world, Sulake Labs has the most advanced micropayment system tailored for around eleven local markets. Physical product sellers could learn a thing or two from one of the leading interactive entertainment providers.