Cost-efficient transaction processing for “micropayments” (transactions in amounts less than $10) is one of the many unrealized dreams of the Internet age. Of the literally dozens of venture-backed companies that have attempted to crack the opportunity, only PayPal can claim even modest success (just last October they announced new, lower micropayments pricing designed to capture a bigger share of this market). Online gaming communities like IMVU and Gaia Online have also made inroads, but mostly by selling credits for the purchase of virtual goods useful only within the confines of a specific gaming environment.
In today’s MacWorld keynote, Apple’s Phil Schiller pointed out that more than 75 million customers now have active credit card accounts at iTunes, and that over 5 billion songs have been downloaded since the service first launched. In December Apple also announced that over 300 million iPhone applications had been downloaded from the App Store in the five months since it opened. Most of these transactions were for items priced as low as 99 cents, and Apple’s strategy for managing transaction costs on these small purchases is the same one employed by gaming evironments: selling blocks of credits in larger denominations.
Thanks in large part to the runaway success of iTunes and the App Store, every major smartphone platform is now scrambling to release a similar offering for their customers. Google’s Android Market was the first to ship, but BlackBerry and Palm are headed the same direction, and Nokia’s Symbian can’t be far behind. Not to be outdone, Amazon has also been investing heavily to stake a claim to their share of the digital goods pie.
Taken in aggregate, these efforts will pump hundreds of millions of dollars of new virtual currency into the micropayments market, in the form of purchased credits (e.g., iTunes Gift Cards). And unlike the credits offered by gaming companies, these currencies will allow consumers to purchase an ever-widening array of digital goods, including music, movies, TV shows, software applications, digital books, etc. From there it’s not a big leap to imagine these marketplaces (and particularly Amazon) opening themselves up to third-party sellers of low-priced goods, making their virtual currencies as portable as Visa and MasterCard are today.
If you’re one of the 75 million iTunes account holders Phil Schiller mentioned today, you’re already a customer of the Bank of Apple. And given the state of our traditional banking system, maybe that’s not such a bad thing…