The race is on to build a simple system that allows small payments to be made online for web content. The winner will make a fortune and the rest of us will lose our free ride. When Rupert Murdoch took on Google by revealing plans to start charging web users for News Corporation's online content, he got everybody's attention. How would this work? Could this save the newspaper industry? But behind the headlines was another, potentially bigger battle that could bring about a second online revolution.
On leafy University Drive in Palo Alto, deep within Silicon Valley, executives and developers at web transaction processor PayPal have spent a year piecing together a radical plan.
PayPal, bought by eBay in 1999, is the bank for the eBay flea market. From those relatively humble beginnings, it is striving to deliver the global game changer for the internet. It is trying to perfect technology that will permit easy charging on the internet.
Forget free content - almost overnight people could start charging for web pages that users are accustomed to getting for nothing, if PayPal gets its way.
A fortune would follow; whoever becomes the gateway for all smaller payments would reap extraordinary rewards.
The race is on.
Everyone from Rupert Murdoch to the humblest scribe could charge. All newspaper publishers, all publishers on the internet in fact. All bloggers, all popular sites.
Imagine a simple and ubiquitous technology that allows customers to pay small amounts with ease. It's the dream come true for every enemy of Google who rails about their content being "stolen".
For a decade, internet shoppers have struggled filling in complicated online forms requiring a myriad of numbers and personal details to buy online goods and services.
PayPal hopes it has the key to a streamlined, two-step system that covers payments from a micro charge of a few cents, to the purchase of a car.
The principle is simplicity. Instead of forcing online shopkeepers to divert customers to a PayPal web page to complete a transaction, the company would give web developers the software tools to embed its payment engine directly into the thousands of web applications and widgets.
If successfully implemented, the current cumbersome series of actions for internet payment will have been pared down to just a couple of brutally simple clicks: one to say yes, and one to confirm.
Look beneath the war of words between News Corp and Google. The real battle for online money is between established payments players, such as Visa, MasterCard and American Express, and online pure plays PayPal and Amazon, which want to embed their two-click services directly into websites and applications.
PayPal estimates it has 200 million accounts worldwide (5 million in Australia) that generate payment volumes of $US60 billion ($65 billion) a year at margins comparable to those of credit cards: between 1 per cent and 5 per cent.
So when PayPal opened up its payment platform to developers in early November, the launch was interpreted by market watchers as a counterpunch to a nascent Amazon service. The $58 billion eBay rival is rapidly diversifying the services it offers. Known as Amazon Payments, the suite offers tools broadly similar to those of PayPal that allow developers to embed payment functionality directly into software or web pages.
A visiting lecturer at the University College London and the University of Chicago and the author of several books and academic papers on technology and payments, David Evans, likens Amazon and PayPal's race to "an invisible engine war".
In a series of posts on the influential "Catalyst Code" blog, Evans claims both companies are trying to entice software developers into adopting their payment gateways in the same way software companies (think Microsoft, IBM, Apple) fought to draw innovators to their platforms to generate a larger market share of products.
"The more developers use one of these payment platforms, the more innovative applications they develop, and the more consumers and merchants that will end up using that platform," Evans writes, noting that this has been Apple's strategy to "ignite" developers' interest in the iPhone.
"Apple and Microsoft both used this strategy almost two decades ago to popularise their operating systems. Microsoft hit it out of the ballpark with Windows, which became the software platform of choice for developers for a long time," Evans says.
Media oligarchs such as Murdoch are watching PayPal and Amazon closely, not least because such a payment system would make it so easy to pay for online content and services - music, news, reviews, horoscopes - that purchasers would barely give it a second thought.
Where the big-buck transactions of air fares and bill payments once dominated online commerce, the new battle line for digitised consumer spending has become the millions of smaller-scale purchases that fuel hugely commercial content brokers such as Apple's iTunes.
It's not hard to see why.
Music labels and film studios stumbled through successive failed attempts to make customers pay for their products via the internet. Their efforts have been overtaken by Apple's slick gadget design and hallmark user-friendly interface extended to the provision of services that require payment.
It is difficult to overstate the great leap forward achieved by iTunes and now Apps Store.
They have lowered the resistance barriers to paying online; because of them, the average web consumer is now willing to pay for content.
For years record labels and Hollywood studios fought the pirates and digital copycats, relentlessly pursuing them through the courts. Their efforts failed and the once lucrative creative industries turned into economic basket cases as they attempted to put digital barriers between consumers and their products.
What Apple managed to do was apply the same digital technology and create a marketplace that was so easy and convenient to use that copyright owners had little choice other than to jump on the bandwagon and come along for the ride as consumers bought up iPods by the million.
In the space of a just few years, Apple went from being a sidelined underdog to a market maker by giving consumers content in a format they liked and for which they were prepared to pay.
In August 2009 US research group NPD estimated that Apple's iTunes shifted 69 per cent of online music sales and 25 per cent of all music units sold, more than Wal-Mart or Amazon.
Applications for Apples iPhone have also been selling fast, and the company chalked up 1 billion sales in April this year, a figure that has propelled the niche player to a market capitalisation of about $US180 billion ($196 billion), which puts it just behind Google on $US185 billion.
If consumers like offerings such as the iPhone Apps Store, Apple's shareholders love them even more because the company extracts a bumper margin of 30 per cent from each sale.
Content and applications sellers may not like the premiums Apple charges - unkindly dubbed iTax - to set up a stall in its proprietary shopping mall, but they are mostly prepared to put up with them because of the monstrous sales volume they generate.
Smart-phone manufacturers, including BlackBerry maker Research In Motion and Nokia have responded in kind.
RIM does not disclose the number of applications (primarily aimed at corporate users) it has sold, but it has undercut Apple's margin by charging developers a 20 per cent premium to sell on its platform.
If News Corp's Murdoch is keen to get his share of the paid content money-go-round, so too are the established players in the financial services market who can see their dominance in the payments system is under threat.
And experts believe the new services do pose a direct challenge to credit and debit card schemes such as MasterCard and Visa, which are so often the default mechanism for consumer payments.
The head of Queensland University of Technology's school of information technology, Mark Looi, who has a PhD in payment systems, is one such expert.
He's been watching the battle for web consumers with interest and believes a simple solution to paying online will quickly gain traction with consumers.
But Looi cautions that the realisation of Murdoch's monetisation dream could come with a hidden surcharge by creating payments juggernauts that have substantially more market power than people first anticipate.
Amazon and PayPal "are basically trying to lock in a large portion of the internet payments market by taking away the need for small businesses or independent internet traders to establish all these payment mechanisms," Looi says.
"[We will] see dedicated payment-processing players that evolve out of this to have a monopoly; one or two specialised companies out of Amazon or PayPal. New challengers like Amazon and PayPal understand the internet model sufficiently to lock in the payment process on the internet."
A key advantage of the new one- and two-click systems is that they will be able to seamlessly vacuum up all the small-change charges that content brokers such as newspapers hope will pull their solvency back from the abyss.
As the utility of such mechanisms becomes accepted, much of the free content many consumers now take for granted will come at a small premium that while at first will be unpopular will become unavoidable.
"People will not like it, but they will come to accept it," Looi says.
Another scrutineer of the click-for-cash battle is Catalyst Code blogger Evans.On November 9 Evans questioned how long it would be before incumbent credit card issuers responded to the new threat.
He didn't have to wait long for the answer.
Just 10 days later American Express swooped on upstart Revolution Money, dropping $US300 million for the four-year-old web and electronic payments company launched by America Online co-founder Steve Case.
A key driver of the deal was that much of Revolution's appeal to consumers is the combination of its online functionality and its physical payments card business, which gives consumers anonymity by replacing signatures with PIN passwords.
While features such as PINs for credit cards are well established in Britain and growing in Australia, their uptake has been far more limited in the US, where both online and point-of-sale card fraud rates are proportionally higher.
QUT's Looi cautions that while consumers and online seller may initially be dazzled by the outward simplicity of one- or two-click online payments, in reality they introduce another layer of complexity into what is already a complicated system and, as a result, introduce additional risks.
Many electronic payments are already processed by so-called third-party outsourcers, and plugging new players into the system will create a fourth layer, thereby increasing the risk that security will be compromised.
Looi says there are long-term concerns. "My view is that it opens up the opportunity of leakage of personal information . . . They all make claims about their systems being secured and tested to the nth degree but we've all seen that human error can see information leaked," Looi says.
One of his fears is that if people become too reliant on big fourth-party processors, competition will decrease and service standards will fall.
At the same time transaction costs will increase to take advantage of a captive market and security will decrease to cut costs and boost margins.
One hallmark of how established online payment markets already operate in Australia, and in most other countries, is that online sellers usually bear the costs of fraudulent transactions directly; whereas physical merchants that accept payment cards are normally partially indemnified through regulation.
The issue of transaction security is a particularly sensitive one for online merchants.
When PayPal sought to use the strength of its transaction security systems as the main argument in its bid for immunity from the exclusive dealing provisions of the Australian Trade Practices Act in April 2008, so that it could lock eBay users into its platform, it was hit by an unexpectedly fierce backlash.
Apart from thousands of sellers who were angered by the move, regulators, including the Reserve Bank of Australia and the Australian Securities and Investments Commission, questioned the logic of PayPal's arguments and police were openly sceptical about any security benefits.
Many in the financial services industry believe eBay's attempt to secure a sanctioned lock-in for customers in Australia was an attempt to secure a regulatory precedent that could then be used as legal leverage for similar moves across the world.
Much has changed since then, not least the prolific success of Apple's 3G iPhone that was released in 22 countries in July last year and has made hundreds of financial services players - including PayPal - scramble to get their piece of the online pie.
The second online revolution may not be televised, but it could just be a whole lot easier to finance.
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