Ask Ron Rivest if he’s ever been whisked away by the CIA in the middle of the night, and he laughs—but he doesn’t say no. At Peppercoin, a two-year-old MIT spinoff in Waltham, MA, the renowned cryptographer oversees an operation far less secretive than an intelligence agency but almost as intense: a clearinghouse for electronic “micropayments,” pocket-change transactions that may finally allow magazines, musicians, and a multitude of others to profit from selling their wares online.

It’s September, and with only weeks to go until commercial launch, Peppercoin’s software engineers troubleshoot at all hours. Marketing executives shout across the room and over the phone, making deals.

But in the eye of the storm, Rivest is calm and collected. Eyes sparkling, real change jingling in his pocket, he even wears sandals with authority. What Peppercoin is trying to do, he says, is make it easy to “pay as you go” for inexpensive Web content—so you won’t need to pay subscription fees, limit yourself to free content, or share files illegally. With a click of the mouse—and Peppercoin’s software churning away behind the scenes—you can now download a single MP3 from an independent-music site, watch a news video clip, or buy the latest installment of a Web comic from your favorite artist. All for just pennies.

It sounds simple, but it wasn’t possible a few months ago. Most Web merchants still can’t support micropayments—transactions of about a dollar or less—because the processing fees from banks and credit card companies erase any profit. But Peppercoin, the brainchild of Rivest and fellow MIT computer scientist Silvio Micali, is in the vanguard of a new crop of companies—including BitPass of Palo Alto, CA, and Paystone Technologies of Vancouver, British Columbia—that make cash-for-bits transactions superefficient. These companies’ founders are well aware of the string of defunct e-payment companies whose virtual currencies have gone the way of the Confederate dollar. But they’ve got something new up their sleeves: easier-to-use technology that allows Web sites to accept tiny payments by effectively processing them in batches, thereby cutting down on bank fees.

So throw out your current conceptions of Web surfing. Rather than sifting through pop-up ads and subscription offers, imagine dropping a quarter on an independent film, video game, specialized database, or more powerful search engine. If programmers and Web artists could profitably charge a few cents at a time, their businesses could flourish. And with an easy way for users to buy a richer variety of content, experts say, the current deadlock over digital piracy could effectively dissolve, giving way to a multibillion-dollar business stream that rejuvenates the wider entertainment industry the same way video rentals did Hollywood in the 1980s. Down the road, cell phones, personal digital assistants, and smart cards equipped with micropayment technology could even supplement cash in the real world.

“The key is timing and technology,” says Rivest, who thinks Peppercoin has both right. The company’s technical credibility, at least, is not an issue. Rivest coinvented the RSA public-key encryption system, used by Web browsers to make credit card purchases secure. Micali holds more than 20 patents on data security technologies and won the 1993 Gödel Prize, the highest award in theoretical computer science. Their system uses statistics and encryption to overcome profit-erasing transaction fees; the approach is unique and more efficient than its predecessors.

The timing looks good, too—not just for Peppercoin, but for other micropayment companies as well. “One year ago, it was, ‘Will people pay?’ Now it’s, ‘How will they pay?’” says Ian Price, CEO of British Telecommunications’ Click and Buy division, which uses micropayments to sell articles, games, and other Web content to customers in more than 100 countries. And in September, Apple Computer announced that its online music store sold more than 10 million 99-cent songs in its first four months. Apple’s success was the “starting gun for a track meet of companies” planning to roll out pay-per-download services by 2004, says Rob Carney, Peppercoin’s founding vice president of sales and marketing.

Indeed, 40 percent of today’s online companies would sell content they’re currently giving away if they had a viable micropayment system, says Avivah Litan, an analyst at Gartner Research who specializes in Internet commerce. According to Forrester Research, the market for music downloads is expected to grow from $16 million in 2003 to $3 billion in 2008. And a Strategy Analytics report states that mobile-gaming revenues could top $7 billion by 2008. “The market is ready” for micropayments, says Rivest.

Even so, getting the technology to take off won’t be easy. Micropayment companies need to make their systems fully reliable, secure, and easy to use. Just as important, they need to increase demand by working with Web businesses to deliver a broader range of digital products. So on the eve of Peppercoin’s commercial launch, the question is not whether the timing and technology are good. It’s whether they’re good enough.
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