The Internet is at a crossroads. The dot-com debacle has raised the possibility that the idea of universal access upon which the Web is based may not be economically viable. Advertising-based business models have generally proved disappointing and small, per-click payments known as microcharges — long viewed as the Holy Grail of profitability for the open Web — have been difficult to implement. But now, third- and fourth-generation (3G for short), high-speed wireless networks, once viewed exclusively as providers of mobile broadband access, can provide something more fundamental: the widespread implementation of microcharges. That may set in motion an evolution away from the open Web as we know it and toward a “wireless Internet” that would be, in effect, a Web of proprietary webs.

The advantage of the wireless Internet over the open-Web Internet is essentially the advantage of microcharging over advertising. Specialized content, which, almost by definition, implies narrow audiences, limits the value of advertising and is, in turn, limited by an advertising-based business model. The use of microcharges will give the wireless-Internet business model a great advantage by promoting the development of rich and specialized content that would not be profitable on the open Web.

The Impact of Microcharging

Although many content providers on the open Web already charge access fees, most require subscriptions and do not allow for true microcharging — that is, item-by-item fees for units of content like, say, 50 cents for one-time access to a news story from Dow Jones Interactive. There are four reasons for this: First and foremost, identity on the open Web is private. It can be concealed or easily faked. As a result, direct billing to users has not yet been feasible without preregistration. Transactions, then, require specific setup and billing procedures that can prove limiting. Second, the costs involved in registering and implementing a credit-card transaction often exceed the small fees for one-time transactions. Third, charging a fee may compete with advertising. Sites that provide access only to fee-paying customers run the risk of losing advertising revenues because the audience is usually smaller and subscribers may not be as amenable to viewing advertising on a site for which they already pay. Finally, although e-currency could provide a way out of the dilemma, problems with security, collection and coordination among diffuse sites have hindered its acceptance. Although Internet service providers could attempt to provide their own microcharging, the fragmentation of the ISP market, with more than 5,000 providers in the United States alone, would create the same kinds of collection risks and coordination problems. The latter are particularly problematic, as the transaction costs generated by agreements among each content provider and the multiplicity of ISPs would probably exceed the value of those transactions. That is why the emphasis, until today, has been on the creation of e-currency, an attempt that failed for the same reasons that microcharging has failed. As a consequence, that has left advertising as the main source of revenue for the open Web.

A wireless Internet would solve these problems. User identity, for one thing, would not be an issue. Every wireless user has a unique, highly secure phone number to which the microcharge can be billed. A 3G wireless operator can charge 50 cents for a click at a specific site — and keep 10 cents for overseeing the transaction — as easily as AT&T can charge 7 cents for a one-minute call. And collection problems would be minimized because the wireless operator would bill and collect payment securely in the same way it does today.

Take the case of iMode, the wireless Internet arm of NTT’s DoCoMo Inc. IMode charges per download rather than by connection time, as is done in the United States and Europe. Its users are constantly connected to the Internet and don’t have to place specific calls. While open-Web content providers have yet to find a way to become profitable, iMode says that it incorporates 40 content providers per week and that those sites usually break even in three months. That has created rich, superior content and that, in turn, has attracted subscribers. Two years after it started operations, in February 1999, iMode had obtained 22 million subscribers (out of DoCoMo’s 35 million), adding 1 million users per month. Approximately 90% of those subscribers are active users of the service, each generating about $20 in revenue per month. That helped DoCoMo reach a valuation of $350 billion by the end of 2000.

The Standards Race

The development of rich, proprietary, profitable content will be at the core of a standards race between the open Web and the wireless Web. The ability of 3G networks to implement a microcharging strategy that provides a direct stream of revenue to content developers will give those developers incentive to sign exclusivity contracts and emphasize wireless-Internet development over open-Web development. As more content developers enter into contracts with 3G service providers, proprietary content will proliferate.

Wireless operators will further expand the richness of their content by cross-licensing their content providers, accelerating profitability and increasingly drawing content developers away from the open Web. Joint ventures between wireless network operators and content providers — such as the AOL/Japan-DoCoMo alliance announced in September 2000 — will further accelerate the wireless wars. In addition, new technologies will be developed to allow 3G services to be accessed through a wide variety of terminal types — hand-held devices, PCs and laptops —once again hastening the move toward the wireless Internet by both users and content providers.

This scenario will create a wireless Web in which each 3G network would offer both mobile and fixed access to proprietary, fee-based and microcharge-based content and, in many cases, to the open Web as well. It will fundamentally change the strategy of content suppliers. Financial advice, reviews and reservations for restaurants and theaters, games, weather forecasts, location information, bill payment and so on will all be available on a small per-fee basis. Unless the open Web makes great strides in developing a microcharging model of its own, its content and profitability will decrease. It will end up being used mostly for “storefront” sites that drive traffic to brick-and-mortar businesses and proprietary sites, as well as for voluntary dissemination of information by universities, governments, communities and corporations.

The open Web will, in effect, revert to where it was 10 years ago, when the Internet was the realm of communities of interest without much commercial content. The commercial content will have migrated to various, albeit interconnected, 3G networks, creating an attractive though expensive place to buy goods, services and information. That will have fundamental implications for content providers and users. Companies will have the opportunity to commercialize previously unexploited sources of content. Long-term customer value will be easier to cultivate, measure and manage. Alliances among content and access providers will become even more critical. An explosion of entrepreneurship may ensue.

That’s not an altogether bad evolutionary outcome.