October 31, 2003

Peppercoin solves download payment processing pickle

WALTHAM, Mass. — The future of money is online. So said Ron Rivest, co-founder of online payment technology company Peppercoin, who spoke at the Future of Money Summit in Broomfield this past week.

Downloading copyrighted material without paying for it may not be ethical, but when you take into consideration credit card processing fees, it’s typically cheaper to offer it for free than to charge for it, Rivest said.

If music-sharing Web sites, for example, charged users a small amount per song, say 10 cents, they would end up losing money.

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That’s because credit card processing costs about 3 percent of the transaction cost, plus about 25 cents per transaction. So collecting a dime would cost the Web site more than a quarter, a losing proposition.

Rivest and Silvio Micali, computer science professors at the Massachusetts Institute of Technology in Cambridge, Mass., founded Peppercoin to help Web scofflaws become honest cybercitizens. Rivest and Micali came up with an online micropayment scheme that eliminates the credit card processing middleman and thus the per-transaction fees.

The technology is based on the cryptography algorithms Rivest is well known for in the network security world. Rivest is the “R” in RSA encryption and a founder of RSA Security (Nasdaq: RSAS), a $232 million Bedford, Mass. online security company.

Peppercoin uses encryption and probabilities that are completely hidden from users, Rivest said. Encryption ensures that the buyer and the merchant are who they say they are, and probabilities determine when the merchant receives money from the bank.

Peppercoin works like this.

Merchants use a tool called a “PepperMill” to encrypt and price digital material. They then publish the encrypted content in “PepperBoxes” on their Web site and indicate that they accept Peppercoin payments for this content.

Consumers install “PepperPanel,” a tool for reviewing and purchasing PepperBoxes, on their computer. When they find merchants that sell using Peppercoin, they launch their PepperPanel to download a PepperBox. PepperPanel displays the price and any other information about the PepperBox content the merchant had placed there.

When the consumer presses the “buy” button, he sends a “PepperCoin” — a kind of electronic token — to the merchant who in turn sends the consumer a decryption key to extract a copy of the original content file (for example, an MP3 file) from the PepperBox.

After the transaction is finished, the merchant runs a process that determines payment using a probability algorithm, said Robert Carney, Peppercoin vice president of marketing. The process selects some transactions for deposit. Those that are selected are assessed a new monetary value that’s predetermined in the contract between Peppercoin and the merchant.

For example, the merchant could have his PepperBoxes listed for $1 and have a contract with Peppercoin that says each transaction chosen for deposit is worth $10. When he runs the payment process, the probability algorithm selects some of the $1 transactions to be deposited and revalues them at $10. Although the merchant doesn’t deposit each individual $1 transaction, he still gets the total amount due because the law of averages works in favor of the merchant. And because of cryptography, “It’s fair, and it’s tamperproof,” Carney said.

Carney explained that simple aggregation — adding up an individual’s receipts and depositing them — is a viable, but unreliable, alternative. He used what he called the “cappuccino method” to explain. A coffee drinker visits a coffee shop every day and picks up a $3 coffee that is put on his tab. At the end of the month the barista presents him with a bill for $90. “That’s fine and works, but there’s some drawbacks,” Carney said. “The cappuccino man has to wait until the end of the month to get paid. What if you’ve figured this out and you only go there 27 times and then you don’t go back on the day he’s going to collect? Or if you just go once or twice?”

Aggregation only works with high-volume buyers, Carney said. Although it could be used by online merchants, “You can’t count on a lot of volume from any one buyer, where aggregation would be of great benefit.”

Just like the barista can’t give cups of coffee to different coffee drinkers and assess one bill at the end of the month, Carney said, the online merchant can’t just press an “add” key at the end of the day and expect to collect his money. Peppercoin allows the merchant to be paid the right amount “without the record keeping that would otherwise entail,” Carney said.

Peppercoin’s initial focus is the music industry, and a number of providers, including Big Frank Records and Music Rebellion, have agreed to test the payment system. But Rivest sees many possible users of micropayments.

“We are looking at gaming, publications, ring tones, a lot of different things,” he said. “There are all kinds of digital goods, so we are exploring that space as best we can.”

Peppercoin was founded in late 2001 by Rivest and Micali to commercialize the micropayment protocols they had developed at MIT’s Laboratory for Computer Science. In September the company raised $4.25 million in its first institutional round of financing from Boston-based POD Holding and private investors. The funding brings the total raised to $5.9 million, which includes a seed round from private investors in February.

Company management includes President and Chief Executive Robert Kiburz; Vice President of Strategy Perry Solomon; Vice President of Marketing Robert Carney; Vice President of Sales and Market Development Mark Friedman; and Vice President of Technology Joe Bergeron.

Peppercoin Inc.

85 Central St., Suite 205

Waltham, MA 02453

(781) 891-8330

www.peppercoin.com

Contact Caron Schwartz Ellis at (303) 440-4950 or e-mail csellis@bcbr.com.

WALTHAM, Mass. — The future of money is online. So said Ron Rivest, co-founder of online payment technology company Peppercoin, who spoke at the Future of Money Summit in Broomfield this past week.

Downloading copyrighted material without paying for it may not be ethical, but when you take into consideration credit card processing fees, it’s typically cheaper to offer it for free than to charge for it, Rivest said.

If music-sharing Web sites, for example, charged users a small amount per song, say 10 cents, they would end up losing money.

That’s because credit card processing costs about 3 percent of…

Christopher Wood
Christopher Wood is editor and publisher of BizWest, a regional business journal covering Boulder, Broomfield, Larimer and Weld counties. Wood co-founded the Northern Colorado Business Report in 1995 and served as publisher of the Boulder County Business Report until the two publications were merged to form BizWest in 2014. From 1990 to 1995, Wood served as reporter and managing editor of the Denver Business Journal. He is a Marine Corps veteran and a graduate of the University of Colorado Boulder. He has won numerous awards from the Colorado Press Association, Society of Professional Journalists and the Alliance of Area Business Publishers.
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