PayPal Chops Its Fees for Online Music Marketers

Online payments processor PayPal announced today a major reduction in its transaction fees exclusively for the burgeoning digital-music market, effective immediately. In what amounts to the Mountain View, Calif.-based processor's first serious foray into micropayments, it is offering pricing of 2.5% plus 9 cents for online song downloads, as compared with its ordinary transaction fees of 2.9% or 2.2% plus 30 cents. On a typical 99-cent download, the new pricing will result in a fee to the content seller of 11.5 cents, down by two-thirds from the minimum 32-cent fee PayPal's established pricing would cost. Typically, licensing fees cost merchants 65 to 80 cents on these downloads, and credit card transaction fees eat up the rest. The new reduced rates apply only to digital music content. Sellers must conduct at least 3,000 transactions a month, and have an average ticket of $5 or less to qualify. Todd Pearson, managing director of merchant services for PayPal, says the new price structure for online music is intended to be permanent. “This is not a limited-time offer,” he says. “We're willing to write longer-term contracts.” PayPal, he says, has already entered talks with a number of major music merchants, and he expects a “deal or deals” to be announced by the end of the month. Announced at the Music 2.0 conference going on now in Los Angeles, the new PayPal pricing comes at a time when major companies such as Apple, Wal-Mart, Microsoft, and Hewlett-Packard have entered or announced plans to enter the market for digital songs, and when a number of startups have entered the so-called micropayments market with new transaction systems relying on prepaid or payment-aggregation models. Pearson says PayPal is changing only its pricing, not its payment infrastructure, and only for online music. “This is a new space, and it's worth it to us to come in and price it really aggressively,” he says. Pearson won't discuss whether, or to what extent, PayPal is subsidizing the new pricing scheme. He says PayPal can justify significantly lower pricing for music on the grounds that it extends PayPal's brand value with an audience that wants to buy music online by the song, and with micromerchants. PayPal is a unit of online auctioneer eBay. “It's worth it to us not to go out with our normal margins,” he says. At the same time, only 55% of PayPal's volume occurs on credit cards, with the rest coming from stored-value accounts. This lowers PayPal's blended transaction cost, allowing the company to offer cut-rate processing to a select, high-potential new market. And the risk of fraud is small, given the small tickets and the availability of free songs on some sites. Says Pearson: “If you're going to steal music, you'll just go to Kazaa.”