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January 28, 2004

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Palo Alto Online

Publication Date: Wednesday, January 28, 2004

Innovating bit by bit Innovating bit by bit (January 28, 2004)

Palo Alto startup BitPass aims to break ground in online-content business

by Elizabeth White

When the dot-com bubble burst a couple of years ago, Kurt Huang and Gyuchang Jun were distraught, not because they had a business that failed with the rest, but because all their favorite Web sites were disappearing.

So the two Stanford University doctoral candidates and longtime roommates decided they would create a way for sites, many of which were fresh out of venture capital funds and reliant on expensive subscription services to stay afloat, a new way to thrive.

"We wanted to change the economics of the Web to find a cost-effective way to charge low prices for content and services" such as pictures, files and interactive personal searches, Huang, 34, said. "It seemed to us the obvious solution was to pay as you go or pay a small amount."

And so their online company, BitPass, was conceived.

BitPass (www.bitpass.com), like other so-called "micropayment" companies, operates on the same principles as a pre-paid phone card. Users, or "spenders" in BitPass lingo, prepay a certain amount of money, anywhere from $3 to $60, using a credit card or PayPal. The "spenders" can then buy online content like comics, music, games and radio shows from BitPass' partnering vendors, or "earners," for just a few cents in some cases.

"You're buying access to an experience," said Huang, BitPass' CEO. "You can spend it anywhere in our system."

Huang and Jun, the company's chief technology officer, decided to entice users by setting lower credit-card transaction and fixed fees than other sites, particularly for content that is a couple of dollars or less. BitPass charges earners a 15 percent transaction fee and no fixed fee for every transaction under $5. Above $5, BitPass charges 5 percent plus 50 cents.

"It's cheap and it's easy; that's our focus," Huang said, noting that content is delivered immediately to the BitPass user without the complicated e-mail confirmation process associated with online credit-card use. "We're a facilitator. We're like the box office."

Spenders need no software to use the site, and earners can upload gatekeeper software, developed by Jun, 32, a student in computational material science, to protect their content.

"We designed the system as scalable as it can be" to allow for future growth, Jun said. It was also designed to be compatible with emerging and existing technologies to accommodate BitPass' thousands of earners and spenders all over the world.

Funding for BitPass, which was founded in 1999, incorporated in December 2002 and put online in July 2003, came from two venture capital firms -- Garage Technology Ventures of Palo Alto and Cardinal Venture Capital of Menlo Park, which each offered $500,000 -- and smaller donors called "angels." The company, which operates out of the Stanford Research Park, launched with a total of $1.5 million.

"The reason that we invested is that we think it is a significant change in digital commerce on the Internet," said Bill Reichert, managing director of Garage Technology Ventures. "We were happy to find a group of guys who did not have false expectations about big salaries and luxurious accommodations."

Reichert says he is optimistic for the eight-employee company and thinks BitPass is a "new type of entrepreneur."

"Every day they're getting more and more transactions," Reichert said. "BitPass has learned from all the failures of all the micropayment businesses."

And there have been many, according to Bruce Cundiff, an analyst at Jupiter Research.

"The landscape is littered with failed companies," he said. The main obstacle for micropayment companies has been that consumers are generally reluctant to pay for content online, Cundiff said. But the mess surrounding online music purchases may make micropayment companies not only convenient, but also essential, he said.

"Maybe this is the time that digital content finally takes off," he said. "We think that online music is the one factor that may break this (reluctance), but the jury's still out."

Huang, who said he and Jun are out to change the online world, thinks the verdict is in.

"Clearly the time for micropayment is now," he said. "I think there's a re-emerging enthusiasm about Internet technology."

And the company is getting bigger and better, Huang said. Right now, the site primarily offers multimedia content, including animation, software, music, film and interactive comics, but it continues to expand into other genres like news, law and education. In just the last month the site signed up 200 new earners, Huang said. BitPass has also joined with Clear Channel to provide access to behind-the-scenes photos of Alicia Keys. The company also sells the David Lawrence radio show.

One of its lesser-known earners says the site is a way for authors and artists to fund their creative efforts.

Erik Goetze, a Palo Alto graphic designer who sells panoramic virtual-reality photography and maps through BitPass, said the site won't let him make a living, but it will let him pay for some of the fees of putting his creative content online, such as paying for an Internet connection and domain names. He's had at least 230 purchases since he signed on with BitPass early last August.

"I don't think it will eliminate other payment schemes but I think it will become a fairly well-established...leg of how to pay for content," he said. "BitPass is so easy to use." Elizabeth White can be reached at lwhite@paweekly.com.


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