The search for an efficient means to handle micropayments has opened all sorts of possibilities on the Net. One of my favorite examples stems from a game under development by Rocket Science Inc. It is a Dungeons & Dragons-style role-playing game, which is given away and run over the Net at nominal or no cost. How does Rocket Science make any money? Here's how.

You find yourself in a beautifully rendered medieval castle, face-to-face with a green, smoke-puffing, long-toothed dragon. You (actually your avatar) are dressed in a terry-cloth bathrobe, which is fine for stepping out of a hot shower but crummy for fighting dragons. Then you notice some nicely polished armor hanging on the dungeon wall. Guess what? You can rent it for five cents to fend off the monster.

Significantly, the vendor has linked the pricing closely to the value received, or at least perceived, by the customer. The developers of future adventure games might even stoop so low as to exorbitantly charge the person trapped in a corner for a spear to ward off a band of ogres.

Buying looking versus eyeballs
Another example involves the current debate over how online advertising should be priced. Advertising in conventional media is priced in proportion to the number of readers or viewers, whether or not the ad is actually seen. A few years ago, a controversial campaign by an association of print media attacked the effectiveness of television ads. It placed an ad that showed a partially clothed couple, otherwise engaged, on the sofa in front of the television. Pointing out that according to the Nielsen ratings this couple was supposedly watching TV, the ad posed the question: Who's really getting screwed?

With Web-based advertising it's possible to know how often and how long an ad appears on users' screens, and whether a user clicked on it for more information (now commonly called a click-through).

Buyers - whether of advertising, videogames, or air travel - seem to assume that they will be better off in an era of value-based pricing, but this is far from true. Some cable companies offered live coverage of the November Tyson-Holyfield fight at US$9.95 per round - the longer the fight, the more you pay. Eleven rounds later it didn't look like such a good deal (although the price was capped at $50). What shall we expect next time? Twenty cents per punch or $20 per half-pint of blood spilled?

My bit is bigger than your bit
Discussions of pricing mechanisms in the wired world have largely focused on increased connectivity (the death of the go-between) and increased processing power (lower transaction costs). The real significance of the Net, however, lies in a greater understanding of context, and context holds the key to customer value.

Airlines euphemistically call this yield management. Advanced pattern-recognition algorithms compare the current booking status of any flight against previous data and predict the expected value of every open seat on the plane, in some cases on an hourly basis. The system then decides whether to make a discount fare available or hold out for the full sticker price. What if the system could make use of more personal knowledge, gained from your frequent-flyer record or from public information?

"I notice, Mr. Negroponte," says an atonal, HAL-like voice, "that you will have to take this flight in order to make the conference in Lisbon where you are the keynote speaker. Under the circumstances, we feel justified in charging double the regular fare ..."

Differential pricing is a common practice in the world of atoms. Seniors get discounts on London buses. Children get into Disneyland for less than adults. Student passes make European travel affordable. Yet this almost never happens when using online services, in part because the industry is young and in part because authentication is difficult - though not impossible. Knowing who the user is will afford new and attractive solutions for selling and protecting intellectual property. For example, a child doing homework will be able to use this back page free, while an adult consulting it for a business plan will need to pay. Workable? Actually, it is.

Wall Street, move over
The thing about value-based pricing is that it cuts both ways. Three months ago I told the story of a person who used the Internet to find other potential auto buyers. They pooled their collective buying power to negotiate a better price with the dealer. An even less complex arena will evolve from the emergence of a wide range of bid-and-offer marketplaces, simply cloned from the financial and commodity markets.

Six years ago, an outfit in California attempted to launch a true bid-and-offer electronic market for airline tickets. It was a little ahead of its time, but with the benefit of pervasive access via the Web, such an idea could triumph today. In Singapore, electronic bid markets are used to buy the license to own a car (which costs more than the car itself) - an effective if less-than-egalitarian approach to regulating traffic. The government of Western Australia has long employed this approach to source everything from telephones to toilet paper. Where I would like to see the technology applied is in plain old telephone service.

"Mr. Negroponte, this is AT&T's international, line-load balancing system. Our loadings are light tonight, so we can offer you an hour's conversation with your son in Italy for just $5. Press 1 to place the call."

"Hello AT&T, this is Nicholas Negroponte. I'd like an hour's videoconference at 128 Kbps with my mother in London within the next 48 hours. Any time of day is OK. I'm offering $10. Call me back when you're ready to place the call."

This article results from conversations at CSC Index Vanguard meetings with Richard Pawson (rpawson@csc.com). Pawson, who coauthored much of the text, is director of research for the CSC Index Foundation.