Amazon debuts Honor System

Dubbed the Amazon Honor System, the new payment method will allow Web sites to solicit small donations from visitors or charge for content on a pay-per-view basis. The system will tie into Amazon's one-click payment feature and Amazon's customer database, meaning that third-party Web sites will seemingly recognize Amazon customers and make it easy for them to donate money.

SatireWire, the SETI (search for extraterrestrial intelligence) Institute, Chank.com and some 50 other Web sites plan to use the new payment system.

The Honor System could prove popular with smaller Web sites and merchants, many of whom don't have a way or can't afford to accept small payments on their sites, said Avivah Litan, a financial services analyst at Gartner.

"This is the start of Amazon getting into payment services," Litan said. "This could turn into something bigger and better for them if they succeed."

Privacy advocates immediately criticized the system because the technology appears to give Amazon the ability to track consumers across all partner Web sites. Jason Catlett, president of Junkbusters, said the pay box it places on participating Web sites, which welcomes Amazon customers by name, lets the company monitor consumers' whereabouts without their knowledge. The technology can potentially identify consumers' link to personal information entered at Amazon's site, such as names and email addresses, advocates say.

Amazon said it does not collect information on customers' surfing habits outside the parameters of its site, as its privacy policy states. The company said it created a filter to block the collection and storage of "clickstream" data, or the trail a consumer leaves while surfing partner Web sites.

Catlett, however, said he is "not persuaded" by Amazon's statement because of the company's past actions on the privacy front. Amazon came under fire from civil libertarians last year when it changed its privacy policy to include instances where it would share customer data despite previous promises to the contrary, for example. The overarching fear consumer advocates have is that Web sites could create elaborate profiles on consumer behavior on the Web, and when linked to personally identifiable information, it could be sold to marketers, or in worst case, be subpoenaed in a lawsuit.

The new system could address some of the obstacles to charging for content online, said Alan Caplan, vice president of Amazon's payment services. The system allows payments as small as $1 and capitalizes on the 29 million customers that have already shopped at Amazon and used its payment system, he said. And at least initially, payments through the system will be voluntary and fully refundable, meaning that customers will still be able to get content for free.

"This is a product where Amazon is taking some of its key strengths, seeing a market and filling it," Caplan said. "We believe that our customers will appreciate this service."

Success with payment services such as the Honor System could prove important for Amazon as it tries to meet a self-imposed deadline for pro forma profitability in the fourth quarter of this year. Amazon's fourth-quarter 2000 revenues came in at the low end of analysts' expectations, and the Seattle-based company warned analysts that its 2001 revenue will be 10 percent to 18 percent lower than it previously estimated.

Meanwhile, the company said in its fourth-quarter report that sales in its core books, music and video stores grew at a mere 11 percent clip in the quarter. Though sales in its newer stores grew at a faster pace, those businesses, such as its electronics store, tend to have much slimmer profit margins.

In contrast, Amazon could see sizable profits from the Honor System. The company will charge Web sites 15 cents plus 15 percent of the amount of the transaction for each payment made using its Honor System. That represents a much bigger slice of the pie than PayPal charges for its online payment services and an even bigger portion than credit card companies charge for their merchant accounts.

But those high fees could stand as an impediment to adoption of the service. And unlike other payment services, payments made through Amazon's system will be refundable up to 30 days after the transaction. For a Web site, that could mean that a customer could ask for refund after downloading its content.

Also, Amazon plans to handle the payment information through its own site and won't pass on any customer information to its Honor System partners. While that might assuage some privacy concerns, some Web sites might be reluctant to give up control of their customers.

Yet the system is better than the alternative, which is basically giving away content for free, Litan said.

"The only reason I'm so positive on this is that Web sites are starting from a zero base," she said. "If they had an alternative, this would be a lousy system because it's so expensive and people can get their money back."

Still, some Web site operators say the service will be beneficial to their sites. The SETI Institute's site, for instance, isn't currently set up to accept donations of less than $45 (in the form of a membership).

The history of Web sites and authors charging for digital content has been a checkered one at best. Although The Wall Street Journal Online has built a significant subscription base, many other content sites such as the San Jose Mercury News' Mercury Center were forced to drop subscription charges.

The Honor System is patterned after the payment system that Amazon used for Stephen King's serialized online novel, "The Plant." More than 75 percent of readers paid for the first several installments of the novel, but by the fourth installment, that figure dropped to less than half.

King suspended writing the novel in November, but said he plans to resume writing.

News.com's Stefanie Olsen contributed to this report.