Boku Debuts to Exploit Markets in Social Networks And Games

Micropayments may have failed in previous attempts, but the idea of processing tiny transactions is enjoying new life in mobile payments. The latest example lies in the announcements made on Tuesday by Boku Inc. that it has acquired two rivals and is launching its worldwide service to allow handset users to buy digital goods and charge the transactions to their wireless bills. But with its emphasis on social networks and so-called virtual games, the new venture will also test what many observers see as the latent potential for mobile payments in these relatively nascent markets. San Francisco-based Boku, which was formed only about five months ago and is led by veterans of Amazon.com, PayPal Inc., and AT&T Inc., received $13 million in financing in a funding round led by Benchmark Capital, with Index Ventures and Khosla Ventures participating. With that backing, it bought Paymo Inc., also of San Francisco, and Mobillcash, a U.K. concern. With these companies in hand, Boku says it can now reach a potential market of more than 1.6 billion consumers in more than 50 countries. It also has links to 170 mobile operators worldwide. The new company's target market is the rapidly growing business of selling items for digital games and various applications used on social networks like Facebook. The market garners $8 billion annually, Boku says, with 135,000 apps and games for sale on Facebook alone. “Boku was specifically formed to go after this space,” says Ron Hirson, a former AT&T executive who is senior vice president of product and marketing at the company and a co-founder. And, while Boku was building its own platform, it also contemplated growth through acquisition from the start, Hirson says. The vision, he says, was “bold moves early on.” To use Boku, the consumer types his mobile-phone number into a field that appears in the merchant's checkout page. Boku sends back a text message asking for confirmation, and if the consumer responds by texting a “Y” for “yes,” the transaction is done. The payment will then appear on the consumer's mobile-phone bill. The service works on either a PC or via the mobile Web. Boku says most digital-goods sales run between $2 and $14 each, though it says its average ticket is close to the top end of the range. The company won't say how many merchants accept payments through Boku, though Hirson says integration isn't an issue. “It can be up and running in 48 hours,” he says. The developers that sell these goods?a class of merchants Boku refers to as “publishers”?pay a hefty fee to the carriers to handle billing and take on risk. Typically, this runs from 20% to 40% on each transaction. Boku's fee ranges from 5% to 10%. Merchants may eat these fees or pass all or some of them on to their customers. While the merchant may be liable for giving up a sizable cut, Hirson says the economics of digital goods makes it possible for publishers to make money on small tickets. That's because, since digital goods are easily replicated, after the first sale the merchant has virtually no incremental costs. But those economics are likely to keep Boku from moving into e-commerce for hard goods any time soon. “Our focus right now is on the virtual goods and games markets that can absorb the [carrier] network fees,” says Hirson. To control risk, the company imposes a cap on transaction amounts. These limits vary by country and by carrier, Hirson says. “It would be difficult” for Boku to adapt its model to general e-commerce, says Mark Beccue, a senior analyst at New York City-based ABI Research who follows mobile payments. “That's a pretty steep number to play with,” he says, referring to the bite carrier fees take out of each sale. On the other hand, he points out, carriers are assuming the risk related to collecting on the incremental payments users are piling on to their bills. Still, Boku may be far from finished with its “bold moves.” While Boku won't reveal the purchase prices for Paymo and Mobillcash, Hirson says the deals came to less than $13 million. “We have significant runway with the money we raised,” he says.