[NEWS]

[dlv@bwalk.dm.com (Dr.Dimitri Vulis KOTM)]

Washington Post: Monday, October 21, 1996

CyberCash: Change Is Good, They Bet

By David S. Hilzenrath

Somewhere in cyberspace, shrouded in anonymity, someone surfed to the World
Wide Web site for Virtual Vegas last Friday and saw casino betting tips for
sale for 50 cents. With a few clicks of a computer mouse, using software
called a "wallet," the surfer ordered the tip sheet. Almost instantaneously,
the gambling advice crossed the Web to the buyer's computer, and payment
traveled to the Web site in a new form of electronic money known as CyberCoin.

When Virtual Vegas settles its accounts, the encrypted CyberCoin payment will
be converted into a 42-cent deposit in the business's bank account. Its bank
and the buyer's bank will share a fee of 2 cents, and CyberCash Inc., the
Reston company that issued the electronic money, will cut itself in for 6
cents.

Mere pennies -- but multiply the transaction by a zillion here and a zillion
there and someday the company could be making real money.

One of the Internet's hottest and most speculative stocks, CyberCash has
emerged as the early front-runner in a race to handle the pocket change of
electronic commerce, many merchants and analysts say. In the process,
CyberCash could help transform the way people do business on the Internet,
making it easier to buy and sell inexpensive items such as individual news
articles, pictures, video-game plays, computer software, recipes, jukebox
selections -- or odds on the third race at Belmont.

"When the Internet comes into its own, and it will come into its own, then
CyberCash and its competitors will have provided a key mechanism for going
from worldwide chaos to worldwide commerce," said Ira Morrow, a financial
services analyst for the Gartner Group.

It's big talk about a tiny company that in the first six months of this year
had only $ 37,705 in revenue and has yet to show a profit. Moreover, the
company is one of many betting on an explosion of on-line commerce that more
than a few savvy observers say may never come.

"Are people really going to want to do real commercial transactions on the
Internet? A lot of us involved in this aren't sure," said Sholom Rosen, vice
president of emerging technologies at Citibank and point man for the bank's
experiment in Internet currency. "There's more smoke out there than there is
fire right now . . . more hype than there is reality in the marketplace."

Until about two weeks ago, some analysts considered CyberCash's prospects to
be tenuous at best. Then Netscape Communications Corp. agreed to package the
CyberCash wallet with its Netscape Navigator software, by far the most widely
used "browser" for surfing the Web. Suddenly, CyberCash appeared more
plausible.

"CyberCash, with the Netscape deal, has emerged with some kind of a leadership
position . . . some clear viability," said Kris Tuttle of SoundView Financial
Group, a technology research firm.

CyberCash introduced a system for secure on-line credit card payments in 1995,
but by its own account it will be just one of many players following a
standard approach in that arena. It is also developing a system for on-line
check payments. But it is CyberCoin, which debuted on Sept. 30, that holds the
key to CyberCash's fortunes -- and the greatest potential to shake things up
in cyberspace. With CyberCoin, the company is trying to facilitate purchases
of 25 cents to $ 10, transactions typically too small to be made by credit
card.

The system could allow Internet merchants to charge for things they have been
giving away, or to charge nominal tolls for visiting Web sites. It could allow
virtual vendors to charge "by the sip" instead of by the bottle, as some
industry analysts say -- for example, to eliminate costly subscription fees
for on-line publications when the reader only wants a single story.

"It seems to be the answer everybody's been looking for to make small-amount
purchases on the Internet," said Ned Barnett, marketing director of
HealthWorld Online Inc., which plans to use CyberCoin to sell chapters of
books and brief audio recordings about nutrition and health on the Internet.

The folks at Virtual Vegas agree, but their own receipts should temper such
enthusiasm. As of Friday, Virtual Vegas, based in Venice, Calif., had rung up
just 48 CyberCoin transactions for a grand total of $ 40.05 in sales.

Only a dozen merchants are currently equipped to accept CyberCoin payments.
Another 33, including the Los Angeles Times, have signed up to use the system.
Netscape won't begin distributing the wallet software to consumers until next
year; in the meantime, it can be downloaded for free from CyberCash's Web
site, www.cybercash.com.

But to CyberCash co-founder and chief executive William N. Melton, it's a
fairly good bet. And Melton has a history of good bets. In a prior life, he
created VeriFone Inc., building it into the world's largest provider of
credit-card terminals, which retailers use to verify transactions. He serves
on the boards of America Online Inc. of Dulles, the world's largest on-line
service, and Transaction Network Services of Reston, which manages a network
that connects retailers and credit card processors.

Melton, 54, grew up on a farm in Nebraska, where he and his brother and mother
tended to the cows and pigs and chickens. His father, a Methodist minister,
died when he was 7. As a boy, he dreamed of being a truck driver, he said,
because the trucks that rumbled through Nebraska represented freedom.

At West Mar College in LeMars, Iowa, he majored in psychology before going to
Honolulu for graduate work in Chinese language and philosophy. He spent five
years in Asia, traveling to Taiwan, Vietnam and Japan, and returned to Hawaii
fluent in Mandarin.

In 1993, practicing venture capital with his own money, Melton watched the
growth of the Internet and saw its "revolutionary and transformative power,"
he said. He envisioned a need for a kind of VeriFone for the global computer
network, an automated on-line payment system.

"Most of the banking world at that time was not paying attention to this new
[Internet] phenomenon, and most of the people in the Internet were not paying
attention to payments. And so there seemed to be a gap that needed to be
filled," he said.

Melton also perceived a gap in his knowledge of the Internet, and sought out
Daniel C. Lynch, now chairman of the CyberCash board, to fill it. Lynch, 55,
one of the Internet's pioneers, had already made a fortune of his own by
creating and selling Interop Co., which ran Internet trade shows. Lynch also
served on the board of UUNet Technologies, the Internet services company
recently bought by MFS Communications.

Early in his career, as a computer programmer for the U.S. Air Force, Lynch
wrote software for missile-tracking radars. But in the early 1970s he decided
that was "a boring game" because "the offense has it all over the defense," he
recalled. Now, Lynch relaxes by working on his own vineyard in Napa Valley.

Melton and Lynch found each other through their mutual interest in bionomics,
the philosophy espoused by author Michael Rothschild in a 1990 book by that
title. Bionomics views the economy as organic and evolutionary, like a rain
forest, and doubts the power of governments or other institutions to direct
it. The two entrepreneurs became sponsors and directors of Rothschild's
Bionomics Institute.

Rothschild describes Melton and Lynch in contrasting terms. "Bill is a man of
few words. To me he's sagelike, just very wise," Rothschild said. Lynch "is
both a mathematical wizard, a hyper hyper techie guy, the super-geek, if you
will . . . and the ultimate party animal."

They met for breakfast one morning in October 1993, and Melton told Lynch
about his ideas. By the time Rothschild arrived, late for the meeting, the two
were planning a business.

Initially, they financed the venture themselves. "We're two guys that could
write checks for millions of dollars, and if we lost, we lost," Lynch said.
"We were going to shake the world up."

As the company developed, they watched the share prices of publicly traded
Internet upstarts, such as Netscape, rise to stratospheric heights. By last
winter, it was their turn to play. CyberCash issued stock on Feb. 15, raising
$ 44 million from the public and $ 15 million from Japanese investor Softbank
in a private deal. Initially priced at $ 17, the stock has since traded
between $ 24.75 and $ 63.50 and closed at $ 33 Friday. Melton's $ 4.7 million
investment in the company is now worth $ 75.5 million on paper, and Lynch has
turned $ 2 million into $ 25.6 million.

What made the offering all the more remarkable was not only that CyberCash was
losing millions of dollars at the time, but that it had yet to take in a penny
of revenue. "That was a bit of a rush, wasn't it?" Lynch said.

Today, CyberCash has about 190 employees and offices in Redwood City, Calif.,
and Bangalore, India, where labor costs for programmers are much lower than in
this country.

The CyberCash strategy is to distribute its system to the masses through
alliances with banks, credit card-processing firms, makers of Internet
software for businesses and consumers -- such as Netscape, Oracle Corp. and
Sun Microsystems Inc. -- and service providers such as CompuServe.

CyberCash decided early on that it was better off cooperating with banks
rather than competing with them. "We knew that the Internet was going to so
challenge all of . . . life's assumptions that we were not interested in
asking consumers to also leave the safe haven of their current banking
relationships," Melton said.

The company wants banks to put their names on the CyberCash wallet and offer
it to their customers. So far, it has forged relationships with dozens of
financial companies, including First Union Corp. and First Data Corp., the
nation's largest credit card processor. To accept CyberCoin payments,
merchants must use a bank allied with the company, but consumers can establish
CyberCash wallets using any bank or credit card company.

The consumer begins by in effect buying CyberCoin currency -- up to $ 20 at a
time. This is done by transferring funds from a credit card or checking
account to a bank account controlled by CyberCash. Encoded digital currency is
placed on the storage disks of the us er's computer, and is transmitted over
the network when purchases are made. Merchants then redeem the digital
currency for the conventional kind via electronic networks run by CyberCash
and the banking system. In this closed loop, the digital money can be spent on
ly once before being cashed in.

That distinguishes CyberCoin from other forms of electronic money that can
circulate endlessly and anonymously like traditional cash or "bearer
instruments" issued by governments. It also reduces the danger that CyberCoin
would be counterfeited or used for money-laundering, major concerns of law
enforcement authorities who are closely studying the emerging electronic money
systems.

When consumers shop with CyberCoin, they do so under a veil of cryptographic
confidentiality. They hold electronic "keys" that can unlock the code. With a
subpoena, the government could compel users to surrender the keys, which would
make it possible to trace their purchases. But unless the user surrendered the
key, the most CyberCash could do to assist law enforcement would be to stop
encrypting transactions for that person.

That's CyberCash's attempt to balance the government's police interests with
the consumer's privacy interests.

"There are no easy answers in this area," said Raymond Kelly, the Treasury
Department's undersecretary for enforcement. "We think electronic money is
good for the country and the world. But there [are] still many outstanding
issues" for policymakers to consider, Kelly said.

The final pillar of CyberCash's strategy is to rely on software, which can be
easily transmitted over the network, rather than hardware add-ons to a
computer.

Some alternative approaches would employ devices such as stored value cards --
plastic cards embedded with computer chips. Those systems -- roughly akin to
Metro farecards -- would also require users to attach card readers to their
computers. Some analysts predict that smart cards eventually could dominate
the market, but CyberCash believes that software solutions will spread faster.
The CyberCash wallet could be adapted to work with smart cards, but at a
reduced level of profitability, Melton said.

For all its progress, CyberCash has also missed opportunities, one former
executive said. It failed to forge a relationship with America Online's 6.2
million-member service. "Shame on me for that," Melton said of his
unsuccessful run at AOL, but he added that as a member of its board he was
unwilling to push AOL too hard.

CyberCash has yet to build an alliance with Microsoft Corp. For a long time it
didn't even try, because Melton thought it should wait until it had more to
show for itself. Former marketing vice president Magdalena Yesil questioned
that judgment. "Putting your head in the sand doesn't get you away from
trouble," she said. "It actually allows the trouble to get bigger."

Perhaps most seriously, the company has yet to recruit many merchants to
accept CyberCash payments. "As a consumer, what do I do with this thing?"
Yesil asked rhetorically. "It's like somebody giving me Turkish liras in
California."

CyberCash's closest competitor, an Amsterdam company called DigiCash, requires
consumers to open accounts at designated banks, and it has enlisted only Mark
Twain Bank in the United States. Other competitors may soon appear, though.
Citibank is working on its Electronic Monetary System. Melton's old company,
VeriFone, is readying on-line card readers.

And Digital Equipment Corp. promises it will launch a service called
Millicent, with much lower transaction charges than CyberCoin's.

Before long, these companies may count their fees not in pennies, but in
fractions of pennies. Then, zillions of transactions won't ensure
profitability. It will take bazillions to get there.

FEWER MIDDLEMEN, BIGGER MARGIN

The chief executive of Virtual Vegas sees products such as CyberCoin as
nothing short of "revolutionary," and he says the proof is the cards --
blackjack cards, to be precise.

The Virtual Vegas Turbo Blackjack computer game sells in stores for $ 29.95.
But with CyberCoin, Virtual Vegas is selling it on the Web for $ 2.95, a tenth
of the price. And CEO David Herschman says he could make more money doing it.

Each $ 29.95 CD-ROM version of the game yields a profit of about $ 4.50 after
deducting the retailers' and distributors' share of the price; production,
packaging and shipping costs; sales commissions; and unpaid accounts.

By contrast, each $ 2.95 copy of the game paid for with CyberCoin and
delivered over the Web costs Virtual Vegas about 26 cents, yielding a $ 2.69
profit. At the Web price, Virtual Vegas could sell many more copies, Herschman
said.

"The profit margin is huge," he said. "We make it once and . . . we could sell
that from here to eternity."

HOW A CYBERCOIN TRANSACTION WORKS

1. CyberCash Inc.'s electronic wallet software is downloaded from its Web site
at http://www.cybercash.com to a user's computer. The user fills the wallet
with money by transferring funds from a checking account or credit card to a
bank account controlled by CyberCash. The actual money stays in the account
until after a purchase has been completed. To fill the wallet from a checking
account, users must mail in a voided check. CyberCash then loads the wallet
with digitally encrypted symbols representing the allotted money in the bank.

2. To buy something, the consumer clicks the PAY button on a participating
merchant's Web site. The code for the money is verified by CyberCash. The
electronic product -- such as an on-line document or news article -- is
transferred to the user's computer. The code for the money is transferred from
the user's wallet to the merchant's electronic "cash register." The user's
wallet logs all transactions.

3. When the merchant empties the cash register of its coded payments,
CyberCash transfers the actual money to the merchant's bank account from the
account where it was holding the consumer's funds. CyberCash deducts a
transaction fee from the merchant's payment. The fee is split among CyberCash,
the consumer's bank and the merchant's bank.

4. The user can return unspent funds to a checking account, but not to a
credit card.


American Banker, 10/23/96

Phone alliance may rival banks in electronic cash

A smart card alliance of five telephone companies could raise competitive
obstacles to banks that desire to control electronic cash transactions. US West
Communications, GTE, Bell Canada, PTT Telecom Netherlands, and Telekom Malaysia
announced formation of the Global Chipcard Alliance at the CardEx 96 conference
this month in the Netherlands. Additional members are welcome. Oracle Corp.,
the data base software giant, plans to join, said US West. The alliance wants
to create an open standard to allow any smart telephone card to operate in any
pay telephone network. Some partners' cards are already interoperable -- for
example, GTE cards work in telephones installed by US West and vice versa --
and alliance members may have the power to affect technology in the banking and
payments field. Though phone card standards are its initial target, the
alliance could view electronic purses and other chip card applications as
viable opportunities. The major bank credit card associations have produced a
smart card standard called EMV, for Europay, MasterCard, and Visa. It is
designed to assure that merchants' terminals accept all compatible cards. The
chip card group could incorporate EMV into its operating standard.

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<a href="mailto:dlv@bwalk.dm.com">Dr.Dimitri Vulis KOTM</a>
Brighton Beach Boardwalk BBS, Forest Hills, N.Y.: +1-718-261-2013, 14.4Kbps