So if you have owned a Microsoft Xbox 360, and have used the Xbox Live Marketplace, you know what MS Points are.   They are simply, a made up digital currency for which you spend to buy online media such as Arcade games, Themes, game add-ons for the Xbox 360 platform.

You can buy pre-paid cards in stores, and enter in the code on the back to redeem them for the point value online.  You can also easily choose to buy more points from the Xbox Dashboard, using your connected Credit/Debit information you previously stored.

So why use MS points, and not cold hard cash (or credit really) when buying these small purchases online?  The problem stems from the fees that credit services (Visa/Mastercard/Amex,etc.) charge the Vendor (Microsoft) for each transaction they enact from the consumer.  While thse fees are the cost of doing business for most purchases,  and take a small percentage of the profit margin on the sale of the item,  they take a deep cut on smaller transactions.

If you were to purchase a 99c song one at a time using your credit card,  the vendor could be charged around 30-45c per transaction.   This has a huge impact on this micro transaction, thus eating into the profits that a company can take in from the thousands of smaller transactions.

Apple’s iTunes’ music store avoids these fees by consolidating multiple purchases, into a single delayed purchase model to reduce the transaction overhead on the purchase.

So how does MS points solve this problem for Microsoft?   The concept is called a Micropayment made with Microcurrency (Not an Microsoft naming invention BTW) which can be described as:

Micropayments are means for transferring very small amounts of money, in situations where collecting such small amounts of money with the usual payment systems is impractical, or very expensive, in terms of the amount of money being collected.

Basically by a consumer purchasing a block of 1600 MS points for $19.99, Microsoft is only having to pay the transaction processing fee once to accept your money.  You now can go and purchase digital media with your points as you choose, and it will not cost the Vendor additional fees as you decide to purchase. The vendor collects it’s money upfront instead of delaying their collection till a later time. (Similar to the Gift Card concept many retailers use today.)

So,  if you were to purchase a single music track for the price of 99c, this would translate to roughly 79msp, by using the online Microsoft Points Converter site.  So around 20 different music tracks can be had for 1600msp, or $19.99.

So it seems that with the new announcements today of the Zune media platform from Microsoft,  there will be an online media store called Zune Marketplace where you can purchase music/video for your PC and Zune Player.

But guess what the currency of choice will be?

You guessed it,  Microsoft Points.  

Engadget has posted this, and you can find more on ZuneInsider about how they will link via your Microsoft LiveID.

Other digital currencies have been tried for the web in the past (Anyone remember the commercials with Whoopie Goldberg for "flooz"), but this one may have a better established model.   Myself and many others already purchased digital media on the Xbox Marketplace, so it’s a proven system for generating money for the vendor.  Can it cross into other avenues to be embraced by the general public?

If MS can pull it off, it has the ability to tie in many of it’s technologies (Live ID, Xbox, Windows Media, Zune, Spaces, etc.) into a nice package for the digital consumer.

There already have been MSP giveaways (the E3 Verizon MSP Giveaway) in contests and promotions, so the uses can be endless.  I could see them being used like digital coupons to entice consumers to buy new media.  You could be given as an Xbox Live contest prize a purse of 100msp, so you could now afford to buy that new Movie for 500msp on Zune Marketplace.

So as you can see,  the concept that first appears on the Xbox Live Marketplace may have found a new venue to be used.   I think this speaks for a nice integration path with the Zune Marketplace and the Xbox 360.   Hopefully you can utilize your already purchased MSpoints for that new Arcade game, or that new music track you heard on the Zune Marketplace.  While I am excited about the Zune player, (My Rio Carbon is getting long in the tooth) I sense there is more than just the device business for Micrsosoft starting to unfold.