Loudeye will use technology from Peppercoin, a small payments company, to process inexpensive digital transactions, the companies said Tuesday, as part of the Seattle-based digital media company’s efforts to bring down payment-processing costs.

will use technology from Peppercoin, a small payments company, to process inexpensive digital transactions, the companies said Tuesday, as part of the Seattle-based digital media company’s efforts to bring down payment-processing costs.

Peppercoin thus receives a string of customers through Loudeye’s network of digital music stores, a major step forward for the startup. For Loudeye, it’s a move directed at improving efficiency. Loudeye posted a loss of $16.4 million on revenue of $16.8 million last year.

“There’s a lot of consternation in the marketplace today about pricing,” said Loudeye CEO Mike Brochu. “People are talking about tier pricing, as the market tends to increase. One of the key variables for us—as we have a service to provide to the end user, retailer, or consumer—is the ability to focus on reducing the cost of delivery.”

Peppercoin offers different payment models, ranging from pre-paid to subscription-based, for low-value transactions. The Waltham, Massachusetts-based company is one of many startups in a field dominated by PayPal. It’s a market that’s growing rapidly, thanks to the relatively recent popularity of buying digital content.

Celent Consulting, a financial services research and consulting firm, estimates the digital content market will grow from $14.1 billion to $50 billion in 2009, with 10 percent of U.S. consumers having paid for some form of digital content by 2007. Forrester Research estimates digital music downloads alone will reach $3.2 billion in revenue by 2008.

Spawned by iTunes

The success of iTunes has spawned an entire market around downloads. But even as people buy and sell increasing amounts of digital content, sellers are struggling to determine the most effective payment options they can give consumers. The issue is further complicated as the amounts in question, more often than not, are very small.

“Micropayments are little bits of money,” said Mr. Brochu. “Unless you do it extremely efficiently, you end up losing money. It can get out of whack pretty fast based on how much it costs to process [the transaction].”

And there’s where companies like Peppercoin come in. Peppercoin raised $8 million in August in a round led by VC firm Wall Street Technology Partners.

The company was spun off by the Massachusetts Institute of Technology in 2001 to cater to a market of payment processors, banks, and credit card associations. While the micropayments industry in the United States isn’t as robust as it is in Europe and Asia yet, it now seems to be gaining momentum.

Peppercoin CEO Mark Friedman sees several factors contributing to the surge in micropayments. “In the online space, there’s a lot of activity, with games, publishing, and entities like Google,” he said. “And there’s tremendous excitement about the physical size of the space. It’s attracting a lot of interest from card associations, banks, and tech providers that have an interest in that space.”

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