Why micropayment will fail
Fame vs Fortune: Micropayments and Free Content
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Micropayments, small digital payments of between a quarter and a fraction of a penny, made (yet another) appearance this summer with Scott McCloud’s online comic, The Right Number, accompanied by predictions of a rosy future for micropayments.To read The Right Number, you have to sign up for the BitPass micropayment system; once you have an account, the comic itself costs 25 cents.
BitPass will fail, as FirstVirtual, Cybercoin, Millicent, Digicash, Internet Dollar, Pay2See, and many others have in the decade since Digital Silk Road, the paper that helped launch interest in micropayments. These systems didn’t fail because of poor implementation; they failed because the trend towards freely offered content is an epochal change, to which micropayments are a pointless response.
The failure of BitPass is not terribly interesting in itself. What is interesting is the way the failure of micropayments, both past and future, illustrates the depth and importance of putting publishing tools in the hands of individuals. In the face of a force this large, user-pays schemes can’t simply be restored through minor tinkering with payment systems, because they don’t address the cause of that change — a huge increase the power and reach of the individual creator.
Why Micropayment Systems Don’t Work
The people pushing micropayments believe that the dollar cost of goods is the thing most responsible for deflecting readers from buying content, and that a reduction in price to micropayment levels will allow creators to begin charging for their work without deflecting readers.
This strategy doesn’t work, because the act of buying anything, even if the price is very small, creates what Nick Szabo calls mental transaction costs, the energy required to decide whether something is worth buying or not, regardless of price. The only business model that delivers money from sender to receiver with no mental transaction costs is theft, and in many ways, theft is the unspoken inspiration for micropayment systems.
Like the salami slicing exploit in computer crime, micropayment believers imagine that such tiny amounts of money can be extracted from the user that they will not notice, while the overall volume will cause these payments to add up to something significant for the recipient. But of course the users do notice, because they are being asked to buy something. Mental transaction costs create a minimum level of inconvenience that cannot be removed simply by lowering the dollar cost of goods.
Worse, beneath a certain threshold, mental transaction costs actually rise, a phenomenon is especially significant for information goods. It’s easy to think a newspaper is worth a dollar, but is each article worth half a penny? Is each word worth a thousandth of a penny? A newspaper, exposed to the logic of micropayments, becomes impossible to value.
If you want to feel mental transaction costs in action, sign up for the $3 version of BitPass, then survey the content on offer. Would you pay 25 cents to view a VR panorama of the Matterhorn? Are Powerpoint slides on “Ten reasons why now is a great time to start a company?” worth a dime? (and if so, would each individual reason be worth a penny?)
Mental transaction costs help explain the general failure of micropayment systems. (See Odlyzko, Shirky, and Szabo for a fuller accounting of the weaknesses of micropayments.) The failure of micropayments in turn helps explain the ubiquity of free content on the Web.
Fame vs Fortune and Free Content
Analog publishing generates per-unit costs — each book or magazine requires a certain amount of paper and ink, and creates storage and transportation costs. Digital publishing doesn’t. Once you have a computer and internet access, you can post one weblog entry or one hundred, for ten readers or ten thousand, without paying anything per post or per reader. In fact, dividing up front costs by the number of readers means that content gets cheaper as it gets more popular, the opposite of analog regimes.
The fact that digital content can be distributed for no additional cost does not explain the huge number of creative people who make their work available for free. After all, they are still investing their time without being paid back. Why?
The answer is simple: creators are not publishers, and putting the power to publish directly into their hands does not make them publishers. It makes them artists with printing presses. This matters because creative people crave attention in a way publishers do not. Prior to the internet, this didn’t make much difference. The expense of publishing and distributing printed material is too great for it to be given away freely and in unlimited quantities — even vanity press books come with a price tag. Now, however, a single individual can serve an audience in the hundreds of thousands, as a hobby, with nary a publisher in sight.
This disrupts the old equation of “fame and fortune.” For an author to be famous, many people had to have read, and therefore paid for, his or her books. Fortune was a side-effect of attaining fame. Now, with the power to publish directly in their hands, many creative people face a dilemma they’ve never had before: fame vs fortune.
Substitutability and the Deflection of Use
The fame vs fortune choice matters because of substitutability, the willingness to accept one thing as a substitute for another. Substitutability is neutralized in perfect markets. For example, if someone has even a slight preference for Pepsi over Coke, and if both are always equally available in all situations, that person will never drink a Coke, despite being only mildly biased.
The soft-drink market is not perfect, but the Web comes awfully close: If InstaPundit and Samizdata are both equally easy to get to, the relative traffic to the sites will always match audience preference. But were InstaPundit to become less easy to get to, Samizdata would become a more palatable substitute. Any barrier erodes the user’s preferences, and raises their willingness to substitute one thing for another.
This is made worse by the asymmetry between the author’s motivation and the reader’s. While the author has one particular thing they want to write, the reader is usually willing to read anything interesting or relevant to their interests. Though each piece of written material is unique, the universe of possible choices for any given reader is so vast that uniqueness is not a rare quality. Thus any barrier to a particular piece of content (even, as the usability people will tell you, making it one click further away) will deflect at least some potential readers.
Charging, of course, creates just such a barrier. The fame vs fortune problem exists because the web makes it possible to become famous without needing a publisher, and because any attempt to derive fortune directly from your potential audience lowers the size of that audience dramatically, as the added cost encourages them to substitute other, free sources of content.
Free is a Stable Strategy
For a creator more interested in attention than income, free makes sense. In a regime where most of the participants are charging, freeing your content gives you a competitive advantage. And, as the drunks say, you can’t fall off the floor. Anyone offering content free gains an advantage that can’t be beaten, only matched, because the competitive answer to free — “I’ll pay you to read my weblog!” — is unsupportable over the long haul.
Free content is thus what biologists call an evolutionarily stable strategy. It is a strategy that works well when no one else is using it — it’s good to be the only person offering free content. It’s also a strategy that continues to work if everyone is using it, because in such an environment, anyone who begins charging for their work will be at a disadvantage. In a world of free content, even the moderate hassle of micropayments greatly damages user preference, and increases their willingness to accept free material as a substitute.
Furthermore, the competitive edge of free content is increasing. In the 90s, as the threat the Web posed to traditional publishers became obvious, it was widely believed that people would still pay for filtering. As the sheer volume of free content increased, the thinking went, finding the good stuff, even if it was free, would be worth paying for because it would be so hard to find.
In fact, the good stuff is becoming easier to find as the size of the system grows, not harder, because collaborative filters like Google and Technorati rely on rich link structure to sort through links. So offering free content is not just an evolutionary stable strategy, it is a strategy that improves with time, because the more free content there is the greater the advantage it has over for-fee content.
The Simple Economics of Content
People want to believe in things like micropayments because without a magic bullet to believe in, they would be left with the uncomfortable conclusion that what seems to be happening — free content is growing in both amount and quality — is what’s actually happening.
The economics of content creation are in fact fairly simple. The two critical questions are “Does the support come from the reader, or from an advertiser, patron, or the creator?” and “Is the support mandatory or voluntary?”
The internet adds no new possibilities. Instead, it simply shifts both answers strongly to the right. It makes all user-supported schemes harder, and all subsidized schemes easier. It likewise makes collecting fees harder, and soliciting donations easier. And these effects are multiplicative. The internet makes collecting mandatory user fees much harder, and makes voluntarily subsidy much easier.
Weblogs, in particular, represent a huge victory for voluntarily subsidized content. The weblog world is driven by a million creative people, driven to get the word out, willing to donate their work, and unhampered by the costs of xeroxing, ink, or postage. Given the choice of fame vs fortune, many people will prefer a large audience and no user fees to a small audience and tiny user fees. This is not to say that creators cannot be paid for their work, merely that mandatory user fees are far less effective than voluntary donations, sponsorship, or advertising.
Because information is hard to value in advance, for-fee content will almost invariably be sold on a subscription basis, rather than per piece, to smooth out the variability in value. Individual bits of content that are even moderately close in quality to what is available free, but wrapped in the mental transaction costs of micropayments, are doomed to be both obscure and unprofitable.
What’s Next?
This change in the direction of free content is strongest for the work of individual creators, because an individual can produce material on any schedule they like. It is also strongest for publication of words and images, because these are the techniques most easily mastered by individuals. As creative work in groups creates a good deal of organizational hassle and often requires a particular mix of talents, it remains to be seen how strongly the movement towards free content will be for endeavors like music or film.
However, the trends are towards easier collaboration, and still more power to the individual. The open source movement has demonstrated that even phenomenally complex systems like Linux can be developed through distributed volunteer labor, and software like Apple’s iMovie allows individuals to do work that once required a team. So while we don’t know what ultimate effect the economics of free content will be on group work, we do know that the barriers to such free content are coming down, as they did with print and images when the Web launched.
The interesting questions regarding free content, in other words, have nothing to do with bland “End of Free” predictions, or unimaginative attempts at restoring user-pays regimes. The interesting questions are how far the power of the creator to publish their own work is going to go, how much those changes will be mirrored in group work, and how much better collaborative filters will become in locating freely offered material. While we don’t know what the end state of these changes will be, we do know that the shift in publishing power is epochal and accelerating.
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Micropayment vs microreward
Earlier this week, Jeff Reifman of Newscloud wrote an essay, “How Micro-payments Could Save Journalism,” which he says was inspired by most recent Editor & Publisher column, “Your News Content Is Worth Zero to Digital Consumers.” (I’m a bit slow to respond due to a busy work week.)
Reifman wrote: “I disagree with the premise of Steve Outing’s column last week. … I think consumers will pay for news content and that an aggregated micro-payment system has a place in solving the sustainability challenge facing journalism.”
In general, Reifman and I simply disagree, and you can read both articles yourself if you’d like to compare and contrast our views. (You’ll discover that both of us wrote headlines that overstate and exaggerate our positions!)
Rather than a point-by-point rebuttal of Reifman’s article (and I do find some good ideas in his writing), I want to suggest an alternative to one idea he pitched: turning on a counter or meter so that a website or blog reader sees how often he/she has used your site. He wrote:
“Place widgets on each page that show readers quantitatively how many stories they’ve read and how much time they’ve been spending on your site. … Set a threshold at which you expect readers to start paying.”
Now, I see that as essentially a negative approach. Let’s determine who our best customers are, then “punish” them by demanding that they start paying small amounts.
Here’s what I’d rather see. I like the idea of telling a reader how much they’ve used your website. If their personal counter widget clearly shows that they put a lot of time into viewing content on your site, then that’s a social cue to “do the right thing” and voluntarily donate some money to support it. (The donation mechanism must be fast and super easy.)
But just as Reifman admits that micro-payments alone won’t solve the news industry’s problems, neither will a donation strategy alone.
So let’s go one step further, and turn Reifman’s negative approach into a positive one! Instead of the counter or meter punishing a web user for over-using your website, reward that frequent user! Turn the personal counter into a tool to encourage more visits. (Most newspaper websites, in particular, have a problem with low average visits-per-month by users.)
This can be as simple and low-cost as making it a game. The “reward” for being in the top 10 users of a site in any month might be nothing more than being highlighted as one of the site’s biggest fans. (Run a photo of your site’s most frequent visitor each week.) Better would be some tangible reward, in the same sort of way that airline affinity programs reward you with points to be accrued and used to get free plane tickets. Reward points to individual users for visiting your site often; they might “spend” the points accrued over multiple visits on accessing the limited amount of premium content on your site rather than having to pay real money.
Or reward frequent visitors with real prizes: The most-frequent site users could win free-meal restaurant coupons or ski lift tickets from advertisers. The top 10 visitors could be entered into a drawing for a weekly prize supplied by an advertiser. I’m sure you can think of many more variations.
Will my approach save the news industry? No, of course not. But I think that Reifman’s micro-payment strategy will bring in little revenue, and turn off lots of online users of your site because of the negative nature of the strategy. By taking the positive approach, news sites can actually encourage more intentional repeat visits. User behavior is clearly trending toward people finding news on your website via other referral sources, rather than purposefully visiting your specific site. A positive “reward” strategy at least has the potential to encourage more loyalty and repeat visits.
None of this solves the news industry’s crisis. I think my positive spin on user usage-feedback could be one little piece of the puzzle. I put more faith in strategies like membership programs, charging for unique niche content (i.e., low pay-walls), network donation solutions (which I’ve written lots about in recent months), and improvements in online advertising. (In fact, I’m feeling more bullish about online advertising for news websites — for the first time in a long time — after learning about some developments that could be game-changing for media companies. Since I typically respect embargo requests from companies, I won’t be writing on that topic until a bit later on.)
