Micropayments, the news, & friction free browsing

Earlier this week I heard Walter Isaacson delve into his new book, “The Innovators,” at the American Enterprise Institute. In discussion, he lamented the development of the various business models in online journalism, and content generally, arguing forcefully for micropayments in their place. In a LinkedIn article on the same subject, he explains:

Companies such as ChangeTip, BitWall, BitPay, and Coinbase – as well as other digital wallets that make use of cybercurrencies or loyalty-points/miles currencies – will empower creators and consumers of content and wrest some power from the Amazons, Alibabas, and Apples. This will upend our current kludgy financial system and ignite an explosion of disruptive innovation.

Our current way of handling small transactions is a brain-dead anachronism. Even Apple Pay and other NFC systems, alas, require that payments go through the current banking and credit card systems. This adds transaction costs, both financial and mental, that make small impulse payments less feasible, especially for digital content online.

In my new book, The Innovators, I report on how the creators of the web envisioned protocols that would allow digital payments, and I argue that this would benefit individual artists, writers, bloggers, game-makers, musicians, and entrepreneurs. Ever since the British parliament passed the Statute of Anne four hundred years ago, people who created cool songs, plays, writings, and art had a right to get paid when copies were made of them. A flourishing cultural economy ensued. Likewise, easy digital payments will enable a new economy for those who sell such creations online.

Even though I am not in the prediction business, I am highly skeptical that micropayments will become widespread for a number of reasons, none of which are particularly new. [See Clay Shirky, Nick Szabo, and Andrew Odlyzko for this argument’s antecedents]

Isaacson is right to point out the first problem, that the cost of the payment instrument is often more than the actual transaction itself. For any payment system to work, a seller must be able to use it without having profit margins wiped. This is why retailers often will require a \$5, \$10 or \$20 minimum for credit card charges because the charges to maintain the payment system only makes sense for a shop owner after a certain price level. And what goes into building such a system? Well there are fixed technical costs for developing the backend architecture and hardware, storage costs for transaction integrity and legal purposes, computational costs for processing payments, communication costs for information transfer, administrative costs, and on and on. All of these costs make sub \$1 payments extremely unprofitable.

And what is in it for consumers? While micropayments might “benefit individual artists, writers, bloggers, game-makers, musicians, and entrepreneurs,” consumer demands are hardly mentioned. They too would have to buy into the project, but there is little benefit for them. For one, a huge mental transaction cost exists between free and even 1/10 of one cent, a phenomena dubbed the penny gap. One analyst, paraphrasing Chris Anderson in “Free: The Future of a Radical Price,” explains this point:

The example given in the book is when a chocolate kiss and a chocolate truffle are offered – the kiss for a penny and the truffle for 18 cents. A significant number of consumers choose the truffle. However, when the price is moved down a penny for each (the kiss becomes free), a transition occurs. While the actual value that has changed is the same, and the cost for the kiss was always much cheaper, it is only when the price moves to free that our consumers select the kiss. The consumers valued the truffle more even when the kiss was only a penny because chocolate kisses are abundantly available and the chocolate truffles are not. The price for the truffle was still deemed a better value.

When choosing between any price and no price, consumers are much more likely to consume the free [at the point of consumption] good. Any requirement to pay or click a button adds a huge amount of friction to the experience, pushing away users.

Additionally, as Clay Shirky points out,

The invocation of micropayments involves a displaced fantasy that the publishers of digital content can re-assert control over we unruly users in a media environment with low barriers to entry for competition.

Said another way, the explosion of content and voices, which we should rightly applaud, has injected competition into the market and pushed down prices to their marginal cost, which in this case is fairly close to zero. Of course, content producers could collude to keep prices at the micropayment level, but would immediately face defection. Thus, this system would be untenable.

A few micropayment systems have worked, with the best example being Apple. But Apple has a closed and tightly integrated system which lends itself far better to micropayments. Moreover, they made a selling point of the relatively painless payment system. But it is helpful to remember that, for a while, Apple had few competitors. Lime and Napster were shut down, fracturing the network power of these programs, while the Store had an extensive catalog. Recently with the introduction of Spotify, Soundcloud, and Pandora, the options for free, legal music exploded, and Apple has taken a hit. Only about 20 percent of Spotify users pay for the service, while the vast majority stream with ads. Lured by this kind of offer, Apple’s iTunes service saw a sales decline of 14 percent last year. It should be no wonder then why the company acquired Beats. The high quality headphones naturally lead consumers into the Beat’s all-you-can-eat music service that is reminiscent of Spotify. Again, they could help to recapture the market with tightly integrated buffet style product, but still face massive competitive pressures.

Any analysis of payments needs to have the consumer as the center. From the literature we do have, it is known that consumers are far more willing to pay for flat rate plans than for metered ones. In fact, when businesses switch from metered to flat-rate pricing usage increases by 50 to 200 percent. This kind of pricing scheme especially makes sense in news. It is difficult to know exactly how informative an article will is before you read it. You might be enthralled by it and willing to pay a high amount after reading, or you may already know what is being discussed and thus see it as valueless. Regardless, a consumer only knows the value of the good after consuming it. So, you rely on the outlet’s brand to guide your decision, assuming from past experience that the quality will match your needs even in the presence of some variability. Obviously, there are good economic reasons that newspapers and magazines are essentially a bundle of individual articles.

In all, micropayments don’t seem like the best option for news or for articles, so I don’t think Isaacson’s big idea is likely to take off.

First published Jan 9, 2015