WSJ To Try Micropayments: What A Bad Idea

from the watch-this-fail dept

There are all sorts of bad ideas around trying to get people to pay for news, but perhaps the worst is the idea of micropayments. Micropayments are trotted out every other year or so as the "savior" to paid content by people with little understanding of economics. The problem is that micropayments never work in a competitive market. First, the "cost" is much bigger than the nominal sum, because of the mental transaction costs ("is this worth buying?") that add friction to the process. Second, and more importantly, it's a self-defeating move. In adding micropayments, you automatically decrease the value of the content. This may sound paradoxical, but what matter is why and how people value content. These days, many people value content for the ability to engage with it, comment on it and share it with others. Micropayments take away that ability, and thus decrease the value of the content. In some sense, adding a micropayment option gives people fewer reasons to pay! Micropayments have been tried over the years, and every time someone announces them the press goes all nuts about how they're the business model of the future for content. And then the projects go nowhere for a few years, whither and die. And the press never seems to notice.

So, it should probably come as little surprise that it's the press itself that's going to try such a plan. The Wall Street Journals' managing editor, Robert Thomson says that the WSJ is going to start offering a micropayment offering for individual articles. Of course, it sounds like it's not always micropyaments either:

"It's a payments system -- once we have your details we will be able to charge you according to what you read, in particular, a high price for specialist material."

A "high price," by definition, isn't a micropayment of course. And it's just as likely to fail miserably. Putting a paywall in the way of people, and they'll find the content elsewhere. Put a paywall in front of good content, and it just opens up the opportunity for other, smarter, publications, to provide the news for free and run away with all the advertising money.

Filed Under: micropayments, robert thomson, wall street journal
Companies: news corp.

Isaacson's Micropayment Article An Example, By Itself, Of How Screwed Up Mainstream Media Is

from the irony-without-the-micropayments dept

We've already beat up on Walter Isaacson and his ridiculous plan to save mainstream newspapers and magazines via online micropayments, but couldn't resist discussing one extreme bit of irony pointed out by Tim Lee and discussed at length at the Abstract Factory blog: the reasoning in Isaacson's article is so weak, it shows why it's not worth paying for. Specifically, the post notes that Time Magazine published Isaacson's writeup instead of those who actually understand the issue, because he's a part of their "club" (the former managing editor). Thus, Time chose a clueless friend, rather than an informed stranger -- and that sort of thinking is all too common in the business:

When you're a member of the club, your buddies will publish any old crap you write; better you than some stupid professor nobody knows....

I mentioned irony earlier. Isaacson has filigreed the irony with extraordinary precision. His article is inferior to material produced for free online by people who draw their paychecks from other sources (Shirky and Odlyzko are both professors who also work(ed) in the private technology sector). Furthermore, it is inferior as a direct consequence of structural weaknesses of traditional magazines. Despite its inferior quality, it presumes its own superior status by ignoring or dismissing contributions to the discussion which occurred outside of traditional "journalistic" media. Finally, taking that superiority as a given, it argues, poorly, that people ought to pay money for products like itself, because (quoting Bill Gates) nobody can "afford to do professional work for nothing".

In short, Isaacson's article not only fails to make its case, it actively undermines its own case while doing so.

Meanwhile, if you want yet another good argument against micropayments, be sure to check out Charles Arthur explaining how micropayments would turn the web into Zimbabwe.

Filed Under: micropayments, news, newspapers, walter isaacson

A Good Suggestion For Funding Journalism... And A Great Explanation For Why Micropayments Don't Work

from the fantastic dept

With a bunch of old school journalism industry guys suddenly rehashing the old and tired debate over micropayments for news, the folks over at Freakonomics put together a little "quorom" where they asked four different people, with varying viewpoints, about the whole "micropayments for news" issue. Two of them, William Baker and Alan Mutter, support micropayments. I find their arguments not particularly compelling, as they both seem to focus on why newspapers need money, not why anyone would want to pay. On the other side of the coin is Clay Shirky and Marshall W. Van Alstyne, a professor at BU. Shirky, not surprisingly, does an excellent job rehashing his reasons for why micropayments don't work, but I have to say that Van Alstyne's reasoning is even better (and quite eloquent):

Micropayments won't solve newspapers' pay-or-perish problem, at least not under current proposals. There are many reasons why micro-scalping readers won't work, but let me start with two: the unique properties of information goods, and inefficiency.

News is not like an iTunes song; it's perishable. Today's front page is tomorrow's fish wrap, and we don't need to replay it. If anything, a reader benefits more from a second source than repetition from the first. Facts are delivered; songs and movies are created. Facts also can't be owned, so when the Internet places geographically dispersed media in direct competition, the price of facts falls to marginal cost. In digital markets, that's zero.

Micropayments introduce friction into an otherwise frictionless world. This means that no matter how efficient they become, it is more efficient to bundle. If a person makes one or two transactions with a news source, it's more efficient to aggregate lots of them and bill a single advertiser once. If a person makes frequent transactions, it's more efficient to aggregate those and bill that person once as a subscription. Any increase in micropayment efficiency improves bundling efficiency at least as much, because the gains accrue over more transactions.

Putting micropayments on news is like putting tollbooths on an open ocean. Internet users, awash in a sea of information, will avoid new barriers by navigating around them. And frankly, the interests of a free society are rarely served by building barriers between the people and their news.

And, unlike the actual newspaper guys, Van Alstyne actually then makes suggestions for ways that newspapers can both add value and give someone (if not the consumer) a reason to buy. He has three suggestions, and you can click through to read them all, but I found the last one the most interesting:

Invert the whole business. Use the friction of micropayments to solve a consumer problem and stem the flood of information from advertisers vying for their attention. Advertisers can bid for limited units of people's time. This increases ad revenues and helps match particular ads to particular people. Vendors will bid low to rent New York apartments to sports fans checking scores for the Oakland A's, but bid high to offer next week's tickets. Publishers need to give up on the idea of profiting from distribution and focus on the idea of matching people to content.

The trick is not to add new types of costs, but to add new types of value.

What a surprise. It looks like the folks outside the industry understand how to make the industry work better than those inside of it.

Filed Under: business models, journalism, marshall van alstyne, micropayments

Economics Doesn't Work In A World Of 'If Only...'

from the back-here-in-the-real-world dept

We had already explained why Walter Isaacson's "we'll just use micropayments!" model for news wouldn't work, but it seems he's still out there pitching the idea. Clay Shirky did an even better job dismantling the concept, but last night Isaacson appeared on the Daily Show with Jon Stewart to pitch the same ridiculous idea: Stewart called him on a couple points -- noting that once something is free, you can't reasonably flip a switch and start charging for it, and also noting that news is fleeting, while music is a product people hold onto. Isaacson didn't have good answers to either points, other than a basic "if only..." Towards the end, Stewart pitched an equally bad idea (which Isaacson loved) which was that any aggregator would need to pay news publications for sending them traffic. It's the "how dare you help build our readership" business model.

But the really frustrating thing is that Isaacson doesn't seem to have a clue about basic economics (and, at times, news business models). For all his talk about the importance of getting good reporters "paid," he seems to have missed out on the reason we want good reporters to get paid: because they actually do good work. That means doing research to understand the topic they're talking about.

Isaacson didn't do that himself.

Instead, his whole idea is based on the wishful thinking of "if only..." If only the newspapers hadn't started by putting content online for free. Newsflash: they didn't. A lot tried to charge and it failed. Miserably. If only we had a system whereby people could pay just a small amount per article. Newsflash: it's been tried. People don't like it and don't use it. If you want to destroy your audience -- the most valuable resource you have as a publication -- it's a great way to do so. If only journalists could get paid. Newsflash: they do. Journalism has always been paid for via advertising rather than direct subscription fees (which mostly just handled the cost of printing/delivery, if that). It's particularly egregious early on in the interview, where Isaacson says:

"Who is going to send people to Baghdad if always, everything in journalism is free?"

Isaacson is certainly well-respected for his work in journalism for many, many years, but how can he make that claim with a straight face. Everything in journalism is not free. It's never been free. The fact that you might allow people to read it for free, does not mean that "everything" is free. Google gives away "everything" it does for free, and is quite able to make a ton of money. Why? Because it sells the "attention" of its users. That's what newspapers have always done. The difference now isn't that they're giving content away for free. It's that they're not used to competition and haven't done a good job keeping their audience around.

But, the most ridiculous thing is that nowhere in the interview does Isaacson ever give a single reason why people would want to pay for a newspaper. Instead, he just focuses on why newspapers need money. That's not how you run a business. That's not how you come up with a business model in the face of tremendous competition. You don't focus on "we need money." You focus on giving someone an actual reason to pay. Isaacson doesn't do that at all. He just focuses on the need for money, and falsely assumes that tollbooths solve that problem.

Filed Under: daily show, micropayments, newspapers, walter isaacson

Micropayments For News Represent A Huge Opportunity... For The Smart News Org That Avoids Them

from the that's-how-you-fail dept

We just went through how dumb it was for newspaper folks to keep on insisting that they need to start charging, so I almost skipped this one, but a bunch of people have been submitting Walter Isaacson's laughable plan to save newspapers: micropayments! I thought we'd done away with that last month, but Isaacson gets attention, so let's end this once and for all, and explain why micropayments for news won't work. I can go through all the basic arguments about mental transaction costs and the cost side of managing micropayments: but there's an even simpler answer.

If most newspapers switch to micropayments, someone much smarter when it comes to business than Isaacson will create a new news site that doesn't charge. And they'll make it high quality, and they'll be able to make money through other means. Hell, it will be easier because all the fools who follow Isaacson and others in demanding payment will take all the competition out of the market.

These old journalists may know something about the inverted pyramid and how to put a news story together, but they might benefit from an economics class on how competition works when it comes to pricing. In the meantime, you just know there's a smart business guy out there, just drooling over the prospect of these old line media companies destroying their own businesses.

Oh, and one final point: just as in the article we saw yesterday, note that nowhere does Isaacson talk about giving people a reason to pay for the content. He just assumes they will. I'm sure the buggy whip makers expected people to keep spending money on buggy whips as well.

Filed Under: micropayments, news, newspapers, walter isaacson

Newspapers Again Thinking About Micropayments

from the won't-work dept

There's been a lot of hand-wringing in the paper journalism world lately about business models, so it's no surprise that bad ideas for business models are springing up again. Specifically, some are beginning to wonder if micropayments could work. As Clay Shirky notes in the article, any time people bring up micropayments as a solution, it's a hail mary pass -- a last ditch effort by someone who has no other ideas. Now, every time we bring up micropayments, we get some pushback, but no micropayment system has ever been shown to consistently work on a large scale -- especially when it comes to news. People will. undoubtedly point to iTunes or even the iPhone app store as micropayment examples to the contrary, but both of those pale when compared to free music and free apps in terms of volume -- and considering the business models we've seen adopted that don't rely on those sorts of payment structures it's difficult to believe that such systems will really be dominant over the long haul. They work in the short term, mainly due to the convenience factor -- but they're a stop gap -- not a true strategy to deal with digital economics. Micropayments add in an element of unnecessary friction -- which represents an economic inefficiency. They may work for some time, but eventually someone comes up with better business models that get rid of that inefficiency.

Filed Under: mental transaction costs, micropayments, newspapers

You Don't Need To Make Money From Every Person Who Enjoys Your Product

from the it's-called-advertising dept

One of the points of contention we sometimes have with those who disagree with us about the role of free in a business model, is how you deal with the issue of "freeloaders." People often respond to our posts on business models that use free to point out that many people who get the content will never pay, and thus the business model is somehow a failure. Amusingly (and, perhaps, tellingly), most often these sorts of comments come from individuals who insist that they, themselves would never pay -- and basically suggest that copyright and artificial scarcity is necessary to protect artists from folks like themselves. But that's missing the point, entirely. The point isn't to get everyone to pay. In fact, it need not be to get the majority of folks to pay -- it's to build up your audience so that it's big enough that when you offer a scarce good of value, enough people do pay for that good. In such a world, the "freeloaders" aren't a problem -- they're simply providing free advertising.

Another way to think about it is that BMW creates some entertaining advertisements -- and plenty of people enjoy those ads without ever buying a BMW. Yet, those same people don't complain that folks who watch BMW ads without buying a BMW are "freeloading" off of BMW -- despite the fact that they are. Instead, they understand the nature of advertising is that not everyone buys the product that's actually for sale. In fact, a very small number of people may actually buy the product, but that's okay. It's not freeloading, it's just the nature of a promotion.

Cory Doctorow has taken this concept a step further in explaining yet another reason why micropayments aren't the solution for content online:

I don't care about making sure that everyone who gets a copy of my books pays me for them -- what I care about is ensuring that the everyone who would pay me decent money for a book has the opportunity to do so. I don't want to hold 13-year-olds by the ankles and shake them until their allowance falls out of their pockets, but I do want to be sure that when their parents are thinking about a gift for them, the first thing that springs to mind is my latest $20-$25 hardcover.

We've long pointed out plenty of reasons why micropayments aren't a real solution for the "online business model" question surrounding content, with most of the focus being on the mental transaction costs, and the fact that competitors will always beat micropayment solutions by eventually embracing business models using free, but Doctorow makes another good point about the failure of micropayments. Beyond the reasons we've discussed in the past, micropayments also focus too much on shaking the pennies from every passing individual, rather than recognizing the real win is in getting someone else to spend more on a bigger scarce product down the road.

Filed Under: business models, cory doctorow, freeloaders, micropayments, promotion

The Hidden Costs Of Micropayments Go Beyond The Penny Gap

from the thinking-this-through dept

For as far back as I can remember, there have always been folks who insist that micropayments are the solution to the "free" content question. That is, they believe that the solution to "free" content is to set up a system where content can be accessed for such a low price that it's "close enough" to free and people don't mind. However, as Clay Shirky pointed out many years ago, it's not that easy at all. As soon as you add in some cost, even a small one, it creates mental transaction costs that go beyond the payment itself. Basically, just the fact that you need to think about whether or not it's worth it, creates a disincentive to consume that content. And, indeed, most micropayment schemes haven't gone very far. Last year, VC Josh Koppelman named this phenomenon "the penny gap" to explain how the "gap" in getting someone to go from $0 to $0.01 is much bigger than the gap from getting someone to go from $0.01 to $0.02 (in some ways, it's the same as the difference from going from 0 mph to 1 mph -- inertia is a powerful force).

However, Andrew Parker is questioning whether the real problem isn't an economics issue, but a usability issue. That is, if it were really easy to pay that $0.01, people wouldn't mind so much. In other words, a big part of that "mental transaction cost" that Shirky talks about is (according to Parker) the effort needed to establish that payment (a login, supplying payment info, etc.). As proof that this may be the case, Parker points to the early distribution numbers for the iPhone App Store which show more $0.99 apps sold than free apps downloaded. His point: since the iPhone makes it so easy to get an app and pay for it, the "penny gap" or the mental transaction costs really aren't that high.

This is a really good point -- and it is a testament to what a good job Apple did with the App Store to make it so seamless to the user. You absolutely can reduce the mental transaction costs, and that shrinks the penny gap significantly. However, I wouldn't be so quick to jump to the conclusion that micropayment solutions will become that big a deal. First off, these are only the initial results from App Store sales, when you're dealing with early adopters. I'll be interested to see if the results remain this way over a longer period of time.

Even more importantly, though, there may be other hidden costs that should deter certain publishers from focusing on micropayments. Mainly, you are driving away the ability of your users to share and promote your content for you. In other words, you're shutting off one of the best tools to get your app more widely used and recognized. So, even removing the transaction costs from the equation, going to a micropayment solution over a free one doesn't always make the most sense.

Filed Under: iphones, mental transaction costs, micropayments, penny gap, software

Have Micropayments Succeeded Long After They Were Dead And Buried?

from the let's-not-rush-to-judgment dept

In the wake of yet another highly touted "micropayment" startup going away, the NY Times is challenging the notion that micropayments will never succeed, specifically pointing to things like iTunes, AdSense and iStockPhoto as examples to the contrary. The article, not surprisingly, references Clay Shirky's explanation for why micropayments don't work, and then suggests they do. There are just a few problems with the argument however. First of all, AdSense isn't about micropayments, no matter how hard the article tries to stretch the definition. Then, neither iTunes nor iStockPhoto are true micropayments in the classic sense of what we were promised (fractions of cents, and so forth). Rather, both are standard normal "payments." There's nothing particularly micro about either (again, unless you stretch the definition). Also, in both cases, the services provided better overall service than alternatives. There was a lot of additional value in using those services, which is what helped them find initial success. However, there are still plenty of folks who find it easier to not deal with the mental transaction costs and the additional burdens provided by things like Apple's DRM and prefer to go free. It remains to be seen if these small (not micro) transaction offerings really do have long-term staying power. As new models evolve -- especially in the music space -- things like iTunes may not be quite as dominant as some believe.

Filed Under: micropayments
Companies: apple, peppercoin