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

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