Fame vs Fortune: Why Micropayments Don't Work

from the exactly dept

I’ve always believed that micropayment schemes on the internet are doomed to failure due to the basic economics of content – and Clay Shirky has done a great job explaining economically why micropayments will fail. Basically, it makes more sense for most creators of content to get attention, rather than cash, for their content (fame vs fortune, in Shirky’s article). As such, charging for content is unsustainable – since it’s always going to be competitive with free content. The competitive nature of the “content” market, means that the price always gets pushed down to nothing. Besides, as he points out, with free content, new opportunities are developed, since sites can’t connect to each other and build something larger than each individual piece. What he leaves out, though, is the idea that free content is actually quite useful as a promotional item for selling services. That’s the important point that many people miss when they dismiss the idea of free content. When market conditions set up things such that one of the resources can no longer be sold, and is free – then it makes sense to figure out ways to leverage what’s free. If you have something that the market says you should give away for free, why not use it to your advantage and let it be free promotion? Free content isn’t bad for business. Ignoring the economic reality of content is.

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Comments on “Fame vs Fortune: Why Micropayments Don't Work”

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Mike (profile) says:

Re: micropayments

Of course! This explains why there are no pennies, nickles, dimes or quarters… no wait a minute, there are!

I think you’re confused… The point is the basic economics of content online, which is that it’s a competitive market, and with very few exceptions, blocked off content can’t compete. That has nothing to do with whether or not change exists… The point is not enough people will pay for this stuff to make it worthwhile.

dorpus says:

Time Holocaust

There is a serious problem with atomic clocks: they are more accurate than the Earth’s rotation.

The Earth’s rotation is slowing down by a few milliseconds a year, due to the moon’s gravity. World chronology authorities have been adding leap-seconds every few years to compensate for this. However, we are starting to run into serious problems with the synching of airline navigation systems, internet transactions measured in nanoseconds, among other things.

Is there a market for time fraud in the future, by which people profit from such discrepancies?

Tony Lawrence (user link) says:

But it isn't really free

Content may be free to the reader, but it isn’t to the provider, and the provider’s expenses grow with the popularity of their content. Most providers have turned to advertising as a way to recoup their expenses, and that is a form of micropayment, albeit one that involves no direct mental calculations by the consumer.

What worries me is the untold story behind this part:

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.

What can make content “harder to get to’? Bandwidth allocation. Right now most packets travel on a fairly equal footing, so seeing Techdirt, my site, or MSN.com is equally “easy”: the users don’t wait any noticeable amount of time for whatever they are looking for or at.

But that doesn’t have to remain so. MSN’s packets could be given tremendous priority compared to the little guys, and in a really sinister scenario, the little folks packets could actually be artificially delayed even when there was available bandwidth. Don’t think for a moment that MSN, the NY Times and other large content providers wouldn’t sign up for that if they could, and that would push down the “value” of smaller free sites. Push it down enough, and the big guys can go right back to charging for content again, because all other content will just be too painful to experience.

dorpus says:

Re: But it isn't really free

You’re right. In such a scenario, will there be an economic incentive to develop a content analogy to flash mobs, via “flash news”? Billions of virus-like packets of little news factoids fly around the net, and people intercept packets that meet criteria of interest. In an interconnected society, we can find out when our neighbor went to the bathroom, when the local cop ate a donut at starbucks, when a teen got caught shoplifting down the street.

Dan Z. says:

Shirky's Folly

By way of setting up a straw man, Shirky asks: “Would you pay 25 cents to view a VR panorama of the Matterhorn?” As if one’s personal preference for Matterhorn photography had anything to do with the success or failure of micropayments.

Make no mistake; like ALL business ventures, some people will fail with micropayments. Some will fail because they didn’t know how to market their product, or because they set their prices too high or too low. But so what? That’s endemic to capitalism, not just micropayments. Just because Crystal Pepsi failed doesn’t mean capitalism itself is a failure. Engaging in these kind of arguments is a beginner’s mistake, and most of Shirky’s thoughts on micropayments surprisingly and unfortunately exhibit this same kind of sloppy thinking.

His “mental transaction costs” argument, for example, is predicated on users being forced to engage in one or two cent transactions every time they want to view a page. But most micro advocates have abandoned this line of thought. The idea of charging a penny-per-page is history. What they want in the 21st century is the ability to sell their products — songs and webcomics, mostly — at a fair price. And micropayments enable them to do that. Shirky endlessly flogs the dead horse penny-a-page model, but conveniently ignores the 99-cents-a-song model that’s made iTunes Music Store such a success.

Scott McCloud himself writes that 1,354 readers bought Part One of “The Right Number” at 25 cents a pop. Considering that he was the very first BitPass seller ever, and that everyone who wanted to see his comic had to go through the effort of signing up for BitPass, that’s remarkable, and worth talking about. It certainly flies in the face of Shirky’s assertion that consumers on the internet are so lazy and indiscriminate in their tastes that they’ll bolt to free content at the first opportunity. Scott’s readers had to not only pay, but go through the effort of risking $3 signing up for a new, untested service. Scott’s experience demonstrates that failure to get people to pay for your product has everything to do with your relationship to your audience and nothing to do with micropayments. But Shirky ignores it all the same.

Finally, Shirky’s views on micropayments completely fail to address the idea that micropayments can work with other forms of payment, such as subscriptions or bundling, instead of replacing them. Buying content ala carte may be the step that convinces you to subscribe to a site, for example. Micropayments aren’t an either/or, they’re an and. One more choice, not one less. And of course, micropayments can work exceptionally well alongside free content. Any public television pledge drive shows this principle in action; even small tchotchkes can induce many people to donate. Any thoughtful analysis of the future of micropayments ought to examine this phenomenon, but Shirky doesn’t even seem aware of it.

In some ways, it’s nice to see that Shirky hasn’t changed his tune. At least he’s willing to go down with the ship. But his analysis is — by any standard — unbelievably shallow. As the market for micropayment content increases, it will be interesting to see how he tries to spin reality.

Mike (profile) says:

Re: Shirky's Folly

I think you’ve misread Shirky’s argument in a very important way, and it may explain why you think he’s wrong.

Here’s the shorthand:

In a competitive market, price will get driven down to marginal cost. That’s basic economics.

In the case of online content, the marginal cost is zero.

Online, thanks to the ease of publishing and the externalities associated with publishing for free online, over time, the online content market become increasingly competitive.

Thus, over time, market forces will drive the price of online content to zero, and it will be unsustainable to charge any higher than $0 for content.

To say that’s not true, you would have to say that the market for content will not become competitive. Scott McCloud is not a good example. His market isn’t competitive, and he got a ton of publicity for being the first to do this (ditto with iTunes). Over time, you should watch and see what happens in both cases. The market for such content will become more competitive, and prices will be force down. You may think that McCloud is such a great cartoonist that no one will ever match him – but the ease of publishing suggests that others with equal talent will get there – and when they do, they will realize that they’re better off giving away the content for free (since they’re not as famous as McCloud to begin with, they won’t be able to charge and since there will be so many other struggling comics trying to do the same, it’ll only make sense to go free). However, if this new comic is really as good, then he can leverage that (and his new found fame) into something greater (book deals, movie deals, TV deals, sponsorships, who knows…).

When you look at the economics, what Shriky says is dead on. What you say makes sense only in the short term.

Dan Z. says:

Re: Re: Shirky's Folly

To say that’s not true, you would have to say that the market for content will not become competitive.

Shirky’s arguments rest on the assumption that all online content is a commodity, that consumers can get exactly what they’d get from one vendor by switching to another. This is demonstrably not so for fans of artists and musicians, and may not be the case for many other types of content creators. Even if your content is a commodity, branding or creating a solid relationship with your customers may make them unlikely to switch.

This isn’t unique to micropayments. You can get generic macaroni & cheese for a few cents less than Kraft. And while some do, many feel that expending that extra few cents for a brand they have a relationship with is worth it. Branding is arguably the most powerful economic force in the world, but in Shirky’s analysis, it doesn’t even exist. This is one reason I described his analysis as shallow.

Scott McCloud is not a good example. His market isn’t competitive, and he got a ton of publicity for being the first to do this (ditto with iTunes).

Sorry, but this is handwaving. Shirky doesn’t say, “Mental transaction costs will drive consumers away, unless you’re Scott McCloud and you’re first.” Being first is just as much of a hindrance as it is a help. Ask some of the previous micropayment first adopters who failed, and they’ll tell you as much.

Scott was the first online comic creator to use BitPass; nearly all others were free. According to Shirky’s essay, no one ought to have paid, since they could easily go elsewhere, and there is, believe it or not, an Internet full of other online comics to read. But they didn’t. Over a thousand people thought it was worth it not just to spend, but to take the time to sign up. From my perspective, that’s a major strike against Shirky. YMMV.

You may think that McCloud is such a great cartoonist that no one will ever match him – but the ease of publishing suggests that others with equal talent will get there – and when they do, they will realize that they’re better off giving away the content for free.

That’s just it. I don’t think McCloud is so unique that his content is unmatchable. And I suspect neither does McCloud. What he does have that is unique is a very personalized relationship with his audience. That’s the force behind his success. And that force can be duplicated. One of the secrets to becoming successful with micropayments will be create a personal relationship with your audience, to decommoditize your content.

…and since there will be so many other struggling comics trying to do the same, it’ll only make sense to go free.

What makes sense for you will depend on what your goals are, what you’re selling, and your ability to market your product. Free makes sense for some; micropayments/advertising/subscriptions makes sense for others. Micropayments are just another tool, and they can be used in concert with free content as well. If you’re a photographer, for instance, you might give away 99% of your work online, but incentivize donations by offering a weekly set of additional photos for anyone who donates to your site. While this is just an off the cuff example, mixed models like this allow content creators to get both the benefits of free content and the benefits of micropayments.

At any rate, I suspect micropayments are here to stay. They’re neither panacea nor poison; just another tool that we’ll see being used more and more often.

Forrest (user link) says:

I’m not sure about the micropayment industry, but the idea that for-pay content isn’t sustainable when there’s free content to compete seems to have been written by someone who hasn’t studied economics.

How many (legal) free images can a designer find on the web? That number will be eclipsed by what even iStockPhoto, a low-end stock house, provides for a charge.

Basically, free content isn’t that competitive on the whole. It’s spread out across the entire internet while a lot of commercial wares are aggregated, labeled, and searchable. They have to, to add value to offset the price.

Now free content can be a great thing on many levels. But it doesn’t spell the end of commercial content at all.

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