Wednesday, January 2, 2002

Micropayments won't work ::: Josh

Micropayments won’t work ::: Josh Marshall, the man behind Talking Points Memo, responded to my post on micropayments by saying that he doesn’t see them addressing the needs of web content providers. But as we’ll see, it’s exactly those other content providers who need micropayments to work – because the advertising model is not supporting them.

Years ago, when David Chaum was running DigiCash, he and Newsweek journalist Steven Levy used to say that “ micropayments” would allow journalists to get paid more efficiently. They used Newsweek as their example. In today’s model, a reader pays Newsweek, and Newsweek in turn takes care of paying the writers. But what if the readers could pay the journalist directly? The reader would pay only for the content they wanted, while the journalist would benefit from the reach of their publication. The more widely read the publication, the more money they could get. In this model, readers might only pay a nickel to read it, yet the total proceeds to the writer could easily be in the thousands.

Well, this is the system already in place at the Honor System. (Full disclosure: yes, I paid my dues at Talking Points Memo.) The idea behind the Honor System is simple: Amazon provides the payment clearinghouse, Josh gets the money. Amazon takes a hefty 15% cut in exchange for doing this, by the way – not a bad premium for their transaction infrastructure. I’ll defer to Josh’s experience for the practicality of the model (who says that “if TPM were run on a balance sheet it would have stopped publishing long, long ago”) but certainly one issue that content providers must consider is that if they want people to pay for the content, the content must not be available for free. While Josh’s page views would almost certainly decline if the content were provided on a for-pay basis, his revenues would almost certainly go up. The question then becomes whether Josh wants to sacrifice his current reach in order to grow his revenues. My guess is no, but that’s his call.

What Amazon has done right with the Honor System is to eliminate many of the steps necessary to make a payment (I’ve used it not only to pay for Talking Points Memo, but also for Stephen King’s “The Plant”, which went dark in November of last year; both times, payment took less than a minute). However, it still requires proactive measures on the user’s part – and this is what Jakob Nielsen was talking about in his AlertBox post.

I believe two things need to happen for micropayments to be truly useful: the proactive steps today must go away, much as Nielsen predicts. But there’s another step – one which will eliminate a fear I would have if I were paying a little money for a lot of content – there must be a simple way to archive the content that users have purchased. I don’t regularly save HTML pages, and I don’t want to rely on the site having a useful, searchable archive. Functionality like this is already built into Internet Explorer and Windows Media Player (for purchased digital music files) – and I’m sure it could be extended to written content fairly easily.

Nielsen suggests that this needs to be like electricity – there’s a transaction cost to leaving a few lights on, but I don’t necessarily worry about what my electric bill will be. Similarly, users can migrate to a for-pay content model where they don’t worry about clicking on an article at Talking Points Memo because (a) the cost is too low to be concerned about and (b) they’ll have it archived to refer back to when they need it. The reason this is a necessary discussion is that the ad-based revenue model works for only the top 10 web sites who get more than 75% of all online ad revenue. The sites that aren’t in the top 10 need another way to fund themselves – and the ad-supported model has had a number of casualties, as this article details the massive decline of former Internet success story The Motley Fool.

By the way, the naysayers are starting to show up on PayPal. This article in Business 2.0 throws some cold water on the PayPal IPO idea, saying that their fundamentals aren’t strong (they’ve lost over $250m since their launch in ’98) and they’re facing increasing competition from eBay Billpoint, Citibank’s c2it, Yahoo’s PayDirect service, and others. What the Business 2.0 article fails to consider is PayPal’s competitive advantage over everyone else: their fraud detection.

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