Big companies are slugging it out for the market in virtual goods, projected to be worth nearly $2 billion, writes Kevin Casey
MUSTERING MICROPAYMENTS into a viable business model has long been the goal for web entrepreneurs.
As long ago as 1998, MIT technology visionary Nicholas Negroponte was predicting the imminent dawn of a flourishing micropayments economy on the web. His “penny-a-page” concept of tiny direct payments was appealing, even if nobody knew how it would work in practice.
Two years later, in his essay The Case Against Micropayments, another web luminary Clay Shirky predicted that "low-value electronic financial transactions" would fail because "users hate them". Multiple cheap transactions would be confusing and generate constant anxiety for users.
To date, Shirky’s prediction on micropayments has been more accurate than Negroponte’s. Instead, pay-per-click (PPC) advertising became the dominant business model of the web.
Search was the key to unlocking riches. Yahoo and Google would monetise content creation in return for a share of revenue generated when users clicked on targeted ads.
It worked for some. Google went on to turn over $20 billion a year with Adwords, its PPC system. The prevailing plan among content providers was to work for free and hope that enough advertising money would come their way to fill the coffers.
Meanwhile, record company executives were having conniptions as technology liberated music fans started to share music any way they wanted to. Instead of concentrating on developing a payments system, music companies put the squeeze on internet usage by hauling file-sharers in front a judge.
It wasn’t until Apple entered the arena in 2003 with iTunes that record companies were shown that people would pay for music if it was easy to do so. Ten billion song downloads later, iTunes is the most successful web micropayments system for sums of money from €1-€10.
Still, the process is dogged by high transaction costs. iTunes profits from music are not that high but the priority has always been to drive Apple’s $42 billion hardware business.
Advertising revenue collapsed in the wake of the 2008 financial crisis. Media mogul Rupert Murdoch elected to hide his News Corporation titles like the Sunday Timesbehind a pay wall. He started charging for subscriptions and gave free-loading search engines the farewell salute.
In response to the cash crisis among content-providers, Google promised in 2009 to devise a micropayments system that will allow providers to charge directly for their content.
In 2010, social networking has surpassed e-mail to become the number one activity on the internet. Casual social gaming is now one of the main activities on social networks like Facebook.
The fun of casual games appeals equally to women as to men. Throw in a little friendly rivalry and you have a service with mainstream appeal that sells itself. With 70 million players, the classic example is Farmville developed by Zynga.
The goal is to move up the levels as you develop your farm. You can get ahead by spending real money to buy in-game goodies like animals, seeds, buildings, tractors and so on. As publisher of three of the top five games on Facebook, Californian company Zynga, which will open offices in Dublin this year, is estimated to be raking in annual revenues of $100 million just two years after starting up.
Media giant Disney last month bought one of Zynga’s arch-rivals Playdom in a deal worth more than $500 million.
EA Games bought Playfish, the third competitor in the space, in a deal worth up to $400 million last year. The titans are now slugging it out for a market in virtual goods projected to be worth $1.6 billion in 2010 and $2.2 billion by 2012.
Startups like Ireland’s Carapay.com and Sweden’s Flattr.com are attempting to monetise the bits of the web larger companies can’t reach with a more user-friendly approach to micropayments.
While Carapay, which has just been issued a payments licence by the Financial Regulator and is expected to launch next year, intends to supplant the cheque book, Flattr is seeking to become the virtual “tips jar”.
As users encounter something on a Flattr-affiliated website they like, they click the Flattr button to leave a tip for the content provider.
Peter Sunde, the founder of Flattr, refers to the amounts as "nano-payments". As one of the original founders of controversial website thepiratebay.org, it might seem like a volte faceon Sunde's part now he is vying to collect on behalf of content providers.
Made to walk the plank in a Swedish courtroom in 2009, Sunde and his shipmates were found guilty of copyright infringement in a verdict that is now under appeal.
Nothing if not innovative, Sunde believes there is untapped potential in the micropayments market for people who are willing to put their money where their mouse is but don’t have an easy, user-friendly way to do it.
Styling itself as the world’s first social micropayment system, Flattr is gaining some traction. Sunde recently connected with fellow iconoclast Julian Assange of wikileaks.org to offer a way to support the whistleblowing website through Flattr micropayments.
It looks like Negroponte’s old “penny-a- page” model might be back on the table after all.
TRAFFIC PROBLEM
Micropricing may drive down quality
IT IS ONE thing to have a popular website with killer content, it’s another thing to make it pay.
The problem with Google-isation is that for most of us, it has delivered increased traffic, says Hugh Linehan, online editor of The Irish Times. “Even if you have visitor numbers that are through the roof, the difficulty is in monetising that.”
Micropricing the article-level is not a viable model for quality news.
“No matter what the best intentions are, the nature of micropayments would drive down quality in a relentless quest for traffic.”
News organisations need to develop “real, meaningful relationships with people who come on a regular basis to visit the site, not the one-off visitor”, Linehan adds.
That does not mean that www.irishtimes. com would say “No” to micropayments or anything else.
“Globally, we’re small. All we can do is sit and watch and learn.”
A MICROPAY DAY
From pizza to push bike
IT IS NOT hard to imagine that one day the average citizen will be able to micropay their way through the day from the time they wake through to the evening’s entertainment using small electronic transactions.
In the UK, the pizza app is a big success with users able to browse menus on their mobile and order in, but it’s not available in Ireland yet.
The most common micropayment most people here make is a premium SMS to vote in a talent show or purchase a ringtone. Trust is an issue for some SMS services with the regulator needing to take a tougher line to bolster consumer confidence.
For micro-journeys, the Dublin Bikes scheme requires a form of micropayment through your pre-registered credit card account. Pricing kicks in at 50 cents an hour and goes up to €2 an hour.
