Markets Don’t Need Money

by on August 11, 2006 · 10 comments

Last year I linked to this fantastic article by Clay Shirky on the reasons micropayments never took off. Shirky wrote:

A transaction can’t be worth so much as to require a decision but worth so little that that decision is automatic. There is a certain amount of anxiety involved in any decision to buy, no matter how small, and it derives not from the interface used or the time required, but from the very act of deciding.

Micropayments, like all payments, require a comparison: “Is this much of X worth that much of Y?” There is a minimum mental transaction cost created by this fact that cannot be optimized away, because the only transaction a user will be willing to approve with no thought will be one that costs them nothing, which is no transaction at all.

Thus the anxiety of buying is a permanent feature of micropayment systems, since economic decisions are made on the margin – not, “Is a drink worth a dollar?” but, “Is the next drink worth the next dollar?” Anything that requires the user to approve a transaction creates this anxiety, no matter what the mechanism for deciding or paying is.

Shirky’s argument looks as solid today as it did six years ago. He pointed to three payment methods as alternatives: aggregation (bundle the business section with the sports section), subscription (take the paper every day), and subsidy (have advertisers pay for the paper). These have all clearly taken off–subsidy especially. Shirky followed that essay up with another in 2003:

The fact that digital content can be distributed for no additional cost does not explain the huge number of creative people who make their work available for free. After all, they are still investing their time without being paid back. Why?

The answer is simple: creators are not publishers, and putting the power to publish directly into their hands does not make them publishers. It makes them artists with printing presses. This matters because creative people crave attention in a way publishers do not. Prior to the internet, this didn’t make much difference. The expense of publishing and distributing printed material is too great for it to be given away freely and in unlimited quantities–even vanity press books come with a price tag. Now, however, a single individual can serve an audience in the hundreds of thousands, as a hobby, with nary a publisher in sight.

This disrupts the old equation of “fame and fortune.” For an author to be famous, many people had to have read, and therefore paid for, his or her books. Fortune was a side-effect of attaining fame. Now, with the power to publish directly in their hands, many creative people face a dilemma they’ve never had before: fame vs fortune.

It seems to me that the right way to think about this is that there is still a market for content on the Internet, but the dominant medium of exchange for content is increasingly eyeballs rather than dollars. I get paid for my time, not with dollars, but with something I value more at the margin: people who are interested in what I have to say. Eyeballs have two key advantages over dollars as a medium of exchange for Internet content: first, the reader doesn’t consider his attention to be a cost, the way he would a micropayment. And second, unlike micropayments, the transaction has virtually no overhead.

In a sense, there’s nothing new about this. People in creative professions have always taken part of their compensation in eyeballs rather than dollars. Paul Krugman would doubtless be able to make a lot more money as a consultant than he does as a columnist, yet he continues to write his columns, presumably because having a million people getting his column every week is worth more to him. The vast majority of musicians never go pro–indeed, most never even turn a profit. Although they would of course like to be rich and famous, they are mostly in it because they love having people who want to hear their music. Hollywood is likewise full of people who crave the spotlight.

I think this point can be generalized: money is an efficient medium of exchange for meatspace transactions, but it tends not to work very well for transactions in cyberspace, which tend to be more numerous, lower value individually, and harder to verify due to the lack of a physical presence. This doesn’t mean that there will be no markets on the Internet. Instead, markets will tend to be mediated by things other than money. For blogs, it’s eyeballs.

BitTorrent is a market in which the bit is a medium of exchange:

Because BitTorrent relies on the upstream bandwidth of its users–and the more users, the more aggregate bandwidth is available for sharing the files–it is considered good etiquette to leave one’s BitTorrent client open after downloading has completed so that others may continue to gain from the file that has been distributed…

Some clients also report the “share ratio”, a number relating the amount of data uploaded to the amount downloaded. A share ratio of 1.0 means that a user has uploaded as much data as they have downloaded. A share ratio greater than 1 means that a user has uploaded more than they have downloaded. It is generally considered good form to at least share back the equivalent amount of traffic as the original file size.

Share ratios are more important on BitTorrent than they are on other peer-to-peer file sharing networks, because many BitTorrent trackers require users to maintain a minimum global share ratio. On some trackers that require users to register, the minimum global share ratio may start at around 0.5 and increase over time, so that the user has adequate time to upload and share their files. Users with a share ratio below the minimum may be put into a restricted “upload-only” mode, where they may not download until their share ratio reaches the minimum.

Bits are an obviously efficient medium of exchange on file-trading networks, since it’s something that all users value, and because they can be exchanged with trivial overhead. And as commenter George persuasively argued in this space a few months back, BitTorrent tends to use bandwidth resources extremely efficiently. BitTorrent is a market in which barter has proven more efficient than money-mediated transactions.

Open source software development is also a market that’s not mediated by money. It has two essential media of exchange. The first, as with blogs, is attention: both the attention of hackers’ peers who are impressed with a particularly elegant hack, and the attention of the broader public, who use and appreciate the software.

The other medium of exchange is code itself. The GPL is a contract among open source programmers: I’ll give you my code and let you modify it, if you give me your modifications and let me modify them further. As with eyeballs and bits, this proves to be an efficient medium of exchange, because the overhead is low, and because code sharing benefits the receiver a lot more than it costs the giver. It turns out that the benefits an open source programmer gets from having others improve his code for him exceed the monetary benefits he could have gotten from trying to commercialize the code.

Money is a very important and useful medium of exchange for high-value, tangible products. For small-value, intangible products, the costs tend to exceed the value of the transactions–especially when you add in the overhead associated with making payments at a distance. Fortunately, human beings are clever. We’ve begun to find a variety of substitutes for money that work better in cyberspace. This isn’t the repeal of market economics, but rather an extension of them to deal with changed circumstances.

  • http://linuxworld.com/community/ Don Marti

    Software value isn’t just access to bits. The actual source code and the maintenance (fixing security issues, making it compatible with new standards) are complementary goods.

    So, if as an individual you’re a seller of software maintenance, and you can commoditize the code (and make sure it stays a commodity by applying a reciprocal license), you just increased the price of your own product. Joel Spolsky’s
    “Strategy Letter V” has examples of the same phenomenon at the company level.

    Sarbanes-Oxley knocked the wheels off the Silicon Valley options machine, so the chance for programmers to own the “code” part of software value is basically gone. Now it seems like the economically rational thing for programmers to do is to increase the value of what they can control.

  • http://www.cato.org/people/harper.html Jim Harper

    Apropos of your observation that eyeballs may be micropayment: Yesterday I attended a very interesting roundtable on the future of financial services hosted by the World Economic Forum. It was observed there that mobile phone air time is becoming a medium of exchange in some countries. It’s an interesting insight into human nature that “ability to talk to others” is a budding form of currency. I’m not a big talker, but time and attention from others seems to be rare enough to be valued by most.

  • http://linuxworld.com/community/ Don Marti

    Software value isn’t just access to bits. The actual source code and the maintenance (fixing security issues, making it compatible with new standards) are complementary goods.

    So, if as an individual you’re a seller of software maintenance, and you can commoditize the code (and make sure it stays a commodity by applying a reciprocal license), you just increased the price of your own product. Joel Spolsky’s
    “Strategy Letter V” has examples of the same phenomenon at the company level.

    Sarbanes-Oxley knocked the wheels off the Silicon Valley options machine, so the chance for programmers to own the “code” part of software value is basically gone. Now it seems like the economically rational thing for programmers to do is to increase the value of what they can control.

  • http://www.cato.org/people/harper.html Jim Harper

    Apropos of your observation that eyeballs may be micropayment: Yesterday I attended a very interesting roundtable on the future of financial services hosted by the World Economic Forum. It was observed there that mobile phone air time is becoming a medium of exchange in some countries. It’s an interesting insight into human nature that “ability to talk to others” is a budding form of currency. I’m not a big talker, but time and attention from others seems to be rare enough to be valued by most.

  • http://tieguy.org/ Luis Villa

    If I participate only in the good old fashioned dollar market, I can live. If I participate only in the bit market, or the eyeball market, or the GPL’d code market, I’m unlikely to survive long- I need some sideline (ads, support services, parents, inheritances, college scholarships) to supplement it. This does seem like a fundamental difference somehow.

  • http://tieguy.org/ Luis Villa

    If I participate only in the good old fashioned dollar market, I can live. If I participate only in the bit market, or the eyeball market, or the GPL’d code market, I’m unlikely to survive long- I need some sideline (ads, support services, parents, inheritances, college scholarships) to supplement it. This does seem like a fundamental difference somehow.

  • http://www.digitalproductions.co.uk Crosbie Fitch

    I agreed with Clay Shirky about the decision cost for small payments.

    However, this primarily applies to unrecognised purchase decisions.

    There is a certain situation when the decision cost is gladly paid. This is when it can represent a deliberate visible demonstration of a decision – to one’s peer group.

    So, if the decision cost is an investment, perhaps accruing a greater value than the token expenditure itself, then such micropayments can work – where the friction of the decision cost is an attractive benefit rather than a hurdle.

    An example is the expenditure of a few pennies on a badge. A GIF badge can be priced at a penny and yet signify the very same decision as the decision cost of the purchase, e.g. “I donate 1 cent a month to XYZ charity for orphan polar bears”. There’s also a far greater conscience cost in this person simply stealing the badge instead.

    And to a large extent this kind of decision doesn’t really need visibility.

    The decision to support a worthy cause can be its own reward. For example, I might decide to support Tim Lee. I might say “Yes, I’ll pay 1 cent for every article that Tim writes on his blog”, but if I ever come across anyone’s blog and am faced with a “Read the rest of this article for a cent” I’ll say “No way Jose!” the decision cost is too great. When I decide I like an artist, THAT’s the point at which my decision should be attached to a payment decision – not when I first stumble across a potentially interesting article.

  • http://www.digitalproductions.co.uk Crosbie Fitch

    I agreed with Clay Shirky about the decision cost for small payments.

    However, this primarily applies to unrecognised purchase decisions.

    There is a certain situation when the decision cost is gladly paid. This is when it can represent a deliberate visible demonstration of a decision – to one’s peer group.

    So, if the decision cost is an investment, perhaps accruing a greater value than the token expenditure itself, then such micropayments can work – where the friction of the decision cost is an attractive benefit rather than a hurdle.

    An example is the expenditure of a few pennies on a badge. A GIF badge can be priced at a penny and yet signify the very same decision as the decision cost of the purchase, e.g. “I donate 1 cent a month to XYZ charity for orphan polar bears”. There’s also a far greater conscience cost in this person simply stealing the badge instead.

    And to a large extent this kind of decision doesn’t really need visibility.

    The decision to support a worthy cause can be its own reward. For example, I might decide to support Tim Lee. I might say “Yes, I’ll pay 1 cent for every article that Tim writes on his blog”, but if I ever come across anyone’s blog and am faced with a “Read the rest of this article for a cent” I’ll say “No way Jose!” the decision cost is too great. When I decide I like an artist, THAT’s the point at which my decision should be attached to a payment decision – not when I first stumble across a potentially interesting article.

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