Mobile Micropayments: Forcing Me to Reconsider the Conventional Wisdom

by on December 18, 2009 · 3 comments

I’ve always generally agreed with the conventional wisdom about micropayments as a method of funding online content or services: Namely, they won’t work.  Clay Shirky, Tim Lee, and many others have made the case that micropayments face numerous obstacles to widespread adoption.  The primary issue seems to be the “mental transaction cost” problem: People don’t want to be diverted–even for just a few seconds–from what they are doing to pay a fee, no matter how small.  [That is why advertising continues to be the primary monetization engine of the Internet and digital services.]

android-market-12-15-09That being said, I keep finding examples of how micropayments do work in some contexts and it has kept me wondering if there’s still a chance for micropayments to work in other contexts (like funding media content).  For example, I mentioned here before how shocked I was when I went back and looked at my eBay transactions for the past couple of years and realized how many “small-dollar” purchases I had made via PayPal (mostly dumb stickers and other little trinkets). And the micropayment model also seems to be doing reasonably well in the online music world. In January 2009, Apple reported that the iTunes Music Store had sold over 6 billion tracks.

And then there are mobile application stores.  Just recently I picked up a Droid and I’ve been taking advantage of the rapidly growing Android marketplace, which recently hit the 20,000 apps mark. Like Apple’s 100,000-strong App Store, there’s a nice mix of paid and free apps, and even though I’m downloading mostly freebies, I’ve started buying more paid apps. Many of them are “upsells” from free apps I downloaded. In most cases, they are just 99 cents. A few examples of paid apps I’ve downloaded or considered buying: Stocks Pro, Mortgage Calc Pro, Currency Guide, Photo Vault, Weather Bug Elite, and Find My Phone. And there are all sorts of games, clocks, calendars, ringtones, heath apps, sports stuff, utilities, and more that are 99 cents or $1.99.  Some are more expensive, of course.

android-market-paid-appsI don’t have any idea how big this marketplace is in the aggregate, but according to AndroLib, “fully 62.2% of the apps available are completely free, compared to just 37.8% that are paid apps. That’s in stark contrast to the [Apple] App Store, which now has over 100,000 individual apps, of which (by some recent counts) a hefty 77% are paid applications — although only 30% of total App Store downloads are for paid apps.” That suggests that micropayments are doing quite well in mobile marketplaces. And this Wall Street Journal piece I was reading just yesterday, “Mobile-Payment Services Grow,” suggests there are lots of innovative things are happening in this space right now.

Of course, this gets into the semantic issue of, “what is a micropayment”? Does 99 cents qualify? I don’t know. I’ve never found any widely accepted definition of the term. Moreover, even if it’s true that a lot of people are buying “small-dollar” apps in mobile marketplaces, that doesn’t mean micropayments can fund all media going forward. It’s unlikely, for example, that we can fund quality journalism one micropayment at a time. People are just not going to pay a quarter (or even a penny) every time they want to read an article.  They might, however, be willing to pay a small monthly or annual access fee for some sites or services.  But with the exception of The Wall Street Journal and a handful of other media services, that model just doesn’t seem to have legs right now. [Although take a look at Dale Jefferson's amazing newspapers app in the Android marketplace. Very cool. Perhaps media providers will learn from aggregation efforts like that and find a way to charge a small fee for access. But at less that one British pound -- the cost of Jefferson's app -- I can't imagine that funding a lot of content. They'll need plenty of ads and other revenue streams to make up for what they are losing.]

Anyway, I’m not saying I have any answers here, just that my mind is still open regarding the possibility of micropayments as a method of funding online services and content. It may end up being easier for the former rather than the latter, however.

  • http://techliberation.com/author/berinszoka/ Berin Szoka

    First, the total number of paid versus free applications is interesting, but it would be much more useful to compare the total download numbers for free apps versus all paid apps, and then to break down the paid apps download numbers by price bracket e.g. less than a dollar less, than five dollars, less than 10 etc.

    Second, it would also be interesting to know what percentage of the paid apps are simply freemium upsells of a free version, as is often the case with android apps. even better would be to get a sense of how many of these freemium versions offer additional functionality, since many differ only in that they do not have ads.

    Third, I think you hit the nail on the head when you say that asking the question of whether “micro-payments work” fails to recognize that the economics of pricing is highly dependent on context. So like her payments by a broad definition obviously do work in the case of downloading MP3s, given our current technology for doing so, but don't seem to work for getting people to pay for news stories or commentary on their desktops. That latter market might work differently for mobile devices where the additional convenience of working through an app is so great that the user is willing to pay for content they might be able to get for free on their browser.

    But that leads me to the other problem with the way people generally ask whether micro-payments will work: The question is not whether, but how well? In other words, how much revenue will micro-payments generate as compared to other potential revenue streams (such as simple or highly targeted advertising) and also as compared to the cost structure of that particular kind of content.

    At best, I feel reasonably comfortable saying that where the content is very close to being pure information, such as in news and to a lesser extent, commentary, micro payments will not work well because there is no scarcity and therefore no pricing power—or, to put it more accurately, there is very little pricing power, so little that the prices fall below the transactions costs involved, including both mental transactions costs and the actual costs of setting up and administering a micro-payments system. This is kind of the point Chris Anderson details in Free.

  • http://pobox.com/~adamm Adam Marcus

    In response to Berin's question about how much revenue micro-payments can generate, Reuters had a story yesterday (http://www.reuters.com/article/idUSTRE5BJ060200…) about one small independent iPhone app developer having revenue approaching $1 million/month.

    In response to his second point about the type of content (pure information versus creative content), I think it's a very interesting question and one that is surely related to copyright. In the U.S., pure information is not protected by copyright, but I believe the European Union's Database Directive provides some protection. But if you think about it, copyright protection may not have that much of an influence. For although the facts in news stories are not protected by copyright, the “arrangement” of those facts and the exact text of the articles is protected. This prevents newspapers from copying entire articles without modification. But there are categories of “pure information”: sports scores, weather, road conditions, flight arrival times. I suspect there are mobile phone apps for all of these areas. Berin is right that even if this information is available via your mobile web browser, you may be willing to pay for a custom app that makes the information more easily accessible. In that case, the payment isn't really for the content but for the interface.

    This may be another way to define micropayments: Should the “unit of measure” be the application or the piece of information. Both models have been tried: Giving the information away to those who pay for the app, or giving the app away and charging for the information. Personally, I think people prefer a subscription model, where they know how much they will be billed each month and they know that they can use a service to a near-unlimited degree. I think this is the antithesis of micro-payments. But when you compare the subscription numbers to online music services of this type (e.g. Rhapsody) with the number of iTunes purchases, it would seem I'm wrong. Maybe it's just a matter of educating the market.

  • http://pobox.com/~adamm Adam Marcus

    In response to Berin's question about how much revenue micro-payments can generate, Reuters had a story yesterday (http://www.reuters.com/article/idUSTRE5BJ060200…) about one small independent iPhone app developer having revenue approaching $1 million/month.

    In response to his second point about the type of content (pure information versus creative content), I think it's a very interesting question and one that is surely related to copyright. In the U.S., pure information is not protected by copyright, but I believe the European Union's Database Directive provides some protection. But if you think about it, copyright protection may not have that much of an influence. For although the facts in news stories are not protected by copyright, the “arrangement” of those facts and the exact text of the articles is protected. This prevents newspapers from copying entire articles without modification. But there are categories of “pure information”: sports scores, weather, road conditions, flight arrival times. I suspect there are mobile phone apps for all of these areas. Berin is right that even if this information is available via your mobile web browser, you may be willing to pay for a custom app that makes the information more easily accessible. In that case, the payment isn't really for the content but for the interface.

    This may be another way to define micropayments: Should the “unit of measure” be the application or the piece of information. Both models have been tried: Giving the information away to those who pay for the app, or giving the app away and charging for the information. Personally, I think people prefer a subscription model, where they know how much they will be billed each month and they know that they can use a service to a near-unlimited degree. I think this is the antithesis of micro-payments. But when you compare the subscription numbers to online music services of this type (e.g. Rhapsody) with the number of iTunes purchases, it would seem I'm wrong. Maybe it's just a matter of educating the market.

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