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Micropayments:
An Open Letter to Tony Pierce, Clay Shirky and PayPal

This post started out as a long reply in the comments field to a post on Tony Pierce's site, but, first of all I posted my comment to the wrong entry on his blog (d'oh!), and then it cut me off because apparently I ranted too long, so I repost it here instead. While I'm at it, I may as well elaborate. (Seemed like a good idea at the time, but now that I've finished writing it, I see it's absurdly long. Oh well.)

Tony's post was in response to a column Vin Crosbie wrote in ClickZ speculating as to whether or not bloggers might ever be able to charge for their content. Vin quoted several bloggers on the question, including myself, making reference to the fact that on MarketingWonk, where I'm doing most of my business-oriented blogging these days, we recently started selling a PDF package of our monthly archives (and weekly coming soon).

In my quote to Vin, I said that I don't see why some bloggers couldn't, in principal, anyway, charge for *some* of their content. I do point out (which Tony seemed to miss) that I advise against their trying to charge for all their content, but rather they should charge only for premium content. In Tony's case, that would of course be his world-famous photo essays.

Here's some of what I wrote in Tony's comments field along those line:

One point you may have overlooked in my quote from that article is the following: "[I]t comes down to 'versioning' the content. A walled-garden approach to charging for all your content would be a disaster for all but a rare few types of online publisher (e.g., porn sites or wsj.com). But many sites should be able to find some versions of their content people will be willing to pay for."

That is, I'm not suggesting you charge an entry fee for the main blog itself, but rather, charge people 50 cents to view your famous photo commentaries, or let them have unlimited access to the photo essays for a year for $5. You could, of course, let them see the first five pictures in the series for free and then they have to pay for the whole thing, and maybe even let one in five of the photo essays remain freely available. But why shouldn't you charge for those? The main blog would still be free, so it's not like you're cheating readers out of everything. But aren't your photo spreads -- truly unique content in the blog world -- worth 50 cents per viewing? For anyone who's seen them in the past, absolutely they are. They obviously take you hours to prepare and are wonderfully creative, so why shouldn't you be compensated for them?

. . . 

Frankly, I think charging especially loyal readers for premium content would be the best way to assure both your independence [from conservative advertisers] and your ongoing commitment to this blog [as opposed to getting hired to blog elsewhere, which Tony suggested is a goal of his]. The attitude among many bloggers that "information wants to be free" harkens back to the early days of the dot-com bubble, and we all know how that ended up.

All of this brings me back to a widely linked article that Clay Shirky wrote a few weeks ago about why micropayments would never work. Micropayments has long been a pet issue of mine, as I believe it is a critical missing link in the whole online publishing world. I meant to challenge Shirky's article earlier, but Tony and Vin's posts finally gave me the extra push. So here is a rant that I've actually been incubating for years. Specifically with regard to Clay's essay, I had several objections:

First, Clay says that micropayments can't work because history tells us they can't work. He writes:

BitPass [a new micropayment system] will fail, as FirstVirtual, Cybercoin, Millicent, Digicash, Internet Dollar, Pay2See, and many others have in the decade since Digital Silk Road, the paper that helped launch interest in micropayments. These systems didn't fail because of poor implementation; they failed because the trend towards freely offered content is an epochal change, to which micropayments are a pointless response.

I'll agree with him as much as I also suspect Bitpass will fail, but not for Clay's reasons. There are two implications to what he's saying above. First, he seems to suggest that we should conclude that because all the previous attempts at micropayments have failed, all future ones are doomed. That's like saying that because no one before the Wright Brothers got a plane off the ground, it couldn't be done.

More importantly, however, he is saying that free content is an "epochal change" with unstoppable momentum moving only in the direction of free. To which I say "hooey." For starters, that ignores the fact that, according to the Online Publishers Association, U.S. Internet users are on track to spend about a billion and a half dollars paying for content this year. (Sure, go ahead and dispute their definition of "content," which includes personal ads and other things, but certainly people are spending millions and millions and millions on "content" by any definition.) Second, despite 25 years of television being free, starting in the 1970s the cable industry was able to change viewers' behavior and get them to start paying for premium TV, to the extent that today roughly 80% of households subscribe to cable.

Point is, just because people aren't doing something today is no indication that they won't do something in the future. Publishers need only to change people's expectations, reposition the value of their content and new behaviors can certainly follow. Look also at ATM fees. For the first several years of that new technology, banks gave access to ATMs free to customers, as well they should, as the use of ATMs actually saves the banks money on staffing costs. But somewhere along the lines, banks decided they could get away with charging people for ATMs, and they've done so ever since. If banks can charge people to access their own damn money (a service that remains free when using the more expensive, indoor human teller alternative), people could certainly be trained to pay for premium content online.

On the face of it, in fact, it's illogical that people wouldn't pay for content. People value the content. Internet usage continues to grow in importance in everyone's lives. Yet, we've seen from the bursting of the dot-com bubble that online companies are bound by the same basic rules of economics as the rest of the world, namely that companies have to cover expenses and make a profit in order to produce stuff. Everyone also hates the online ads and thinks they don't work (also false, but an argument for a different time), so we understand that few online publishers can make a go of it based on ads alone. So, how are they supposed to stay in business if they give away the content for free?

Second, Clay cites some pseudo-scientific-sounding theory about the "mental transaction cost" of selling incremental content as being too much of a barrier for people to make micropayments viable. That is, when presented with the request to pay five cents for an article, we have to think too hard about whether the article is really worth five cents, so we give up just because the contemplation isn't worth the mental energy.

Nonsense. By that reasoning, why do we spend money on anything? Why, for example, would I spend hundreds of dollars more to upgrade to first class when really it's only a difference of a slightly bigger seat, more leg room and better food? Is that really worth $800? Ouch, my brain hurts. I think I'd rather just walk.

Anyone who has seen one of Tony's photo essays in the past should realize they're definitely worth 50 cents. In September, Apple announced it had sold 10 million songs through iTunes, priced at $1 each, five months after the service launched (available only to Mac users, a tiny slice of the online universe). Why on earth would anyone pay $1 for a song when you could download them free with Kaaza? Ouch, my brain hurts.

Third, Clay says we can't compare the fact that consumers are willing to pay for content offline (e.g., newspapers) because offline publishing entails unit costs, in terms of paper and distribution, whereas with online publishing there are (virtually) no unit cost, in that it doesn't cost (much) more to serve up the same story digitally to a million readers than it does to a single reader (aside from server and bandwidth, but let's not split hairs).

But that's a spurious argument. The reader doesn't care about the distribution and other "unit costs." The value that the user is paying for is the content, which is roughly the same online as off. (Okay, to be pedantic, there is some value to the paper, such as the ability to take the story on a bus, but then you can just as easily print from online, and there is at the same time unique value to digital content, such as timeliness, global access, searchability, etc., which should offset any value the paper itself offers.)

If I'm willing to pay 75 cents for a copy of the NY Times, why wouldn't I see five cents' worth of value in a single story? I know that I don't read every single story in the Times , so I can appreciate, in principal, without even doing the math, that a single story has some fraction of that value. Not a lot of mental energy, really.

Moreover, if I can't appreciate that the content itself has value and I'm only paying for the paper and the distribution, why would I be willing to pay more for the Harvard Business Review or Playboy than I would for the NY Post? They're all just paper, aren't they? Or why would I pay for HBO when NBC is free? Both come into the same box in my living room. The truth is, of course, people are capable of assigning levels of value to the content itself.

Fourth, Clay says that content online suffers from "substitutability." That is, he contends online writing is a fungible commodity, where any site is basically as good as another. This may be true of some kinds of content, such as a tornado story, but it is not the case for all content. For example, find me a substitute for Tony Pierce's photo essays. There isn't one. His general blog posts may get a bit rambly now and then, but those photo essays are one-of-a-kind, pure Tony.

No one is going to pay for tornado stories, because you can find that on Yahoo or anyplace else that carries AP wire stories. But many small local newspaper publishers have realized they do have some content that users are willing to pay for online, notably wedding announcements and obituaries. That is content you simply can't get elsewhere. Likewise, were their syndication networks to insist that every site that carries Dave Barry's humor columns or Scott Adams's Dilbert cartoon had to charge 10 cents for users to access the content -- no exceptions -- I'm sure many users would pay, as there is not suitable substitute for that content. Which leads me to my next point:

Fifth, Clay's assumption, although he never states it explicitly, seems to be that were sites to implement micropayments, they would implement it on all their content. This is the great fallacy of the paid content model, the so-called "walled garden" principal. Absolutely, I agree that it would be suicide for most sites to insist that all their content costs a fee.

But, as I say in Vin Crosbie's piece, it's all about "versioning" content. Some users will be willing to pay for some versions of some sites' content. For local newspapers, it is the obits and wedding pages. For Tony, I'm confident it could be his photo essays, and for Drew Curtis, it could be Fark's PhotoShop competitions. For Clay Shirky and Elizabeth Spiers and Matt Welch, I suspect it could be their longer essays. For Matt Drudge and Glenn Reynolds, it could be some kind of breaking news (e.g., you sign up for email or IM alerts when they have a scoop or write a longer article).

For bigger newspaper sites, it is certainly (at least) their archives, although presently most charge too much for that. The NYT set the bar there, charging $2.50 per article from the archive. Occasionally, I may be willing to pay that much, such as when it's for a piece of business research (when there is high alignment between my interest and that version of that content), but generally I think newspaper sites could make a lot more money selling their archives at simply 25 cents a story or less. At that price, I'd be much more inclined to buy stories often if I thought I was interested in them. NYT set the price so high because it makes a lot of money (or used to) off of Lexis-Nexis reselling its articles, which charges in that same price range on a per-article basis, so it was a matter of managing channel conflict. But that is a different issue that has nothing to do with the viability of micropayments in its own right. There are other ways to deal with channel conflict besides simply knuckling under to resellers, and I suspect anyway that Lexis-Nexis is a lot less lucrative source of revenue for publishers since Google made online research so incredibly easy.

And sixth, a glaring hole in Clay's logic about the inviability of micropayments is that his whole essay focuses exclusively on bloggers, as if they were they only kind of online publishers that would be interested in a micropayment system. Hello? What about Salon.com, WSJ.com, Nerve.com and the hundreds if not thousands of other big publishers that would also be well served by this additional revenue stream?

Indeed, big publishers should think hard about the micropayment opportunity. Let's take Salon for example. Let's analyze what it would take for Salon to earn $1 million in a year by charging 25 cents for access to some of its premium articles. That should get Salon's attention, as it announced in June (PDF press release), the end of its fiscal year, that it earned a total of only $4 million for the year. Half of that, the press release says, came from subscription fees from roughly 62,400 active subscribers. Subscription prices range from $35 a year to $6 a month. Let's assume that someone willing to pay for a monthly subscription would, on average, read one story per day on the site. Six dollars divided by 30 days works out to 20 cents a day.

So, back to the $1 million a year, break it down by 12 months, and you get $83,333 per month. How to get that at 25 cents a pop? Well, considering that Salon has already conviced 62,400 people to pay at least $6 a month for its content (the equivalent of 24 purchases of 25 cents), how hard should it be to get another 83,333 people to pay 25 cents four times a month (on average)? I would think it shouldn't be that hard.

In fact, one of the untested but, I would argue, most promising opportunities of micropayments is the ability to let people try before the buy a subscription. Those who find themselves paying 25 cents more than 11 times a month should do the math to realize they'd be better off paying the $35 per year subscription.

Salon has already proven itself an innovator at defining content as premium value with its Ultramercial format that grant users free access to premium content after they click through multiple pages of ads from the same advertiser. Even clicking at top speed, it takes the better part of 20 seconds to get through those ads. People seem capable to do the "mental transaction cost" that it's worth 20 seconds of their time to suffer through some ads for the premium content. How many would be happier to just pay 25 cents and avoid the bothersome ads? We'll never know unless we give it a try.

One factor missing from my calculations here is Salon's current audience size. The most recent number I could find on their site was 2.7 million visitors a month, as of December 2000 (see bottom of this page). I've got a call into a source there for a more recent number, which I'll update here when I get it. But even using that 2.7 million number (which, presumably is significantly higher three years later), 83,333 people works out to only 3% of that audience size. Seems to me, converting that portion of readers to pay with micropayments is highly feasible.

So, hopefully at this point I've made some kind of case for the demand among users for micropayments, as well as an economic case as to why publishers should desire it. All that is missing is the connecting tissue, namely a viable micropayment system. As I said at the top of this article, I'm not holding my breath that Bitpass is that solution. Why? Not as Clay suggests that there is no consumer demand because information wants to be free, dude.

Rather, it's the classic chicken-and-the-egg problem. Users don't want to commit themselves to some weird new payment system they don't see on most of their favorite sites, particularly as they may have witnessed several similar systems go bust in previous years, and publishers feel the same way when they don't see a critical mass of users employing a particular system. To that extent, the failings of so many would-be micropayment systems previously does, in fact, reinforce the likelihood that future ones will fail.

Except...there is a viable micropayment system staring everyone in the face that already works, is dead simple to use, has solved the security problems and has more than 30 million users worldwide: PayPal.

PayPal, for micropayments? Yes. Go ahead and try it. If you've got a PayPal account, send me a penny.

But, if it's so easy to do, why aren't publishers doing this already? Because, despite the fact that it can do it, PayPal apparently doesn't consider itself a micropayments provider at the moment. Not at the level of 25-cent transactions anyway. But there's no good reason that I can see why they shouldn't go there.

Presently, PayPal's standard transaction fee for processing payments to merchants is 30 cents, plus 2.9% of the value of the transaction. But, for "personal" accounts (like mine), PayPal charges nothing for the transaction. As best as I can tell, the 30-cent minimum fee is arbitrary, meant simply to discourage micropayments. Perhaps some e-commerce expert would tell me otherwise, but I honestly can't see why it would cost PayPal anywhere near 30 cents to process a transaction, when it's just a bunch of server calls. We're not talking about a restaurant making a modem call to a secure private server to process a Visa payment with 30-seconds worth of identity verification. We're basically talking about matching a password and an email address on a secure HTTP server. Besides, if the transaction really cost them anywhere near 30 cents, why would they let you pay me just a penny to my personal account? Just to be nice? Unlikely.

Instead, what they should do is create a new class of account specifically for micropayments. For that, the processing fee could be a straight 20% for all transactions under, say, $2 (at which point the fee would be more than their current "Standard" merchant fee). That would mean for a five-cent transaction, PayPal would get a penny. If the publisher really wanted to net 25 cents, put the fee put the fee up to 31 cents to the user -- the difference, at that level, should be negligible to the user.

Is 30 million users enough to break the chicken-and-egg problem? Well, it's not really a critical mass (depending, particularly, how many of those are in the U.S.), but it's close enough. Sure, lots of Internet users (the majority) won't be signed up with PayPal yet, but probably their sister or someone else they know is, or at least they're likely to have heard of it. That should be enough to give publishers confidence to give it a try, particularly if PayPal were to market the micropayment opportunity aggressively (to both users and publishers). In fact, were dozens of top publishers to take the leap and start offering premium content for micropayments via PayPal at the same time as one another, it would be the push many more users would need to join PayPal, giving PayPal a huge boost in membership. Getting so many new users hooked up with the system, who would then go on to use PayPal for other more profitable e-commerce transactions should be in PayPal's interest enough to justify the lousy margin they may get on transactions as small as five cents.

So what's going to get PayPal off the dime, so to speak, and follow my wise advice? Well, perhaps loads of bloggers joining me to beat the drum on this might help get their attention. Or anyway, it might at least get me a much-coveted position on DayPop, for once.

[Since my comments provider frequently sucks eggs, send me an email if it's not working and you have something to say.]
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