Much has been written of why micropayments won’t work in the past. The recent announcements by many newspapermen of their desire to start charging for news has sparked it off again.  Rupert Murdoch is leading the charge. Clay Shirky is leading the naysayers. Who will win? My money’s on Murdoch.

This debate has flared and waned several times since the advent of the internet. An initial case against micropayments came from Szaboin 1996, pointing out that if payments become so small, then the mental transactional cost of enacting the payment meant that they simply wouldn’t be viable. In the first debates the most interesting protaginists for micropayments were Jakob Nielsen, in his essay The Case for Micropaymentswith Nicholas Negroponte backing him up. They didn’t believe that advertising or subscription models would be enough to support the development of online content and saw micropayments as the least obtrusive way to make the economics of the internet stack up. Clay Shirky then stepped in in 2000with a barrage of arguments against micropayments. In 2003, it flared up again with a debate about Bitpass, with Shirky going head to head with Scott McCloud (McCloud has since given the round to Shirky, following the demise of Bitpass). And now, in 2009, it seems we’re going again. This time, the renewed interest from print media has brought out more of the same arguments. Shirky has updated his line of argument and a host of people have jumped on both sides. It appears no one can sit on the fence on this one.

Although you could probably fill a book with all the arguments that have been made (and no doubt someone will), it seems that there are three broad buckets of arguments against micropayments. And these are…

1. There’s a mental transaction cost that gets in the way.

2. Users don’t want to pay them.

3. They’ve all failed in the past.

To give a bit more flavour, let me talk through each in turn giving the detail, before giving my thoughts on them.

1. There’s a mental transaction cost that gets in the way.
In it’s simplest form this argues that the hassle factor of paying (both whatever action is required plus the mental energy of weighing up whether it’s worth paying) will mean that micropayments will fail. This is what Szabo calls the “mental transaction cost” and what Shirky calls “anxiety and confusion”.

2. Users don’t want to pay them.

This argument says simply that it is the publishers who are talking about this now because they are desperate. The desperation of publishers will not make this work. You need users to be happy to pay them too.
In the few instances where micropayments work (electricity or water in the old world, iTunes and Cyworld in the new world) the media owners have control of distribution. Where people don’t control distribution, anyone offering a flat rate system rather than “nickle and diming” their customers (to coin Shirky’s phrase) will become market leader. This is seen of as especially true in the world of journalism where there is a plethora of news sources that users could flee to if specific portals started charging. If it was just one major brand that charged, they’d flee to the other major brands. If it was also major brands they’d flee to the aggregators and blogs.

3. They’ve all failed in the past.

In 2000, Shirky could roll off a long list of failed micropayment providers (FirstVirtual, Cybercoin, Millicent, Digicash, Internet Dollar, Pay2See, MicroMint and Cybercent). Since then he’s been able to add others to the list, including Bitpass. Obviously, the world is a different place now and some would argue that the likes of iTunes and Cyworld have proved that micropayments can work. Shirky comes back and says that these are the exceptions and that for the vast majority of content, where distribution is open, micropayments cannot work.

It’s not that complicated really

For all the arguments, the case of micropayments seems pretty simple to me. It all comes down to execution. Done correctly, micropayments will work. There are two key points to this.

1. You have to have something that people are willing to pay for (given all the alternatives available)

2. You have to make sure that it is so easy to use that the time/hassle cost of paying for the media doesn’t get in the way.

At the end of the day, micropayments are just small payments and so all the normal rules of pricing apply. People will only pay for something if it is worth the value and if they can’t get an equivalent cheaper elsewhere. People will decide whether to make a purchase irrespactive of a mental transaction cost (which they don’t normally factor in). What will be a greater barrier than the mental transaction cost will be the time transaction cost of authenticating the payment. In my view, anything more than an initial two field form would generally be too much of a barrier for a 5 pence/cents article. In short though, if you have something that people want to buy, you can sell it. The key is making sure that people will want to buy it, given the alternatives.

Within the execution, co-ordination of media by type is important. Media owners of similar types need to come together to manage the alternatives that are available. People will go to the cheapest source of any given media, where the media is of the same quality. If you managed to get all the national newspapers in the UK to go for a micropayments model would you see all the traffic flood to blogs and aggregators. My guess is probably not. I don’t see my Mum leaving the Guardian site for a host of other “unbranded” sites. She would probably pay so long as the Times wasn’t offering their site for free. The bigger question then is whether you can effectively group media of a given quality and that is tied to the next point.

I find it a very weak argument that because micropayments have failed in the past they will necessarily fail in the future. (I have to admit that this is somewhat of a red rag to a bull.) That things haven’t worked in the past doesn’t mean they won’t work. It just means that the conditions weren’t right at the time, but conditions change. This has never been more true than with the ever changing online world. The fact that newspapers are now clamouring for micropayments to work as a way to keep their businesses alive, might just be he impetus required to encourage them to act together and implement micopayments in a co-ordinated way. Whether that would be seen as collusion is another question (although the desire from politicians to save the newspapers might just allow them to get away with it).

It sounds very likely that we will be seeing the first major effort by traditional media to adopt micropayments in the near future. It’ll be interesting to see if this round goes to Clay Shirky or Rupert Murdoch. My money’s on Murdoch to take this one.

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