Here’s a rambling unfinished article about micropayments I started on yesterday but ran out of time to properly complete:
Slashdot linked to an online comic by Scott McCloud pushing his favorite idea for compensating artists on the web — micropayments. Fortunately McCloud’s piece also includes examples which, if you think about them more carefully than McCloud does, illustrates the problems with micropayments.
McCloud offers two examples:
1. Imagine you could download songs from Napster at 15 cents per song! Wouldn’t you be willing to pay that?
2. Scott Kurtz, who draws the popular PvP comic, notes it was costing him $600/month for a dedicated server for his 30,000 regular readers. McCloud points out that if every one of them would have paid 25 cents a month, PvP could have returned a net profit of $73,000 per year.
McCloud dismisses the obvious alternative — subscriptions. He says the problem with subscriptions and bulk pricing is that people don’t want to put up too much money to pay for something that they’re not sure they’re going to like in the first place.
Okay, I have to confess, he may be right on the Napster part, but I doubt a price that low would be sufficient to entice people into making music as the return isn’t very high. It would be high if you could force people to download an entire album at a time — that would work out great both ways. You’d have the ten song album for $1.50, and the band would have say $1 per album in pure profit. Sell 200,000 copies and you’re doing great. But, with micropayments people would just download the 1 or 2 popular songs from the album. Suddenly rather than 200,000 CDs, a band is selling 400,000 songs at 15 cents a piece, and you’re only clearing $60,000.
The PvP example is even worse. It is absurd to think that all 30,000 people would be willing to put up 25 cents. For example, I wouldn’t. I’ve read PvP a few times, its made me laugh, but would I pay 25 cents a month to read it. Absolutely not. I’d just switch to a different free online comic.
I think this is also absurdly high, but lets assume that half of the people who read PvP for free would be willing to pay 25 cents a month. Now we’re down to $36,500 a year. Is that going to satisfy Kurtz (it would satisfy me, but I have a messed up value system when it comes to money)? How many comic artists are realistically supportable with that model? I suspect the answer is not many.
And beyond that, I don’t want to pay 25 cents a month. If I’m going to pay, just charge me $4 per year. Given the current value of the dollar that’s a price where the asking price just barely exceeds the transaction cost of subscribing.
What’s the solution? I think what it’s going to take is a mix of free and subscription services. The problem with most subscription services is this — they simply want to start charging you for something that they’ve been giving you for free. This is what Salon.Com is trying to do. For a couple years I’ve been visiting Salon every morning for free. Now they want me to pay a subscription fee. For what? So I can continue to visit Salon every morning.
Aside from fact that I’m not sure why I should pay for something I’ve become accustomed to getting free, there’s another problem with a subscription-based Salon — I can’t share it. Today if I see an article that is particularly good on Salon, as I did just the other day, I can mail someone the URL or post it on this web log and comment on it (or rip on it if it is particularly bad). The second articles get hidden behind subscription walls, though, *poof* — there goes much of its value to me.
But there are sites selling content and making money off it. Here’s what I think the secret is (and I plan to put this to the test later this year). With subscriptions you still have to give quite a bit away, otherwise people aren’t going to have enough information to decide whether it is worth it. The subscription part, however, build on that but has to be aimed at the minority of visitors for whom whatever content you are giving away has such a high marginal value, that they are willing to shell out a small amount of money (and I do mean small) for additional content that the casual visitor probably has no use for.
I see this a lot with physical products. I receive an e-mail newsletter every week from a woman who gives very informative advice and has a content-rich site. She makes the money on selling a) physical paper books (remember those — people used to use them before Al Gore created the electron) and b) various supplies that people would find useful in applying her ideas.
The bottom line, though, is that this is a lot of work (duh), and hardly as glamorous as the idea of people visiting your web site and some electronic register going kaching, kaching, kaching, as micropayments roll in. If you look around at the real world, however, you will notice that it is extremely difficult for anyone to make a very good return-on-investment in selling media. When you look at the financial positions of record companies, publishers, and others, they are not exactly the most attractive investment options in the world. People always focus on absolute numbers such as the total size of the industry in billions of dollars or how many billions of dollars in profit record companies made last year, but rarely do you see people take a serious look at the P/E ratios of their stocks much less a look at the long term rate of return return from media companies.
It’s not like these companies are going broke — though many of them are — but it is a lack of profitability compared to other industries (remember stockholders can move their money relatively easily) that has led to the huge megamergers like Time-Warner-whatever. You really need those sorts of enormous economies of scale to make the big bucks in the media game.