The Case for Micropayments (Alertbox Jan. 1998)

Rohit Khare (
Tue, 27 Jan 1998 12:04:28 -0800

This is a multi-part message in MIME format.

Content-Type: text/plain; charset=us-ascii
Content-Transfer-Encoding: 7bit

Nielsen did a great job in this piece of comparing the much-feared and
mligned cost of micropayment with the
time-value-of-watching-the-hourglass. It at least offers a cost-bsed
justification of micropayments. The other challenge though is to find a
value-based micropayment. A stock quote should sell, in a
price-discriminating monopolist's ideal world, at a premium to Adam, who
gives a shit and trades regularly, than to me, who only wants to know
out of curiosity. [One way of encoding that, by the way, is significant
figures. I only need to know within a dollar or two; Adam would want
1/16ths and a price history chart]. A subscription to some specialist
magazine *should* cost more to an investor, but then they price me, the
marginal buyer out of the market. Ideally, we can have more auctions of
more variegated products (magazine plus delay; magazine minus some key
articles; other forms of "weakening") which set more price points and
realize more of the 'area under the curve".

But micropayments first -- then microauctions...


Content-Type: text/plain; charset=us-ascii; name="980125.html"
Content-Transfer-Encoding: 7bit
Content-Disposition: inline; filename="980125.html" [->] Alertbox [->] Jan. 1998 Micropayments

Jakob Nielsen's Alertbox for January 25, 1998:

The Case for Micropayments

Ultimately, those who pay for something control it. Currently, most websites
that don't sell things are funded by advertising. Thus, they will be
controlled by advertisers and will become less and less useful to the users.
A veritable arms race has already started with more and more annoying
advertisements that intrude on the user's attention in at attempt to survive
ever-declining click-through rates.

Annoying ads are ultimately self-defeating since people will avoid sites
that do not give them a positive user experience. The Web is a user-driven
phenomenon, where people go online for a purpose. Quite often, that purpose
will be to buy something, so there is a great future for commercial sites
that sell or support products and services. Traditional products can be
charged to credit cards, but many new Internet services will require
incremental payments rather than large one-time payments.

I predict that most sites that are not financed through traditional product
sales will move to micropayments in less than two years. Users should be
willing to pay, say, one cent per Web page in return for getting quality
content and an optimal user experience with less intrusive ads. Once users
pay for the pages, then they get to be the site's customers, and the site
will design to satisfy the users' needs and not the advertisers' needs.

Some analysis say that users don't want to be "nickeled and dimed" while
they are online. In fact, the problem is being dimed; not being nickeled.
Unfortunately, some sites that currently charge for content do so at a level
of a dollar or more per page. Such pricing is obviously unpleasant and will
only be acceptable for highly value-added content that users can predict in
advance that they will benefit significantly from buying. Regular articles
(like this column) cannot be that expensive.

Long-distance telephone calls and electricity are both metered services.
Many people do feel a tension while they are on the phone, at least while
making an international or other expensive call. At the same time, very few
people worry about powering a lightbulb, even though doing so costs a few
cents per hour. Electricity charges mainly serve to make people turn off the
lights when they go to bed or during the daytime. The difference is clearly
in the level of pricing:

* less than a cent per minute and people use as much as they need
* 10 cents per minute, and people ration their usage a little (long
distance phone calls)
* 40 cents per minute, and people ration their usage a lot (international

On the Web, users should not worry about a cent per page. Even as the Web
grows in importance in the future, most people will probably access less
than 100 non-free pages per day, meaning less than $30 in monthly service
charges for Web content. If a page is not worth a cent, then you should not
download it in the first place.

During working hours, it is easy to calculate the value of a user's time. If
we assume that various overhead costs (benefits, office space, equipment,
travel, etc.) are about the same as a person's salary, then somebody making
$35,000 per year costs their company a cent per second. In other words,
every time you access a Web page, it costs your company ten cents just for
having you sit and wait while it downloads (assuming that the page design
obeys the 10-second response time limit). Add time to actually read the
page, and we are looking at a cost of 25 cents to a dollar every time an
employee accesses a Web page (with proportionally larger costs for
highly-paid staff). In this context, paying a cent (or a few cents) for the
content is nothing if it ensures higher-quality pages.

Simply waiting for a typical banner ad to download costs about 3 cents in
lost employee time, so that could be a possible value of add-free pages. Of
course, much Web access occurs during off-duty hours where peoples' time is
harder to value. But if people value their free time at a third of their
working time, then even leisure browsers should be willing to pay a cent to
avoid an ad.

Subscription Fees Do Not Work

Acknowledging that Web advertising is not a sufficient business model,
several famous websites have announced that they will start charging
subscription fees later in 1998. Unfortunately, subscriptions are not a good
idea on the Web.

The main problem with subscription fees is that they provide a single
choice: between paying nothing (thus getting nothing) and paying a large fee
(thus getting everything). Faced with this decision, most users will chose
to pay nothing and will go to other sites. It is rare that you will know in
advance that you will use a site enough to justify a large fee and the time
to register.

Micropayments lower the threshold and do not require a big decision before
users get their initial benefits: thus users will be encouraged to view more
pages and spend more. Of course, there will almost certainly be discount
schemes for frequent users of a site such that nobody would end up paying
more than they would under a subscription plan. It would also be reasonable
to make repeat viewing of the same page by the same user virtually free
since doing so would discourage pirate copying.

Subscriptions work in the physical world because people can sample single
issues of publications through newsstand purchases before they have to
decide on a subscription. Also, limitations on the physical distribution of
printed materials make the magazine or newspaper a reasonable unit of
packaging: it would be too difficult to assemble a daily reading list of
twenty articles from ten different magazines and ten newspapers. On the Web,
it is no problem at all to browse the best pages from many different sites,
following recommendations, search engine hits, and cross-references.

Subscriptions work counter to the basic principles of the Web: the linking
of information and user-controlled navigation. Charging subscriptions is
like building a city wall: you keep people out. Authors who want to link to
other sites for background information will rarely chose to link to
subscription sites because they will know that the majority of their users
will not be able to follow the links. Similarly, search engines will not be
able to index subscription sites, so users will not find pages that relate
to their interests on such sites.

Even if authors and search engines do link to a subscription site, users
will never go there because the cost of signing up for a subscription and
the time needed to do so cannot be justified for the sake of a single
desired page. Thus, the site never gets visited by the user; it also never
gets the chance to prove its value to that user and convert him or her into
a loyal, repeat visitor.

In contrast, charging a micro-fee will not prevent links. Presumably, there
will be a way for reputable search engines to spider a micro-charging site
for free since most sites want to be found. A human author would not be
deterred from linking to a fee-based page: if you don't think that a page
would be worth a few cents to your readers, then you should not recommend it
in the first place.

When deciding on what pages to recommend, an author would certainly consider
the pricing: cheaper sites would have an advantage, though somebody who had
really great content could get away with charging more. A site need not
charge the same for all its pages. An opinion piece or a news story might
carry lower fees than a thorough review of an entire product category.

It is likely that there will be mechanisms for pre-paid links. If, for
example, a movie site wanted to refer users to a particularly favorable
review on a certain newspaper's site, then it could use a special, digitally
signed, link that would authorize the newspaper to charge the micro-fee to
the movie site and not to the user. Users would thus be encouraged to follow
the link and read the favorable review.

In general, it will be necessary to develop a spectrum of user interfaces
for micro-payments such that users can follow cheap links with no overhead
and without having to register, and yet still be protected from being hit
with a large charge without knowing it.

February 8: The Reputation Manager

See Also: List of other Alertbox columns