Micropayments must reshape online economics

We all know how it works. You walk past a newspaper stand, spot a catchy headline, and immediately sign up for a 12-month subscription, filling in forms, divulging personal information, handing over your credit card and... wait. No. No, you don't. You reach into your pocket, pull out some change, and take away a single copy.

So why do we expect online content to work differently? Right now we have two models: free, and subscription. Users in between must do without, or just steal the content. The lack of a middle ground is a tragedy for online business and it's stupid, because it shouldn't be that hard a problem to fix.

The online newspaper pay-wall is the obvious symptom. You spot a catchy headline online, possibly linked from a blog or in Google News, go to read it, and must sign up for a subscription before reading it. That's crazy, but if you're the New York Times, it's less crazy than just giving everything away. They're not getting the casual newsstand revenue, but they weren't anyway. And now they have built some subscription income and, for the NYT at least, it turned out to be more successful than anyone expected. But the long tail, well, that's just left on the table. Sure, its 80:20, but it could be a profitable 20 for anyone who invents the Internet's first workable small-change.

The existing payment systems, manifested in the dinosaurs that are the banks and credit card networks, can't or won't achieve that downward scale. There are plenty of micropayment platforms out there, but historically they have been too fragmented and too niche, with too many awkward hoops to jump through. Mxit has done a great job getting the banks on board and extending the reach and role of Moola, but it's focused on Mxit's ecosystem.

What about the international payment players? PayPal defines a micropayment as anything under $12, and has rigid limitations on where and how they are accepted (not in SA, for starters). And $12? R100 is not a micropayment. R10 is a micropayment. 50c is a micropayment. We're nervously dabbing a toe in the water here, not enthusiastically diving in.

The issue here is not about the absolute size of the individual payment, but the size relative to established norms. It's about breaking down barriers to trade, and then allowing business to flourish. But "break" is right. If current systems can't do it, when it happens, it will be disruptive in the extreme.

Apple understood the importance of breaking price barriers. iTunes' 99c per track model has been so successful it reshaped the music industry, and did so without any e-cash jiggery-pokery. And so Apple profited hugely from the music industry's failure to break the price barriers and embrace digital delivery. The music industry is still smarting from that, and well they should be.

The television industry is, with few exceptions, enthusiastically making the same mistake. Miss an episode on TV, and your options are a) wait months for the DVD release then buy the entire series, or b) pirate it. Really? This is the best we can come up with? No option to pay a few bucks to watch an episode online? And don't tell me that making it available digitally will encourage piracy - it's already being pirated. Anyone who wants it can get it, the only distinction being that some of them may actually want to pay for it, but can't. Nor do I care about how distribution agreements forged in the 80s prevent delivery to my region. Figure it out, or prepare for a nasty shock when someone else does. Someone other than the pirates, of course: they figured it out a long time ago, and it hurts, doesn't it?

But, those are obvious, existing markets. What about new ones? In terms of transactions, we've hit a limit, and we need to crash through it hard. Right now we're stuck around $1, and there's a tremendous potential for transactions smaller than that. In-game purchases? Micro-content delivery? Virtual tip jars? Smartphone apps and add-ons? Measure prices in cents and a lot of users won't think twice. I don't want a $35 recurring subscription to the New York Times, but I'd like to be able to pay a few cents for an article now and then. I might not be keen to pay $5 for an app that might turn out to be rubbish, but I'd pay for a day pass to check it out.

Targeted advertising alone could allow them to be fee-free.

Existing players are struggling to fit themselves within the confines of the existing banking and payment frameworks. So, look elsewhere. Two different groups of players could blow this market open with relative ease. One is the incumbent Internet giants: Google, Amazon, and Apple, and possibly (heaven help us) Facebook. These are services we remain logged into, which allow for near-seamless integration at a merchant.

Google already has Google Wallet: add a cheque account to that and bang, micropayments are go. Amazon and Apple, meanwhile, see huge transactional volume anyway - the barrier to either negotiating a micropayment-friendly deal with payment gateways, or just maintaining a positive balance as a regular purchaser, isn't high. For any of those, targeted advertising alone could allow them to be fee-free.

Google actually tried to launch a micropayment platform before, and failed. But now it's looking at rebooting that initiative under its Wallet programme, initially targeting publishers, but with great potential elsewhere.

The other group is the mobile operators. They already process micro-transactions by the million: every time a prepaid user makes a phone call. Give them banking licences and let them extend payment APIs to online merchants. The banks are not blind to this - they're eyeing mobile micropayments, but they're doing it with one eye on the prize and the other focused on the legacy models. Mxit's in the game too, but again, focused on being Mxit, just as other micropayment initiatives have similar limitations. Chances are it'll be an outsider, not an incumbent, who brings serious disruption.

Meanwhile, the online world is frantically downsizing. Apps and content are all moving to bite-size models which demand bite-size purchasing. The incumbents need to think outside the piggybank if they don't want to paint themselves into a corner.