[Clay Shirky @ OReillyNet] The Case Against Micropayments

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From: Adam Rifkin (adam@KnowNow.com)
Date: Sat Dec 30 2000 - 03:27:34 PST


Ok, so I'm really looking forward to a world in which PayPal and other
Internet payment facilitators expose their services as a composable SOAP
service so that developers can build Web apps that enable the Internet
sellers to get their money, the Internet buyers to get their stuff, and
the wee little infrastructure provider to make a small (but fair) amount
for helping to make such transactions possible.

Micropayments, in my mind, are the same thing, only on smaller scale.
So I fundamentally agree with Clay: micropayments are just payments.

It's hard to make a living at fractions of a penny at a time, though.
Millicent was as ahead of its time as First Virtual was... but
micropayments really don't seem feasible until the costs of doing them
go down. That is, until the fees to merchants for the use of debit and
credit cards are reduced substantially. That's still going to take a
while, culturally.

(Rohit, public markets reality check, take fifteen: Messagemedia and
Cybercash are still public -- barely. MESG currently trades at 0.44
with a market cap of $25m, CYCH currently trades at 0.81 with a market
cap of $21m. Two weeks ago, Cybercash signed a definitive agreement to
merge with Network 1 Financial Corp., a supplier of payment processing
systems and Internet payment services based in McLean, Va. CyberCash
said it expects the combined company to report more than $100 million in
annual revenue during its first year and anticipates that the merged
company will be cash flow positive in the third quarter of 2001. For
the year ended Dec. 31, 1999, and including a restructuring charge of
$775,000, CyberCash lost $43.1 million, or $2.02 a share, on revenue of
$20.3 million.)

> The Case Against Micropayments
> by Clay Shirky
> 12/19/2000
>
> Published on The O'Reilly Network (http://www.oreillynet.com/)
> http://www.oreillynet.com/pub/a/p2p/2000/12/19/micropayments.html
>
> Micropayments are back, at least in theory, thanks to P2P. Micropayments
> are an idea with a long history and a disputed definition - as the W3C
> micropayment working group puts it, " ... there is no clear definition
> of a 'Web micropayment' that encompasses all systems," but in its
> broadest definition, the word micropayment refers to "low-value
> electronic financial transactions."
>
> P2P creates two problems that micropayments seem ideally suited to
> solve. The first is the need to reward creators of text, graphics, music
> or video without the overhead of publishing middlemen or the necessity
> to charge high prices. The success of music-sharing systems such as
> Napster and Audiogalaxy, and the growth of more general platforms for
> file sharing such as Gnutella, Freenet and AIMster, make this problem urgent.
>
> The other, more general P2P problem micropayments seem to solve is the
> need for efficient markets. Proponents believe that micropayments are
> ideal not just for paying artists and musicians, but for providers of
> any resource - spare cycles, spare disk space, and so on. Accordingly,
> micropayments are a necessary precondition for the efficient use of
> distributed resources.
>
> Jakob Nielsen, in his essay The Case for Micropayments writes, "I
> predict that most sites that are not financed through traditional
> product sales will move to micropayments in less than two years," and
> Nicholas Negroponte makes an even shorter-term prediction: "You're going
> to see within the next year an extraordinary movement on the Web of
> systems for micropayment ... ." He goes on to predict micropayment
> revenues in the tens or hundreds of billions of dollars.
>
> Alas for micropayments, both of these predictions were made in 1998. (In
> 1999, Nielsen reiterated his position, saying, "I now finally believe
> that the first wave of micropayment services will hit in 2000.") And
> here it is, the end of 2000. Not only did we not get the flying cars, we
> didn't get micropayments either. What happened?
>
> Micropayments: An Idea Whose Time Has Gone
> Simplicity in pricing
>
> The historical record for user preferences in telecom has been
> particularly clear. In Andrew Odlyzko's seminal work, The history of
> communications and its implications for the Internet, he puts it this
> way:
>
> "There are repeating patterns in the histories of communication
> technologies, including ordinary mail, the telegraph, the telephone, and
> the Internet. In particular, the typical story for each service is that
> quality rises, prices decrease, and usage increases to produce increased
> total revenues. At the same time, prices become simpler.
>
> "The historical analogies of this paper suggest that the Internet will
> evolve in a similar way, towards simplicity. The schemes that aim to
> provide differentiated service levels and sophisticated pricing schemes
> are unlikely to be widely adopted."
>
> Micropayment systems have not failed because of poor implementation;
> they have failed because they are a bad idea. Furthermore, since their
> weakness is systemic, they will continue to fail in the future.
>
> Proponents of micropayments often argue that the real world demonstrates
> user acceptance: Micropayments are used in a number of household
> utilities such as electricity, gas, and most germanely telecom services
> like long distance.
>
> These arguments run aground on the historical record. There have been a
> number of attempts to implement micropayments, and they have not caught
> on in even in a modest fashion - a partial list of floundering or failed
> systems includes FirstVirtual, Cybercoin, Millicent, Digicash, Internet
> Dollar, Pay2See, MicroMint and Cybercent. If there was going to be broad
> user support, we would have seen some glimmer of it by now.
>
> Furthermore, businesses like the gas company and the phone company that
> use micropayments offline share one characteristic: They are all
> monopolies or cartels. In situations where there is real competition,
> providers are usually forced to drop "pay as you go" schemes in response
> to user preference, because if they don't, anyone who can offer
> flat-rate pricing becomes the market leader. (See sidebar: "Simplicity
> in pricing.")
>
> Why have micropayments failed? There's a short answer and a long
> one. The short answer captures micropayment's fatal weakness; the long
> one just provides additional detail.
>
> The Short Answer for Why Micropayments Fail
>
> Users hate them.
>
> The Long Answer for Why Micropayments Fail
>
> Why does it matter that users hate micropayments? Because users are the
> ones with the money, and micropayments do not take user preferences into
> account.
>
> In particular, users want predictable and simple pricing. Micropayments,
> meanwhile, waste the users' mental effort in order to conserve cheap
> resources, by creating many tiny, unpredictable
> transactions. Micropayments thus create in the mind of the user both
> anxiety and confusion, characteristics that users have not heretofore
> been known to actively seek out.
>
> Anxiety and the Double-Standard of Decision Making
>
> Many people working on micropayments emphasize the need for simplicity
> in the implementation. Indeed, the W3C is working on a micropayment
> system embedded within a link itself, an attempt to make the decision to
> purchase almost literally a no-brainer.
>
> Embedding the micropayment into the link would seem to take the
> intrusiveness of the micropayment to an absolute minimum, but in fact it
> creates a double-standard. A transaction can't be worth so much as to
> require a decision but worth so little that that decision is
> automatic. There is a certain amount of anxiety involved in any decision
> to buy, no matter how small, and it derives not from the interface used
> or the time required, but from the very act of deciding.
>
> Micropayments, like all payments, require a comparison: "Is this much of
> X worth that much of Y?" There is a minimum mental transaction cost
> created by this fact that cannot be optimized away, because the only
> transaction a user will be willing to approve with no thought will be
> one that costs them nothing, which is no transaction at all.
>
> Thus the anxiety of buying is a permanent feature of micropayment
> systems, since economic decisions are made on the margin - not, "Is a
> drink worth a dollar?" but, "Is the next drink worth the next dollar?"
> Anything that requires the user to approve a transaction creates this
> anxiety, no matter what the mechanism for deciding or paying is.
>
> The desired state for micropayments - "Get the user to authorize payment
> without creating any overhead" - can thus never be achieved, because the
> anxiety of decision making creates overhead. No matter how simple the
> interface is, there will always be transactions too small to be worth
> the hassle.
>
> Confusion and the Double-Standard of Value
>
> Even accepting the anxiety of deciding as a permanent feature of
> commerce, micropayments would still seem to have an advantage over
> larger payments, since the cost of the transaction is so low. Who could
> haggle over a penny's worth of content? After all, people routinely
> leave extra pennies in a jar by the cashier. Surely amounts this small
> makes valuing a micropayment transaction effortless?
>
> Here again micropayments create a double-standard. One cannot tell users
> that they need to place a monetary value on something while also
> suggesting that the fee charged is functionally zero. This creates
> confusion - if the message to the user is that paying a penny for
> something makes it effectively free, then why isn't it actually free?
> Alternatively, if the user is being forced to assent to a debit, how can
> they behave as if they are not spending money?
>
> Beneath a certain price, goods or services become harder to value, not
> easier, because the X for Y comparison becomes more confusing, not
> less. Users have no trouble deciding whether a $1 newspaper is
> worthwhile - did it interest you, did it keep you from getting bored,
> did reading it let you sound up to date - but how could you decide
> whether each part of the newspaper is worth a penny?
>
> Was each of 100 individual stories in the newspaper worth a penny, even
> though you didn't read all of them? Was each of the 25 stories you read
> worth 4 cents apiece? If you read a story halfway through, was it worth
> half what a full story was worth? And so on.
>
> When you disaggregate a newspaper, it becomes harder to value, not
> easier. By accepting that different people will find different things
> interesting, and by rolling all of those things together, a newspaper
> achieves what micropayments cannot: clarity in pricing.
>
> The very micro-ness of micropayments makes them confusing. At the very
> least, users will be persistently puzzled over the conflicting messages
> of "This is worth so much you have to decide whether to buy it or not"
> and "This is worth so little that it has virtually no cost to you."
>
>
> User Preferences
>
> Micropayment advocates mistakenly believe that efficient allocation of
> resources is the purpose of markets. Efficiency is a byproduct of market
> systems, not their goal. The reasons markets work are not because users
> have embraced efficiency but because markets are the best place to allow
> users to maximize their preferences, and very often their preferences
> are not for conservation of cheap resources.
>
> Imagine you are moving and need to buy cardboard boxes. Now you could go
> and measure the height, width, and depth of every object in your house -
> every book, every fork, every shoe - and then create 3D models of how
> these objects could be most densely packed into cardboard boxes, and
> only then buy the actual boxes. This would allow you to use the minimum
> number of boxes.
>
> But you don't care about cardboard boxes, you care about moving, so
> spending time and effort to calculate the exact number of boxes
> conserves boxes but wastes time. Furthermore, you know that having one
> box too many is not nearly as bad as having one box too few, so you will
> be willing to guess how many boxes you will need, and then pad the number.
>
> For low-cost items, in other words, you are willing to overpay for cheap
> resources, in order to have a system that maximizes other, more
> important, preferences. Micropayment systems, by contrast, typically
> treat cheap resources (content, cycles, disk) as precious commodities,
> while treating the user's time as if were so abundant as to be free.
>
> Micropayments Are Just Payments
>
> Neither the difficulties posed by mental transaction costs nor the the
> historical record of user demand for simple, predictable pricing offers
> much hope for micropayments. In fact, as happened with earlier
> experiments attempting to replace cash with "smart cards," a new form of
> financial infrastructure turned out to be unnecessary when the existing
> infrastructure proved flexible enough to be modified. Smart cards as
> cash replacements failed because the existing credit card infrastructure
> was extended to include both debit cards and ubiquitous card-reading
> terminals.
>
> So it is with micropayments. The closest thing we have to functioning
> micropayment systems, Qpass and Paypal, are simply new interfaces to the
> existing credit card infrastructure. These services do not lower mental
> transaction costs nor do they make it any easier for a user to value a
> penny's worth of anything - they simply make it possible for users to
> spend their money once they've decided to.
>
> Micropayment systems are simply payment systems, and the size and
> frequency of the average purchase will be set by the user's willingness
> to spend, not by special infrastructure or interfaces. There is no magic
> bullet - only payment systems that work within user expectations can
> succeed, and users will not tolerate many tiny payments.
>
> Old Solutions
>
> This still leaves the problems that micropayments were meant to
> solve. How to balance users' strong preference for simple pricing with
> the enormous number of cheap, but not free, things available on the Net?
>
> Micropayment advocates often act as if this is a problem particular to
> the Internet, but the real world abounds with items of vanishingly small
> value: a single stick of gum, a single newspaper article, a single day's
> rent. There are three principal solutions to this problem offline -
> aggregation, subscription, and subsidy - that are used individually or
> in combination. It is these same solutions - and not micropayments -
> that are likely to prevail online as well.
>
> Aggregation
>
> Aggregation follows the newspaper example earlier - gather together a
> large number of low-value things, and bundle them into a single
> higher-value transaction.
>
> Call this the "Disneyland" pricing model - entrance to the park costs
> money, and all the rides are free. Likewise, the newspaper has a single
> cost, that, once paid, gives the user free access to all the stories.
>
> Aggregation also smoothes out the differences in preferences. Imagine a
> newspaper sold in three separate sections - news, business, and
> sports. Now imagine that Curly would pay a nickel to get the news
> section, a dime for business, and a dime for sports; Moe would pay a
> dime each for news and business but only a nickel for sports; and Larry
> would pay a dime, a nickel, and a dime.
>
> If the newspaper charges a nickel a section, each man will buy all three
> sections, for 15 cents. If it prices each section at a dime, each man
> will opt out of one section, paying a total of 20 cents. If the
> newspaper aggregates all three sections together, however, Curly, Moe
> and Larry will all agree to pay 25 cents for the whole, even though they
> value the parts differently.
>
> Aggregation thus not only lowers the mental transaction costs associated
> with micropayments by bundling several purchase decisions together, it
> creates economic efficiencies unavailable in a world where each resource
> is priced separately.
>
> Subscription
>
> A subscription is a way of bundling diverse materials together over a
> set period, in return for a set fee from the user. As the newspaper
> example demonstrates, aggregation and subscription can work together for
> the same bundle of assets.
>
> Subscription is more than just aggregation in time. Money's value is
> variable - $100 today is better than $100 a month from now. Furthermore,
> producers value predictability no less than consumers, so producers are
> often willing to trade lower subscription prices in return for lump sum
> payments and more predictable revenue stream.
>
> Long-term incentives
>
> Game theory fans will recognize subscription arrangements as an Iterated
> Prisoner's Dilemma, where the producer's incentive to ship substandard
> product or the consumer's to take resources without paying is dampened
> by the repetition of delivery and payment.
>
> Subscription also serves as a reputation management system. Because
> producer and consumer are more known to one another in a subscription
> arrangement than in one-off purchases, and because the consumer expects
> steady production from the producer, while the producer hopes for
> renewed subscriptions from the consumer, both sides have an incentive to
> live up to their part of the bargain, as a way of creating long-term
> value. (See sidebar: "Long-term incentives".)
>
> Subsidy
>
> Subsidy is by far the most common form of pricing for the resources
> micropayments were meant to target. Subsidy is simply getting someone
> other than the audience to offset costs. Again, the newspaper example
> shows that subsidy can exist alongside aggregation and subscription,
> since the advertisers subsidize most, and in some cases all, of a
> newspaper's costs. Advertising subsidy is the normal form of revenue for
> most Web sites offering content.
>
> The biggest source of subsidy on the Net overall, however, is from the
> the users themselves. The weblog movement, where users generate daily
> logs of their thoughts and interests, is typically user subsidized -
> both the time and the resources needed to generate and distribute the
> content are donated by the user as a labor of love.
>
> Indeed, even as the micropayment movement imagines a world where
> charging for resources becomes easy enough to spawn a new class of
> professionals, what seems to be happening is that the resources are
> becoming cheap enough to allow amateurs to easily subsidize their own work.
>
> Against users' distaste for micropayments, the tools of aggregation,
> subscription and subsidy will be the principle tools for bridging the
> gap between atomized resources and demand for simple, predictable pricing.
>
> Playing by the Users' Rules
>
> Micropayment proponents have long suggested that micropayments will work
> because it would be great if they did. A functioning micropayment system
> would solve several thorny financial problems all at
> once. Unfortunately, the barriers to micropayments are not problems of
> technology and interface, but user approval. The advantage of
> micropayment systems to people receiving micropayments is clear, but the
> value to users whose money and time is involved isn't.
>
> Because of transactional inefficiencies, user resistance, and the
> increasing flexibility of the existing financial framework,
> micropayments will never become a general class of network
> application. Anyone setting out to build systems that reward resource
> providers will have to create payment systems that provides users the
> kind of financial experience they demand - simple, predictable and
> easily valued. Only solutions that play by these rules will succeed.

----
Adam@KnowNow.Com

Ending a dismal year for stocks, the Dow Industrials registered its first losing year in a decade while the Nasdaq experienced the most devastating loss in its near 30-year history, ending 2000 down a bruising 39 percent. -- Dow 10787, Nasdaq 2471, S&P500 1320

Web stocks in final fade out Goldman Sachs Net Index sinks 75% in 2000 NEW YORK (CBS.MW) -- Internet stocks fell Friday, ending a crash and burn year down 75 percent after a fin de siecle analyst downgrade that could spell more losses in 2001.

As the curtain closed on 2000, Bear Stearns lowered its rating on CacheFlow (CFLO: news, msgs) and Inktomi (INKT: news, msgs) on worries a slowing economy would hurt revenue and profit goals in 2001.

It's the nagging theme that's dragged the Nasdaq down 39 percent, its worst annual performance in its 29-year history.

Internet issues were the biggest casualties. By the close, the Goldman Sachs Internet Index fell 5 percent to 181. For the year, the Net barometer declined 75 percent, after more than doubling in 1999.

Performances 2000

The biggest losers within that barometer were those that benefited the most from the go-go days of '99.

Name-your-price pioneer Priceline.com (PCLN: news, msgs) and Internet Capital Group (ICGE: news, msgs) , a holder of Net commerce companies, plunged 97 percent to $1.31 and 98 percent to $3.28, respectively.

In 1999, Priceline and ICG jumped 196 percent and 2,733 percent, respectively.

After a scorching 1,160 percent return in '99, shares of content management software firm Akamai Technologies (AKAM: news, msgs) sank 94 percent to $21.06 in 2000.

Among the Internet's four horseman, America Online, Yahoo, EBay and Amazon.com - the veterans in the public market - AOL and EBay gave up less ground.

America Online (AOL: news, msgs) lost more than half its value to close out the year at $34.80. EBay (EBAY: news, msgs) closed out the year at $33, down 47 percent. But Yahoo (YHOO: news, msgs) shriveled up 86 percent to $30.17 and Amazon.com (AMZN: news, msgs) shaved off 80 percent to $15.56.

Notably, Ariba (ARBA: news, msgs) , the leading business-to-business software and services firm, saw shares shrink 40 percent to $53.63. The stock 15-fold rise in '99.

Check Point Software (CHKP: news, msgs) deserves a standing ovation for its extraordinary performance in 2000. Shares of the e-security firm ran up 169 percent to $133.56.

Final acts for the week

In a blow to Net infrastructure companies that develop caching technology -- products that essentially accelerate Web pages -- Bear Stearns analyst Robert Fagin downgraded Inktomi (INKT: news, msgs) to an "attractive" from a "buy," and CacheFlow (CFLO: news, msgs) to a "neutral" from an "attractive."

Once again, concerns over a slowing economy and a slowdown in IT spending led to Fagin's prudent call. Shares of CacheFlow lost 19 percent to $17.06. For the year, CacheFlow shares fell 87 percent.

Inktomi lost 11 percent to $17.88 on the day, and 80 percent for the year.

After dipping below $40 in mid-December, America Online shares failed to recapture that mark as the stock dipped 5 percent to $33.50 on Friday.

The clock is ticking on the Federal Communications Commission's self-imposed Dec. 31 deadline for reviewing AOL's proposed merger with Time Warner. And there is no guarantee the FCC will rubber stamp the deal, as some issues remain unresolved from the FTC's approval of the deal earlier this month. The sticking point is AOL's popular instant messaging service. The agency may require AOL to open the service to at least one rival.

Priceline.com (PCLN: news, msgs) meandered within a 6-cent range on Friday to close out the year as chump change.

Late Thursday, the founder Jay S. Walker resigned from his post as vice chairman of the board. Walker was the visionary behind the name-your-price concept. He wanted to take that concept even further with WebHouse Club, a service that would allow consumers to name their own prices for gasoline and groceries. It launched in November of last year and began shutting down operations in October of this year. -- http://www2.marketwatch.com/news/intuit/story.asp?guid={5FB04B51-8406-4667-A8B2-BCFFB52F96C9}


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