Micro-payments And The Web

Regular readers of this blog will know that I regularly write about the “web vs. native apps” debate, in which my position is that the Web needs a better micro-payments ecosystem to be as economically viable and appealing as native platforms are for stimulating new apps and innovations and, therefore, attracting developers. So today I want to talk about micro-payments more and how I think those can work best on the Web. I’m currently working on my own web startup, and rewarding our future customers’ efforts is something I keep discussing with my co-founders; the micro-payments debate plays an important role in that discussion.

First things first: what’s the problem?

Only two major sources of revenue are commonly used on the web by publishers: advertising, and subscriptions or paywalls. There are others, but they are few and far between. These two models cover the vast majority of online revenue that isn’t e-commerce, gambling and spam-related. But it is hardly enough to keep major publishing brands afloat or provide comfortable income to small-time publishers, and so they all try to maximize ad revenue through analytics and increasingly offensive tactics—like, for example, putting huge ads all over the content until you find the tiny close link to click them away.

But as these advertisements get increasingly obnoxious, readers get smarter and start reaching for tools like AdBlock to keep these things out of their faces. The loss of ad revenue drives publishers to get even more “creative” with forcing users to view ads, and the cycle repeats itself. Paywalls are a generally-unsuccessful attempt to do it differently, but in a world of copy-paste republishing of press releases, news and articles, readers see little reason to subscribe with a monthly fee to all the online newspapers and magazines they read. If they subscribe to any at all, it will only be those they read the most, but those very same people will still read content occasionally on a large number of other websites.

In 2003, Apple’s iTunes Store proved an important point about online/digital economies: people are perfectly willing to pay for content they consume, as long as you maximize return value and minimize all required effort and friction in paying. Online publishing has, thus far, done a poor job at mimicking this concept.

The two types of content aren’t parallels, however; news content on the web is typically consumed for free (thanks to everyone offering content for free on the web for the first ten years), whereas iTunes content is typically paid for up front, and consumed only thereafter. The failure of paywalls shows that when it comes to news on the web, people are ill-inclined to pay up front before they can read an article. That same truth makes it hard to convince people to sign up for subscriptions unless you offer additional value, but with news it’s hard to come up with valuable offerings that don’t involve withholding some news from non-subscribers.

I’ve only very superficially described this problem so far, but already you can see the complexities and challenges publishers face. So what’s the solution?

Micro-payment services

New startups like Flattr aim to convince publishers that the solution involves a reward-system where payment is made in micro-form through appreciation by the reader, whose appreciation is translated into money by a third-party service which is the one and only place the reader subscribes to with a monthly fee. The friction is thus reduced to having to pay for only one service, and the reader gets to distribute that monthly fee by liking (or “flattring”) content through a simple appreciation button which the publisher puts underneath all content.

An alternative to this is Rewrd, which drives micro-payments by having you (the reader) share content through their service. Same basic financial proposition to the reader, but a more stringent mechanism of rewarding.

These services reduce the friction of paying for content, but reduced friction is not necessarily equal to minimal friction. For one, the publisher has to participate in the service by placing its buttons all over their site. If the publisher in question isn’t participating, users can’t financially reward or thank the publisher.

Kachingle, another similar service, recently tried to solve that problem in a somewhat questionable (and perhaps illegal?) way: by allowing their customers (readers of the web) to “pay” money to publishers even when those publishers haven’t (yet) signed up for the service. For every site that their subscribers pay money to that isn’t a participating publisher yet, they reach out to the owners as best they can (for a period of 180 days) to get them to sign up so that they can receive those payments. All money that doesn’t get claimed eventually goes to a brain cancer research charity—after Kachingle takes its 15% cut (5% being used to cover the Paypal processing fees).

This is a problem.

Astute observers may well be affronted by this tactic, and publishers will (rightly) question why Kachingle is taking money for their content without any prior agreement or consent. I am not a lawyer, but netting profits by “selling” someone else’s content only to offer them the money (minus a percentage cut) after the fact sounds like it is, at best, in legal gray territory. I put selling in quotes because it is, more accurately speaking, taking in a donation on someone else’s behalf, but I don’t see how that makes it any better.

Now, I don’t wish to accuse Kachingle of being malicious or having greedy intentions; in fact, I think they are truly and sincerely hoping to help the Web thrive by rewarding online publishers. As their CEO explains in a recent blog post, this approach is a new policy driven by users wanting to pay money to sites regardless of their participation. But I still consider it incredibly naïve and questionable, because—intentional or not—it strongarms publishers into participating in their service only to receive the money they rightly deserve. To not participate is to forfeit donations made to you specifically. In a way, Kachingle is like a bouncer who goes to a free club, starts charging an optional entrance fee, then only later tells the club about the money “they” earned and that, if they want it (minus a 15% cut), they have to hire the bouncer for all perpetuity.

This is not how to solve micro-payments on the web.

I think that a service like Flattr has more potential to reward publishers, but their current execution will not get us there. If a service like Square mimics this approach, not only would Flattr—in its current form—have a hard time competing, but the concept would get more traction. Paypal themselves could do this and offer a better value proposition for publishers (the Paypal cut can easily be smaller than, say, Flattr’s cut, which has to factor Paypal’s cut into theirs).

But one lesson is clear from the success of Apple’s iTunes and App Stores: minimal friction is achieved when people only ever have to enter their payment information once, and are then able to buy or reward content throughout the ecosystem. For the web, no such ecosystem currently exists—nobody “owns” the web, and in many ways that is a very good thing. But thanks to web technologies it is entirely possible to build an ecosystem that lives on top of the web, spanning it across, and allow any and all publishers to tap into it. The question is: who’s going to get this right?

Closing note

There is another model on the web, used by only one site I know of: Newsvine, now owned by and part of MSNBC. Their model is still advertising-based, but includes a reverse-reward to all of its users that help build the site by providing user-generated content. On Newsvine, 90% of ad revenue on pages of content that you created goes to you, but all revenue from main news pages goes to Newsvine.

I think for any publishing platform whose content is user-generated, this approach has a lot of merit. It rewards better content with more revenue, and therefore stimulates quality over mere page views. I don’t know whether there are any lessons there for big publishers, but I think the web will thrive a lot better the more we reward our best contributors as well as quality content, rather than just page views indiscriminately.

UPDATE: Kachingle actually just backtracked on their policy with a new stance. CEO Fred Dewey explains:

After considering this feedback further, we’ve decided that the right thing to do is to change our policy as follows. If a site owner decides to opt out, we will deliver (to them or to our charity, at their discretion) any money that was already collected, without taking any cut — the recipient will receive 100%. We will in fact lose money on this, since we will still have to cover the PayPal fees for these transactions.

Surely this has nothing to do with the New York Times’ Cease & Desist that was ongoing. So in brief, Kachingle no longer strongarms publishers into participating and will lose money if the publisher opts out, but nevertheless continues to behave like the bouncer described above.

UPDATE 2: the Kindle book-lending service Lendle has a reward system inspired by Newsvine. Additionally, Mobilista is a service offering micropayments for mobile web apps specifically.

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