Micropayments and publishing on the internet
Source Joanna Bujes
Date 03/09/10/10:42

Fame vs Fortune: Micropayments and Free Content
First published September 5, 2003 on the "Networks, Economics, and Culture"
mailing list.

Micropayments, small digital payments of between a quarter and a fraction of
a penny, made (yet another) appearance this summer with Scott McCloud's
online comic, The Right Number, accompanied by predictions of a rosy future
for micropayments.

To read The Right Number, you have to sign up for the BitPass micropayment
system; once you have an account, the comic itself costs 25 cents.

BitPass will fail, as FirstVirtual, Cybercoin, Millicent, Digicash, Internet
Dollar, Pay2See, and many others have in the decade since Digital Silk Road,
the paper that helped launch interest in micropayments. These systems didn't
fail because of poor implementation; they failed because the trend towards
freely offered content is an epochal change, to which micropayments are a
pointless response.

The failure of BitPass is not terribly interesting in itself. What is
interesting is the way the failure of micropayments, both past and future,
illustrates the depth and importance of putting publishing tools in the
hands of individuals. In the face of a force this large, user-pays schemes
can't simply be restored through minor tinkering with payment systems,
because they don't address the cause of that change -- a huge increase the
power and reach of the individual creator.

Why Micropayment Systems Don't Work

The people pushing micropayments believe that the dollar cost of goods is
the thing most responsible for deflecting readers from buying content, and
that a reduction in price to micropayment levels will allow creators to
begin charging for their work without deflecting readers.

This strategy doesn't work, because the act of buying anything, even if the
price is very small, creates what Nick Szabo calls mental transaction costs,
the energy required to decide whether something is worth buying or not,
regardless of price. The only business model that delivers money from sender
to receiver with no mental transaction costs is theft, and in many ways,
theft is the unspoken inspiration for micropayment systems.

Like the salami slicing exploit in computer crime, micropayment believers
imagine that such tiny amounts of money can be extracted from the user that
they will not notice, while the overall volume will cause these payments to
add up to something significant for the recipient. But of course the users
do notice, because they are being asked to buy something. Mental transaction
costs create a minimum level of inconvenience that cannot be removed simply
by lowering the dollar cost of goods.

Worse, beneath a certain threshold, mental transaction costs actually rise,
a phenomenon is especially significant for information goods. It's easy to
think a newspaper is worth a dollar, but is each article worth half a penny?
Is each word worth a thousandth of a penny? A newspaper, exposed to the
logic of micropayments, becomes impossible to value.

If you want to feel mental transaction costs in action, sign up for the $3
version of BitPass, then survey the content on offer. Would you pay 25 cents
to view a VR panorama of the Matterhorn? Are Powerpoint slides on "Ten
reasons why now is a great time to start a company?" worth a dime? (and if
so, would each individual reason be worth a penny?)

Mental transaction costs help explain the general failure of micropayment
systems. (See Odlyzko, Shirky, and Szabo for a fuller accounting of the
weaknesses of micropayments.) The failure of micropayments in turn helps
explain the ubiquity of free content on the Web.

Fame vs Fortune and Free Content

Analog publishing generates per-unit costs -- each book or magazine requires
a certain amount of paper and ink, and creates storage and transportation
costs. Digital publishing doesn't. Once you have a computer and internet
access, you can post one weblog entry or one hundred, for ten readers or ten
thousand, without paying anything per post or per reader. In fact, dividing
up front costs by the number of readers means that content gets cheaper as
it gets more popular, the opposite of analog regimes.

The fact that digital content can be distributed for no additional cost does
not explain the huge number of creative people who make their work available
for free. After all, they are still investing their time without being paid
back. Why?

The answer is simple: creators are not publishers, and putting the power to
publish directly into their hands does not make them publishers. It makes
them artists with printing presses. This matters because creative people
crave attention in a way publishers do not. Prior to the internet, this
didn't make much difference. The expense of publishing and distributing
printed material is too great for it to be given away freely and in
unlimited quantities -- even vanity press books come with a price tag. Now,
however, a single individual can serve an audience in the hundreds of
thousands, as a hobby, with nary a publisher in sight.

This disrupts the old equation of "fame and fortune." For an author to be
famous, many people had to have read, and therefore paid for, his or her
books. Fortune was a side-effect of attaining fame. Now, with the power to
publish directly in their hands, many creative people face a dilemma they've
never had before: fame vs fortune.

Substitutability and the Deflection of Use

The fame vs fortune choice matters because of substitutability, the
willingness to accept one thing as a substitute for another.
Substitutability is neutralized in perfect markets. For example, if someone
has even a slight preference for Pepsi over Coke, and if both are always
equally available in all situations, that person will never drink a Coke,
despite being only mildly biased.

The soft-drink market is not perfect, but the Web comes awfully close: If
InstaPundit and Samizdata are both equally easy to get to, the relative
traffic to the sites will always match audience preference. But were
InstaPundit to become less easy to get to, Samizdata would become a more
palatable substitute. Any barrier erodes the user's preferences, and raises
their willingness to substitute one thing for another.

This is made worse by the asymmetry between the author's motivation and the
reader's. While the author has one particular thing they want to write, the
reader is usually willing to read anything interesting or relevant to their
interests. Though each piece of written material is unique, the universe of
possible choices for any given reader is so vast that uniqueness is not a
rare quality. Thus any barrier to a particular piece of content (even, as
the usability people will tell you, making it one click further away) will
deflect at least some potential readers.

Charging, of course, creates just such a barrier. The fame vs fortune
problem exists because the web makes it possible to become famous without
needing a publisher, and because any attempt to derive fortune directly from
your potential audience lowers the size of that audience dramatically, as
the added cost encourages them to substitute other, free sources of content.

Free is a Stable Strategy

For a creator more interested in attention than income, free makes sense. In
a regime where most of the participants are charging, freeing your content
gives you a competitive advantage. And, as the drunks say, you can't fall
off the floor. Anyone offering content free gains an advantage that can't be
beaten, only matched, because the competitive answer to free -- "I'll pay
you to read my weblog!" -- is unsupportable over the long haul.

Free content is thus what biologists call an evolutionarily stable strategy.
It is a strategy that works well when no one else is using it -- it's good
to be the only person offering free content. It's also a strategy that
continues to work if everyone is using it, because in such an environment,
anyone who begins charging for their work will be at a disadvantage. In a
world of free content, even the moderate hassle of micropayments greatly
damages user preference, and increases their willingness to accept free
material as a substitute.

Furthermore, the competitive edge of free content is increasing. In the 90s,
as the threat the Web posed to traditional publishers became obvious, it was
widely believed that people would still pay for filtering. As the sheer
volume of free content increased, the thinking went, finding the good stuff,
even if it was free, would be worth paying for because it would be so hard
to find.

In fact, the good stuff is becoming easier to find as the size of the system
grows, not harder, because collaborative filters like Google and Technorati
rely on rich link structure to sort through links. So offering free content
is not just an evolutionary stable strategy, it is a strategy that improves
with time, because the more free content there is the greater the advantage
it has over for-fee content.

The Simple Economics of Content

People want to believe in things like micropayments because without a magic
bullet to believe in, they would be left with the uncomfortable conclusion
that what seems to be happening -- free content is growing in both amount
and quality -- is what's actually happening.

The economics of content creation are in fact fairly simple. The two
critical questions are "Does the support come from the reader, or from an
advertiser, patron, or the creator?" and "Is the support mandatory or

The internet adds no new possibilities. Instead, it simply shifts both
answers strongly to the right. It makes all user-supported schemes harder,
and all subsidized schemes easier. It likewise makes collecting fees harder,
and soliciting donations easier. And these effects are multiplicative. The
internet makes collecting mandatory user fees much harder, and makes
voluntarily subsidy much easier.

Weblogs, in particular, represent a huge victory for voluntarily subsidized
content. The weblog world is driven by a million creative people, driven to
get the word out, willing to donate their work, and unhampered by the costs
of xeroxing, ink, or postage. Given the choice of fame vs fortune, many
people will prefer a large audience and no user fees to a small audience and
tiny user fees. This is not to say that creators cannot be paid for their
work, merely that mandatory user fees are far less effective than voluntary
donations, sponsorship, or advertising.

Because information is hard to value in advance, for-fee content will almost
invariably be sold on a subscription basis, rather than per piece, to smooth
out the variability in value. Individual bits of content that are even
moderately close in quality to what is available free, but wrapped in the
mental transaction costs of micropayments, are doomed to be both obscure and

What's Next?

This change in the direction of free content is strongest for the work of
individual creators, because an individual can produce material on any
schedule they like. It is also strongest for publication of words and
images, because these are the techniques most easily mastered by
individuals. As creative work in groups creates a good deal of
organizational hassle and often requires a particular mix of talents, it
remains to be seen how strongly the movement towards free content will be
for endeavors like music or film.

However, the trends are towards easier collaboration, and still more power
to the individual. The open source movement has demonstrated that even
phenomenally complex systems like Linux can be developed through distributed
volunteer labor, and software like Apple's iMovie allows individuals to do
work that once required a team. So while we don't know what ultimate effect
the economics of free content will be on group work, we do know that the
barriers to such free content are coming down, as they did with print and
images when the Web launched.

The interesting questions regarding free content, in other words, have
nothing to do with bland "End of Free" predictions, or unimaginative
attempts at restoring user-pays regimes. The interesting questions are how
far the power of the creator to publish their own work is going to go, how
much those changes will be mirrored in group work, and how much better
collaborative filters will become in locating freely offered material. While
we don't know what the end state of these changes will be, we do know that
the shift in publishing power is epochal and accelerating.

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