still misunderstanding micropayments

Please, Shirky, don’t hurt me.

See, in the past Clay Shirky has expressed some healthy, justifiable skepticism about Second Life, or rather, the hype around SL in 2006-07.  And on a scale of one to infinity, he knows about a googol (old skool usage) more about the future of Internet and new media than I do.  So I’m loathe to disagree with him on any topic.  But I’ve got to chime in about micropayments.

The quick recap:  Shirky says that publishers are grasping at straws if they think that micropayments will save their dying business models.  Matthew Gertner hopes that publishers might still find that magic blend of quality and scarcity that allows them to charge micropayments for content.  I think both misunderstand the demonstrably successful business models for micropayments.

Shirky’s right when he says that “users don’t like being nickel-and-dimed” for content.  But that’s not what happens in the successful models, not from the users’ point of view.  Users are making small payments, but they’re not paying nickels and dimes, they’re paying significant amounts of dollars over relatively short periods of time.  They are paying for the convenience of not making micropayments while making micropayments.  Huh?

If “micropayments” means anything anymore, on a pragmatic definition it means “payment of an amount that is typically too small to justify its own transaction costs.”  Depending on volume, merchant fees and chargeback rates, the $0.99 price of a song is probably not large enough to justify transaction costs on a transaction-by-transaction basis – but that’s not how iTunes does it.  iTunes aggregates charges and only incurs transaction costs when the aggregate charge supports the costs.  This is a seamless experience for the user, and together with the presentation of a broad catalog, a pleasant user interface, and smart search and recommendations, this service is well worth paying for.

Shirky believes that iTunes demonstrates that “the only real lesson of small payment systems generally . . . is that if you want something that doesn’t survive contact with the market, you can’t let it have contact with the market.”  Ironically, the internal contradiction of this statement is that it assumes that the value is in the content.  But the value is not in the content, as many people, including Shirky, have pointed out.

The point is even clearer in Shirky’s other example, Cyworld, a Korean social networking site where users can buy each other “virtual gifts.”  Facebook introduced the same feature in 2007, quickly giving birth to a virtual economy that some estimate at $100 million a year.  Shirky says these kinds of services are a “monopoly within the environment” that “prevent[s] competition for pricing of digital goods.”

fbvirtualgoodsWhat?! Think about it, how can there be competition for pricing on goods that are worthless?  Those little virtual gifts that sell for a buck a piece – the flowers, hearts, puppies, etc. – there ain’t no monopoly on them, it’s not a closed environment as far as those goods are concerned.  I can take them wherever I want (notwithstanding copyright claims, which aren’t the point here).  You see, there they are, 21 virtual items right next to this paragraph.  Did I just steal $21 from Facebook (or worse, from Susan G. Komen)?

Nope, I didn’t.  Because nobody gives a damn about those items here on my blog.  (Well, maybe someone will make a copyright claim that I’m not making fair use of them, as I think I am, but again that’s not the point.)  People don’t pay for those little bits of clip art, and I certainly wouldn’t be interested in paying to display them here.  People who buy virtual goods are paying to have those bits of content show up on the service of Facebook, of Cyworld, etc.  They are paying to have it show up on the profile of a friend, they are paying for the social graph, they are paying for all of the reliability, usability, network effects and ego-fulfillment of those services.  And they’re making micropayments, and the services are again aggregating the micropayments in a way that is part of a convenient and seamless user experience.  The content in Facebook is not “trapped” in some kind of monopoly – the service of Facebook is in full and open competition with every other social service out there.

So that’s all I have to say about that, but I have to end with a little disclaimorama:  Second Life may have had a “virtual economy” of over $360 million last year, but that’s not necessarily where my thinking comes from on this.  I’ve been looking at things like Cyworld since I was a VC at a Korean shop, long before I joined Linden.  Disclaimer necessary because there’s whole reams of thought about whether the content on SL has value off of SL, which I am not getting into and not taking any position on here.

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2 thoughts on “still misunderstanding micropayments

  1. You’re confusing two kinds of monopoly — there is competition *between* Cyworld and other social network services. There is not, however, competition within those services. Put another way, if you can create a technology platform that operates at a competitive advantage to other platforms, you can have non-competitive behavior within that platform.

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  2. I’m saying that your notion of competition *within* a service is based on a mistaken notion of what is being purchased. And, perhaps, a mistaken belief that these services mean to be a true platform, at least with respect to virtual goods.

    Again: No one is buying an icon of a flower. People are buying an icon of a flower that is displayed on Facebook. There’s plenty of competition in pictures of flowers. There’s no competition in pictures-of-flowers-on-Facebook, because only FB is FB. If you want to compete against that, you do so by starting another social network.

    ETA: One more example, though it’s not a perfect analogy: Let’s say I buy a nylon jacket from the designer John Varvatos. It’s worth a significant amount of money. Now, I can buy and sell nylon, I can even cut my jacket into squares and sell those pieces. But those items would not be worth very much. What is worth what I paid is the design from Varvatos, what it signifies to others who see this garment associated with me, the experience and service at the store, the status, etc etc. There’s not a question of competition for nylon. The competition is from Ted Baker or Ben Sherman or their ilk.

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