How nanopayments finally came of age

8th Jul 2009 | 14:00

How nanopayments finally came of age

Social networks offer new opportunities for developers

Is 'cheap' as attractive as 'free'?

How do you get people to pay for something they're used to getting for free? It's a question that bedevils the music and film industries, and it's no less of a challenge for anyone trying to monetise an app for Facebook, MySpace or Bebo.

But a new approach is emerging – make it cheap. Really cheap. Charge just 10 or 20p for a bingo card, an accessory for a virtual pet or a weapon for a game character. Get enough people signed up and, once you've added up all those pennies, you've made a tidy bundle.

Like all ideas that sound too good to be true, you'll be thinking, it probably is. But it's not just a theory. In Asia, such 'nanopayments' have been making big money on social networks for years. In 2007, China's Tencent raised $523million in revenue – that's four times as much as Facebook, in a country where the average monthly wage is less than $20 – with operating profits of $224million.

Yet only 13 per cent of revenue came from ads. Two-thirds came from internet services like games and digital goods: 'gifts' such as virtual flowers, background music for users' profiles, virtual pets, fashion items to dress avatars in, and so on.

Lessons to be learned

It's tempting to mock the predominantly young people who spend their money on such things. But young people are much the same everywhere, and in the same way other Asian fads, from karaoke to Pokémon, have spread like wildfire, there's much we in the West can learn from the East. There are lessons to be learned closer to home, too.

The success of Apple's App Store has proved beyond reasonable doubt that people are willing to pay small amounts for virtual goods, whether useful or trivial. More than a billion applications created by 50,000 developers have now been downloaded from the Store, typically for between $0.99 and $4.99, from fart noisemakers to translators to virtual spirit levels. Yet if such success is to be repeated on social networks, there's one thing everyone agrees on: the need for stable, reliable, easy to use payment platform.

For a start, there's no point in charging to credit cards if the bulk of your audience is too young to have one. In China, kids can add money to their Tencent accounts via their mobile phone bill or by buying 'QQ coins' in real world shops.

Similar systems exist for users of Japan's Mixi and Korea's Cyworld. (In case you haven't heard of Cyworld, it was actually the world's first social networking site. Founded in 1999, three years before Friendster, it's been making massive profits for a decade, so it must be doing something right.)

Which platform?

At the end of 2007 it looked as if Facebook was joining in the party. Just before Christmas of that year it announced the beta test of Facebook Payments, which would enable firms to accept small payments from users directly inside their Facebook apps. Then … nothing. However, you can't keep a good idea down.

MySpace COO Amit Kapur revealed at last November's Web 2.0 Summit that MySpace is working on its own payment platform. And while developers are waiting for the big boys to come up with the goods, a number of start-ups have sprung up to fill the gap, such as Spare Change, Zong, OneTouch and PayByCash.

Spare Change's system is currently being used by 400 games and apps, charging users an average of 25 cents a pop. You can add money to your account through PayPal, through your mobile phone bill or using cash at thousands of retailers throughout the US.

Co-founder Mark Rose says that the "shoestring operation" he set up a year and a half ago is already making healthy profits: "We've got more than a million users, mainly of quasi-casual gaming applications," he says. One example is Mob Wars, a Facebook app in which players rise through the ranks of a gangster organisation by committing crimes and fighting other players.

According to TechCrunch, it's generating $1million per month. Mob Wars costs nothing to play, and you're given a certain amount of virtual currency to spend on recruiting and equipping your mob. To earn more, you have to perform certain tasks – or sidestep the process by paying with real money instead. "Apps like this lure people in and get them hooked," explains Rose. "Once people are engaged and having fun, they're happy to shell out a few cents to continue."

And it's not just games. Other apps let users adopt virtual gifts; send their friends 'kisses', virtual gifts or cash; sign up to dating services, make charitable donations and so on.

Micropayments on the wider web

Working with advertising

Of course, there's a great deal of cynicism about nanopayments, and there are no signs of the ad-supported model being seriously challenged on the wider web. Yet Greg Golebiewski of Znak suggests the two need not be in opposition.

On Znak, his "marketplace for content providers", users have the choice of buying virtual currency with real cash or 'earning' it by clicking on infomercials and completing advertising surveys. "Payments and advertising are working in tandem, not against each other," he argues. Golebiewski believes this is only the start of a sea change in ecommerce, and predicts a brave new future in which nanopayments begin monetising whole new areas of the web.

He suggests people would be more than willing to pay, for example, "a dime to view the latest pictures of Brad and Angelina; a quarter to download a current financial report by a reputable, independent analyst". A major awards ceremony could, he half-jokingly suggests, announce the winners online 10 minutes ahead of the live TV broadcast – "I bet there would be thousands of people willing to pay 50 cents for that".

Charging for news

Similarly, an article in February's Time suggested newspapers start charging for their online content through nanopayments. Walter Isaacson described the US press as facing meltdown, and argued ailing titles should start charging for online content through "an iTunes-easy method". A paper might charge "a nickel for an article, a dime for that day's full edition or $2 for a month's worth of access".

However, the basic thrust of Isaacson's argument – 'It works for iTunes, so it can work for news' – has been widely challenged. When he was interviewed on The Daily Show, host Jon Stewart pointed out that while a song lasts a lifetime, news is fleeting, so people are less willing to pay for it. Also, unlike iTunes, news providers have to compete with a myriad of legitimate free sources – not just online, but on radio and TV as well.

In a response to the Time article, blogger Clay Shirky suggests nanopayments can only succeed when a provider has a monopoly on a particular type of content and a proprietary system of distribution.

This both explains its success in Asia – "A Cyworld user who wants a certain kind of digital decoration for their online presence has to buy it through Cyworld" – and the difficulties of trying to replicate it elsewhere. An example he gives of the principle in action is "how mobile phone carriers prevent the ringtone distribution network from becoming generalpurpose, lest freely circulating MP3s drive the price to zero".

Achieving the same level of control over other digital goods, especially something as easily duplicated as a photo or news article, is not a task embarked on lightly – although some have suggested the Kindle could perform the 'iPod role'.

Widening the field

Or is it just a matter of reaching the optimal price point? Tony Cohen, CEO of X Factor producer FremantleMedia, recently called for a radical rethink of on-demand TV. "We must look afresh at the potential of micropayments per-view," he told the MediaGuardian's Changing Media Summit. "Charging just a few pence, say £0.05, to watch catchup could really help stimulate demand."

Surely at those sort of prices, few would be tempted to waste time on illegal filesharing sites? Whether or not nanopayments are a financial cure-all remains to be seen, but the fact that new payment methods are opening up to developers can only be a good thing.

"These days, web merchants need to capture as many customers as possible," points out Eli Gurock, marketing manager of OneTouch. "40 per cent of internet users in the USA and 90 per cent worldwide don't have credit cards, and many who do are too afraid to use them online. The addressable market could be at least two or three times bigger and as a result, a lot of money is being left on the table."

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First published in .net Issue 190

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