Why Micropayments Fail Online

This is taken from a comment I made on a G+ post, in a conversation about Micropayments. Thanks Kevin G, Andrew K. 

The motivating comment was:

“Hey Kevin, you’ll have to explain Stack Exchange to us then.. cos the only people benefiting financially are the owners of Stack Exchange, the rivalous advertisers, and power-house search engines like Google. How does “virtual reputation” help me answering questions all day long? Who’s doing all the moderation of mundane duplicate questions? Are they getting “rewarded” for their effort? 

It’s a great free resource, but myself and others wouldn’t bother asking even one question there, because our question might run into more and more specific questions (we might even want to strike up a dialogue) and we don’t like “using” people for free like that.

Aren’t there any more equitable examples on the web by now?”

I agree wholeheartedly with Kevin that you’re not using people if their volunteering. It’s abundantly clear by now that people don’t require micropayments to add to and maintain massive, quality stigmergic media http://en.wikipedia.org/wiki/Stigmergy#Applications, and further that the attempt to include micropayments can actually derail them. People chase the money and game the system, or are annoyed by the introduction of money and abandon the system, or are simply demotivated by it.

I’ve been reading about Self Determination Theory (http://en.wikipedia.org/wiki/Self-determination_theory). It talks a lot about intrinsic and extrinsic motivation, and how extrinsic motivation crowds out instrinsic. I think Dan Pink’s theories about Mastery, Autonomy and Purpose (http://www.youtube.com/watch?v=u6XAPnuFjJc) come from this (although they talk about Relatedness instead of Purpose, which seems a bit more social). Contributors to Stack Overflow and Wikipedia are instrinsically motivated, introduction of money would probably destroy them, *particularly* wikipedia (why do you think they’re so dead against even advertising on the site?).

I understand the problem you’re trying to solve with micropayments. You’re seeing that there’s work to be done / being done, and no one paying, and it’s potentially displacing paid work even as we speak. So extend this into the future and everyone’s pecking away at stigmergic media for free, and no one’s getting paid, and we all starve. Clearly the old jobs model isn’t translating into this environment. So we need something to replace it.

Unfortunately (fortunately), this isn’t a designed change, it’s an expression of radical human environmental change springing out of the technology. Rapidly lowering transaction costs (in the sense of Coase) approaching zero are leading to this alternate family of methods of human organisation (roughly, stigmergic and other massive technologically enabled forms) which beat out hierarchical forms and which generally seem not to be amenable to payments.

Why wouldn’t they be amenable to payments? To understand that you’ve got to understand Coase’s theory of the firm.

Coase, writing in the 30s, wanted to know why firms (ie: hierarchically organised groups, ie: at least a boss with money and subordinates with labour) would form at all in a free market. Why wouldn’t individuals just trade on the free market? It’s already a way of organising complex effort, why subvert it with a different form, a mini command economy, which is what a company is?

His answer was that transaction costs make it useful. Transaction costs are every cost to do with being able to make a transaction, which aren’t the direct transaction itself. So finding buyers/sellers, determining the right price point, moving stuff around, etc. He proposed that these costs were high enough that firms could do better, by performing a lot of related functions in houses, coordinating internally under the direction of an entrepreneur (boss). Provided that the entrepreneur was relatively good at this direction, they could beat the high transaction costs of the open market, and retain a lot more profit. This had limitations (the internal costs get higher as you get bigger), and so you get many firms.

Now we’ve got digital networks that we organise over, and transaction costs are becoming very low for information “goods”. Search at a minimum lets us discover things quickly. Distribution is ridiculously cheap per unit. But critically, they are lowered differently depending on how we organise.

The surprising thing seems to be that down in the area we’re in now, just using money at all keeps the transaction costs relatively high. If you require people to pay for information, you introduce a friction to the consumer that they usually wont tolerate. Think newspaper paywalls, or imagine a paywalled encyclopedia trying to make its way. People know there are substitutes that are cheaper (free!) and easier (no financial transactions to think about) that deem such paid resources irrelevant.

Further, down at the transaction cost levels we’re seeing, that can actually be true of the producer, too. Wikipedia lets you make an edit relatively frictionlessly. Hit edit, type, save it. Wander off. Whereas a paid service is going to require creating an account, putting in bank details, etc etc, all for micropayments which are likely going to be next to nothing anyway, ie: not worth the effort, especially as that service probably isn’t going to succeed.

And why isn’t it going to succeed? Because we all intuit the rules above, and understand that these micropayment systems aren’t viable. The service that is skewed by micropayments is going to be trumped by those that aren’t, and so it wont get traction. Without traction, the micropayment system is pointless anyway.

And on top of this is the demotivating effect of introducing money into an environment like this.

The other assumptionwich about stigmergic media, which isn’t quite right, is that people aren’t being paid. They are, they’re just not being paid with money. Instead, consumers are getting information they need. Producers are getting maybe reputation, or maybe internal autonomy/mastery/control rewards, or maybe some of both. Whatever it is, there’s a reason people participate, and keep participating. That only motivates a subset of people, of course; probably a fairly small percentage, but given that they seem to be some of the best people (hypothesis: the motivations that stigmergic media rely on are the same ones that people need to achieve excellence?), and that the number of producers and consumers are unrelated (“he who lights his [candle] at mine receives light without darkening me”), that’s ok.

Now there is one excellent example of micropayments working in recent years, and that’s the Apple iPxx App Store. But to do that, stigmergic alternatives (eg: a giant store of free “apps” and equivalent) have had to be purposefully discouraged, to the point that their transaction costs are too high, by chasing out attempts to build it (punishing free apps in various ways, eg search listings), retaining strict control over the environment (thou shalt have no other appstore before myself, plus capricious enforcement), and making the web a second class citizen. And of course they’ve also brilliantly created products that disproportionately attract “payers”, people with both money and the belief that ticket price reflects actual value (so for example freebies are worthless). So they’ve been able to control all parts of the environment, *including* the consumers who are allowed into their shopping mall!

I doubt that anyone’s going to be able to pull off that combination of factors again. Like the Wall Street Journal’s paywall, Apple’s appstore is an anomaly.

I hinted above that the primary motivation for the idea of micropayments is that the old system’s breaking, so we need a new system. But I think that’s got another fundamental flaw, the idea that we’ll get one type of new system. What we’re seeing, in fact, is many niche specific local solutions slowly replacing a general solution (doing stuff for pay).

The low transaction cost solutions are heterogeneous. Wikipedia and Stack Overflow and Open Source / Free Software and the Arab Spring and #Occupy and 4Chan have some things in common, but they mostly have a lot that’s fundamentally different. You can’t apply Open Source to everything, because it’s very specific (it works to organise massively interdependent technical work which can be broken into very small pieces, and doesn’t require a high level of overall coordination/design). You can’t organise everything like a modern decentralised protest movement. You can’t (and really really shouldn’t try to) organise everything like /b/ .

So there’s not going to be one answer to this question. The real question to my mind is “Capitalism is failing, what now?” and the answer seems to be “Everything, all at once, hang on to your hat”.

But we all still need to be paid.

I think the very short term answer to that is “hello massive unemployment and depression 2.0”. That’s happening. But what societies need to be doing is something we were on track to do through the 20th century, which was derailed in the 80s, which is to shorten the working week, and to move toward a universal basic income. The latter means really just repurposing our welfare systems in most of the western world, removing the element of punishment, though in the US it means something a lot more profound and probably socially inconceivable. So the US will likely fail at this unfortunately.

Longer term, these new forms of organisation are going to begin controlling serious resources, because they work better. As they do that, new ways of distributing those resources will arise. Also, the value that abundance is better than scarcity is spreading, watch for the technology to begin providing it in more areas than just information.

Really, if you’re looking at abundance and thinking “omg, disaster”, you’re doing it wrong. Surely.

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Why Micropayments Fail Online

3 thoughts on “Why Micropayments Fail Online

  1. Hi Emlyn, excellent analysis of the micropayments, thanks for a great read. I did notice that you carry Flattr button on your site – what motivates you to keep that button on your site? Do you think that one-click no-decision-about-price after-the-fact micropayments might have a place somehow/somewhere?

    I work for Flattr so can say that we do face the very real challenge of gaining momentum (doing OK so far with great enthusiastic user base but will need to grow) to be more relevant to more content creators.

  2. Emlyn says:

    I do carry a flattr button, I’d forgotten about that! I don’t even know if it still works.

    I don’t actually think of flattr as micropayments, tbh. It’s best thought of, to my mind, as a signalling mechanism; sometimes people want to do something stronger than press +1.

    Crucially, I don’t think you’d see flattr as being the driver of why some particular piece of work happens (which is what people are often proposing with micropayments). Rather, it’s there in the mix, not essential, but nice to have.

    re: gaining momentum, I tried it for a while, but found the necessity to be filling my account with cash was too high a hurdle. Maybe I’m too tight? Anyway, it’d be nice to be able to interact with flattr buttons in some way that doesn’t require you being financial with the service. Maybe it could function more like a +1 button, but with some way of putting actually financial people in a prominent position? Somehow you’ve got to get past that problem that regular joe presses the button, then finds out he can’t do anything without registering and paying money.

    It needs to be more freemium. The vast majority of people (who are only interacting with it very casually) need to be able to interact frictionlessly and for free. Then there needs to be a reason for people who are more committed to convert to being payers. Find a way to let every person pay as much as they are willing to (most people nothing, some people very little, a few people a whole lot), and you might be able to get some motion.

    fwiw, I think payers are often motivated by a bit of status, a bit of public acknowledgement, feeling like part of an exclusive circle, and by feeling that their contribution is valued.

  3. Emlyn, excellent ideas, thanks for this. I’ll definitely discuss these with our team how to catch the initial interest (that today doesn’t very well convert into registered users and active supporters) and perhaps introduce different levels.

    And yes, your button still works 🙂

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