Fast Company

Nickeled-and-Dimed to Death

A few years ago, experts thought a new pricing model would sweep the Internet in which users would gladly pay a few cents a page for the content that they liked. It was a costly misjudgment.

Instead of subscribing to Fast Company for $23.95 a year, imagine what it would be like to order each article à la carte. Cover stories might cost 50 cents apiece to read. Shorter articles like this column could run for a mere 15 cents or so. In fact, we could slice our pricing -- and our content delivery -- even thinner. What if you got to read each paragraph of Untangling the Web for a penny apiece? Keep reading, and we keep billing you. Stop reading, and the meter shuts off.

Tempting? No, it isn't.

When a magazine -- or almost any consumer good -- catches our fancy, we want to spend most of our time enjoying it. There just isn't much joy in negotiating details of price and delivery. We're willing to do that once, because, except for a few economists, no one really wants to keep dickering over each new sliver of value. It's just a poor use of time.

That lesson is finally sinking in for the Internet economy, after years of sincere but misguided excitement about new economic models based on micropayments. Get consumers online, the theory went, and all of a sudden, prices could be exquisitely tailored to their actual shopping desires. As the micropayment boosters put it: Why pay $15.99 for a compact disc when you could pay $1.50 for your favorite song?

In a now famous (or infamous) burst of enthusiasm, Web-site-usability guru Jakob Nielsen suggested back in 1998 that online micropayments would become as commonplace and as accepted as long-distance phone charges. "If a page is not worth a cent," he declared, "then you should not download it in the first place." Similar prophesies were made by Nicholas Negroponte, head of the MIT Media Laboratory, who proclaimed in 1998, "You're going to see within the next year an extraordinary movement on the Web of systems for micropayment."

In fact, plenty of companies did spring up to provide the technical means for micropayments. They allowed vendors to charge anywhere from five bucks to as little as one-tenth of a cent for various slivers of Web content -- and their technology, by and large, was sound. But the expected wave of customers never arrived. Before long, pioneers such as CyberCash, DigiCash, and First Virtual Holdings Inc. were either out of business or forced to sell their companies and see their micropayment initiatives largely fade away.

Norman Guadagno, vice president of marketing at Qpass in Seattle, has studied the micropayment debacle as closely as anyone. His company at one time concentrated on providing micropayment technology to more than 100 Internet-based content providers, ranging from the New York Times and USA Today to NHL.com, the main pro-hockey site. Today, Qpass continues to offer micropayment technology to many of those services, but growth is so modest that the company has refocused on new payment approaches for the wireless market.

"If you get inside the consumer's mind," Guadagno says, "I think there are three factors at work. First, there's an intense belief that the Web is a free medium. Even a 25-cent charge pushes against an unconscious belief that it should all be free. Second, customers often didn't think that the content was worth as much as the providers did. And finally, people don't want to deal with the hassles of microtransactions every time they want something. They would rather take out one subscription and be done with it."

Even some businesses have come to regard micropayments as a device that tends to annoy Web-site visitors rather than attract them. In Chicago, Haywood Kelly, the editor in chief of Morningstar.com, has experimented with many different ways to convert his Web-site visitors into paying customers. Morningstar provides detailed information on mutual funds and individual stocks -- with some information given free of charge and other material available only through a $99-a-year premium subscription.

"We tried offering individual reports at a low price, but it's not a large business for us," says Kelly. "My boss, Cathy Odelbo, always says, 'You don't want to nickel-and-dime the customer.' Our main emphasis is on selling premium subscriptions. And the best way to explain to visitors what we've got behind the premium wall is to let them get one free analyst report -- or even to have a one-day open house, where people can briefly look at premium content at no cost."

Last year, in a landmark essay titled "The Case Against Micropayments," Internet strategist Clay Shirky argued that any micropayment system sends a confusing message to users. It simultaneously tells them, "This is worth so much you have to decide whether to buy it or not" and "This is worth so little that it has virtually no cost to you."

As prices become vanishingly small, Shirky adds, consumers' main concerns are convenience and good use of their time. Consider the way that we order cardboard boxes for a move, he says. No one tries to measure every item ahead of time and optimize the use of the boxes. We just take a guess and over-order slightly, regarding box costs as a trifling part of the move. Micropayment enthusiasts lose track of this dynamic, he says. They mistakenly treat cheap resources such as content or computing power as if these were precious, while regarding the user's time "as if it were so abundant as to be free."

If there is any palatable way to bring micropayments to the consumer, Shirky suggested in a recent interview, it may be through users' mobile phones. There, at least, users are already dealing with an instrument that gradually charges them more for greater use. Also, cell-phone contracts have already validated users' identity and creditworthiness -- two vital chores that a micropayment system can't handle easily on its own.

In fact, VeriSign Inc., one of the leading Internet-security companies, is concentrating its micropayment efforts on wireless services. Paul Healy, vice president of wireless services for VeriSign, observes that fancy ring tones are already sold this way. And he says that in years to come, people may use their mobile phones to pay for parking spaces, movie tickets, and other incidental purchases.

But even on the wireless Internet, micropayment enthusiasts may be fighting an uphill battle against the belief that if it's cheap, it really ought to be free. Consider the recent experience of Richard Kosinski, a San Francisco - based PR executive. On the Fourth of July, he went to yourmobile.com and downloaded "Yankee Doodle Dandy" as the new ring tone for his phone. It was free and fun, he says. Later, he went back to yourmobile.com to look for more ring tones, only to discover that the site now wanted to charge him.

"That was a real disincentive for me," he says. "When it was free, it was terrific. But I don't think I'd want to pay."

George Anders (ganders@fastcompany.com) is a Fast Company senior editor based in Silicon Valley.

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