Past Is No Prologue for Micropayments

“There will never be a mass market for motor cars — about 1,000 in Europe — because that is the limit on the number of chauffeurs available!” – Gottlieb Daimler, inventor of the gasoline-powered automobile, 1889

“Heavier than air flying machines are impossible.” – Renowned physicist and mathematician Lord Kelvin, 1895

“The radio craze will die out in time.” – Thomas Edison, 1922

“There is not the slightest indication that nuclear energy will ever be obtainable.” – Albert Einstein, 1932

Even the smartest people make bad predictions based on seemingly solid reasoning.

Last September, New York University Adjunct Professor of Interactive Telecommunications Clay Shirky wrote an influential essay in which he said “freely offered content is an epochal change, to which micropayments are a pointless response.”

Shirky based his vision about micropayments’ future on the fact that no proprietary microtransaction system (he cites BitPass, FirstVirtual, Cybercoin, Millicent, Digicash, Internet Dollar, Pay2See, and others) had gained widespread use, and on the computer scientist Nick Szabo’s hypothesis of Mental Transaction Costs.

Shirky writes:

“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.”

While I’ve never been burgled or robbed, I think we can safely assume theft victims do indeed suffer mental transaction costs. I also think NYU’s professors of economics might call the reduction of a service’s pricing to levels that consumers don’t mind paying a good idea, not the perpetration of a felony, or even a misdemeanor.

Pondering Shirky’s statements, I made a new pot of coffee, took a hot bath, and phoned some friends around the U.S. and Europe. (I’ll explain in a minute why I did these things.)

Shirky writes excellent essays and is a brilliant theorist of the social effects of Internet technologies, but not so good when it comes to the economic effects of those technologies. The purpose of this Shirky essay wasn’t necessarily to torpedo the concept of microtransactions, but rather to remark on the truly epochal change new media communications technologies have wrought in information supply and demand.

I agree with him about that change, which I’ve frequently written about in this column. I agree with most of his essay, except for his dismissal of microtransactions’ viability.

Shirky states the failures of previous microtransaction systems constitute evidence that future ones will fail. But the past is never prologue, particularly concerning new technologies. The quotations from Daimler, Kelvin, Edison, and Einstein atop this page demonstrate even smart people can predict badly when looking backwards.

Shirky further writes, “These [micropayment] systems didn’t fail because of poor implementation….” This is observably untrue. Proprietary microtransaction systems, such as FirstVirtual, Cybercoin, Digicash, etc., were all misimplementations because those proprietary systems weren’t open and interoperable.

Any proprietary transaction system that isn’t readily interoperable with others is a misimplementation, no matter whether it transacts micro or macro amounts. Would credit cards be as widely used today if they could be used only with merchants or restaurateurs who actually hold accounts at the specific banks that issue those cards? What if Sprint refused to transact long-distance calls to subscribers of Verizon or AT&T?

Those previous microtransaction systems’ lack of open interoperability meant online consumers who used multiple sites that required payment for content had to enter their credit card or bank information multiple times, and learn how to operate multiple microtransaction systems. That’s a true definition of mental transaction costs.

Which leads to Shirky invoking Szabo’s hypothesis that:

“…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.”

When I made a new pot of coffee, took a hot bath, and phoned friends in the U.S. and Europe to discuss that hypothesis, what I really did was an exercise disproving the hypothesis.

Though the coffee beans I used certainly weren’t part of any microtransaction, the water I used in the pot and in the bathtub certainly were. So was the electricity I used to heat the water. So were my long distance calls. All are frictionless examples of microtransactions — micropayments without perceptible levels of inconvenience.

Do you think about the kilowatt microtransaction cost before turning on your coffee pot? Before you open a faucet, do you consider how many cents per gallon the local water company will charge? Does your telephone company’s few cents per minute microtransaction charge for a long distance call really deter you from making a five minute call?

Over the past few months, I’ve encountered many people influenced by Shirky’s declaration that microtransactions cannot work. They forget they’ve been making micropayments for water, electricity, telecommunications, and other services for years. Microtransactions are common and used every day.

They reply, “Online is different.”

No, not really. The sole difference is that unlike older technologies like water, electricity, or telecommunications, no open and interoperable billing system has yet been implemented for online use. During the first 20 years of the electric or telephone industries, the situation was the much the same as it is now with online.

Information will never be too cheap to meter, just as water and electricity never became too cheap to meter. When the price of water and electricity declined decades ago, micropayment systems were built to transact purchases of those services. Those services never became absolutely free because someone had to be paid to produce them.

The same is true of online content. The “free” in “free content” is a fuzzy, not absolute, adjective. It simply means the price of most online content has fallen so low that it’s nearly free; it’s well below macro amounts. Unfortunately, no open and interoperable billing systems for wired online transactions have yet been implemented (although many using wireless systems are) to transact its true price.

Microtransaction isn’t a panacea for the online content industry. Its applications may not be appropriate for many, perhaps even most, forms of online content. Yet it will exist in the future, particularly if consumers want professionally produced content.

Daimler in 1889, Kelvin in 1895, Edison in 1922, and Einstein in 1932 each expertly believed the future was settled. A little time proved the future to be quite different from what they predicted.