How nanopayments finally came of age

[Steve Furlong]

http://www.techradar.com/news/internet/how-nanopayments-finally-came-of-age-614212

How nanopayments finally came of age

Social networks offer new opportunities for developers
By Tom May

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 b 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 b that's four times as
much as Facebook, in a country where the average monthly wage is less
than $20 b 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 PokC)mon, 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 b& 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 b 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. 


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 b
"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 b 'It works for iTunes,
so it can work for news' b 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 b 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 b "A Cyworld user who wants a
certain kind of digital decoration for their online presence has to buy
it through Cyworld" b 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 b 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 B#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."


First published in .net Issue 190
http://www.netmag.co.uk/zine/latest-issue/issue-190