UK Accounting Glossary
economics A financial transaction for a very small amount of money
Micropayments are a proposed means for generating revenue while providing online content. In the early days of the World Wide Web, content would usually be made available for free by organisations such as universities.
With the phenomenal growth of the Internet people soon began to seek various means of earning money from content. Advertising is one such form of revenue. Content would be offered for free, with accompanying ads or links to sponsor sites. Other content providers have also experimented with subscriptions, where people would pay for access to content for some period of time. A third form of revenue comes in the form of donations solicited by the content provider.
Micropayments present a relatively recent innovation in the online revenue stream. The basis of micropayments would be to maintain and take advantage of the very high volume of viewers by offering content for a very low price. For example, a webcomic author would make his online comic book available for $0.25 (USD). Other variations on the idea propose charging fractions of cents (that is smaller than the smallest possible amount of hard currency) for equally fractional amounts of contents, for example, a tenth of a cent per single web page in an online magazine.
Economists define a “public good” as one which can be consumed or used by an unlimited number of people at no additional cost to the provider. Radio broadcasting produces a public good. A radio program is produced at a fixed cost, but an unlimited number of people within the reception area can receive that program. When one additional listener hears the program, no additional cost is incurred by the broadcaster for that listener. For this reason, the sale of program advertising by broadcasters can produce income without excessive cost. If a listener hears a radio program but does not respond to its advertising, no additional cost results. A listener who hears the radio program but does not purchase advertised products is a “free rider.”
In contrast, publishers of magazines and newspapers incur an additional cost to provide the publication to each additional reader. Some publishers impose a purchase price on that reader to defer the additional publication cost. Therefore, newspapers and magazines which must be purchased are not public goods and their publishers solve the free-rider problem by charging for each copy of their printed product. Some magazines and newspapers are provided without charge. The publishers of these “free” publications obtain revenue only from the sale of advertising. These publications usually have limited and narrowly targeted readerships which are most likely to respond to the advertising in the free publications. Also, publications which bear a purchase price may be printed on glossy paper and have attractive colour photos and illustrations, whereas free publications may be produced at a lesser cost, omitting some or all of these features.
Many Internet sites have attempted to provide content as a free public good with the cost of that content paid for only by advertising. These sites provide a non-public good without charge. Because of bandwidth costs, this approach has often failed. Online content cannot be provided at a fixed cost, as with broadcast programs, because each additional person who accesses a particular web site imposes more bandwidth cost on the operator. Although the additional incremental cost could be very small (depending on the file size of the site’s content), the cost may accumulate rapidly depending on the number of persons who access the site. Therefore, many sites have suffered losses from high bandwidth costs disproportionate to available advertising revenue, since many people access the content, impose a bandwidth cost, but never respond to the advertising banners/pop-ups. Many sites have failed for this reason, while others have resorted to charging subscription fees or increasing the ratio of advertising to the amount of content provided(reducing the overall quality of the site).
Proponents of the micropayment business model believe that micropayments will solve the free-rider problem for sites that are attempting to depend solely on advertising, and, that such a system is a refinement for sites that have resorted to charging subscription fees.
On the other hand, detractors of the micropayment business model believe that the subscription-based system is preferable and that micropayments generate less revenue than advertising.
Some online artists are strongly in favour of micropayments, as they offer a means of recuperating the cost of online publishing, and if they are sufficiently popular, of making a profit. Currently, successful artists are punished by their popularity because this popularity requires them to pay for increasingly large amounts of bandwidth. The argument by artists in favour of micropayments is firstly that such schemes would free them from sponsorship and advertising, which allows more independence for their art; and secondly that the possibility of earning a living through their work would allow them to produce more and higher quality work.
Detractors of micropayment strategies generally argue that micropayments would cause too much inconvenience for users of content. They invoke a “mental transaction cost” argument: each price, no matter how small, carries a burden of deciding if the content is worth that price; accumulated over a large amount of content, this burden would pose an extreme inconvenience to the users.
One of the major drawbacks of micropayments is getting the funds from the customer in the first place. The easiest solution is to charge the customer’s credit card for the amount they have purchased the content for. Billing a customers credit card for $1.00USD is fiscally irresponsible to the micropayment provider. Given that there are certain base transaction charges for using the credit card network. A working system used by companies like Bee-Tokens bills the customer’s credit card for a fixed amount of tokens where the user can then spend on websites accepting the Bee-Tokens micro currency.
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This glossary post was last updated: 13th February 2020.