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The Case Against Micropayments

by Clay Shirky

Micropayments are back, at least in theory, thanks to P2P. Micropayments are an idea with a long history and a disputed definition - as the W3C micropayment working group puts it, " ... there is no clear definition of a 'Web micropayment' that encompasses all systems," but in its broadest definition, the word micropayment refers to "low-value electronic financial transactions."


The other, more general P2P problem micropayments seem to solve is the need for efficient markets. Proponents believe that micropayments are ideal not just for paying artists and musicians, but for providers of any resource - spare cycles, spare disk space, and so on. Accordingly, micropayments are a necessary precondition for the efficient use of distributed resources.

Jakob Nielsen, in his essay The Case for Micropayments writes, "I predict that most sites that are not financed through traditional product sales will move to micropayments in less than two years," and Nicholas Negroponte makes an even shorter-term prediction: "You're going to see within the next year an extraordinary movement on the Web of systems for micropayment ... ." He goes on to predict micropayment revenues in the tens or hundreds of billions of dollars.

Alas for micropayments, both of these predictions were made in 1998. (In 1999, Nielsen reiterated his position, saying, "I now finally believe that the first wave of micropayment services will hit in 2000.") And here it is, the end of 2000. Not only did we not get the flying cars, we didn't get micropayments either. What happened?

Micropayments: An Idea Whose Time Has Gone




Furthermore, businesses like the gas company and the phone company that use micropayments offline share one characteristic: They are all monopolies or cartels. In situations where there is real competition, providers are usually forced to drop "pay as you go" schemes in response to user preference, because if they don't, anyone who can offer flat-rate pricing becomes the market leader. (See sidebar: "Simplicity in pricing.")

Simplicity in pricing

The historical record for user preferences in telecom has been particularly clear. In Andrew Odlyzko's seminal work, The history of communications and its implications for the Internet, he puts it this way:



Why have micropayments failed? There's a short answer and a long one. The short answer captures micropayment's fatal weakness; the long one just provides additional detail.

The Short Answer for Why Micropayments Fail

Users hate them.

The Long Answer for Why Micropayments Fail



Anxiety and the Double-Standard of Decision Making




Thus the anxiety of buying is a permanent feature of micropayment systems, since economic decisions are made on the margin - not, "Is a drink worth a dollar?" but, "Is the next drink worth the next dollar?" Anything that requires the user to approve a transaction creates this anxiety, no matter what the mechanism for deciding or paying is.

The desired state for micropayments - "Get the user to authorize payment without creating any overhead" - can thus never be achieved, because the anxiety of decision making creates overhead. No matter how simple the interface is, there will always be transactions too small to be worth the hassle.

Confusion and the Double-Standard of Value

Even accepting the anxiety of deciding as a permanent feature of commerce, micropayments would still seem to have an advantage over larger payments, since the cost of the transaction is so low. Who could haggle over a penny's worth of content? After all, people routinely leave extra pennies in a jar by the cashier. Surely amounts this small makes valuing a micropayment transaction effortless?






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