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Micropayment – A burning platform for publisher collaboration

Most news based publishers are wrestling with the idea of charging for content; they look enviously at iTunes and wonder why that model can’t be replicated for news. Deloitte’s Tom Frazer looks at the ins and outs of micropayments and outlines what is required to make it work for publishers.

By Tom Frazer

For many publishers, the rapid evolution of the digital content market has looked like little more than the shredding of today’s newspaper into digital confetti. The prospect of making money by charging small sums for individual items of content is tantalising for all those who to date have cast their content in to the digital ether. Micropayment offers an opportunity for publishers to generate new revenue and therefore potentially recover some of the value destroyed by intense digital competition. However, this article will argue that significant value will also derive from publishers’ ability to capture and exploit user information, and moreover, that only a standardised and platform-based solution can deliver this value.

Micropayment is being considered against the most testing commercial backdrop seen for many years. Users continue to migrate online in search of a wide choice of convenient and cheap content, and publishers (faced with pressure from new entrants) have responded by making content freely available. These structural pressures have been compounded by cyclical strains. More than just a sobering reminder of current challenges, these conditions form the backdrop against which an ability to collaborate, not simply compete, may determine the success of a publisher-led micropayment platform.

The two-sided market double whammy

The transition to digital resulted in significant disruption to traditional publishing businesses, ultimately leaving them with a stark choice: move online and seek to retain audience share but face the cannibalisation of paper revenues; or not move online and risk somebody else eating your lunch. Few newspapers, with the FT being a notable exception, have been able to replicate their physical business models online by charging users a content subscription and advertisers a premium for access to high-value audience segments.

Newspapers are classically described as operating ‘two-sided market’ business models: in the first market, publishers monetise content by selling papers to readers; in the second market, publishers monetise users by ‘selling’ readers to advertisers. Two-sided market business models have two key characteristics. Firstly, they require a platform – where the two markets coalesce. Secondly, the platform operator requires a mechanism to optimise the value generated – most commonly in the form of subsidised pricing. By giving away online content, publishers were seeking to maximise advertising volumes. However this ultimately disabled their pricing mechanism and weakened their ability to re-balance content revenues and advertising revenues in the future.

What to sell – content segmentation

In order to determine what content users may pay for on an item by item basis, publishers must first segment their portfolio based on the uniqueness and desirability of their content. Content may be unique (ie. with a lack of alternatives) due to a number of reasons; normally however it will result from the application of a particular set of assets or capabilities that other organisations find hard to match. Examples here may include a detailed knowledge of institutions, insight as a result of prior experiences and investments and the perspectives of specific journalists.

In addition to supply constraints, users must want the content that is being offered. Historic examples of publishers successfully offering content within pay-walls have often come from work-related publications. This information is often important, if not critical, to the users and therefore the value is relatively transparent. Other areas of high desirability are often in specialist areas of individual interest. As the level of online competition has intensified, many publishers have strived to become ‘famous’ for niche areas of clearly defined expertise and knowledge. Brand will play a critical role – as users seek out trusted providers – potentially resulting in a less even distribution of value amongst operators.

Newspaper content is perishable (its value significantly diminishes after the first use) unlike other forms of content where micropayment systems are being considered, or already exist. For example, a consumer may decide they like a song when they hear it on the radio, and therefore buy it on iTunes (the dominant music payment platform). Indeed, the value of this song to the consumer may increase overtime. Value transparency is therefore critical for online news content purchasing. In the future, publishers will strive to provide a transparent view of the content and price their products appropriately.

Incremental opportunity – content monetisation

Micropayment revenues will not replace subscription revenues. In the physical world, audiences were willing to pay for a bundle of news, ie. a newspaper, as it supplied a convenient way of accessing a broad range of stories. The supply of news was also relatively limited – constrained by barriers to entry determined by high levels of fixed investment.

In the digital world, the same restrictions do not exist. Users are faced with a choice of content from an incredibly wide range of sources – both originators and aggregators. In addition, the cost of switching between providers is extremely low (just a few clicks of the mouse button), resulting in a fall in users’ propensity to pay. Thus, publishers need to understand what items of content can be charged for and at what price – in order to optimise online content revenues whilst protecting online advertising revenues.

Charging small sums for individual digital products therefore offers two direct benefits. First, revenue from content that has previously been given away. Second, the protection of paper revenue from further cannibalisation – ie. the loss of readers to the free online version. For most providers, micropayments is unlikely to generate significant incremental online revenue. It is important to note that this debate principally considers existing sets of content and not the potentially profitable diversification into new products and services, based on creatively exploiting existing capabilities.

A significant upside – user monetisation

The more significant commercial upside from micropayments may result in the monetisation of users. Specifically, the information acquired about customers and their preferences may have a much greater long-term value than the incremental revenue from the payments themselves.

All payment solutions require some form of identification; therefore in its most simple form, a popular micropayment platform would create a powerful connection between a specific user (as opposed to a specific machine) and their habits and preferences. Indeed, as the buyer information and user insight becomes more granular – for example to include age, sex, location and profession – the ability to monetise these audiences may also increase. It is also worth noting that in addition to offering advertisers greater value, this also allows the publisher to hone its proposition.

Micropayment therefore becomes an opportunity to maximise advertising revenues and not solely content revenue. This is a critical strategic difference and it will result in markedly different content segmentation and pricing strategies. Instead of seeking to charge a maximum number of buyers a maximum price for content, whilst minimising any negative impact on advertising, almost the reverse becomes true. The strategy objective becomes the capture of as much information about as many users as possible in order to maximise advertising revenue. For example, the freemium model – whereby a small number of users are charged a premium for additional content and services – may be considered less desirable in this context, as it seeks to maximise revenue from content and not the level of information from users.

Platforms: a conundrum of cooperating to compete

It is impossible to fully consider micropayment without analysing potential solutions and how these could be implemented. Evidence from the payment sector suggests that some fundamental supply and demand characteristics would be critical to success. If users are to adopt micropayment then it must be simple, convenient, secure and reliable. It appears clear that the most costly (in terms of user time and effort) component of any online payment is the initial registration. Some frequent users of specific sites may consider registration a reasonable trade-off in order to access and own content. However, infrequent users (precisely the target market) will be disincentivised to register at multiple sites. Indeed, the notion of creating a pre-paid account with a number of publishers simply compounds the complexity and inefficiency of micropayment propositions. Therefore, proprietary or standalone solutions offered by individual publishers appear unlikely to succeed in the mass market.

From a supply perspective, the economics of low value payment require some degree of aggregation – ie. grouping together a number of payments into a single transaction. Debit card transactions cost merchants circa 12 pence each; it is clear therefore than any payment below this level becomes immediately unprofitable – but this is broadly the expected cost of individual articles. Whilst some large publishers will be able to aggregate payments based on payment windows or a minimum number of transactions, smaller publishers with low levels of usage will again be locked out. In addition, the initial cost of implementing a standalone solution would also be prohibitively large for most small publishers.

Now, at first glance this might appear to be a benefit for heritage print publishers: new entrants are excluded from driving additional revenue from micropayment impacting their commercial viability and consumer proposition. However, there are two reasons why this may be self-defeating. First, users will demand a standardised and open solution therefore barring small players does not resolve the need of interoperability amongst large players’ propositions. Second, by collaborating with small players to create a more standardised approach, the larger players may reduce the risk of disruptive models emerging.

A standardised platform appears to be a pre-requisite for a viable micropayment solution. Indeed, even with a platform-based solution offering all publishers the opportunity to drive content and advertising revenues it remains to be seen if publishers are really capable of collaborating. By not pursuing a standardised and publisher-led platform, newspapers face the threat of being disintermediated in the link between advertisers and audiences – an equally significant threat to their business models as the risk of being disintermediated in the link between content and users (by aggregators and search engines). In the absence of a publisher-led solution, with current levels of market interest, and with the highly valuable incentive of online audience data, it is extremely unlikely that this burning platform will remain in its current state for long.