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Why micro-transactions won’t work

By on February 11, 2009
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Clay Shirky is my favourite Web 2.0 thinker (his piece on the cognitive surplus should be required reading for anyone thinking about how to engage consmers in the Web 2.0 era).

His latest post discusses the futility of micro-transactions for online publishers. His primary target is journalists hoping to sell their articles for anything from cents to dollars a time, which he believes is ultimately futile.

A number of key points leap out for games publishers seeking to use the micro-transaction model:

  • Consumers hate being “nickeled and dimed” – the phrase exists because we hate it.
  • Where micro-transactions work (Apples iTunes store, Korean MMOs) it is because there exists a de facto monopoly in that area. So if you want music for your iPod, you have to purchase it in micro-transactions; yet if you want a podcast on your iPod, you can get it for free, even though Apple has the facility to charge you for it. The combination of Apple’s distribution monopoly and the music industry’s organised and litigious nature create an environment where micro-transactions can thrive.
  • We are no longer consumers of media: we are users. We use our media to inform our discussions with friends, to develop conversations, and hence we need to share it, through Facebook, email links or social bookmarking sites. Shirky calls this superdistribution, and argues it “matters a lot. It matters so much, in fact, that we will routinely prefer a shareable amateur source to a professional source that requires us to keep the content a secret on pain of lawsuit. (Wikipedia’s historical advantage over Britannica in one sentence.)”

Micro-transactions can work in a closed environment where users have no free alternative and where the items purchased have meaningful value. However, the focus has to be on thinking about what the user will buy, not what the corporate would like to charge them for.

About Nicholas Lovell

Nicholas is the founder of Gamesbrief, a blog dedicated to the business of games. It aims to be informative, authoritative and above all helpful to developers grappling with business strategy. He is the author of a growing list of books about making money in the games industry and other digital media, including How to Publish a Game and Design Rules for Free-to-Play Games, and Penguin-published title The Curve: thecurveonline.com
  • Offering value to customer is the essence of any sustainable business model, micro-transactions are no different.It doesn’t work for newspaper articles because they are essentially commodities, that you can’t try them before you buy because their value drops as soon as they’re consumed, and that it fragments your audience as it slows their viral propagation. Basically, there’s zero advantadge to owning a piece of news article.

    In games, selling anything that fragments your player base is generally a bad idea – the in-game quivalent of selling news articles that you can’t share with non-purchasers is to sell maps or game modes you can’t play together with non-paying players. Offering the option of “VIP” areas can be good. But if they’re totally exclusive, how would the paying players feel like VIPs?

    Micro transactions have already proven they work even when free alternatives are available : Facebook still sells gifts while Free Gifts exist (or images pasted in an email, that have been here for a long time). Everybody knows that Free Gifts are free, and knowing that a person paid is an important attribute of gifts, so a paying gift is more valuable than a free one. Being able to show off your popularity is also why Facebook Gifts have more value than an image pasted in an email. Actually, a lot of people reproach to Facebook that the paying gifts all have the same value and are all cheap.

    Intangible value also has a role to play : The main functions of brands, in virtual as well as real goods, is to avoid being commoditized and bypassed as soon as a cheap or free alternatives appear.

    The service also matters : iTunes has also grown the market for online music because it made music easy to find, reliable and of predictable quality, secure to download, recommended or not by user reviews, clearly labeled, etc. The free alternative, downloading on torrents, can require more skill and time to find what you want, sort it, and organize it. Classical music sales rose a lot when iTunes appeared. There’s a “long tail” effect of niche demand aggregation here, but the classical music audience is also maybe not necessarily expert at downloading on P2P sites and values the quality and accessibility the iTunes service provides.

    Also, open marketplaces like IMVU show that micro-transactions are working with platform approaches and user-created content as well.