Micro-payments are an old idea, some say a bad fantasy. Chief, we’re rich: I found a way to get a millicent per page view…
So far, not much has happened. Unless you look at a tidy, not tiny, little billion-dollar business called iTunes. Three years ago, in February 2006, 1 billion songs served, sold, cashed in, since 2003. July 2007, 3 billion. June 19th, 2008, 5 billion songs. January 2009, 6 billion. Tidy it is at 99 cents for every song. A little so now, with three stages, 69, 99 and 129 cents, without DRM, without copy protection.
But, you’ll justifiably object, this is a unique phenomenon, it doesn’t replicate elsewhere. How can we draw lessons from Apple’s idiosyncratic, proprietary, ferociously monolithic, militantly anal practices? True when it comes to Apple’s style, but less so when it comes to substance, to the replicability, to the potential for use elsewhere. Apple’s competitors are rushing to build their own App Store; for their smartphones, they yearn for their own applications distribution platform. This certainly makes the case for the idea’s replication.
But what idea?
What Apple did was lowering the mental cost of the transaction. You create an account once and you’re done. Like a song, click, buy a song. No longer do you have to go through the painful obstacle course of filling in name, shipping and billing address, telephone, credit card number and the like. Occasionally, you have to restate a password but that’s the highest hurdle. Amazon does the same once you’ve established a relationship, which is the cornerstone of such smooth – and immensely successful – practices. Why doesn’t eBay do the same? It’s a mystery, they own PayPal, after all. I know the official explanation, they don’t control the merchant; their situation is different from Apple’s or Amazon’s with their tightly integrated systems. I don’t buy that. Yes, eBay doesn’t control the occasional seller like me recycling an Apple 30” monitor. But they have a huge population of professional merchants selling thousands if not tens of thousands of articles every month. They have an easy recourse for problem transactions there, just as Amazon polices their own merchants. With the “pro” merchants, eBay could offer a lower mental transaction cost by making the Buy It Now click the only click needed.
(While it applies to micro-payments, the one-click practice is broader, it applies to much larger amounts as well.)
One obstacle often cited by knowledgeable observers is the credit card fee. They say Apple must have gotten an exceptional deal from credit card issuers for these 99 cents purchases. True. Initially, Apple’s plan wasn’t to make money with the iTunes business itself, it was designed as a way to push high volumes of high-margin iPod hardware. With the iPhone App Store, things started evolving. There, Apple keeps 30% of the price paid for the application, including 30% of nothing when the app is free, a clear restatement of the strategy: selling content as a way to push hardware sales. This is, while we’re at it, a great benefit for the individual programmer. All s/he has to do is write great code, Apple does the rest and sends a check every month. Before, the same programmer had to build and maintain a web site, buy an e-commerce engine, pay various credit card processing and hosting fees. And the would-be buyer had to go through the old obstacle course. Now, no click if on the PC, one password on the iPhone and the sale is made. All for 30%. And, again, 30% of nothing if the programmer wants to put a free application out, either as a promotion for the paid-for version or just for fun and/or self-promotion.
In the near future, Apple will announce 1 billion App Store downloads.
Going back to the mental transaction cost, a friend of mine went to one of these often touching but also often boring school theater shows. To keep his other two kids, the ones not on stage, quiet, he let them play with his iPod Touch. The next day, he got an email invoice showing $15.75 of game purchases. He had just downloaded a game for them. Either they used a feature that lets you make successive purchases without entering the password again if said consecutive purchases are within a couple of minutes of each other – or they picked up his password as he typed it in… He wasn’t too upset. In the first place, he got tranquility at an acceptable price. More important, he’s a VC like yours truly, he observed that Apple created a place where people are ready, used to, happy to pay for things. A working business model not requiring advertising.
But, as we say in America, Wait! There is more!
Weeks ago, Apple announced its next iPhone software version, 3.0. In it, we see a solution for additional revenue once you sold an application, a solution that is sure to be replicated everywhere else. A replication we, VC, love to see happen as quickly as possible.
It goes like this. You sell a game for 99 cents, or $9.99, prices are climbing back up. You play the game. Now the app offers to sell you more weapons, more game levels. With the iPhone 3.0 platform, application programmers will be able to sell additional content from within the application without having to go back to the App Store. Nice for games but even nicer, I believe, for people who have trouble selling content on the Web. For example, it looks like we won’t pay for the New York Times on the web. Not even on the smartphone we carry everywhere all the time (almost…). The latest NYT iPhone app is a pretty good one now, it used to crash all the time, and it’s free. Now, well, almost now, I read a book review and download the book from within the NYT app. I know, I’m fantasizing, not about DRM, copy protection, but about dealing with publishers and existing digital rights agreements. Same for a Diana Krall concert review, get the album, or a DVD, get the movie downloaded to your Nokia smartphone. Don’t just advertise, which works so-so on smartphones, sell, which works. (Speaking of books, I’m delighted with the Kindle app, I’m still using it beyond the novelty two weeks.)
You want a packaged collection of Obama speeches or videos, or Maureen Dowd columns, they’re yours for the asking, I mean the clicking from within the NYT app, for 99 cents. That, perhaps, is a solution to a problem Frédéric raises in his columns and, for sure, is a neat revenue model breakthrough for us VC. —JLG