Saturday, October 15, 2005

Micropayments & free software

The internet has always been full of free stuff, but people offering free stuff have always had a problem: it's hard to make money! There are a lot of people offering software and media files (movies, music) for free online, but there have always been few viable ways to make money. Advertisements on web pages can help sometimes, but
  • they annoy visitors, and
  • so few people click on them that for most individuals, it is hardly worth the effort of putting them on their web page.
There are several reasons it is hard to convince people to pay for things online. Here are a few:
  1. In the first place, you generally need a credit card. But some people don't have one! In particular, this requirement is a non-starter for kids and most teenagers. Before I had a credit card, I was willing to pay for some things online, but couldn't.
  2. Most things that people get online, such as desktop wallpaper, individual music tracks, and small programs, just aren't worth very much, and due to the reasons below, people won't pay small amounts with a credit card. Many things are worth well under $1 to the average web surfer, but more than 1¢.
  3. Many things online have value that is only apparent after the user has tried them out. For example, you have to hear a song before you can decide whether it is worth the price, and you have to try a computer program to see if you like it.
  4. Using a credit card is a bother. You have to type in the credit card number, the expiration date and, often, the full name of the cardholder. Also, you usually have to "register" at a site (giving them your e-mail address) before you can pay. Also, you have to pay the credit card bill separately. People don't want to go to so much trouble unless they are spending a sumstantial amount of money. Personally, I prefer debit, and find credit cards to be an all-around nuisance.
  5. Trust is a big problem, especially for small business. No one wants to give their credit card number to an "unknown" web site, because such a site might
    • Have security leaks which could allow fraudsters to steal credit card information from the site after you give it to them.
    • Be selling such a terrible product or such bad service that you want your money back.
    • Be fraudulent itself, and could attempt to steal from you.
A micro-payment system, with which consumers can spend one cent or ten cents on something with a couple of clicks, could solve most of these problems. The technical challenges in implementing such a system would be great, but I think it is entirely feasible. Elsewhere on the web people have talked about how it could be done; I want to focus on the benefits of a micropayment system that attains universal use.

Here's how a micropayment system could address the above problems:
  1. Kids & teens: if users' ISPs take on the money-management task, then parents could register micropayment credit or debit accounts with the ISP, giving a separate account to each child. Parents would be able to set limits on spending per-day or per-week, and, much like a credit card bill, would be able to see the web site addresses at which their children spend money.
  2. Low-value items are the whole point of a micropayment system: to allow websites to make money offering online commodities such as very cheap software, music, individual e-book chapters, and so forth. It would create new business models and markets, and it would reward "small potatoes" content creators like myself.
  3. Items whose value becomes apparent after download: a micropayment system would allow users to easily donate small- and medium-sized amounts to free software projects, to register cheap shareware products, and pay for higher-quality versions of music, videos and other media. For example, online music could be offered at 1¢ for a sample version; when the user decides they like it, they could pay 50¢ to $2.00 for versions of higher quality, alternate mixes, and so on.
  4. Amount of effort required from the buyer: various "one-click" payment methods are possible, which I won't address in this article.
  5. Trust: it is important to ensure that if a web site is charging for something, that the user must confirm every transaction before it happens. It must be technically infeasible for a web site (or fraudsters) to make a charge without the user's confirmation.

    Of course, if a website is charging one-tenth of a cent to view every little thing, then it shouldn't require the user to confirm every one of those tiny amounts. Instead, the web site could silently tally up the amounts and make a charge when it reaches some larger total, e.g. 10 cents. At that point the user could refuse to pay, in which case the web site would deny further access.

    Given the above guarantees, chargebacks seem unnecessary in a micropayment system. Users should have little reason to contest a charge of ten cents or even $1 that they confirmed. For large amounts, of course, chargebacks might be justified, but consumers should be expected to "swallow" small losses. If users could make unlimited chargebacks on small amounts, then vendors would have a big trust problem of their own. Also, if chargebacks were allowed, then the resultant overhead costs and legal wrangling might make a micropayment system infeasible.
As an open source developer, I wrote a program called MilliKeys for the Palm Pilot. I had been using PayPal for donations, and over the lifetime of the program, a total of 11 people donated $135, even though several thousand people downloaded it. (Donations are handled through PayPal, and I recommend a minimum donation of $5, since PayPal charges $0.75 per transaction IIRC.) What if, I wonder, I had asked for donations of 50 cents? Or even 10 cents? It's not hard to imagine that half the downloaders would have been willing to donate 10 cents, with many people willing to give 50 cents or (gasp!) a dollar. It's impossible to know how many users there are, but let's estimate 2,000 (out of 8,342 downloads.) Supposing 40% would donate 10 cents, and 10% giving 60 cents on average, that would net me $200. So even without any big donations, I could easily get more from a "dime" donation system. Note that convenience is of the utmost importance when it comes to little donations like this; preferably, whether they donate or not, the user should have to click the same number of times.

Now imagine that I could put my "free" software under a mandatory 5-cent download charge. How could I justify calling it "free", then? Well, free software is really about freedom, not just about cost. You see, my software is licenced under the GNU GPL, which means that after downloading my 5-cent software, anyone is allowed to redistribute and/or modify my software. So, someone would be fully within his rights to put up MilliKeys on another web page and offer it for free--or even charge for it, making money for himself! But since I'm charging only five cents, I would hope that most users would be willing to take me up on the offer.

If they did, then all 8,000 downloads could make five cents for me. Well, not quite. For one thing, I'd probably be willing to offer free upgrades, so that people who are re-downloading a new version get it free. That might mean 3,000 fewer payments. And, if a few hundred people (let's say 1,000 downloads worth) aren't willing to spend even five cents on my software, they could either not download it at all, or they could search the 'net for a free copy. In fact, if this micropayment system for OSS and freeware were to become ubiquitous, I fully expect that sites would appear offering zero-cost downloads. But the hope I have is that these mirror sites would not be as popular as the original source of the software. Now, will 4,000 moneymaking downloads, I'd make $200. This isn't much for the hundreds of hours of work I put into the program, but it's still more than I actually got. Anyway, I could ask for donations of $1 separately, and perhaps a large number of people would be willing to pay it, once they have tried the software and like it. If there are 200 takers, I would be up to $400 total.

Now, consider what would happen if someone wants to try to make money from my software. With a micropayment system in place, they could charge 25 cents per copy. I hypothesize that someone would not be able to charge much more than that, because otherwise users would search for a cheaper or free version. But 25 cents is still not a lot, and if some guy really wants to make money, he would have to put some effort in promoting the software--he would have to try harder than I did myself (I didn't use any advertisements). To promote it, he could
  • Place paid ads on Palm-related websites, or take advantage of Google adwords.
  • Spam. For example, he could post positive messages about it on Palm-related websites, or use old-fashioned e-mail spam. In the latter case, he's more likely to get hatemail than money, but I digress.
In all cases, the ads would bring you to his MilliKeys website, so that he can make money.

He might make money from this venture, but I wouldn't mind at all: it would be free promotion for my software, and more users makes me almost as happy as money... almost. In the end, it could bring more visitors to my website, provided that people can find my website more easily than they can find his. To this end, I could tweaking the terms of my licence agreement to ensure that no one is allowed to simply repackage my program as their own. In this way, I could ensure that the program he sells still has my web address in it (and mentions that the download price is 5 cents.) Then, when friends tell other friends about it, they are likely to send the true home page address to one another.

If free software developers were to move en-masse to a micropayment system, it would finally provide a good way for us to make money. Many free software and shareware projects enjoy millions of downloads. If these projects were to charge 5¢ per download, I think most people would pay it without thinking twice. Consumers might not even mind paying 10¢ or 15¢. The free Mozilla Firefox, which I use and recommend, has enjoyed 90 million downloads. At a mere 5¢ per download, they would make $4.5 million, which I would guess is enough to cover the cost of development.

A huge number of useful free programs don't reach a mainstream audience because the no one is willing to do the work required to increase their quality to "mainstream level"; and the reason no one is willing is because there is no way to make money. Thus, there are endless thousands of useful programs that people only work on in their spare time, since they must devote most of their time to full-time jobs. A micropayment system would finally allow many free software developers to do what they love, and buy food at the same time.

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