Many of you might not know or remember but I was on a panel at CTIA about mobile technology and politics. WHile the panel was not recorded here is a video of me being interviewed after the panel by BNET TV.
There’s a big hole in online payments that I wanted to blog about. Small payments of a few USD are expensive to receive. Visa charges 20¢ to process any transaction fee and PayPal can charge 30¢. Apple offers digital goods priced at $1, but, if you notice your iTunes bill, it’s really careful to batch your purchases. For example, you might buy a couple songs one day, but Apple will wait a little while to see if you’re going to buy more later in the week. Eventually, iTunes aggregates all of your charges and bills you for the songs you bought, but it only pays the 20¢ to Visa once. Companies like BitPass and Peppercoin have thought to batch across merchants, and Amazon’s Flexible Payment Solutions and PayPal take advantage of their scales. Completely independent of the consumer, there’s still a compelling reason for merchants not to offer online goods for low prices, so what could happen if that weren’t the case? As for now, small transactions are expensive. Even offline, the consumer’s options are limited. If the merchant will only accept cash for a $5 purchase because of the same reasons online, it is very time expensive for the consumer when considering the amount of time that goes into 1/20<sup>th</sup> of a trip to the ATM.
Security problems are emerging, too. Because of phishing – mass spam asking the recipients to validate their PayPal account information and taking them to high quality replications of the real site – and opportunity to launder funds from stolen creidt cards, merchants are finding charge-back issues to be an expensive use of resource. (<a href=”http://www.technologyreview.com/Biztech/12696/”>PayPal co-founder/ CTO Max Levchin worked heroically</a> and famously towards identifying laundering activity in real-time.) Many American websites have turned off payment access of American Express in China, and several websites block IP addresses from India.
Most importantly, recent and continued internet usage growth in emerging markets presents the greatest challenges for interactivity online yet. Credit doesn’t exist on the majority of this planet. While the first markets to adapt to internet usage have adults with credit histories, there is a problem still outstanding. The upper-middleclass teenager sitting in an emerging market internet café, knowing exactly what it is that he wants to do online, cannot get the cash that is in his pocket into an online platform. Forget for now how he might collect modest payment for some small service online that he could perform – or all of the two-way opportunities that could open up if PayPal could reach the underbanked, why can’t this kid make this payment?
The payment space for this use case is limited to bank accounts, credit cards, PayPal, premium SMS, gift cards, and advertising. Credit card and PayPal account holders have bank accounts, which do not have prevalence in markets where commercial banking doesn’t serve a broad user base. Premium SMS has some clever use in online payment. It requires a direct bind with each mobile operator; the consequence is that premium SMS aggregators sit on top of one another in order to gain full coverage of just one region; to reach a significant number of markets, a merchandiser has to give up 35-70% of the revenue in the long cash flow chain of premium SMS aggregators. Additionally, though the operator’s revenue share seems immodest, it finances customer support for problems related to disconnects in service billing and fulfillment, reoccurring charges (anything from intended, unintended, unintended and inherited to fraudulent), and voice/ SMS revenue from cannibalization because there are no remaining balance requirements.
Where credit cards don’t have reach, SIM cards do.
There’s a related question to how to bill an emerging market internet sub – how to pay him. How do currency and price purchasing parity arbitrage opportunities come into play – can they affect the next stage of online publishing?
Many virtual world websites have proprietary currencies that people sell in secondary markets. Last summer, the New York Times Magazine wrote a story about Gold Farmers. Chinese teens were earning virtual gold in one of these sites, then selling a night’s worth for $1.25 to a local aggregator (who at least owned the computers and facility that the farmers had used). The local aggregators were selling the $1.25 worth of gold for $3.00 to a country aggregator (who had a PayPal account), who was selling the $3.00 worth for $20.00 to some American or European kid.
Secondary points of interest to this story include that the local aggregator was leaving nearly 6x his revenue on the table (because – even though he owned the facility, he didn’t have a PayPal account to collect payment on eBay?), the staggering size of this specific sector, the existence of a services industry even though many of the virtual sites hunt down and remove for-profit farming parties in order to protect their currencies from inflation. On that last point, the piece illustrates the potential for more streamlined outsourcing of internet services.
One of a few interesting Amazon investments is Mechanical Turk, the means to compensate users for performing non-differentiated services. It got some press around the same time as the gold farming because of the two applications of the use case of paying users to look for crash remains or clues on provided satellite images (the company from which Google sources): users looked for a missing boat and plane. The potential user base for Mechanical Turk would be much greater if someone without banking access could receive payment, too.
YouTube doesn’t have a lot of traction. Besides reproducing the assets, a competing site that gave whoever uploaded the video a share of advertising revenue would force a fundamental change in expectations of the user contributing content. Digg relies on users to contribute its content – recommendations, but a similar version that compensated users based on success would offer the user a more compelling motivation to contribute to that site instead. (The only way for two sites offering similar user-generated content to avoid a margin race to 0% would be to access potential contributors in the emerging markets. PayPal doesn’t reach far enough.)
Another Amazon investment, called Amie Street, that sells independent music, compensates users who help rate the music (as a means to make the site navigable for purchasers) with credits. The credits allow the recommenders to buy music based on their success in rating music that others like. It seems like a pretty logical ecosystem because it uses the assumption that the recommenders like independent music. It’s a good model, though, and it has broader application if one tweaks it for advertising based sites (YouTube, Digg) by sharing revenue with the recommenders.
Of course, any future mobile wallet linked to stored value (gCash in Singapore, SmartPay in China, Vodafone’s M-Pesa in Kenya and Afghanistan) would make earnings from contributing to a website’s content much more fungible in an emerging market. These sort of sites might not exist today, but it’s been pretty recent that 600 million people without credit cards got online and it would be a future development if they were able to receive revenue shares . . . so maybe the means to pay them has to develop first.
The m-commerce initiatives in the GSM arena make a lot of sense. The mobile sub without a bank account is a much more compelling target for marketing in the physical world than the online one. Besides wallet concepts like M-Pesa, SmartPay, and gCash (below), the GSMA has been exploring a trial with Western Union for remittance (possibly, already a multiple hundred billion US dollar market if 100% of it were legitimate and recordable – and that’s with restrictions that fees and convenience impose). A handful of start-ups are addressing that problem as well.
These are intelligent points of focus because of what the GSM operators as a whole offer: reach to 2.6 billion subs and the best distribution system in the world. Along the same lines, the developed world is suggesting that the trend is to consolidate what’s in the pocket to less items. (For example, the camera going into the phone; now, the music device going into the phone; in the future: the wallet going into the phone?)
Just as it made sense to get credit car capability online in the 1990s, the use of stored value to pay for things in the physical world should extend to e-commerce.
At the same time that emerging market PC shipments and internet usage have started catching up, the virtual goods space online has developed into <a href=”http://gigaom.com/2007/06/24/making-real-money-from-virtual-goods” mce_href=”http://gigaom.com/2007/06/24/making-real-money-from-virtual-goods”>an impressive market</a> (multi-billion USD in 2007). Interestingly enough, the unanticipated viral growth of virtual worlds and social network sites creates new interaction across different demographics that have never had connected with one another before. Fotolog is an American photo sharing site that unintentionally gained the plurality of its 30+ million users in South America, while Google’s Orkut has become popular in India (though, presumably, not by design). From an academic standpoint, it might be interesting to examine what characteristics are common to two regions (previously unlinked and unassociated with one another) to bind them together in penetration of one website and not another. More straightforward to examine is that there are revenue models designed for the developed world that are not translating as well for the emerging markets.
Fotolog’s South American conversion rate of paid user to total users is not as favorable as that for the United States. However, whenever Fotolog’s been able to maintain local marketing partnerships that allow users to pay for credits for goods in person, Fotolog sees its conversion rate in that area asymptote towards the US level.
In the developed world, Fotolog’s introduction of using premium SMS for billing in Spain and Portugal quintupled its revenue from these areas, doubling its total revenue and indicating that internet access has spread to people with disposable income who lack means to make payment in more places than just geography indicates. Susan Wu, a west coast venture capitalist, <a href=”http://www.techcrunch.com/2007/06/20/virtual-goods-the-next-big-business-model/” mce_href=”http://www.techcrunch.com/2007/06/20/virtual-goods-the-next-big-business-model/”>describes</a> Gaia Online employing three people to open envelopes of cash (from American teenagers, presumably).
Monetizing the online usage growth is not easy. If there are 1.2 billion internet users and only 600 million credit card holders, then there must be a lot of people getting online (and either paying to do or working somewhere that allows for this) who can’t make online payments.
It gets worse. In the developed world, internet users have gotten accustomed to receiving services in exchange for their eyeballs viewing ads that yield the site its revenue. Not at all to be patronizing, but the eyeballs in the emerging market aren’t worth the same. If the internet user cannot make a payment online, then the scope of who wants to advertise to him narrows pretty quickly. The only interested party would be one that has a brand to build in order to sell the internet user something offline. That’s not zero – besides local supermarket chains, you have large international consumer goods companies), but it’s a smaller pool of potential advertisers than in the incumbent internet using market.
In a related note, Google and Yahoo charge IP addresses for premium services in geographies where advertisers are harder to find. Like the local aggregator of farmed virtual gold, even Google and Yahoo concede leaving money on the table when confronted with this problem.
MOpocket is starting up again and to kick it off I thought I would post this funny clip about what has been keeping busy all this time, manly To Much Information or as they say in Text Speech. “TMI Dude.”
