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Microtransactions in the Internet Economy and Bitcoin

author: Vitalik Buterin
published: 2011-03-31 14:47:56 UTC

The internet has resulted in profound changes to the economics of selling media. Before, if one wanted one an album or a movie, the only option would be to go to the store and buy it. Now, however, piracy has presented itself as a cheaper and often, especially for very popular downloads, more convenient option, and traditional corporations are struggling to survive in this new environment. Why would anyone pay $10 for an album, they reason, when one can easily get it for free? Where is the revenue stream that artists need to survive going to come from? For years, many have tried to preserve the earlier way of doing things, enacting increasingly oppressive copyright laws to try to remove the option of piracy, but others have adapted: Apple's iTunes store boasts an annual revenue of $2 billion, and a package of games known as the Humble Indie Bundle made $2 million on a pay-what-you-want model. Contrary to a simplistic view of the concept of the purely rational, self-interested Homo economicus, people are willing to pay for content even if they don't have to. However, a more in-depth look at the situation, and a fuller interpretation of the idea of "rational self-interest", reveals other factors: social and emotional considerations, the fact that voluntarily supporting artists may in fact be rational, and the fact that many people will pay if doing so is more convenient. It is convenience, the idea that time itself has a value, that is at the core of the issue.

These new business models generally rely on the concept of microtransactions; rather than paying $10 for an album or $60 for a game, customers pay 99 cents for a song, 99 cents for an app or $1.50 for an episode of a television series. This has the advantage of democratizing the market - individual developers do not have the resources to create a movie or game that could sell for $60, but creating a $2.50 product is within their means. On the demand side, lower prices open up the market to teenagers, who have plenty of free time but cannot afford to pay the high prices of blockbuster mainstream content. This business model, however, is very difficult to implement; as an article in Wired points out: "Give a product away and it can go viral. Charge a single cent for it and you're in an entirely different business, one of clawing and scratching for every customer". The problem is not that everyone on the internet is selfish and unwilling to part with 99 cents for a product they like, it's that the act of paying in itself is currently too inconvenient and uncomfortable.

The problem is both a psychological and a practical one. The practical issue is one of convenience. Paying someone over the internet requires a tool such as credit cards or Paypal to tie into the financial system, and these tools have several weaknesses. The first is that each payment requires a considerable effort in itself - the effort of entering a credit card number, or the effort of logging in to Paypal can in itself be enough to turn away a potential customer. Receiving money is even more difficult, since it involves the complexities of setting up a merchant account. This obstacle is not significant for professionals who wish to make the internet economy their job, but mandate a level of commitment, posing a serious practical and especially psychological barrier to entry to curious, casual hobbyists. Finally, the system locks some people out entirely. If you are located in a third world country where, for example, Paypal only offers the option of sending money, it may even be impossible. If you are a teenager, bank policies and government regulations may make it impossible for you to participate in either buying or selling.

The social stigma around money adds another psychological barrier to the problem. Mowing your neighbor`s lawn is an act of simple friendliness, while giving someone $20 as a gift is seen as strange at best, and as an attempt to buy love at worst. The idea of exchange is rooted deeply in our society, with the concept of 'owing' someone a favor, so the potential for a casual internet economy is clearly present, but the potential is repressed; any exchange involving money carries a certain formality to it. An activity done for money immediately becomes a 'job', with all the unpleasant connotations that that entails.

Some microtransaction-based business models have broken through these barriers; Apple's iTunes store and App Store, and its competitors, are good examples. In these managed store models, customers have an account into which they deposit a lump sum of money, either through a credit card or through a gift card bought at a physical store, and developers have a merchant account, and paying for a product is a simple process of clicking on the "buy" button. No money is actually transferred until the developer withdraws from his account. Systems like these do reduce the burden of the payment process, and, just as importantly, informalize it, hence their undeniable success, but they do not do much to solve the problem of putting money into the system or setting up a merchant account. Their other major weakness is that they are centralized, so they are not universal, with each one offering only a very limited range of goods, and all activity happens under the control of the gatekeepers, which often allow and refuse goods according to arbitrary and unpublished rules and sometimes simply according to their whims, and can extract a "sales tax" as high as 30%.

Bitcoin offers a much stronger alternative. With Bitcoin, it is possible for anyone to send money in quantities of fractions of a cent with very little transaction overhead, and with bitcoin banks even that could potentially be almost completely removed. Sending someone bitcoin, even if the recipient is not part of the same proprietary ecosystem as you, is a simple process that barely takes half a minute. This also serves to make bitcoin more informal than existing currencies. This is the true appeal of Bitcoin: earning money is no longer relegated to the sacred status of a "job", but rather is a simple, informal activity that even children can participate in. The advantages of Bitcoin have given rise to a number of microtransaction-based services and sites:

• Many MMORPGs have recently emerged following a business model of offering a free game, but charging for items, a business model well suited to Bitcoin. With Bitcoin, microtransactions could reduce from several dollars to the range of 10-50 cents, opening up the possibility for players to choose, and pay for, exactly what parts of the game they want to take advantage of, rather than paying for everything as a lump sum. This creates a sort of free market within a game, allowing developers to much more accurately know what players are interested in, and therefore what they should focus their efforts on improving. Games like Mine Things are adopting this model with Bitcoin, and more are sure to come as the Bitcoin economy expands.

• On witcoin, "a micropayment-based social content site", users can make forum posts and upvote the forum posts made by others. Every action, whether posting, editing, or upvoting, costs a very small amount of money, which is then distributed to posters so that if you post something interesting that many other people like you are rewarded with bitcoin. The genius behind witcoin is that even though anyone can read the forum for free it requires bitcoin to truly participate and enjoy the social aspect of the site.

• The Bitcoin marketplace forum allows people to easily contract out quick tasks for small amounts of bitcoin, allowing the time-rich and money-poor teenage demographic to get some money and working adults, plagued with the opposite problem, to enjoy more free time. The greatest potential is for one-time tasks of a value in the sub-dollar range, such as question answering services. Bit QnA, although it does not specifically target low-value questions, is a good example of this.

As the Bitcoin economy expands, we can expect to see services like this appear, and for the existing ones to gain a larger audience. There is a lot of potential in all of these markets and many others; these are merely a glimpse of what the future of the Bitcoin microtransaction economy holds.

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