One Drip at a Time

Illustration for TIME by Ellen Weinstein

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Media tycoon Rupert Murdoch recently stated the obvious when he said the newspaper business model of providing content online for free was "malfunctioning." Poleaxed by a severe ad slump and hemorrhaging red ink, printed newspapers and magazines have been downsizing or closing in some countries, even as their digital editions attract growing numbers of readers. Murdoch — whose News Corp. media empire includes the Wall Street Journal, a rare newspaper with a profitable, subscription-based website — has vowed to boost the earning power of his digital properties by increasing the number of News Corp. sites that charge for content. Other publishers are suggesting that, while subscriptions to online newspapers and magazines might be a tough sell to consumers accustomed to getting their news for free, readers might be willing to pay small fees, from a few pennies to a few bucks, for each story that grabs their attention.

Of course, publishers are not the first to view so-called micropayments as a potential source of revenue for digital content. Apple's iTunes store showed it was possible to build a billion-dollar business by selling songs for 99 cents each. And, although many analysts doubt publishers can make the switch from free to fee, there is another industry that is currently making a similar transition: online gaming.

Two of the online-gaming world's fastest-growing segments — multiplayer role-playing games and social games — are increasingly generating impressive revenues from tiny transactions. Most role-playing games, or RPGs, originally relied primarily on subscriptions for income. The enormously popular World of Warcraft series remains subscription-based. But the trend is the free-to-play, or "freemium," model. Under this system, gamers can play as long as they want at no cost, but they usually find the games are more entertaining when they pay small fees to outfit their characters with virtual weapons, useful tools and other accessories. The popular virtual world Second Life garners some 75% of its revenue from the sale of virtual land and other digital-world dealings, according to the company.

Nick Gibson, analyst at Games Investor Consulting, says that while the $7.85 billion RPG market is expected to increase by a healthy 27% this year, the micropayments submarket will grow by an even more robust 40% to 50%. That's partly because customers seem to prefer not being locked into playing just one or two online games by stiff up-front charges and subscriptions. And, freed from paying a set fee each month, some players actually end up spending more. Four years ago, Shanda Interactive Entertainment, China's biggest online-game developer, ditched subscriptions for the freemium model and turned around its sagging fortunes. Kristian Segerstrale, CEO of London-based social-gaming site Playfish, says micropayments work because online games aren't a product, they're an ongoing service. "It's nonsensical to pay up front for a service," says Segerstrale. "You don't pay up front for your gas or water."

For pay-to-read to succeed, however, media companies will need a trustworthy, easy-to-use payment platform. Common online payment methods like credit cards aren't feasible because processing fees can exceed the value of such tiny transactions. In the gaming world, the typical micropayment system allows consumers to transfer money (usually via credit or debit cards) into electronic accounts, or e-wallets, where hard cash is converted into digital currency for online purchases. There are already several companies providing micropayment services to gaming websites; Santa Clara, Calif. – based PlaySpan offers its service in 80 countries. Micropayments are also migrating to mobile phones. In Japan, cell phones are regularly used to pay parking-meter and vending-machine charges, while Apple's iPhone 3.0 operating system includes a purchasing platform that will allow developers of mobile-phone games to sell virtual goods via handsets, with billing through iTunes. That's an industry-changing development, says Juniper Research, which predicts mobile-game revenues will jump fivefold to $14 billion by 2014.

Unfortunately, micropayments in the past have failed to live up to lofty expectations. Over the last 10 years, several companies including U.S.-based Peppercoin and CyberCash offered online payment systems that didn't catch on. PlaySpan CEO Karl Mehta says this is because "there was not enough digital content to consume." That's changing. Mehta predicts that micropayment services will over the next few years become available on a wide range of gaming and social websites — adding that there's no reason they can't be used to buy newspaper and magazine articles, too. "The newspaper industry is now crying for this kind of solution," he says. If it works, publishers might be able to nickel-and-dime their way back to health.