• Milos Dunjic

Can Pay-Per-Use Model For Digital Content Finally Become Reality?

There is a fierce debate out there, about what’s better – subscription or pay-per-use model of services? Digital content providers (like digital versions of the mainstream newspapers), telcos and TV broadcasters mainly prefer subscription or licensing model as it allows them to better predict revenue than in a pay-per-use/view schemes. But is it necessarily beneficial and fairer for the consumer? It may also be inherently anti-competitive in nature, by relying on natural inertia demotivating consumers to frequently switch between different subscription services.

Many of the subscription services are offered on a free trial basis for a limited period, however, in almost every instance, subscriber is asked to provide payment credentials upfront and subscription automatically starts being charged after expiry of the free trial, unless explicitly cancelled by consumer. I am sure we all have had bad experiences with dormant subscriptions we were not aware of, simply because we forgot to cancel them.

That's why many of us are reluctant to commit to a single provider and may prefer metered usage for product or services, across multiple providers with option to pay per single use. That would also increase competition and potentially visibly improve the quality of the competing services in order to attract recurring usage.

For example asking usual fee of 10$ per month (i.e. $120 per year) for a single digital newspaper subscription may be very unreasonable, if one wants to be able to read articles from several of such providers on an ad hoc basis. That's why, in my opinion, pay-per-use/view looks like much fairer and more competitive model than a flat monthly subscription fee.

The pay-per-use works best when the usage of the service can be effectively measured. News articles, streaming services, TV broadcasts, wireless plans, etc., are good examples. Still, in most of these cases, the subscription models dominate. Why can’t we be free to choose and read a single news or scientific article OR watch single sport game and pay only for it, while ignoring the rest of the merchant's digital content?

Proponents of the flat subscription fee model argue that pay-per-use model would be:

  1. Complex to track, since companies struggle with counting named users reliably.

  2. Potentially expensive for the clients, arguing that per second/minute/hour/megabyte/gigabyte rate will always cost consumers more than the flat monthly subscription fee.

  3. Counter-productive, as service providers do not want to create obstacles or disincentives for customers.

I am not sure I see it the same way. Mainstream cloud infrastructure providers already revolutionized the IaaS space including flexible and very competitive pay-per-use infrastructure models. If they were able to figure out how to reliably track named users, why can’t providers of news and digital streaming?

Pay-per-usage model is ideal for infrequent, occasional users, which on average, would spend less than paying for the full monthly or yearly subscription. In my opinion, it is always a good business practice to try and get some revenue from customers than none. I also believe that pay-per-use is not a dis-incentivizing model for the customers, especially if done properly. On the contrary, it may be a great incentive to get new customers on board, instead of pushing them to pay a full subscription and losing them due to their unwillingness to commit. Of course, the best would be to have both options available to customers and let them flexibly decide how they want to pay for the service usage.

Is Profitable Processing Of Micropayments Possible?

Probably the main reason why digital content providers do not offer pay-per-use services, is because ubiquitous cost effective payments processing of very small transaction amounts is perceived as a formidable challenge currently. Why?

The current payment card networks like Visa and Mastercard are global, ubiquitous and accepted both locally and internationally, but their levels of interchange fees may be too prohibitive for merchants if they want to process individual micropayments (less than a dollar) through the card rails.

An alternative may be to use significantly cheaper NACHA ACH payments, or Canadian EFT, but unfortunately, ACH and EFT are neither real-time payment rails and on top of that they is very local in its nature without ubiquitous cross border / international payment capabilities.

What about the existing public blockchain cryptocurrencies as a payment option? They are definitely global and cross border in nature, but are currently significantly more expensive than card networks for individual micropayments, plus they are slow and sluggish compared to Visa and MasterCard throughput capabilities.

In many jurisdictions across the world there are initiatives to build brand new faster / real time payments rails like Real Time Rails (RTR) here in Canada, with similar schemes being planned and / or delivered in Europe, UK, Australia and in US. However, although being real time and fast, they are unfortunately very local in their coverage and may not offer ubiquity for international transacting.

PayPal digital wallet, similar to Visa and MasterCard, has real time payment guarantee (if purchase is paid from existing PayPal balance) and is also offer global acceptance, but its 3% transaction fee may be prohibitive and also pure prepaid nature of its digital wallet (customer funds are basically blocked in the PayPal digital wallet account) may be adding unnecessary friction.

This perceived inability to cost effectively process very small transaction amounts globally through available payments rails may be one of the main reasons why most of digital content merchants currently rely on subscriptions despite growing demand for pay-per-use services.

Transaction Aggregation On Top Of Current Payment Card Rails Can Be A Solution For Cost Effective, Global And Frictionless Processing Of Micropayments

Does it have to be this way? No, not at all.

Apple for example, very effectively uses transaction aggregation techniques for a long time, to profitably and frictionlessly process individual song purchases (each 99c) through their iTunes store, on top of traditional payment card rails.

Their transaction aggregation methodology works something like this:

  1. The very first iTunes sale for the customer in the transaction aggregation period results in Apple using the existing customer's payment card on file to obtain standard 'pre-authorization' for the fixed pre-auth amount (i.e. real time payments guarantee for up to pre-auth amount) from the card issuing bank, through the payment card rails. For the pre-auth transaction Apple pays the regular interchange fee to the card issuing bank, in accordance with the payment network's fee schedule. Then based on that real-time payment guarantee, Apple immediately 'credits' customer's temporary virtual digital balance with the (pre-auth amount - first sale amount) for the duration of the aggregation period. NOTE: Merchants like Apple, usually have several weeks before they must 'complete' the pre-authorized transaction amount, so Apple has flexibility to adjust aggregation period duration per customer. Also note that Apple does not receive any funds from the customer's card issuing bank until they complete the pre-authorized transaction.

  2. Every next iTunes sale during the same aggregation period is directly authorized and 'paid' from the customer's virtual balance managed by Apple, i.e. without need to go through the payment card rails. On these intra aggregation period iTunes transactions Apple directly saves on interchange fees. Apple also maintains the running total of customer spend during the aggregation period.

  3. The aggregation period ends either a) when user 'spends' all of their temporary virtual balance allocated for the aggregation period OR b) if the aggregation period timer expires before customer's spends their temporary virtual balance. Apple then resets the customer's temporary virtual balance to zero, and submits standard 'completion' transaction through the payment card rails for the total amount spent by the customer in the current aggregation period. For this transaction Apple also pays regular interchange fee, in accordance with payment network's fee schedule.

  4. Then the very next transaction, after the previous aggregation period for the customer has been closed, just triggers and starts the new transaction aggregation cycle from the start again.

This way Apple can: a) offer pay-per-use model globally, b) significantly save on interchange fees for individual micropayments, c) process payments without (or with very minimal) financial risk and d) avoid adding any unnecessary friction to its customers, by not requiring customers to pre-fund any digital wallet account.

Of course there can always be edge cases of some customers buying just one or two songs during the aggregation period, but on average, the vast majority of Apple iTunes customers is likely buying lot more songs than that.

So Apple simply spreads the costs of two interchange fees across multiple iTunes transactions and achieves very cost effective processing of low value payments. Apple is therefore motivated to keep improving their iTunes content offering constantly, knowing that it would also result in more repeat purchases during the customer aggregation periods, which would then further reduce average costs of individual micropayment transaction processing for Apple.

Can This Be Model For Other Digital Content Merchants?

Since the described transaction aggregation method (based on my knowledge) isn't protected by patent, other digital content merchants, like digital newspapers, scientific magazines, digital song catalogs, etc could easily use it themselves in order to reduce their own micropayment transaction fees and effectively enable painless switch toward pay-per-use model.

Why don't they? Are they just being lazy in their anti-competitive hope that comfortable subscription model will be possible to be pushed on consumers for a long time? Or are they maybe waiting for a new FinTech that would build and offer service for global transaction aggregation, so that they don't need to invest any money to build it themselves? Well, there may be an idea for a potential payment processing startup ;-)

I do not know the answer, however I certainly hope that soon we may indeed be able to seamlessly and cost-effectively enjoy pay-per-view ability for individual digital content items or pay-per-use of the connected IoT devices.

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