Micropayments – huge opportunity ahead?

Micropayments are creating a brand new revenue stream for digital media, mobile and technology companies. An easy payment mechanism such as automatic billing significantly lowers the bar for making small purchases (up to a few dollars) on the web. For such small payments, it turns out, the bar is oftentimes not the users’ willing to pay. Rather, the showstoppers have been the overhead (pulling out credit card, filling up digits into the form, and the transaction processors’ minimum fee) and uncertainty associated with such transactions. Systems that remove these overheads and uncertainities by giving the user a seamless, trustworthy payment and billing mechanism are well positioned to unleash a huge new revenue stream on the web.

Apple’s iTunes and iPhone apps are the best examples of this. The seamless purchase mechanism and small amounts involved transform the user’s software purchase decision from a meditated one into an impulse purchase. The result is the ongoing “Gold Rush” where thousands of paid apps are being downloaded hundreds of thousands of times for a few dollars each. What does this signify for similar platforms on the web?

There is an immense potential to monetize online media and content through micropayments. Online micropayment systems have been around for almost as long as the Internet. However, several factors prevented first generation micropayment systems from taking off, including a) Lack of differentiated short-form content and applications that users would pay small amounts of money for b) Lower comfort with online credit card transactions c) Lack of trustworthy micropayment systems that presented a seamless experience to the user and were widely adopted.

However, with the wave of online apps (including those on social networking platforms) and the iTunes-iPhone mindset, all of the three factors above seem to be changing substantially. There is a large variety of apps, music, videos that is now legally available. And customers are more comfortable using their credit cards online, thanks to the increasingly high adoption rates of online ticketing and travel. 

Players to watch out

Besides Apple, there are a number of players who are positioned to take advantage of this trend. Here is an attempt to capture some of the categories:

  • Startups such as Spare Change and Tinker which are enabling monetization of social network apps and blogs. Space Changeis apparently already processing $30M of micropayments annually. Expect to see social networks such as Facebook and MySpace start their own competing micro payment systems, or buy some of these small players.
  • Mobile phone companies, which already have billing relationships with customers are really well positioned to build micropayment systems of their own. Indeed, Apple is eating what could have been AT&T and Verizon’s lunch, had they given up their walled-garden approach as the times evolved.
  • Similarly, ISPs and Cable companies such as Comcast/CIM have an opportunity to create or integrate micropayments into their broadband customer sites, use micropayments to monetize some of the premium content on their new media sites, and charge customers directly through their monthly bills. 
  • Other usual suspects who have customer relationships and/or customers’ credit card numbers include Internet giants Google, Yahoo, Microsoft, Amazon and Ebay/Paypal, and eCommerce providers.
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Evolution of Online Video offerings

The Digital Media space in general, and Online Video space in particular, is a sector that has perhaps seen the maximum amount of startup activity over the past couple of years. It is an industry undergoing massive disruption, as traditional content moves online, new business models are experimented with, and viewer habits evolve. Given the numerous venture-funded players that entered the online video market over the last year, there could be a shakeout in the near term. However, the long-term fundamentals of the space are strong. I believe that new players that are able to innovate ahead or along with the consumer preference curve will be able to build sustainable businesses. The rapid changes that the space is undergoing still provides for a window of opportunity for new entrants that offer clear value to their consumers.

I’ll apply my consumer themes framework to the Online Video space to look at where the key opportunities for innovation and investment lie moving forward. I will focus on user-generated and semi user-generated content arenas (as opposed to professional content). Also, monetization of online videos is a space in and of itself, and I’ll look at the monetization aspect in another post. I’ll focus on the online video product offerings in this post. Using our list of consumer themes, here are some current consumer new product opportunities and areas that are seeing a lot of action:

  • Hyperdiffentiation and Long Tail: Online video started as (and still is to a large extent) a phenomenon that appealed to a narrow segment. Quantcast shows that audiences of most online user-generated video sites are still dominated by male youth, while sites that offer TV content are frequented more by slightly older females. However, this is quickly changing, and in the near future, online video sites will succeed more by catering to a an increasingly wider variety of tastes. The rise of MetaCafe, (which does a better job of categorizing its videos using wisdom of the masses), even on entering the scene long after YouTube, is a case in point. In the future, we’ll see more and more successful sites that offer tailored content that resonates with more and more narrowly-defined communities and tastes. Example successes include CollegeHumor, which provides a platform of UGC for college students, and BarelyPolitical, which creates videos combining politics and humor. Sites will come up that cater to narrow behavioral preferences, regional choices (e.g. South Asian video sites e.g. Saavn), fine arts, independent films etc.
  • Personalization: Video content is perhaps the ultimate arena for personalization. People’s tastes are inherently and increasingly different, and consumers today are constrained by content discovery in the types of content they consume. Offering personalized front pages and page trees will become increasingly important. Pages and listings can be customized based on viewing habits, past history, the user’s friends, and even time of day and mood. One example is the recently launched Fancast.com, which personalizes what’s on TV. Another related area is improved recommender systems for online video. This would be like an advanced form of StumbleUpon applied to online videos. Currently, according to Forrester research, web search is the most common way of finding online videos, ahead of specialized video sites such as YouTube. This can change if users can go to a site which will let them discover content that they are more likely to like.
  • Convergence: In line with the trend of increasing convergence between access types, we’ll see more consumers taking to consuming video on other devices besides the PC – including mobile phones, Television, specialized devices, and advertising signage. Apple TV was one of the early attempts to bring online videos to TV. However, there is a long ways to go in making the viewing experience seamless. An upcoming stealth-mode startup is Zillion.tv, which will offer a software/hardware combination that makes viewing online videos more seamless. The instant success of Hulu.com, which represents the other side of this trend (i.e. bringing TV content online) is another case study. Cellware is a startup which offers users the chance to participate in a social network, and gives mobile users the opportunity to download videos, ringtones, wallpapers and more.We should also see more specialized devices being used to consume videos – e.g. future versions of portable DVD players could download customized online content for viewing in offline mode on airplanes, hotel lobbies etc.There is also potential for new desktop applications that can automatically download video content for offline viewing, or enable the consumption of higher quality videos that cannot be streamed effectively.
  • New Communication Mechanisms: The most popular current video content types in UGC are short-form humor and news content (source: Forrester). Other forms being experimented with includevideo Twitter’. There is certainly scope for a variety of other innovative forms of expressions that startups may bring to market.

  • Consumers want to be Producers: This goes beyond the current form of User-generated content. New services could give users increasingly interesting ways to interact, produce and collaborate in ways beyond the current YouTube model. One example is BigThink.com, which lets users post video responses to interviews with major celebrities and politicians. Future applications could enable better interactivity and collaboration between multiple contributors.

  • Community: Surprisingly enough, social networks are not yet fully integrated with videos. Facebook’s video sharing and video mail feature is popular, but YouTube and other UGC sites still don’t have dominant social networking features. Imagine a site that recommends videos for you to watch, “based on videos that your friends have watched/liked”. One interesting new offering is Election2008TV, which gives users a place to put their political videos supporting candidates, to see candidates in the news, to see the videos put up by others about candidates, and more.  There is a host of upcoming general UGC sites that offers some good community features, e.g. ClipShack. But this may only be the beginning. We’ll likely see a lot of action in the video-meets-social-network arena.
  • Information Organization: This is another area that will keep seeing a lot more innovation and new products. Advances will include increasingly better ways of searching (including vertical video search, semantic search), more intuitive categorization, social discovery and recommender engines. There are currently loads of players in the video search space, and all are experimenting with a variety of new features. Blinkx has an interesting approach that combines video search and aggregation (though I believe they don’t host any of the videos).

  • Ease of Use/Better User experience: Online videos today are predominantly low quality. Applications such as Joost and other online TV content sites that aim to provide higher quality content are still not entirely reliable. Any application that enables content creators and owners to deliver higher quality video more reliably to consumers (either by using new compression technologies, or by smart caching or by using desktop applications etc) will certainly make space for itself.  On another note, the average duration of online videos being watched today is about 2.8 minutes. The type of content that is watched by users is highly correlated with this short length. It will be interesting to see where the average video length evolves towards.

Needless to say, there will continue to be a lot of opportunities around the entire online video ecosystem. There are a large number of plays in the video infrastructure/hosting/storage space – players that enable all the video sharing sites to exist. The 800 pound gorilla, however, is the monetization of online videos – an area where we are seeing a lot of action and experimentation, but where no one seems to have good answers as yet.

Review of current consumer themes in Internet, media and mobile

New ideas and startups don’t necesarily succeed by trying to drastically change consumer behavior. Instead, they succeed more often by identifying shifts that are happening in consumer behavior and needs, and then leveraging then capitalizing upon them with slick execution.

A framework that can help identify, assess and classify potential opportunities is to look for dominant consumer themes that are taking shape across a broad spectrum of products and industries. These themes represent major shifts in consumer behavior, and can  help identify new products and services that consumers are ready to adopt now, or will be in a few years.

Here’s a shot at listing some major current themes in consumer behavior evolution, which are applicable to the Internet, media and mobile sector:

  • Hyperdifferentiation and Personalization: We are in an era where consumers are asking for products that are more and more differentiated, and at the same time more personalized to their tastes.
  • Convergence: As the complexity of types of media and access mechanisms increases, the human need for simplicity keeps creating opportunities for various types of convergence – convergence of access device (e.g. TV content on mobile phone), convergence of media types (e.g. blurring boundary between TV content and online videos), convergence of desktop software and web services (e.g. SaaS).
  • Acceptability of new communication mechanisms: In the beginning, there were phone calls, email and personal web pages. Then came SMS, social network pages, blogs, personal videos, twitter, video twitter… whats next?
  • Consumers also want to be Producers: User-generated content (blogs, videos, music etc) represents a major shift in consumer behavior from the early Internet model, where most consumers were happy being just consumers. Even though the percentage of consumers who contribute content may still be low (less than 20% of YouTube users ever contribute a video), the key theme is that consumers are now ready and eager to consume content created by other non-professional users.
  • Community: The advent and popularity of the Internet took away a little bit from real-world social interactions, as an entire generation grew up spending enormous amounts of their leisure time in front of screens. However, humans are social animals, and the human need for social interactions and affiliation has given rise to an entirely generation of online tools that relicate real-world social behavior – ranging from social network platforms to people search tools to match-making sites.
Then there are some evergreen themes, that have always been around, but which keep acquiring a different flavor with each generation of new technology. These themes include:
  • Information Organization: As the amount of information that is available continues to grow exponentially, opportunities for new mechanisms to organize that information keep on arising. Version 0 was Yahoo-type directories. Version 1 was google-type horizontal search. The current frontiers seeing a lot of action are vertical search (e.g. Indeed for jobs, Kayak for travel), social discovery tools (e.g. StumbleUpon, Digg etc), recommender systems (like the ones used by Amazon for instance). One area where we could see more action in this domain the near future is more comprehensive Personal Information Management.
  • Ease of Use or Lower Cost: Anything that helps me simplify what I already do, or lowers the costs of what I do in some way is always attractive.

These, of course, are all very broad themes. But they can provide us a good framework to look for opportunities. We can cross-index these themes with the major macro trends and structural changes that I laid out in a previous post, to have a matrix that we can classify currently evolving opportunities into.

In a few posts, I’ll start delving into each theme, with the end goal of identifying upcoming players that are well positioned for harnessing those themes.

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