Vindicia in the News

Consumers are winning the battle with online publishers, thanks to easy ad-blocking software that lets them surf the sites they want free from annoying ads. While publishers are turning to micropayments to gain revenue, that strategy also has holes.

One study found that in 2015 alone publishers lost $21.8 billion due to ad-blocking software. Although some claim this number is exaggerated, the fact remains that ad-blocking software is diverting a lot of money from publishers’ pockets.

So what can publishers do? Many are now requiring site visitors to disable their ad-blocking software or shell out a micropayment. Will it work? Probably not.

Let’s overlook for a moment consumers’ notoriously low tolerance for hassle on the internet. Many won’t bother going into settings and switching off their ad blocker. Many more won’t bother with the process of actually making a micropayment. But even if consumers were willing to go to the trouble and pay a small fee to see the content they want, micropayments won’t work for publishers for the simple reason that they don’t make economic sense.

Why do I say this? Because there are two ways for consumers to make payments online: recourse payments and nonrecourse payments, which is really just a fancy way of saying credit card or cash.

Let’s first break down the flawed economics of small recourse payments. By law, consumers have the right to dispute any credit card or debit card transaction if the product or service they purchase does not perform as promised. In other words, they have recourse. Almost every single transaction conducted on the internet is done through a recourse payment system. (That includes PayPal, because most PayPal accounts are funded by a credit or debit card.)

So here’s the problem with micropayments: they’re expensive. When consumers ask for recourse—in other words, a refund or chargeback to their card—it costs the merchant money. A single chargeback fee assessed by a bank ranges from $5 to $7. Which means the only way for merchants to make money overall is to charge at least $5 per transaction.

Let’s say you’re a publisher and you’re charging users 25 cents for the right to read an article. Now say one user doesn’t like the article and wants his 25 cents back and calls his bank to get that quarter back. (Yes, these people do exist.) This one chargeback will wipe out the profit on not only that transaction but at least 20 other transactions of the same value. And this completely derails the economics of micropayments.

But what about iTunes? Doesn’t iTunes charge a form of micropayment? Aren’t consumers happily paying 99 cents for apps, songs and other content at iTunes? And isn’t Apple making money hand over fist? Yes. But that’s because Apple charges a 30% fee on all iTunes sales of intangible goods like game credits, music and premium apps.

What’s more, Apple considers all these low-value transactions an enabling a platform to drive sales of iPhones and iPads. So Apple is happy to run iTunes as a break-even business. But, last I checked, most publishers aren’t Apple. They actually need to make money from their content.

Now let’s look at the economics of nonrecourse payments, i.e. cash. On their face, nonrecourse payments seem a nonstarter. How would consumers even go about paying cash for content? In fact, there is one nonrecourse payment system that could work for content publishers: Bitcoin.

But the fact that I had to provide you the answer demonstrates the fundamental problem with Bitcoin. It’s used by too small a number of consumers so far. Online retailer Overstock.com started accepting Bitcoin payments in early 2014 and, two years later, the digital currency is still used in just 0.1 percent of sales.

One option is to offer a subscription service that allows consumers to pay a flat fee for all the content they want on a particular site or network of sites. A subscription service is that it locks in reliable cash flow, it lifts publishers above the noise of recourse costs and it accommodates constant improvement to attract more customers.

Gene Hoffman is CEO of Vindicia.