An Inflection Point for Consumer Spending on Digital Media: Who Will Be the Web’s Master Currency Provider in 2012?

As you know, I’m obsessed with figuring out the future of digital media. And to do that, there’s nothing better than putting stakes in the ground – based on the best available information and sharpest analysis I can muster – and then checking back to see how they held up.

In the last couple of weeks, two of the calls I made have come true; and that offers us a great opportunity to re-visit them, and see what we can learn from them.

Hulu Plus:  Great Experiences Worth Paying For

First, Hulu Plus, which is thriving with over 1 million consumer subscriptions.

A year ago, when success seemed far from likely, I went out on a limb and estimated that Hulu Plus would have huge traction with consumers, surpassing $100 million in revenue in 2011.  As it turns out, Hulu’s growth with its subscription product has been even faster than I expected – albeit with lower revenue per customer, given to CEO Jason Kilar’s smartly aggressive pricing, and the resulting much higher consumer adoption.  The result has been substantial corporate revenues that have helped make Hulu market itself, enticing suitors to break it free of its complicated parent-company structure.

Content licensing agreements may still represent the greatest complexity of Hulu’s business under any ownership scenario, but what’s been a fascinating expectation exceeder is that by delivering the most desirable content and consumer experience, Hulu has gotten consumers to open their wallets in droves.  That’s something that we can all learn from.

PayPal Acquires Zong:  Making Payments Easier

And second, EBay’s PayPal, which recently bought mobile payment company Zong for $240 million.

Back in June 2010, I strongly recommended this deal and pointed out its many advantages.  Indeed, Zong’s payment system makes it easy for consumers to pay – leveraging the addictive relationships people have with their mobile phones.

As my newsletter readers know, I recently updated my formula for consumer spending on digital media.

The Consumer Media Spending Formula:

(Desire + Relationship + Ease) X Scarcity = Spend

Now both of these transactions are reinforcing it for me.

The Future of Consumer Paid Media

Beyond that, these two announcements also tell us something important about the rapidly approaching future of digital media: increasingly, the industry will be relying on consumers to contribute toward its profitability.

Now it’s up to us to create great content and meaningful experiences that are worthy.

A Bonus Prediction: Apple Versus Facebook in 2012

And that’s why I’ll take this opportunity to make a bonus prediction.

By this time next year, we will be in the early stages of what will later become an all-out war over who will be the master payment and currency provider for digital media. Even as Paypal has made significant upgrades with the Zong acquisition, they won’t be enough to ignite Paypal as the leader in the key venues:  on the social networks and in mobile applications.  Instead, this online conflagration will, I believe, be waged primarily between Apple and Facebook Credits.

What do you think? And what’s your favorite digital media prediction for 2012?

 

 

How Paypal Can Save Media — And Itself

This article was published as a guest post on paidContent.org.

Earlier this month, John Donahoe, CEO of eBay (NSDQ: EBAY) and its subsidiary Paypal, was interviewed at the D8 conference. It was a flashback to see him speak:  I had worked under him 15 years ago when I was a freshly minted undergrad just hired into the San Francisco office he ran for Bain & Company. A strapping and charismatic up-and-comer, John was known for his bold visionary talks and his strident walk.

But at D8, I didn’t see that confidence. He spoke of eBay’s connections between buyers and sellers as though he hoped we’d believe it was a new trend; meanwhile far from his Santa Clara headquarters, Gilt Groupe and Groupon are reinventing e-commerce. On Paypal, he looked backwards to the innovation of getting financial services online, rather than forward to the app revolution. Overall he looked staid, the way eBay and Paypal now look to me – entangled by their legacy, unable to cut the cords to freely enjoy the new boom around them.

With that in mind, I’d like to offer Paypal the chance to get ahead in an area that still has room for wild success. Media desperately needs help to become financially viable – and consumers will need to foot part of the bill to make it so. It’s clear that others see the opportunity here: Facebook surely wants to spread its Facebook Credits currency to take over the world the way ‘Like’ has; and now word comes that Google (NSDQ: GOOG) is readying Newspass in its bid to capture consumer payments for media. But more than these other companies, Paypal, with its huge footprint of consumer accounts and years of web experience, is in the catbird seat to be media’s savior.

I wrote recently that there is an easy formula for consumer spend on media:

Desire + Relationship + Ease = Spend

With ad revenues going less far to foot the bill for published content, making media profitable will increasingly mean turning to consumers to pay for content and experiences. And consumers open their wallets in proportion to how badly they want it (desire); how well they know the other parties (relationship); and how little work it takes (ease). This is why there is such a strong future in bite-size media consumption: for all the talk about paywalls and subscriptions, it is far easier to get payments of a buck or two. Apple (NSDQ: AAPLdemonstrates the value of bite-size with hundreds of millions of dollars of revenues from apps alone, far exceeding any leading online publisher’s subscription programs.

But while Apple is the king of creating platforms for desirable experience, its eminence is limited to its domain of devices, just as Facebook is confined to the social network. And publishers need to up the desire, relationship and ease for their whole online audience. Enter Paypal.  Paypal works across the wide open web. With 219 million registered accounts and trust among users and merchants alike, Paypal has an outstanding position to work from. And so Paypal’s great opportunity is to enable quick consumer payments for media with fast, easy, lightweight universal payments.

What Will It Take: The Impulse Click

Media doesn’t rank highly in terms of the necessities on Mazlov’s pyramid. And so the essence of consumer-paid media is impulse, and the critical enabler of paid digital media is the “impulse click.” That click starts the brief moments/long window of consumer intent. For Paypal that means, it needs a button that completes the sale before the impulse fades – and needs to spread that button throughout media. If it delivers on that, Paypal can play as critical a role in the fast-growing digital media economy as it did in the person-to-person commerce revolution of Web 1.0.

To do so, it will take five key upgrades in ease and structure. Here’s what they are:

1)    Lighter authentication: For a $50 e-commerce transaction (from which the merchant earns just a few dollars of gross margin), a transfer to the Paypal website and fresh login and password entry may be called for, but that won’t do for a $0.99 purchase of media bits, where the lack of ease would be a deal-killer. Recognize the user automatically for most bite-size purchases, as Facebook does for sites using its new open graph technologies. For a transaction of less than a buck, and considering Paypal’s preeminent capability in fraud prevention, it should be able to manage risk to make this effective.

2)    One-step confirmation: Apple has set the bar for how easy it is to transact:  on my iPad, I tap the “buy” price and then supply my password. That’s all that’s needed or appropriate for this transaction.  And no one has done this on the web at large.  If Paypal does, it will lead the industry in ease – and help media publishers in the process. The current process usually requires three or more pages and requires not only login with password, but confirmation of accounts to fund the transaction with; backup funding options; and often classifying the transaction. The interface is slow and kludgy, vintage 1990s, while the web (and user’s expectations) have had massive upgrades since then.  It’s time for an experience overhaul, Paypal!

3)   Simple billing: Offer fewer options to make it simple. Instead of bank cards, credit cards and different guarantees, keep one default payment method on file and just bill to it without asking for anything less than $5. For impulse purchases, the consumer needs to complete the transaction before the impulse fades.

4)    Use the phone: For universal payments and quick setup, bank and credit cards are too cumbersome. But consumers young and old with good credit and poor alike have one thing in common:  mobile phones. Paypal should acquire Zong, which would contribute an instant way to bill cellphones with minimal hassle that smart sites like Facebook are already taking advantage of. With this simplified experience, Paypal then is ready to offer its payment system on every device possible.  As consumers are increasingly consuming content from their mobile phones, Paypal needs to be where the consumer is – available to apps on every platform possible.

5)    Offer attractive revenue share: Platforms like Apple’s require that publishers give up 30% of revenues or more; Paypal’s heritage in banking and payment processing comes at it from a much lower pricing level of 5% plus $0.05 per transaction. For its bite-size payment system, Paypal should get adoption from every major publisher by holding to this structure for its most profitable transactions, and taking no more than 15% of other transactions; while using its massive scale to negotiate fees with credit/debit and cellphone providers on the back end. By competing on price to win adoption by publishers, Paypal will be expand its footprint to get more cost leverage.

If Paypal does these five things, it can supply a payment system that is so good that it will enable digital-media companies to charge and collect frequently for premium experiences and content. For Paypal, this will enhance its offering and help it win a huge share of the emerging paid digital media category. But more importantly, this will hasten our progress toward a profitable future for the digital-media industry. And I think that sort of change-the-world accomplishment is exactly what is missing to get John Donahoe as charged up again as I remember him.