KH Business Solutions

Microtransactions have been discussed for many years as a way to monetize content. Unfortunately, the reality has not lived up to the hype and promise. Until recently, that is. Games have been slowly replacing porn as the innovators of the Internet. One area they have made great innovations is in the promised land of microtransactions.

The idea of microtransactions was originally to pay very small amounts ($0.05 or so) to read an article or some piece of content. This would be done on credit card. The trouble which has plagued that model is the transaction and processing fees assessed by the credit card companies. For such a small transaction, the processing fee is more than the transaction amount.

MMO Games (and later, other online games) have developed a great way to do this, without the problems of processing fees eating up all revenue. Virtual currency. For example, a player buys $10 or $20 of virtual currency with their credit card and then uses units of that virtual currency to buy items for small amounts like $0.05 or any other amount.

A significant benefit of using virtual currencies for microtransactions is that users don’t necessarily need to pay with cash to buy the desired content. CPA (Cost Per Action) advertising is doing well in the games industry as a supplement to cash transactions. CPA ads allow people to complete actions, like surveys, subscription sign-ups, or buying another product or service from the advertiser, to earn virtual currency. The user’s game account is credited with a stated amount of virtual currency after the action is completed and verified. The advertiser pays the game publisher only for the completed action.

This model of advertising works very well and is replacing old banner and interstitial ads in gaming sites and ad-supported Free-to-Play games. Advertisers like it because they only pay for conversion results. Game publishers like it because the resulting payout is much higher because of the increased value of the ad display.

It took over 10 years for microtransactions to really develop into a working revenue model outside of isolated sites. Now virtual currencies have grown into a real force, large enough that the Chinese government recently passed new laws restricting their use. They are concerned about virtual currencies being used to trade in real-world goods and services or gambling, all avoiding the reach of tax collectors. I’m sure this type of legislative change will be seen in other countries too, as their tax revenues decrease due to the economy and virtual currencies rise in prominence.

The microtransaction and virtual currency model has become such a success, fueling the fast-growing Free-to-Play game industry. As this industry develops further, probably replacing the old subscription model in most games, I see the virtual currency model appearing in many other industries. Newspapers, magazines, blogs, shareware, and any other type of digital content can be paid for with virtual currencies.

It will be exciting to see the new innovations that will revolutionize the digital goods industries and bring the virtual currency model to a new level, realizing the promises originally advertised with microtransactions.