Are people more willing to pay for digital goods on mobile devices?

Mary Meeker’s presentation this year on internet trends was all about mobile. Inasmuch as data-heavy research report from a major investment bank can be said to have a “climax,” it was probably these slides:Screen shot 2009-12-27 at 11.51.18 AM

Screen shot 2009-12-27 at 11.51.24 AM

The assertion seems to be that there is something special about the mobile internet that compels people to pay for things they wouldn’t pay for on the desktop internet.  It is this same thinking that has newspapers and magazines hoping the Kindle or a tablet device might be their savior.

It is certainly true that today people are paying for things on iPhones and Kindles that they aren’t paying for on the desktop internet. Personally, I’ve bought a bunch of iPhone games that I would have expected to get for free online. I also paid for the New York Times and some magazines on my Kindle that I never paid for on my desktop.

But longer term, the question is whether this is because of something fundamentally – and sustainably – different about mobile versus desktop or whether it is just good old fashioned supply and demand.

I think we are in the AOL “walled garden” days of the mobile internet. Demand is far outpacing supply, so consumers are paying for digital goods. I don’t pay for news or simple games on the desktop internet because there are so many substitutes that my willingness to pay is driven down to zero.

What are the arguments that the mobile internet is sustainably different than the desktop internet? One of the main ones I’ve heard is habit: digital goods providers made a mistake in the 90′s by giving stuff away for free. Now people are habituated to free stuff on the desktop internet. Mobile is a chance to start over.

I think this habit argument is greatly overplayed. The same argument has been made for years by the music industry: “kids today think music should be free” and so on. Back in the 90s, I bought CDs, not because I was habituated to paying for music, but because there was no other reasonably convenient way to get it. If tomorrow you waved a magic wand and CD’s were once again the only way kids could buy the Jonas Brothers and Taylor Swift, they’d pay for them. It’s the fact that there are convenient and free substitutes that’s killing the music industry, not consumers’ habits.

As the supply of mobile digital goods grows — the same way it did on the desktop internet — consumers’ willingness-to-pay will drop and either advertising will emerge as the key driver of mobile economic growth or the mobile economy will disappoint. I was going to buy a Chess app for my iPhone this morning but when I searched and found dozens of free ones I downloaded one of those.  At some point there will be lots of Tweetie, Red Laser, and Flight Control substitutes and they too will be free.

40 thoughts on “Are people more willing to pay for digital goods on mobile devices?

  1. Absolutely, yes. I believe people will pay for mobile access to digital goods. What will be interesting to see see how the Verizons, AT&Ts, T-Mobiles, etc. continue to evolve from pipe layers to content providers as well.

  2. I agree. To focus on games for a second, where a lot of digital goods are purchased, the same competitive and economic dynamics that have pushed web-based game publishers into a free-to-play model will happen on mobile, and I don’t think the compulsion drivers that get a consumer to buy a virtual good are really any different with a mobile interface than with a computer UI.

    I do, however, think we might see more “impulse” purchases of goods (not necessarily digital) happening via mobile, just by the fact that you carry it everywhere.

  3. Here’s an example where consumers — US consumers at least — haven’t paid for mobile goods: “Over the air” music downloads, which have never taken off here.

    It’s not simply that you can get any music you want from Pirate Bay, LimeWire, free streaming, et al — consumers seem happy to spend some $2 billion a year buying music via iTunes.

    If you want, you can argue that OTA music hasn’t worked here because labels/carriers screwed it up: At first they tried to charge more than 99 cents a song, and for quite some time you couldn’t buy music via your phone that worked on your iPod, which made it a non-starter.

    So we’ll see what happens with other mobile content — newspapers, magazines — when you’re offered the chance to buy it and integrate it into Apple ecosystem from the start.

  4. Yo Chris,

    I think you see this on the desktop already, yes, as you say in iTunes (where they compel a user auth every time you go to buy something, blech), but even better in Zynga / Club Penguin virtual goods markets. When “buying” is the same as “click here”, the friction drops precipitously.

    I remember when VMware added Paypal to its online store checkout process, and saw a lift of like 5%-8% of sales right off the bat, because paying with paypal simply requires keying in your email addy and password–no digging your wallet out of your pocket, and tediously keying in digits…

  5. JordanCooper_NYC says:

    I think the “something special” about mobile that has not been mentioned in this discussion is a deliverance of utility (i.e. entertainment) in a physical location where no/minimal other alternatives exist (in transit). The user is captive because their alternative to a mobile device on a train or in a doctor’s office is staring at a wall, whereas in a desktop environment, there are multiple other avenues for a user to direct their attention. As such, the value of entertainment or filling this low-stimulus time with some form of entertainment is greater than that of the same piece of entertainment in a desktop environment. If value is greater, willingness to pay follows, hence users willing to pay for mobile content. This is particularly interesting for folks in the newspaper intdustry, etc…if a users wieghs the value of entertainment in terms of it’s ability to fill low-stimulus hours, the NYT at 9.99 is visibly more valuable than a lightweight gaming application (evergreen content, etc…). I agree that segments of this economy will go the way of free/ad supported, especially games, etc…but I do see an opportunity for publishers and conent creators to leverage the relative lack of alternative stimulus (i.e. go outside and ride a bike, turn on the tv, do work at the office, etc…) into paid models that are sustainable as well.

  6. Maybe it’s because there aren’t as many alternatives in the mobile environment. If I want an iPhone app, there is no box I can buy in a store. If I wanted a ringtone on my last Verizon phone, the only authorized way to do it was digitally. The most physical thing I can buy for my Kindle is a gift certificate that I can print at home. Digital sales probably do well on these devices because there is no alternative if you want the software or the music or the text or whatever it is you’re buying. This is especially true on closed or DRMed platforms like the iPhone or the Kindle, as the average user does not want to deal with jailbreaking or running python scripts to transfer books between devices.

    Also, I suspect people are less materialistic on the go than they are in their homes. The people who still buy CDs presumably want the physical disc or album artwork. Maybe they want to look at it; maybe they want to display it on their shelf. This seems pretty common, but it doesn’t apply in the mobile world. A physical representation of a ringtone or iPhone App would not be something I would want to show off on my shelf like a CD or a book.

  7. People prefer to buy things they use on mobile instead of to buy on the desktop and then transfer the files or applications to the mobile. I don’t have this number, but perhaps the sales of apps on itunes through iphone or itouch are bigger than on desktop. It is easier than keep transfering the files everytime you buy a new one.

    I totally agree that Kindle and other tablets might be the savior. But there is one thing more: apps for ecommerce, such as prices comparators on mobile, which will facilitate the research for best prices and quality, can also increase this market.

  8. marissa says:

    It’s very much about access to content and payment channels. Apple and Amazon have made virtual “storefronts” out of itunes and the Kindle shop that the mainstream consumer has come to understand and “respect”… There is a certain ease at which a consumer can access content and get immediate delivery- It’s “trusted” and we all know what to expect. If tomorrow the entire Internet shut down and announced from Tuesday on, access to content will be something we all pay for…on a subscription monthly plan (tiered or something like that…) people would eventually succumb…Obviously, this would need to be regulated…b/c as soon as someone offers a loophole, a la, “Free” content, the Herd will follow…

    Mobile is no different… Location and Real time are great features of how content is relevant on mobile but in reality, consumer expectation about content lives somewhere in between itunes (paid) and browsing the Internet (free)… Big guys in the space (Amazon, PayPal, Google, etc…) will be the determinants of which shall become the norm.

  9. suyogmody says:

    agree with you on the habit vs. supply/demand argument. however, the difference (so far) seems to be who controls the pipe (at&t, verizon etc). the likes of google would love to have it completely open (maybe apple too?) but the infrastructure cost of the pipe is too high.

    4G/WiMAX/LTE has some potential but has not taken off so far.

  10. I’m in the “it’s just waaay easier camp.” Think about it: Imagine if in the offline world you had to manually input your credit card number, name, address, expiration date and security code each time you made a purchase. It’d be nuts––we wouldn’t buy half the shit we do. The online world has no equivalent of the credit card swipe or cash. Each purchase requires the purchaser to overcome this huge friction. Often, it’s easier to just search for a free alternative.

    By controlling the process, Apple standardizes everything and removes all the friction from purchasing. Plus, they monopolize the pipe. If it’s not in their shop, your either can’t buy it or it’s a pain in the ass to do so.

    As for me personally, honestly, I don’t mind paying for stuff if it’s quality and it takes just a click. One-click purchasing is often easier than searching for a free alternative.

  11. I agree making payment more convenient helps. Its no coincidence the biggest mobile content sellers also have credit card #’s on file (carriers, Apple, Amazon).

    But do you think the (desktop) NYTimes could save themselves by adding a “Pay by iTunes/Amazon/Apple” button? Fundamentally the problem is too many alternatives.

  12. People spend tons of time playing Flash games on the desktop internet. Zynga etc. Probably most of this stuff happens at work when they are kind of “stuck.” Seems like the issue isn’t demand – there is demand for this stuff on desktop and mobile internet – it’s supply (supply is much greater right now on desktop).

  13. No, you’re totally right on that point.

    And in that case, where product differentiation is key, those vendors will have to get religion. It’s little surprise that the Economist, a brand that has willfully diverged from having an undifferentiated product (e.g., they take pride in having an editorial cant that pervades their publication), is one of the few media properties that is growing robustly. At the end of the day, what I get from the NYT is tough to differentiate from what I get from the AP.

  14. JordanCooper_NYC says:

    I’m on board with that concept, I just think there is an additional force at play here, which is a variance in perceived value of an identical piece of content across those two environments

  15. Obviously product differentiation matters too. NYT still runs a lot of generic legacy newspaper type news, so they’re not a good example. But let’s take TechCrunch––would you pay for a TechCrunch Pro product if all it took was two clicks? Step 1) Initiate purchase, Step 2) Confirm Purchase. I sure as hell would.

  16. But see, even this pay by iTunes/Amazon/Apple option involves the friction of having to remember then type your login info and password.

    What the world needs is a web browser that interfaces with a standard payment system. That’s how you really get to frictionless two-click purchasing.

  17. Utility of the application.

    I think many developers and companies will realize the potential business model opportunity – or erosion – and make digital good products better as a result in order to charge money.

    In fact, having worked on DIRECTV for instance, perhaps charging for a mobile-only iPhone NFL SuperFan package could make sense whether the phone owner has DIRECTV or not. That’s acquisition. Would they charge someone who already has the package extra for using on the iPhone? Right now, no/doubt it.

  18. The supply demand argument is right on. This is a symptom of mobile browsing still falling short of user needs. The app stores will thrive (and be able to charge more) in the short term because the web isn’t working properly on phones yet. Long term, the web wins out on mobile just like your desktop.

  19. Very well said. I’ve felt this way for quite some time, and you’ve stated in a clear straight forward manner.

    I’d add that the mobile internet has been held up by three issues:
    1) Infrastructure: Now that the wireless infrastructure has improved enough with 3G to make the mobile internet usable, people are finally starting to use the browser on their phones. Consider that 2-3 years ago you would have never even attempted to use your phone to access the internet (maybe once, then never again)
    2) Phones: The iPhone changed how we expect devices should access the internet. Since then, every manufacturer has improved the device experience. As the devices get even more user friendly, it will get even easier to access content over the internet.
    3) Advertising: Until recently, there was no way to monetize traffic on the mobile internet. Let’s face it, that is why many games on the desktop are free. As mobile advertising matures, people will monetize entertainment and services through ads, not the user.

    It all comes back to the fact that there is only one internet. People are trying to separate mobile from desktop, but when I am mobile, I want to be able to have access to the same types of services, entertainment, and information that I have on the desktop.

    Within the next 2-3 years, whether you are on a mobile connection or “traditional” desktop connection, the internet experience will be the same.

  20. i could agree with 100% of your argument chris, but then how do you explain that people are ready to pay $3 for a ringtone when they can get a song for free and probably by searching a little get the ringtone free also. The content is not what drives the premium but its adequate packaging.

    I agree that competitive pressure will drive many apps to free, but just like software there will be a combination of free to use and pay to keep for quality rightly packaged app

    This being said i believe the overall trend of the App store will be to go down to an average zero price, but not because of the trend you describe. Because 100% of brands will offer free apps as a main access point to their service, since the browser will become useless.

  21. bthoskins says:

    Agree 100%. Only a matter of time before some of these habits will shift. With such lower barriers to entry, it will be a race to the bottom. We’re already seein this with paid vs. free apps.

  22. No I agree that movement plays a role here. It’s also how fast can you deliver your supply, and how does that supply display. I’m sorry, a cell phone display (output) and current 3g and 4g speeds are nothing compared to a laptop with broadband.

    It’s hugely limiting- if you compare early generation internet games, a lot of them were text based. A number of flash sites had pay walls at some point (maybe to get rid of ads, or to get to higher levels).

    That’s changed as standardization of what people will interact with and as broadband proliferated. That has yet to happen with cell phones at all. Then we shall see. Even then, you might be able to train people to buy digital goods. Cell phones are radically different devices- and fulfill radically different needs…

  23. Paying for quality was never an issue (on or off the web).I’ve heard bloggers, and web service providers praise the addition of “donate to support us” button. Amazon patented one click buying because it made shopping easy.In an unknown space (new web virtual interface), we follow the local customs. Even if it means paying for stuff, that we can get the equivalent for free online. We’re irrational spooky creatures sometimes. The rules change, depending on where we find ourselves.

  24. It can be explained with simple survivor bias: if I’m trying to get something on my cell phone, it’s more likely that I really need it. Partly because it’s more painful to browse on a cell phone (even on an iPhone). So it must be more important to me than the average browsing I do from my home computer.

    And then, as others said, payment is kind of easier and there are fewer alternatives (at least they are more painful to achive on mobile, so the few cents I’m being charged are a better deal – it wouldn’t be so true on a desktop).

  25. AgeOfSophizm says:

    Or more people are closer to a mobile device (i.e. attached at the hip/face/etc…) than tied to a computer. It’s a volume game. Even when I’m in my house, i now use my phone to surf quite a bit even though my computer is steps away!

  26. Richard Jordan says:

    I have to disagree with you on the topic of people paying for mobile content being a temporary situation. There are a couple of factors that play into this:

    1) the convenience of having access while mobile is a real benefit that people understand and will pay for

    2) the device/network situation provides a greater degree of control to the device and makes the various toll-booth and pay wall mechanisms more enforceable

    Other commenters have added to this the obvious simplicity of mobile payment, and it’s possible that if it were easier to pay on the fixed position Internet people would have done so. Makes sense to me.

    The mobile networks have spent a couple of decades training people to value what they get on mobile devices and to pay for it. This helps with the transition. You dismiss this, but I think it has a real impact.

    media content is not exactly interchangeable like perhaps your chess app is. I am not going to move to Britney Spears themed music content because it’s free and my Glasvegas themed music content has to be paid for.

  27. couldn’t you have made almost identical arguments 15 years ago about the desktop internet?

    e.g.
    1) the convenience of having access *instantly online* (versus e.g. physical newspaper magazine) is a real benefit that people understand and will pay for

    2) the ISPs like AOL provide toll-booth and pay wall mechanisms enforceable

    etc

  28. To illustrate the point that payment ease of use drives behaviors:

    There is a quasi dating service in Europe that has both a mobile and desktop version. The service allows users to buy a premium profile that pushes their profile to the top of the list for a few hours– basically a user generated and paid ad.

    The vast majority of their revenue for this product comes from the mobile context (very lucrative). In a mobile context to pay for the product the user hits one button and the charge is added to their carrier bill. While on desktop pc user has to either check-out via PayPal or enter credit-card information.

  29. I totally agree that making payment easy helps a lot. But I think its a necessary but not sufficient condition. You also need value + scarcity. Which is why making seamless payment for, say, online desktop news wouldn’t save the news business.

  30. Totally agree that there is less friction for users who pay for virtual goods on App Store than on the web, today. The best evidence is currently proprietary, but will be broadly known as virtual goods becomes a “normal” monetization scheme for more companies.

    Unclear whether convenience increases volumes at the same price, or affects pricing of virtual goods. In the meat world, convenience often earns a premium price, but not always.

    Other possible affects on virtual goods pricing mentioned at the last Virtual Goods conference included tradability, portability, and “blingability” (how easy to show off to others). I am also curious about whether art quality matters, or whether 3D gets a higher price than 2D.

  31. binggordon says:

    Agree with David that AppStore is a killer app. When proprietary data becomes available, i believe it will show that virtual good pricing is roughly similar on mobile vs the web, but that there are fewer disconnects during AppStore commerce. Fewer clicks equals fewer disconnects.

    I am also interested in what drives perceived value of VG. At the VG conference, several asserted that VG prices rise when they are tradable (more liquidity) and show-offable (bling). I believe that art quality also matters, and I tried to test whether 3D commands higher prices, but wasn’t able to run a good enough experiment.

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