How the iPhone app market could change online retail and the media: Kohler

The incredible blooming of iPhone applications and the creation, from nowhere in just a couple of years, of a booming global ‘iPhone app’ cottage industry, has demonstrated the biggest tragedy of the internet: the failure to find a viable micropayments system.

In fact I would go as far as to say this failure is the reason journalism as we know it and traditional media companies are in danger of dying.

Newspapers and magazines in print are sold for ‘micropayments’ at newsstands and newsagents – $1 to $10 – but you can’t do that online. Therefore publishers are stuck with expensive, long-term credit card subscriptions or giving the content away.

It is part of a wider problem, or benefit, of the internet, depending on how you look at it.

When Tim Berners-Lee was developing the World Wide Web during the 1980s it was a scientific enterprise, not a commercial one. Berners-Lee is himself a computer scientist and at the time he was working at the European Organisation of Nuclear Research. (Now he mostly just collects lifetime achievement awards).

The first web browser, Mosaic, was developed in 1993 by a team at the National Centre for Supercomputing Applications at the University of Illinois, led by Marc Andreeseen, who went on to be founder of Netscape.

It’s hard to believe now, but until 1991 commercial enterprise on the internet was strictly prohibited. The scientists and assorted geeks who were developing it at the time were deeply concerned that it would be taken over by the capitalists. Even when it was opened up a bit in 1991, the rules forbade “extensive use for private or personal business”.

Which is all well and good, and the result is a wonderful, enduring culture of democracy with all sorts of very successful sites either happily providing a public service – such as Wikipedia and Craig’s List – or struggling to make money – Facebook, YouTube.

But in a way the early internet pioneers inadvertently did a deal with the devil: Visa and Mastercard.

The credit card companies became the default billing system for the internet, but their fees are too high for anything cheaper than a book.

Jeff Bezos launched amazon.com in 1995 and this has become one of the world’s greatest e-commerce enterprises, now branching out into Kindle book reading devices and cloud computing. It works because books costing $25 or more per item can be billed via credit cards. Single newspapers and magazines can not, because the Visa and Mastercard fees are too high.

There was actually a good model for combining a public data service with a billing system but Tim Berners-Lee and the rest of the scientists working on the World Wide Web during the 1980s ignored it – it was Minitel, launched in 1982 in France by the state-owned entity that later became France Telecom.

Minitel has been mercilessly sneered at by internet geeks, but it’s still going. It was going to be closed down in March this year, but because its telephone directory is accessed more than a million times a month in France, they have had to keep it going.

Minitel is connected to the phone company’s billing system, so micropayments are perfectly feasible.

The other major attempt to provide small payments online has been PayPal, which was started in 2000 and acquired by eBay in 2002.

PayPal currently operates about 75 million active accounts around the world and provides the cash for most auction sites like eBay, but there have been a lot of problems with it. There are several anti-PayPal websites because of its poor customer service (eg, www.paypalsucks.com), and the Australian Competition and Consumer Commission last year found that it was not the most secure or most efficient method of payment for online transactions.

But Apple has now shown how to do it – with iTunes.

It works with credit cards, but as a micropayments billing system overlaid on the credit card network. It began with $1.69 (US99c) payments for individual songs, and now Apple uses the same system for iPhone apps which cost between $1.19 and as much as $5.99. Many are free, most are less than $2.

iPhone applications have become an extraordinary phenomenon. Thousands of new ones are launched every week, developed by everyone from global corporations to individuals fuelled by pizzas, scratching out a living in their bedrooms, developing games.

This week I bought Sudoku ($1.19) and Scrabble ($5.99) so now my every waking minute is spent fiddling with my iPhone. It is seductively easy to buy applications; I’ve seen some people with hundreds of the things on their phones.

The simplicity and success of this system is an indictment and an embarrassment for the newspaper industry.

Newspapers and magazines have been selling for the same price as iPhone apps for two hundreds years, making many families rich and employing a lot of people.

When the internet came along they suddenly turned into rabbits in the headlights, unable to think of what to do and incapable of cooperating with each other. So in the absence of a strategy, they simply didn’t charge at all.

As a result, journalism is now free. Sudoku, however, costs $1.19.

This article first appeared on Business Spectator.