How nanopayments finally came of age

How do you get people to pay for something they're used to getting for free? It's a question that bedevils the music and film industries, and it's no less of a challenge for anyone trying to monetise an app for Facebook, MySpace or Bebo.

But a new approach is emerging – make it cheap. Really cheap. Charge just 10 or 20p for a bingo card, an accessory for a virtual pet or a weapon for a game character. Get enough people signed up and, once you've added up all those pennies, you've made a tidy bundle.

Like all ideas that sound too good to be true, you'll be thinking, it probably is. But it's not just a theory. In Asia, such 'nanopayments' have been making big money on social networks for years. In 2007, China's Tencent raised $523million in revenue – that's four times as much as Facebook, in a country where the average monthly wage is less than $20 – with operating profits of $224million.

Yet only 13 per cent of revenue came from ads. Two-thirds came from internet services like games and digital goods: 'gifts' such as virtual flowers, background music for users' profiles, virtual pets, fashion items to dress avatars in, and so on.

Lessons to be learned

It's tempting to mock the predominantly young people who spend their money on such things. But young people are much the same everywhere, and in the same way other Asian fads, from karaoke to Pokémon, have spread like wildfire, there's much we in the West can learn from the East. There are lessons to be learned closer to home, too.

The success of Apple's App Store has proved beyond reasonable doubt that people are willing to pay small amounts for virtual goods, whether useful or trivial. More than a billion applications created by 50,000 developers have now been downloaded from the Store, typically for between $0.99 and $4.99, from fart noisemakers to translators to virtual spirit levels. Yet if such success is to be repeated on social networks, there's one thing everyone agrees on: the need for stable, reliable, easy to use payment platform.

For a start, there's no point in charging to credit cards if the bulk of your audience is too young to have one. In China, kids can add money to their Tencent accounts via their mobile phone bill or by buying 'QQ coins' in real world shops.

Similar systems exist for users of Japan's Mixi and Korea's Cyworld. (In case you haven't heard of Cyworld, it was actually the world's first social networking site. Founded in 1999, three years before Friendster, it's been making massive profits for a decade, so it must be doing something right.)

Which platform?

At the end of 2007 it looked as if Facebook was joining in the party. Just before Christmas of that year it announced the beta test of Facebook Payments, which would enable firms to accept small payments from users directly inside their Facebook apps. Then … nothing. However, you can't keep a good idea down.

MySpace COO Amit Kapur revealed at last November's Web 2.0 Summit that MySpace is working on its own payment platform. And while developers are waiting for the big boys to come up with the goods, a number of start-ups have sprung up to fill the gap, such as Spare Change, Zong, OneTouch and PayByCash.

Spare Change's system is currently being used by 400 games and apps, charging users an average of 25 cents a pop. You can add money to your account through PayPal, through your mobile phone bill or using cash at thousands of retailers throughout the US.

Co-founder Mark Rose says that the "shoestring operation" he set up a year and a half ago is already making healthy profits: "We've got more than a million users, mainly of quasi-casual gaming applications," he says. One example is Mob Wars, a Facebook app in which players rise through the ranks of a gangster organisation by committing crimes and fighting other players.

According to TechCrunch, it's generating $1million per month. Mob Wars costs nothing to play, and you're given a certain amount of virtual currency to spend on recruiting and equipping your mob. To earn more, you have to perform certain tasks – or sidestep the process by paying with real money instead. "Apps like this lure people in and get them hooked," explains Rose. "Once people are engaged and having fun, they're happy to shell out a few cents to continue."

And it's not just games. Other apps let users adopt virtual gifts; send their friends 'kisses', virtual gifts or cash; sign up to dating services, make charitable donations and so on.