Nick Tomaino is currently on the business development team at Coinbase, and is also a first-year business school student at the Yale School of Management. Prior to that, he worked in venture capital, most recently for Softbank Capital.
With Facebook’s $19bn acquisition making headlines yesterday, WhatsApp has become the first truly successful consumer technology company to avoid advertising as a business model.
Instagram and a few other early stage companies have been acquired advert-free (and thus without revenue), however, WhatsApp generates millions of dollars directly from its users and has always been committed to protecting these consumers from advertising.
The company makes its money by charging consumers 99 cents to download the application, which allows them to completely remove advertisements from the equation. WhatsApp’s ability to make its users the customer rather than the product is one of the main reasons the team was able to build such a phenomenal company.
WhatsApp’s story highlights the beginning of a major shift in consumer technology – away from advertisements and towards direct-to-consumer monetization through micropayments.
A massive shift to direct-to-consumer monetization for consumer tech companies could be really good news for the bitcoin world.
The primary reason that advertising has been the business model of choice for consumer tech companies in the 25-year history of the Internet, is that the existing financial infrastructure is not built for the Web.
It’s generally a difficult and time-consuming process for a consumer to enter credit card information and make an online payment. Additionally, micropayments (generally considered payments under $1) are not economical for merchants to accept because of the fees on the merchant side.
This friction has forced consumer technology companies to rely on the advertising business model, which makes the advertisers the customer and the consumers the product.
Need for change
Online advertising has persisted for these reasons, even though it is generally detested by consumers and also prevents companies from maximizing the time spent building great products. Effectively, it forces engineers to focus on satisfying the advertisers by data mining, rather than satisfying the users by building a better product.
Micropayments can change this, and WhatsApp clearly demonstrates that the change is already happening on mobile with existing financial infrastructure.
Apple typically charges developers 30% of app profits, and it’s likely that’s what Apple charges WhatsApp on every 99 cent purchase of the application. Of this 30%, a significant portion (around 20%) goes towards credit-card processing fees.
While WhatsApp was able to successfully utilize this direct-to-consumer micropayment business model without bitcoin, there is still too much friction in this equation, and for every WhatsApp there are thousands of app developers that can’t successfully monetize due to the significant fees that still exist.
Bitcoin removes the friction associated with online payments. Transactions on the Bitcoin network are instant, irreversible, and almost free of charge, making micropayment business models much more economical for merchants.
Major media companies, like the Chicago Sun-Times, are already experimenting with bitcoin-enabled micropayments for this reason, and the early results have been promising.
Bitcoin also allows consumers to make payments more efficiently, and companies like Coinbase offer two-click checkout and OAuth (an open standard for authorization) features, which make the online payment experience seamless.
Bitcoin applications are prevalent in the Google Play store, and the industry is continually trying to help Apple understand the power of bitcoin.
Regardless, though, it will probably soon become apparent to consumers and merchants that bitcoin is the most efficient way to transfer money online for micropayments.
This will ultimately make the Internet a more enjoyable place by helping to significantly reduce advertisements from consumer technology companies.
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