Can Cryptocurrency Save Digital Media?
Ad revenue is way down, but crypto offers an alternative revenue model for online publications. Is it workable?
With the coronavirus decimating ad revenue, digital media companies are in desperate need of new ways to make money. Blockchain technology offers one—and some companies are already using it.
The pandemic has caused a spike in news readership, which should be a good thing for the news industry. But it wasn't. Many advertisers cut spending in the struggling COVID economy; others refused to allow their ads next to stories about the coronavirus. Revenue plummeted. A slew of pay cuts, furloughs, and layoffs followed in newsrooms across the country.
Social media companies were hit hard too. Facebook is expected to lose $15.7 billion in ad revenue this year due to the pandemic—a 19 percent decline. Twitter and Snap Inc. are expected to lose 18 and 30 percent, respectively.
With print circulation also declining, many magazines and newspapers have shifted to digital subscriptions over the past several years, usually allowing readers a small number of free articles each month before they hit a paywall. Some reports suggest that social media platforms are thinking of following suit. In July, Twitter chief Jack Dorsey said that Twitter is exploring a subscription model for some of its features.
The subscription revenue model has problems as well. Many readers are not willing to pay for subscriptions at all, let alone shell out $50 to $420 a year for every publication they're interested in reading. That means subscription-funded publications only make money from devoted readers.
But blockchain technology makes digital transactions involving just a few cents economically feasible. In that way, digital media companies could erect a paywall that you needn't buy a subscription to get past. By giving readers the option of paying for a single article at a price that makes sense, publications could recover revenue from casual readers unable or unwilling to subscribe.
Traditional electronic payment systems can't support transactions this small because they rely on third-party intermediaries, such as banks and credit card companies, that have costs. As a result, credit card companies and digital payment platforms such as Venmo, Stripe, and Paypal typically charge merchants 30 cents plus 2.9 percent per transaction, which are then built into the cost of the goods and services they sell. Even Patreon, which now charges merchants a lower rate for pledges under $3, still takes 10 cents plus 5 percent of the pledge. Any potential profits from transactions at such low rates are thus wiped out by the fees involved in making them.
Cryptocurrencies remove the need for these costly intermediaries, thereby making instant tiny digital payments possible.
For the cryptocurrency that most people are familiar with, bitcoin, microtransactions haven't panned out, mainly because the cryptocurrency's protocol limits the rate at which the network can process transactions. Miners cannot add blocks larger than 1 megabyte to the blockchain, and the protocol adds one new block to the blockchain every 10 minutes, so the system can't process more than seven transactions per second. For perspective, Visa averages about 2,000 transactions per second and has reached as many as 56,000 per second.
For years, bitcoin's block size wasn't an issue, as the network was not large enough to bump up against the size cap. But as the system has become more congested, transactions are taking a long time to process and transaction fees are high. At the moment, it costs about $4 to send bitcoin.
Developers are working to solve this through "second layer" protocols such as the "lightning network," where transactions can be passed back and forth quickly and cheaply before being added to the underlying blockchain. In the meantime, bitcoin isn't the only cryptocurrency.
As bitcoin approached the block limit, developers disagreed about whether or not to increase it. So the cryptocurrency split—or "forked"—in 2017, leaving two distinct cryptocurrencies: bitcoin, which maintained the previous block size, and bitcoin cash, which increased its block limit to 32 megabytes. In 2019, bitcoin cash forked again, and yet another currency—bitcoin SV—emerged, having removed the technical cap on the block size entirely.
Today, both bitcoin cash and bitcoin SV enjoy extremely low transaction fees. For the former, the average transaction fee is less than a penny. Bitcoin SV's is less than a tenth of a penny.
People are building businesses around this technology. For example, Twetch is a social media site similar to Twitter, except that every time you follow someone or favorite a post, you are effectively sending them a few pennies in bitcoin SV. Josh Petty, the app's co-founder, likens Twetch to the old SMS pay-per-text system. Users pay for every action they take on the app: It costs 2 cents to make a post, 5 cents to like a post, and 10 cents to follow another account. Every time one of these transactions occurs, Twetch takes a penny.
This revenue model means that Twetch doesn't have to sell ads or user data. Because the blockchain allows even the smallest transactions to be split and sent to multiple addresses, Twetch can take its share of a transaction without ever holding users' money. It also allows users to profit from their own content. And it's taking off—Twetch has surpassed 16,000 users, including Danny Trejo.
Other apps have adopted similar systems. Streamanity, a video streaming platform, uses a "pay to play" framework to let creators monetize their content without relying on ads. Creators can charge as little as a penny per view, and viewers can earn bitcoin SV by sharing videos. Bit.sv, which has yet to officially launch, is a blogging platform like Medium that allows content creators to charge for individual posts.
According to Ryan Charles, the founder of Money Button—the interface that allows Twetch users to make 2 cent transactions at the push of a button—the technology and the product are all in place for digital media companies to implement a pay-per-article paywall today. But there is still a major non-technical problem to solve before doing so would make sense: Most people don't have bitcoin SV. Most of the hundreds of apps currently using Money Button, including the social media network Powping and the messaging app Baemail, are used and run by bitcoin SV enthusiasts.
There are a variety of ways publications could encourage users to purchase the necessary cryptocurrency. One technique that Twetch uses is to "gift" new users bitcoin SV in order to help them get started. "We give every user three cents to start, and it costs two cents to post," explains Petty.
Another option would be for digital media companies to sell "credits." Publications could offer $10 credits that readers could purchase with a credit card and then spend down on one-off articles. But this approach would fail to capture readers who are unwilling to commit $10 to a publication or are interested only in reading a single article.
Truly unlocking the economic potential of microtransactions would require widespread cryptocurrency adoption. Charles envisions a world in which someone browsing the internet could sign into The New York Times—or any other publication—through their preferred cryptocurrency wallet the same way they can sign in with a Gmail account now.
Some question whether a blockchain can scale to handle a global volume of microtransactions without destabilizing the network. Handling a huge volume of transactions in every block would make mining expensive, which could lead to an "extreme centralization" of the network that would threaten its security. For that reason, many think second-layer solutions like the lightning network are a better approach. Others point out that bitcoin SV can already manage a high volume of transactions. Earlier this year, Bitcoin Association reported that the currency's scaling test network sustained "1,300 transactions per second for a prolonged period, in addition to handling a peak load of 6,400 transactions per second," approaching Visa's typical rate.
It's not clear if either system will ever be popular enough to work in the mainstream media. But with subscription rates remaining low and ad revenue erratic, it may be time to give cryptocurrencies some serious consideration.