Monetization

Last updated January 03, 2024

Monetization (also spelled monetisation in the UK) is, broadly speaking, the process of converting something into money. The term has a broad range of uses. In banking, the term refers to the process of converting or establishing something into legal tender. While it usually refers to the coining of currency or the printing of banknotes by central banks, it may also take the form of a promissory currency. The term "monetization" may also be used informally to refer to exchanging possessions for cash or cash equivalents, including selling a security interest, charging fees for something that used to be free, or attempting to make money on goods or services that were previously unprofitable or had been considered to have the potential to earn profits. And data monetization refers to a spectrum of ways information assets can be converted into economic value.

Another meaning of "monetization" denotes the process by which the U.S. Treasury accounts for the face value of outstanding coinage. This procedure can extend even to one-of-a-kind situations such as when the Treasury Department sold an extremely rare 1933 Double Eagle. The coin's nominal value of $20 was added to the final sale price, reflecting the fact that the coin was considered to have been issued into circulation as a result of the transaction. In some industry sectors such as high technology and marketing, monetization is a buzzword for adapting non-revenue-generating assets to generate revenue.

Promissory currency

Such commodities as gold, diamonds, and emeralds have generally been regarded by human populations as having an intrinsic value within that population based on their rarity or quality and thus provide a premium not associated with fiat currency unless that currency is "promissory". That is, the currency promises to deliver a given amount of a recognized commodity of a universally (globally) agreed-to rarity and value, providing the currency with the foundation of legitimacy or value. Though rarely the case with paper currency, even intrinsically relatively worthless items or commodities can be made into money, so long as they are challenging to make or acquire.

Debt monetization

Debt monetization is the financing of government spending by the central bank.^[1] If a nation's expenditure exceeds its revenues, it incurs a government deficit which can be financed either:

by the government treasury, by way of
- money it already holds (e.g. income or liquidations from a sovereign wealth fund); or
- issuing new bonds; or
by the central bank, through money it creates de novo

In the latter case, the central bank may purchase government bonds by conducting an open market purchase, i.e. by increasing the monetary base through the money creation process. If government bonds that have come due are held by the central bank, the central bank will return any funds paid to it back to the treasury. Thus, the treasury may "borrow" money without needing to repay it. This process of financing government spending is called "monetizing the debt".^[1]

In most high-income countries the government assigns exclusive power to issue its national currency to a central bank^{[ citation needed ]}, but central banks may be forbidden by law from purchasing debt directly from the government. For example, the Treaty on the Functioning of the European Union (article 123) forbids EU central banks' direct purchase of debt of EU public bodies such as national governments.

Revenue from business operations

Web sites and mobile apps that generate revenue are often monetized via online advertisements, subscription fees, or (in the case of apps) in-app purchases. In the music industry, monetization is achieved by placing ads before, after, or in the middle of content on a platform that supports this or posting the music on on-demand apps like Spotify ^[2] and Apple Music. On-demand content sites like Spotify and Apple Music pay the artist a percentage of the monthly subscription fees they receive from their users. To put release music on streaming apps like Spotify and Apple Music, an artist has to reach out to a distributor like TuneCore ^[3] or Distrokid.^[4] They are the one who do make the music available on streaming sites. This is usually done for a percentage of the revenue generation. For each public viewing, the advertising revenue is shared with the artist or others who hold rights to the video content.^[5] A previously free product may have premium options added thus becoming freemium.

Businesses monetize their value propositions to generate the resources necessary for continued operation through a business model or revenue model. Failure to monetize websites due to an inadequate revenue model was a problem that caused many businesses to fold during the dot-com bust.

Equally, David Sands, CTO for Citibank Equity Research, affirmed that failure to achieve monetization of the Research Analysts' models as the reason the de-bundling of Equity Research has never taken hold.

On the other hand, aggressive monetization refers to how a firm or business is overemphasizing the process of making money at the cost of the user's well-being. The over-emphasis generate equal resistance from the users due to perceived unfairness and psychological reactance.^[6]

Monetization of non-monetary benefits

Monetization is also used to refer to the process of converting some benefit received in non-monetary form (such as milk) into a monetary payment. The term is used in social welfare reform when converting in-kind payments (such as food stamps or other free benefits) into some "equivalent" cash payment. From the point of view of economics and efficiency, it is usually considered better to give someone a monetary equivalent of some benefit than the benefit (say, a liter of milk) in kind.

Inefficiency: in the latter situation people who may not need milk cannot get something of equivalent value (without subsequently trading or selling the milk).
Black market growth: people who need something other than milk may sell it. In many circumstances, this action may be illegal and considered fraudulent. For example, Moscow pensioners (see below for details) often give their personal cards that allow free usage of local transport to relatives who use public transport more frequently.
Changes on the market: supply of milk to the market is reduced by the amount distributed to the privileged group, so the price and availability of milk may change.
Corruption: firms that should give this benefit have an advantage as they have guaranteed consumers and the quality of the goods supplied is controlled only administratively, not by market competition. So, bribes to the body that choose such firms and/or maintain control can take place.

Russian social welfare monetization of 2005

In 2005, Russia transformed most of its in-kind benefits into monetary compensation.

Before this reform there was a large system of preferences: free/reduced price of travels on local transport, free supply of drugs, free health resort treatment, etc. for diverse categories of society: military personnel, the disabled, and separately, persons disabled due to World War II, Chernobyl liquidators, inhabitants of Leningrad during the siege, former political prisoners, and for all pensioners (that is, women 55+, men 60+). This system was a legacy of the Soviet Union, but it was heavily extended by populist laws passed by central and regional authorities during the 1990s. ^[7] By the law 122-ФЗ of 22 August 2004, this system was converted into cash payments by various means:

abolition of preference, compensated by raising of wage (e.g. free use of local transport for military personnel) or pension (e.g. different preferences for Chernobyl liquidators)
for the three most important preferences (free local transport, 50%-price suburban rail transport, free supply of drugs): a choice between the preference and some extra money.

The main causes of friction in the reform were the following:

technical and bureaucratic problems (e.g. for usage of the 50% discount for suburban rail transport, a person would need to present a paper from the local State Pension Fund office stating that he/she doesn't choose monetary compensation);
separation of all preference-recipients into federal and regional according to the body authorizing the preference. The largest group – pensioners – was regional, and this caused most of the problems:
- In poor regions, financial pressure caused the local government to abolish these preferences with little or no compensation to the former recipients.
- Even if the preferences were retained, they would apply only to pensioners of the region in question. Thus, pensioners from the Moscow Oblast (administrative region), for example, could not freely use the metro and buses in Moscow proper, because these are two different local governments. Later, most of these problems would be solved by a series of bi-lateral agreements between neighboring regions.

A wave of protests emerged in various parts of Russia in the beginning of 2005 as this law started to take effect. The government responded with measures that eventually addressed the most pressing of the protesters' concerns (raising of compensations, normalization of bureaucratic mechanisms, etc.).

The long-term effects of the monetization reform varied for different groups. Some people received compensation in excess of the services they had previously received (e.g. in rural areas without any local transport, the free transport benefit was of little value), while others found the compensation to be insufficient to cover the cost of the benefits they had previously depended on. Transport companies and railroads have benefitted from monetization as they now collect higher revenue from the use their services by pensioners who had previously ridden at the government's expense. (In some regions, more than half of the passengers formerly did not pay for municipal transport, but the government did not compensate the transport companies for the full fare of these passengers.) Effects on the medical system are controversial. Doctors and nurses have to fill out many forms in order to receive compensation from the government for services provided to pensioners, thus reducing the time that they have to provide medical services.

United States agricultural policy

In United States agricultural policy, "monetization" is a P.L. 480 provision (section 203) first included in the Food Security Act of 1985 (P.L. 99–198) that allows private voluntary organizations and cooperatives to sell a percentage of donated P.L. 480 commodities in the recipient country or in countries in the same region. Under section 203, private voluntary organizations or cooperatives are permitted to sell (i.e., monetize) for local currencies or dollars an amount of commodities equal to not less than 15% of the total amount of commodities distributed in any fiscal year in a country. The currency generated by these sales can then be used: to finance internal transportation, storage, or distribution of commodities; to implement development projects; or to invest and with the interest earned used to finance distribution costs or projects.^[8]

Related Research Articles

A currency is a standardization of money in any form, in use or circulation as a medium of exchange, for example banknotes and coins. A more general definition is that a currency is a system of money in common use within a specific environment over time, especially for people in a nation state. Under this definition, the British Pound sterling (£), euros (€), Japanese yen (¥), and U.S. dollars (US$) are examples of (government-issued) fiat currencies. Currencies may act as stores of value and be traded between nations in foreign exchange markets, which determine the relative values of the different currencies. Currencies in this sense are either chosen by users or decreed by governments, and each type has limited boundaries of acceptance; i.e., legal tender laws may require a particular unit of account for payments to government agencies.

A gold standard is a monetary system in which the standard economic unit of account is based on a fixed quantity of gold. The gold standard was the basis for the international monetary system from the 1870s to the early 1920s, and from the late 1920s to 1932 as well as from 1944 until 1971 when the United States unilaterally terminated convertibility of the US dollar to gold, effectively ending the Bretton Woods system. Many states nonetheless hold substantial gold reserves.

Seigniorage, also spelled seignorage or seigneurage, is the difference between the value of money and the cost to produce and distribute it. The term can be applied in two ways:

This aims to be a complete article list of economics topics:

A government bond or sovereign bond is a form of bond issued by a government to support public spending. It generally includes a commitment to pay periodic interest, called coupon payments, and to repay the face value on the maturity date.

The risk-free rate of return, usually shortened to the risk-free rate, is the rate of return of a hypothetical investment with scheduled payments over a fixed period of time that is assumed to meet all payment obligations.

The monetary policy of The United States is the set of policies which the Federal Reserve follows to achieve its twin objectives of high employment and stable inflation.

The money market is a component of the economy that provides short-term funds. The money market deals in short-term loans, generally for a period of a year or less.

<span class="mw-page-title-main">Monetary reform</span> Movements to amend the financial systeem

Monetary reform is any movement or theory that proposes a system of supplying money and financing the economy that is different from the current system.

A monetary system is a system by which a government provides money in a country's economy. Modern monetary systems usually consist of the national treasury, the mint, the central banks and commercial banks.

<span class="mw-page-title-main">Government debt</span> Total amount of debt owed to lenders by a government/state

A country's gross government debt is the financial liabilities of the government sector. Changes in government debt over time reflect primarily borrowing due to past government deficits. A deficit occurs when a government's expenditures exceed revenues. Government debt may be owed to domestic residents, as well as to foreign residents. If owed to foreign residents, that quantity is included in the country's external debt.

Money creation, or money issuance, is the process by which the money supply of a country, or of an economic or monetary region, is increased. In most modern economies, money is created by both central banks and commercial banks. Money issued by central banks is termed reserve deposits and is only available for use by central bank accounts holders, which is generally large commercial banks and foreign central banks. Central banks can increase the quantity of reserve deposits directly, by engaging in open market operations or quantitative easing. However, the majority of the money supply used by the public for conducting transactions is created by the commercial banking system in the form of bank deposits. Bank loans issued by commercial banks expands the quantity of bank deposits.

The history of the United States dollar began with moves by the Founding Fathers of the United States of America to establish a national currency based on the Spanish silver dollar, which had been in use in the North American colonies of the Kingdom of Great Britain for over 100 years prior to the United States Declaration of Independence. The new Congress's Coinage Act of 1792 established the United States dollar as the country's standard unit of money, creating the United States Mint tasked with producing and circulating coinage. Initially defined under a bimetallic standard in terms of a fixed quantity of silver or gold, it formally adopted the gold standard in 1900, and finally eliminated all links to gold in 1971.

The history of money is the development over time of systems for the exchange, storage, and measurement of wealth. Money is a means of fulfilling these functions indirectly and in general rather than directly, as with barter.

Debt monetization or monetary financing is the practice of a government borrowing money from the central bank to finance public spending instead of selling bonds to private investors or raising taxes. The central banks who buy government debt, are essentially creating new money in the process to do so.

Modern monetary theory or modern money theory (MMT) is a heterodox macroeconomic theory that describes currency as a public monopoly and unemployment as evidence that a currency monopolist is overly restricting the supply of the financial assets needed to pay taxes and satisfy savings desires. According to MMT, governments do not need to worry about accumulating debt since they can create new money by using fiscal policy in order to pay interest. MMT argues that the primary risk once the economy reaches full employment is inflation, which acts as the only constraint on spending. MMT also argues that inflation can be addressed by increasing taxes on everyone to reduce the spending capacity of the private sector.

<span class="mw-page-title-main">Quantitative easing</span> Monetary policy tool

Quantitative easing (QE) is a monetary policy action where a central bank purchases predetermined amounts of government bonds or other financial assets in order to stimulate economic activity. Quantitative easing is a novel form of monetary policy that came into wide application after the financial crisis of 2007‍–‍2008. It is used to mitigate an economic recession when inflation is very low or negative, making standard monetary policy ineffective. Quantitative tightening (QT) does the opposite, where for monetary policy reasons, a central bank sells off some portion of its holdings of government bonds or other financial assets.

Money is any item or verifiable record that is generally accepted as payment for goods and services and repayment of debts, such as taxes, in a particular country or socio-economic context. The primary functions which distinguish money are: medium of exchange, a unit of account, a store of value and sometimes, a standard of deferred payment.

Fiat money is a type of currency that is not backed by a commodity, such as gold or silver. It is typically designated by the issuing government to be legal tender, and is authorized by government regulation. Since the end of the Bretton Woods system in 1971, the major currencies in the world are fiat money.

The BONEX Plan was a forced conversion of bank time deposits to Treasury bonds performed by the Argentine government in January 1990.

References

1 2 The Economics of Money, Banking, and the Financial Markets 7ed, Frederic S. Mishkin
↑ Spotify. "How do artists get paid?". community.spotify.com.
↑ "TuneCore: Sell Your Music Online - Digital Music Distribution". United States. Retrieved 26 March 2019.
↑ "DistroKid is the easiest way for musicians to get their music into Spotify, iTunes, Apple Music, Amazon, Google Play, and more". DistroKid. Retrieved 26 March 2019.
↑ Wixen, Randall W. (2005). The Plain & Simple Guide to Music Publishing. home: Hal Leonard Corporation. p. 180. ISBN 978-1-4803-5462-3.
↑ Salehudin, Imam; Alpert, Frank (29 August 2022). "Perceived aggressive monetization: why some mobile gamers won't spend any money on in-app purchases". Electronic Commerce Research. doi:10.1007/s10660-022-09603-2. S2CID 251942705.
↑ Bolat, Jeff. "Best offerwall" . Retrieved 6 January 2021.
↑ CRS Report for Congress: Agriculture: A Glossary of Terms, Programs, and Laws, 2005 Edition - Order Code 97-905 Archived 10 August 2011 at the Wayback Machine

External links

Monetizing the Debt

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[:0-1] 1 2 The Economics of Money, Banking, and the Financial Markets 7ed, Frederic S. Mishkin

[2] Spotify. "How do artists get paid?". community.spotify.com.

[3] "TuneCore: Sell Your Music Online - Digital Music Distribution". United States. Retrieved 26 March 2019.

[4] "DistroKid is the easiest way for musicians to get their music into Spotify, iTunes, Apple Music, Amazon, Google Play, and more". DistroKid. Retrieved 26 March 2019.

[5] Wixen, Randall W. (2005). The Plain & Simple Guide to Music Publishing. home: Hal Leonard Corporation. p. 180. ISBN 978-1-4803-5462-3.

[6] Salehudin, Imam; Alpert, Frank (29 August 2022). "Perceived aggressive monetization: why some mobile gamers won't spend any money on in-app purchases". Electronic Commerce Research. doi:10.1007/s10660-022-09603-2. S2CID 251942705.

[7] Bolat, Jeff. "Best offerwall" . Retrieved 6 January 2021.

[8] CRS Report for Congress: Agriculture: A Glossary of Terms, Programs, and Laws, 2005 Edition - Order Code 97-905 Archived 10 August 2011 at the Wayback Machine

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