Monetization (
also spelled monetisation) 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
Legal tender is a form of money that courts of law are required to recognize as satisfactory payment for any monetary debt. Each jurisdiction determines what is legal tender, but essentially it is anything which when offered ("tendered") in pa ...
. While it usually refers to the
coin
A coin is a small, flat (usually depending on the country or value), round piece of metal or plastic used primarily as a medium of exchange or legal tender. They are standardized in weight, and produced in large quantities at a mint in order t ...
ing of currency or the printing of
banknote
A banknote—also called a bill (North American English), paper money, or simply a note—is a type of negotiable instrument, negotiable promissory note, made by a bank or other licensed authority, payable to the bearer on demand.
Banknotes w ...
s by
central bank
A central bank, reserve bank, or monetary authority is an institution that manages the currency and monetary policy of a country or monetary union,
and oversees their commercial banking system. In contrast to a commercial bank, a central ba ...
s, 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
In finance, a security interest is a legal right granted by a debtor to a creditor over the debtor's property (usually referred to as the ''collateral'') which enables the creditor to have recourse to the property if the debtor defaults in makin ...
, 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
Data monetization, a form of monetization, may refer to the act of generating measurable economic benefits from available data sources (analytics). Less commonly, it may also refer to the act of monetizing data services. In the case of analytics, ...
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
A double eagle is a gold coin of the United States with a denomination of $20. (Its gold content of 0.9675 troy oz (30.0926 grams) was worth $20 at the 1849 official price of $20.67/oz.) The coins are 34 mm x 2 mm and are made from ...
. 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
High technology (high tech), also known as advanced technology (advanced tech) or exotechnology, is technology that is at the cutting edge: the highest form of technology available. It can be defined as either the most complex or the newest te ...
and
marketing
Marketing is the process of exploring, creating, and delivering value to meet the needs of a target market in terms of goods and services; potentially including selection of a target audience; selection of certain attributes or themes to emph ...
, monetization is a
buzzword
A buzzword is a word or phrase, new or already existing, that becomes popular for a period of time. Buzzwords often derive from technical terms yet often have much of the original technical meaning removed through fashionable use, being simply used ...
for adapting non-revenue-generating assets to generate revenue.
Promissory currency
Such commodities as
gold
Gold is a chemical element with the symbol Au (from la, aurum) and atomic number 79. This makes it one of the higher atomic number elements that occur naturally. It is a bright, slightly orange-yellow, dense, soft, malleable, and ductile met ...
,
diamonds
Diamond is a solid form of the element carbon with its atoms arranged in a crystal structure called diamond cubic. Another solid form of carbon known as graphite is the chemically stable form of carbon at room temperature and pressure, b ...
, and
emeralds
Emerald is a gemstone and a variety of the mineral beryl (Be3Al2(SiO3)6) colored green by trace amounts of chromium or sometimes vanadium.Hurlbut, Cornelius S. Jr. and Kammerling, Robert C. (1991) ''Gemology'', John Wiley & Sons, New York, p. ...
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
A currency, "in circulation", from la, currens, -entis, literally meaning "running" or "traversing" 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 def ...
unless that currency is "promissory". That is, the currency promises to deliver a given amount of a recognized
commodity
In economics, a commodity is an economic good, usually a resource, that has full or substantial fungibility: that is, the market treats instances of the good as equivalent or nearly so with no regard to who produced them.
The price of a comm ...
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
A central bank, reserve bank, or monetary authority is an institution that manages the currency and monetary policy of a country or monetary union,
and oversees their commercial banking system. In contrast to a commercial bank, a central ba ...
.
If a nation's expenditure exceeds its revenues, it incurs a
government deficit
The government budget balance, also alternatively referred to as general government balance, public budget balance, or public fiscal balance, is the overall difference between government revenues and spending. A positive balance is called a ''g ...
which can be financed either:
*by the government
treasury
A treasury is either
*A government department related to finance and taxation, a finance ministry.
*A place or location where treasure, such as currency or precious items are kept. These can be state or royal property, church treasure or in p ...
, 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
In economics, the monetary base (also base money, money base, high-powered money, reserve money, outside money, central bank money or, in the UK, narrow money) in a country is the total amount of money created by the central bank. This include ...
through the
money creation
Money creation, or money issuance, is the process by which the money supply of a country, or of an economic or monetary region,Such as the Eurozone or ECCAS is increased. In most modern economies, money creation is controlled by the central bank ...
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".
[The Economics of Money, Banking, and the Financial Markets 7ed, Frederic S. Mishkin]
In most high-income countries the government assigns
exclusive power to issue its
national currency
Fiat money (from la, fiat, "let it be done") is a type of currency that is not backed by any commodity such as gold or silver. It is typically designated by the issuing government to be legal tender. Throughout history, fiat money was sometime ...
to a
central bank
A central bank, reserve bank, or monetary authority is an institution that manages the currency and monetary policy of a country or monetary union,
and oversees their commercial banking system. In contrast to a commercial bank, a central ba ...
, 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 site
A website (also written as a web site) is a collection of web pages and related content that is identified by a common domain name and published on at least one web server. Examples of notable websites are Google, Facebook, Amazon, and Wikipe ...
s and
mobile app
A mobile application or app is a computer program or software application designed to run on a mobile device such as a phone, tablet, or watch. Mobile applications often stand in contrast to desktop applications which are designed to run on d ...
s that generate revenue are often monetized via
online advertisement
Online advertising, also known as online marketing, Internet advertising, digital advertising or web advertising, is a form of marketing and advertising which uses the Internet to promote products and services to audiences and platform users. ...
s, subscription fees, or (in the case of apps)
in-app purchase
Microtransactions, often abbreviated as mtx, are a business model where users can purchase virtual goods with micropayments. Microtransactions are often used in free-to-play games to provide a revenue source for the developers. While microtransact ...
s. In the
music industry
The music industry consists of the individuals and organizations that earn money by writing songs and musical compositions, creating and selling recorded music and sheet music, presenting concerts, as well as the organizations that aid, train, ...
, 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
Spotify (; ) is a proprietary Swedish audio streaming and media services provider founded on 23 April 2006 by Daniel Ek and Martin Lorentzon. It is one of the largest music streaming service providers, with over 456 million monthly active us ...
and Apple Music. On-demand content sites like Spotify and
Apple Music
Apple Music is a music, audio and video streaming service developed by Apple Inc. Users select music to stream to their device on-demand, or they can listen to existing playlists. The service also includes the Internet radio stations Apple M ...
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
TuneCore is a Brooklyn, New York–based independent digital music distribution, publishing and licensing service founded in 2005. TuneCore principally offers musicians and other rights-holders the opportunity to distribute and sell or stream the ...
or Distrokid. 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. A previously free product may have premium options added thus becoming
freemium
Freemium, a portmanteau of the words "free" and "premium," is a pricing strategy by which a basic product or service is provided free of charge, but money (a premium) is charged for additional features, services, or virtual (online) or physical (o ...
.
Businesses monetize their value propositions to generate the resources necessary for continued operation through a
business model
A business model describes how an organization creates, delivers, and captures value,''Business Model Generation'', Alexander Osterwalder, Yves Pigneur, Alan Smith, and 470 practitioners from 45 countries, self-published, 2010 in economic, social, ...
or
revenue model A revenue model is a framework for generating financial income. It identifies which revenue source to pursue, what value to offer, how to price the value, and who pays for the value.Afuah, A. 2004. ''Business Models: A Strategic Management Approach ...
. Failure to monetize websites due to an inadequate
revenue model A revenue model is a framework for generating financial income. It identifies which revenue source to pursue, what value to offer, how to price the value, and who pays for the value.Afuah, A. 2004. ''Business Models: A Strategic Management Approach ...
was a problem that caused many businesses to fold during the
dot-com bust
The dot-com bubble (dot-com boom, tech bubble, or the Internet bubble) was a stock market bubble in the late 1990s, a period of massive growth in the use and adoption of the Internet.
Between 1995 and its peak in March 2000, the Nasdaq Compos ...
.
Equally,
David Sands
David Sands was a convenience shop chain located in Fife, Kinross and Perthshire, Scotland. At 200 years old, the family-owned enterprise had 28 outlets at its peak. According to a 2009 article on Business7, a publication of the ''Scottish Dail ...
, 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 over-emphasizing 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.
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
In the United States, the Supplemental Nutrition Assistance Program (SNAP), formerly known as the Food Stamp Program, is a federal program that provides food-purchasing assistance for low- and no-income people. It is a federal aid program, ad ...
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
A black market, underground economy, or shadow economy is a clandestine market or series of transactions that has some aspect of illegality or is characterized by noncompliance with an institutional set of rules. If the rule defines the se ...
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
World War II or the Second World War, often abbreviated as WWII or WW2, was a world war that lasted from 1939 to 1945. It involved the vast majority of the world's countries—including all of the great powers—forming two opposin ...
,
Chernobyl liquidators
Chernobyl liquidators were the civil and military personnel who were called upon to deal with the consequences of the 1986 Chernobyl nuclear disaster in the Soviet Union on the site of the event. The liquidators are widely credited with limiti ...
, 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.
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
Moscow ( , US chiefly ; rus, links=no, Москва, r=Moskva, p=mɐskˈva, a=Москва.ogg) is the capital and largest city of Russia. The city stands on the Moskva River in Central Russia, with a population estimated at 13.0 million ...
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
Monetization ( also spelled monetisation) 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 tend ...
" is a
P.L. 480 provision (section 203) first included in the
Food Security Act of 1985
The Food Security Act of 1985 (P.L. 99–198, also known as the 1985 U.S. Farm Bill), a 5-year omnibus farm bill, allowed lower commodity price and income supports and established a dairy herd buyout program. This 1985 farm bill made changes in a ...
(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.
CRS Report for Congress: Agriculture: A Glossary of Terms, Programs, and Laws, 2005 Edition - Order Code 97-905
See also
*Data monetization
Data monetization, a form of monetization, may refer to the act of generating measurable economic benefits from available data sources (analytics). Less commonly, it may also refer to the act of monetizing data services. In the case of analytics, ...
*Debt monetization
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 ...
* Demonetization in legal tender
* Economy monetization
*Monetized Installment Sale A monetized installment sale is a special type of installment sale whereby a seller of appreciated assets attempts to defer U.S. Federal income tax liability over a period of years while currently receiving cash or other liquid assets via a monetiz ...
*Patent monetization
Patent monetization refers to the generation of revenue or the attempt to generate revenue by a person or company by selling or licensing the patents it owns. According to a 2006 survey of patent owners at the European Patent Office, about half of ...
* Remonetisation
*Software monetization
Software monetization is a strategy employed by software companies and device vendors to maximize the profitability of their software. The software licensing component of this strategy enables software companies and device vendors to simultaneously ...
References
{{reflist
External links
Monetizing the Debt
Money