crowdfunding

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Will crowdfunding make Intellectual Property obsolete?

Friday, August 10th, 2012

‘The problem with traditional publishing is that you do all the work and take all the risk before you find out if the audience is ready and willing to buy the book. And you have only a few days to go from “it’s new” to “it’s over.”’

(Seth Godin blogging on his Kickstarter campaign for a proposed new book).

Does the success of crowdfunding cultural goods do away with the necessity for intellectual property?

The economic argument for  intellectual property schemes is often something along these lines: it takes a great deal of time/money to make something that requires knowledge or creativity such as books or pills. In the absence of legislation anyone could copy the book or pill and undercut the creator’s investment. Knowing this a rational creator would not write or invent. In this model incentives to create are scarce. This account dismisses both Shakespeare and Salk as irrational.

That people create for reasons other than potential monetary rewards has been pointed out repeatedly but the account is inadequate for other reasons.  Some proponents of intellectual property argue that is it necessary not so much for the initial creation of an intangible good so much as for the mass production and distribution of material copies of the good.  Proponents of intellectual property are often intermediaries rather than creators, record companies, movie studios and book publishers for example. These intermediaries (have) often control(led) the distribution channels for creative goods. One reason for this control is that intermediaries spend all their time trying to control the channels while creatives are creating. Another is that some kinds of creative goods cost a lot of money to mass manufacture and distribute, LP’s or CD’s for example. The argument is that exclusive rights are necessary to ensure a return on the capital expended in mass manufacture and distribution.

Intermediaries are able to maximize their profits by spreading the payment they were required to make to the creator over the greatest number of copies of a good. If a publisher could publish just one best seller a year it could make more profit than publishing a 100 books for which there was limited demand. But best sellers have proven notoriously hard to predict. Intermediaries have to market a number of intangible goods some of which are profitable and cross subsidize others.  In this argument for intellectual property the demand for an intangible good cannot be as readily ascertained as the demand for a tangible good say a can of baked beans. Exclusive rights are useful not so much as an incentive to initial creation but to reduce the risk to capital. Intermediaries provide(d) capital for such capital intensive processes. In this model information about customer preferences is scarce. This is why Hollywood is so obsessed with making movies only from successful books, computer games and endless remakes, sequels, prequels and sharquels (the sequel that jumps the shark).

The result was a world in which intermediary control of production and distribution channels together with the limits of technology defined by what  Chris Anderson explained as ‘limited shelf space’; distribution channels offering only a narrow choice of creative goods. Digital technology and new intermediaries have increased choice, and reduced blockbusters. Digital technology is also revealing new data on customer preferences. New intermediaries have lowered the barrier to market entry. Amazon.com offers authors an opportunity to publish ebooks through Amazon, and it is the market and not Amazon that decides whether the work becomes popular. Authors are able to set their own price unlike authors who publish ebooks through traditional publishers. But Amazon still takes a substantial portion of the revenue and controls the distribution system. In this model the attention of consumers is scarce. Amazon consolidates consumer attention.

Enter crowdfunding. Here is a description of the process on the Fundable site:

Entrepreneurs with great business ideas pitch them to the Fundable community. Each fundraise has a minimum fundraising goal that it must reach in order to be funded….

“Community “backers” support the ideas by pledging capital in exchange for rewards, like a pre-order of the product.”

Goding used crowdfunding site kickstarter.com to raise money; $ 287 342 was pledged, while Godin’s goal was only $40 000. but Godin also used the kickstarter campaign to demonstrate interest in in his proposed book ‘The Icarus Deception’ to his publisher. Godin, a popular figure amongst marketers, used crowdfunding not simply for funding but in order to simultaneously create, gauge and demonstrate demand.

Musician Amanda Palmer also used kickstarter but to raise money for mixing, promotion, manufacture and distribution of an album, album art and a world tour. She obtained $1 192 793 though her goal was only $100 000.

The campaigns by Godin and Palmer share certain features including tiered support levels tied to creative rewards, the higher the pledge the more, and more elaborate, artifacts promised to the pledge maker.  Both Godin and Palmer are established creative personalities with strong brands. Neither offered to release their creations under open licences. These data give rise to some caveats that I’ll discuss in a paragraph or two. But these examples and others like them suggest are highly suggestive.

Creators are able to simultaneously aggregate demand and raise capital. It is in principle possible for a creator using no more than technology and contract law to set a price for creative work, and once that price is met to produce the work without requiring intellectual property as an incentive.

Of course crowdfunding creative production means disintermediating incumbent intermediaries. It is more economically efficient because captures two important pieces of information; what is the market demand for the good and what is the minimum (financial) incentive for the creator. It also enables the creator to raise capital directly from the purchasers of the good thus lowering the cost of capital. It also enables a far greater range and number of creative projects than was ever in the interests of intermediaries.

Even this scheme is far from perfect. Creatives may over or under price their projects. The system relies on a certain minimum reputation, Godin for instance has already had numerous books on marketing published. It would likely be more difficult for an unknown author to obtain similar levels of funding. Godin presumably is adept at marketing. Other objections are that only 25% of tech and design projects on kickstarter currently deliver on time, some proposals may be scams. Despite these issues there are already crowdfunding sights for fashion, social causes in the United States and in Britain.   Glyn Moody suggests crowdfunding to create FLOSS. Using crowd funding for resources that are open is particularly interesting since it will enable discovery of information that is distorted by the current intellectual property system; the price that is a sufficient incentive for a creative person to create something.

I expect that economists will begin to pay attention to crowdfunding because it enables market mechanisms to discover information distorted or obscured by current intellectual property production systems. I expect creative people will begin to pay attention to crowdfunding because it will give them the ability to engage more directly with the people who like their work and are willing to pay for it.