Friday, July 23, 2010

Judgement Trumps Experience

Unless you've made a commercially successful film, you have no place in the debate over movie piracy.
This isn't the first time this argument has come up in debates over movie piracy. Truthfully, it must be one of the most ignorant things I've ever heard. Do you have to be designer to spot bad design? Do you have to be a writer to recognize bad writing? Do you have to spend time making and selling horse whips to realize that the horse whip business model is becoming obsolete with the invention of the automobile?

There is no school for presidents, yet new presidents seem to do just fine. You can have tons of experience and still make poor judgement calls, as we have seen with the record industry's gradual nose dive over the last decade.

The whole reason I haven't made a commercially successful feature film is mostly because of circumstance—I have two daughters who monopolize most of my time. But even then, I have had the chance to produce feature movies numerous times and on each occasion, I've chosen not to because all my research pointed at one ugly conclusion: the current business model for making films is intrinsically flawed. A shift has happened in the last five years that has radically changed how films are getting their money recouped, or not. Piracy plays an increasingly larger role in that landscape, and that scares the shit out of me. I absolutely am not going to look an investor in the eye and tell him he's going to make his money back if I haven't done my own due diligence to prove it.

So I vowed to myself that I should make it my life's mission to completely master how film distribution worked before making my own movie. After all, doesn't it make sense that you must know how much your product will sell for before you draw up your budget? If the product doesn't sell for what you expect, then you're saving yourself a whole lot of anguish by not gathering money to create that product. Right?

After two years of research, I finally figured out what was going in the film business. At the root of problem were two key factors:
  1. there was a complete misunderstanding of the new economics in play;
  2. there was an industry-wide denial from anyone with skin in the game.
As for #1, the internet has introduced the concept of abundance into economics. For thousands of years, economics has been dominated by an understanding of how best to allocate scarce resources, but when you can copy things digitally—when each copy is an exact replica of the original—those things aren't scarce at all, but abundant. In the grand scheme of history, the internet is brand new and we're only now starting to get our head around what it is, and what it means. Sure, we try to graft Analog Age concepts onto it like Intellectual Property (as if anyone can own an idea), but the way we consume and share ideas is unlike anything we have known about how we use scarce resources. Once you get that concept (and I was militantly resistant to the idea for almost a decade), you see that business models that have been around for almost a century are becoming obsolete and new business models will inevitably replace them. The artists who have based their business models on an understanding of the new economics in play have done famously well, like Amanda Palmer who got kicked off her label (at her request) and then made $15,000 in only 3 minutes.

As for #2, I can't say I blame people in the film industry for being in denial about how things are changing. Nobody with $15 million riding on the line is seriously willing to contemplate that their business model is becoming, or has become, obsolete. What they want or don't to be true is moot—the car replaced horse & buggy drivers, the printing press replaced manuscript illuminators, and the internet will have similar effects on legacy delivery systems like records, CDs, DVDs, and books. Deny that change if you wish, but it doesn't stop the wave from destroying your sand castle.

The changes in the market are now so clear to me that it would be suicide to enter the marketplace in the traditional way to make a commercially successful movie. And if that is the only price of admission I must pay to get my message through to those in denial, then I pray for their survival as I watch their car tragically head for the cliff.

Thursday, June 03, 2010

Why They Hate Free

I hear a lot of anger from content creators whenever they hear me say "free" and "content" in the same sentence. They seem to think I want everything to be free, that "information wants to be free", etc. Their main point of contention, it seems, is they feel their hard work is devalued by offering it to consumers for free.

But free is just another price.

Say a book publisher offers a book for $15, and I offer a similar book for $10—all things being equal, my cheaper book will attract more buyers. To regain readership, my competitor might lower their price from $15 to $9. Then some jackass comes along and offers a similar book... but for free.

That's insane! That's so stupid! That's retarded! Readers will obviously choose this new free book over our book! We must loudly and unequivocally denounce this moronic behavior, and tout this interloper as a purveyer of dangerous ideas that will surely kill the publishing industry. Above all, we must insist that everyone will lose, especially the consumers. So get on our bandwagon, consumers! Stop all this free stuff if you want to save the publishing industry!

But free is just another price.

When I arrived at that conclusion, I realized that—from the perspective of most Old Dogs in the industry—they hate when I talk about offering product for free because they see no way to compete with it. Not only am I "devaluing" their work by giving away product which they must still charge for, which must feel pretty offensive to them, but I'm also offering up content for a price far lower than they can afford to offer... if they want to stay in business. In short, I'm advocating a strategy that represents their single most lethal business threat. Of course they're going to hate me for that.

But free is just another price.

If I discover a new and more innovative business model which allows me a chance to give away a product for free and still make a profit (by selling other scarce and valuable things), should it be my moral responsibility to help keep all those Old Guard competitors in business even though they continue to reject and openly deride my new business model? Of course not. My responsibility is to compete and if I don't compete better, then I'll be beat by those who do compete better than I. If my business model means I've found a way to give product away at a price lower than my competitors can afford, too bad for them. That's how it goes. But offering content for free is not anathama in itself.

Free is just another price.

Sunday, May 30, 2010

What does it lead to?

The following piece is an unabridged version of an article first published in Microfilmmaker Magazine, issue #53.

Hypothetical situation. You're in a movie store trying to return a DVD set of a TV series. The dude at the counter looks at the DVDs you've just handed him. "What's wrong with it?" he says.

"The episodes have been shuffled around," you say. "Every episode in the series is out of order so I have no idea which episode needs to be played first."


"It's usually pretty important to see a TV series in the right order."

Shrugging, "Nobody else seems to care."

"Look, I care—and I'm a paying customer."

"What can I say? Don't buy it, then."

At this point in the conversation, most people might walk out of this movie store in disgust. This is probably what they'd be thinking:

Are you seriously telling me, a paying customer, not to pay you $50-$100 for an entire season's worth of DVDs—which could end up leading to a larger purchase of the entire series if I like it enough—simply because you won't sell a DVD set with each episode in its correct order??? That's lame, bro. I hope you go out of business. In fact, although I know there are more important things in life to worry about, I'm going to make it my mission to see you go down. I'll start by finding a competitor of yours who cares enough about earning my money that they'll give me what I want. And if I can, I'll even go so far as finding that TV show online somewhere illegally, and then I'll happily download it because I know by downloading it, I didn't reward your short-sighted cavalier attitude with my money.
We've all encountered lame customer service, but in a competitive economy, companies with wretched customer service eventually lose their customers and go out of business because another company would have successfully spotted their competitor's shortcomings and filled the market need. As customers, we'd never accept this kind of flippancy coming from a company we're giving money to, especially if the amount of money dips into the triple digits.

My wife and I swore off cable TV in 2003 for two reasons: 1) the current quality of American TV had always seemed so low to us that it's hard to find anything we want to watch that we can't already rent on DVD, and 2) commercials suck.

Seven years later, TV has changed a lot. The selection of quality isn't that much better, but networks like ABC have begun to offer their shows online, and DVR technology like U-Verse and TiVo have become ubiquitous. So my wife and I tried out cable with DVR and chose to keep it for a while, just to experiment.

Despite my reluctance, I must admit that AT&T's U-Verse DVR system is awesome. If I like a TV show, I just tap a few buttons and know I'll never miss any show in a series again, even if that show gets pushed to a different time due to unforeseen circumstances. Whenever I sit down to watch TV, I know I'll always have the most recently broadcast episode queued up waiting for me. And AT&T's U-Verse remote has a killer 30 second skip feature to allow me to blaze past commercials whenever they intrude upon my viewing experience.

When I watch a TV show, I prefer to watch the series in its original order. Not all TV series are written with a specific order in mind, but you never really know from one show to the next how rigid a season's story arc is going to be. The show might be extremely episodic in nature, i.e., you can watch each episode in sequence with no problem, or the show might be highly dependent upon sequence, where watching one episode out of sequence would throw you off completely. I remember watching a marathon of The West Wing in its original order and saw the season's timeline unfold over the course of a single day... events were causal and cumulative, and there was immense satisfaction knowing the contextual signficance of each subsequent plot development based on all the plot points that had come before it. You wouldn't watch a movie on DVD with the DVD player's chapter shuffle setting on, would you? And you wouldn't buy a DVD set of a TV series with its episodes out of order, would you?

So it really irks me when station programmers broadcast old TV series episodes out of their original order, flipping back and forth from one season to the next with no clear reasoning behind their decision. They have their own bizarre logic in doing so, and it's irritating if you're trying to really invest in that TV show's world. For instance, the geniuses at FOX opted to bump Firefly's original pilot episode, and insisted another episode be created because they felt the pilot wasn't good enough at introducing the series to new audiences. Dude, trust the writers. Trust the audiences. We're not dumb. Let us see the content the way it was intended to be seen.

...and that's where piracy comes in. Here I am, I'm looking at my U-Verse DVR screen, scanning over a long list of episodes my DVR has dutifully recorded for me. As far as I can tell, I can have at least 24 episodes in a series to choose from at any time—a season's worth of episodes. Given enough time, my DVR will eventually soak up every episode ever broadcast from that series. Which means my DVR is, ultimately, going to deliver to me exactly what I want—the series—but not in the order I want it. And because I may be watching a series where that's kind of important, that irritates me quite a bit. So if I have access to BitTorrent or an online site where I have that choice to watch pirated versions of those same TV episodes but in the order I want to watch them, even if it means sacrificing some quality... I could easily see myself doing it. Broadcast TV has failed to deliver what I really want, and now I'm going to get what I want without broadcast TV.

The clincher is that the experiences of using DVR technology and using BitTorrent are strikingly similar. With both U-Verse DVR and BitTorrent, I would:
  1. Find a program and get it recording/downloading;
  2. Wait for it to be finished and come back whenever I want to watch it.
  3. For U-Verse, I skip over commercials in 30 second leaps. For BitTorrent, the commercials have been conveniently removed—effectively, these are the same experience, though BitTorrent is slightly more convenient and time-saving.
Thus, if both experiences are effectively the same, but my BitTorrent copy deletes commercials that would have been skipped over anyway (and saves users the time of reaching for the remote and finding the exact spot where the commercials stop) and offers more content choice than using my DVR... well, it's pretty obvious why users are willing to sacrifice a little image quality to pirate content.

I could stop there and say broadcast TV's myopia has effectively forced me into BitTorrent piracy once and forevermore... but that would be a lie. The fact is, contrary to what most people might think, an act of copyright infringement of a TV series is actually a huge win for the TV series' creators. Yes, a fan has resorted to piracy to seek out episodes to play in the original order they were intended... but that fan is still watching their TV series. Meaning, they still have a person's attention. Thus, it doesn't follow that a person will continue to pirate every episode of the TV series just because they can. On the contrary, the more a person pirates a series, the more of a fan that person becomes (if the series is good, of course)... and the more likely that person is to keep watching the series on DVR. Right now, the best quality image is still on TV so, when given a choice to view content on a TV set or through BitTorrent/web streaming, I know that I would still prefer to watch stuff on my TV. Why? If I can get all my content for free, why wouldn't I? Because BitTorrent and web streaming piracy is still way too much effort (i.e., it takes too much time and it's too inconvenient) and pirated web streaming is typically of far poorer image quality (it has poor embodiment).

This is the single most irritating myth I hear invoked about piracy, that "piracy is a lost sale". Rubbish. Maybe that's true in some cases, but piracy is never as clear cut as always equating to a lost sale. In my case, piracy actually leads to sustained and increased fandom because the more attention I give that content, the more time I have to become a fan of it... and the more I think about buying DVDs on Amazon for myself and/or my friends. Perhaps this is why rumors persist that allowing copyable content (music, movies, books) roam free on the internet without copyright enforcement actually increases the sales of non-copyable content (merchandise, concert tickets, lunch with the content creator, watching in IMAX 3D).

Of course, people resort to piracy for many reasons, but I still believe that casual users—which likely represents the bulk of pirates out there—don't resort to piracy merely because they can get something for free. If I could get anything I wanted for free online without fear of negative consequence, why do I still pay for cable? Why do I still pay for Netflix? Why do I still buy off of Amazon? Piracy, at its juicy inner core, is really about control. Consumers of digital content want what they want and if producers can't figure out how to make money by giving consumers what they want, consumers will get it regardless. The mortal sin for producers is that if they remain obstinate enough to allow consumers to venture into piracy (and yes, piracy is the producers' fault for not fulfilling a market need quickly enough), producers have not only lost an opportunity to get their consumers' money, but they've also lost a chance to get their consumers' attention. As anyone in marketing knows, it takes seven touches to a sale, so the more attention your customers give your product or service, the more your sales should increase overall. Pirates are also fans, and fans buy stuff. As long as producers are clear that fans don't buy the actual product, but the intangibles embedded in the product, producers should be fine with letting their content be freely available online. Content only gets buyers in the door, but intangibles are what get money changing hands.

Another mental eddy I run into is people seeing red when they hear the word 'piracy'. People's brains shut down. Their knee-jerk reactions seem to be steered by moral judgments they've made months, or even years ago, about theft: It's wrong, it's theft, they're pirates, and they should go to jail. Theft is actually an Analog Age concept—taking an apple from you which deprives you of its use—and if we apply the rules of the Analog Age to the Digital Age, this would certainly be true... but the Digital Age has new rules. Never before has it been possible to infinitely copy a product with zero cost to the producer. If I could go back in time 600 years and tell someone a book could be copied and sent to every person on the planet in less than a day, they'd laugh in my face. A book, they'd say, is a scarce object, something venerable because of its inability to be copied. (Even if a book were copied back then, it would still be so original that it would remain unique.) But then they'd see the invention of the Guttenberg press and be both amazed and horrified about its ability to duplicate books with ease. As printing presses increased the supply of books, their price per unit dropped and what had previously been scarce was now suddenly far more abundant and accessible. The Digital Age is merely the latest evolutionary chapter: instead of having a low cost of reproduction, we now have a zero cost of reproduction. And when something can be handed from one person to the next without any cost to the producer, it cannot be defined as theft under any definition. Even the law recognizes there is a difference—illicit digital copying isn't called theft, it's called infringement.

Here is it useful to look at piracy in a different light. Rather than define the act of piracy for what it is—i.e., illegal and immoral—let's look at the act of piracy as what it leads to. You can look at the world in static terms or in fluid terms, and the latter yields more useful conclusions. Author Edward de Bono draws a distinction between the two forms of thinking:
de Bono contends that traditional logic is static, based on the solid foundations of 'is' and identity. In contrast to the traditional 'rock logic', he proposes 'water logic' which is based on 'to' and the flow of the mind: 'What does this lead to?' as opposed to 'What is...?'
How does this pertain to piracy? de Bono explains further:
Pragmatism is very much based on the 'leads to' of water logic. There is a justified fear of pragmatism because it seems to seek to operate without principles. This is nonsense because the principles can be just as much part of the pragmatism as are the circumstances. One strong reason for a dislike of pragmatism is the fear that 'the end may come to justify the means'. In other words if the end is worthwhile then the means of achieving that end are justified. Since different people and different bodies will have different notions of worthwhile ends, the result would be chaos and barbarity. Interestingly the very reason we reject this notion of the end justifying the means, is a pure example of pragmatism and water logic. We are concerned with what it 'will lead to'. So pragmatism can police pragmatism just as well as rock logic policies rock logic.
To cite another de Bono example, if a customer goes to a store without a receipt to return an object they bought, the store can point to their sign that says, "No receipt, no refund." According to Rock Logic, the store would be in the right and the customer would be in the wrong. According to Water Logic, though, that sort of rigid decision leads to a dissatisfied customer unlikely to buy from that store again. Would you rather be right... or breed lifelong customer loyalty?

In Rock Logic terms, piracy is bad/wrong/evil, etc. and always will be until the end of time. Fine. But what does it lead to? What does having a film leaked on BitTorrent lead to?

Piracy leads to attention... and attention leads to more sales.

It sounds so simple, doesn't it? John August had his film The Nines leaked onto BitTorrent and he had this to say about it:
IMDb searches for The Nines peaked at #11 on January 20th, 2008 — two weeks before the DVD was released. That’s because it finally got leaked on BitTorrent. Suddenly, that college student in Iowa and that programmer in Arles could finally see the movie.

Let’s try a thought experiment: what if The Nines had leaked shortly before the theatrical release, say, August 19th? At that point, we were number 836 on IMDb, and that was during a concerted publicity campaign which would ultimately get us as high as 47 on the chart.

Would the leak have helped us or hurt us?

Given we were only playing in two cities in the world, I can’t think it would have hurt us much. And if there had been a legal and easy way to let people watch the movie — say, through iTunes — I think we could have capitalized on the attention. The pirated version was going to be available on or before the release of the DVD regardless, so one might as well benefit from it as much as possible.

To my thinking, leaking a decent-quality, watermarked version would have greatly increased the awareness and discussion of the movie, which could have paid off if the DVD and/or iTunes version were available shortly thereafter.
Piracy is the only explanation for why a film like the massively pirated Wolverine—which received awful reviews—actually did better at the box office on its opening weekend than the other equally popular franchise film Star Trek, which received rave reviews. For every case of a pirated film where the producers claim they lost everything, it feels like I can point to just as many films which seem to have done very well because of piracy and/or because the film was free. My hunch is that the pirated movies that don't make money aren't good enough to demand repeat viewings... so we only hear complaints from the producers who are getting their asses tanned for making product the market doesn't want badly enough.

In a digital age where a decade of enforcing copyright has yielded nothing but a pyrrhic victory, does it make sense anymore to keep throwing money at a pointless battle... and then feel bitter about its lackluster results? Or do you think it's maybe time to bite the bullet, embrace the market's new rules and get on with making money the new way?

Thursday, April 08, 2010

The Cliff

Bad news for you. You're asleep at the wheel—you can't see what's coming. We're not in the car ourselves, but we can see passengers with you; if you crash, they will surely be injured.

But you might also hurt us, or people we know. People look up to you, they're counting on you. What you decide will sway countless others... and you're asleep at the wheel.

We feel we see the world for as it is, and we're well aware the path is foggy. You probably fell asleep because you felt the path would never, and should never, change. Yet the path has changed, and massively. Looking ahead, we think we know—at least in broad terms—where the path will take us all. We can tell a few things for sure and we can see the cliff you're coasting towards. You're smarter than that. You should be awake. You need to be awake. Lives are at stake.

And we try. We try hard every day to get you to see the world as it is despite how you wish it might otherwise be. We also desperately wish the path weren't so foggy... but it is. If you were awake, and lucid, you'd see things as they actually are, not through the lens of how things have been or should be.

If you want to drive off that cliff, asleep at the wheel, we've given you fair warning. Still, we can't stop pestering you because our very humanity does not permit us to stand idly by and watch others needlessly spiral into oblivion.

The path has changed. It's not going back and will never go back to how it used to be. Accept it. Wake up and veer away from disaster.

As for us, we're also going off the cliff... but we're not going in a car.

We're going on a hang glider.

Friday, March 26, 2010

One Million Screwdrivers: The Bassinet Story (Part 5 of 5)

This is an article in a series called One Million Screwdrivers. You may read all the articles in this series by clicking here.

My wife and I had a bassinet given to us when our first child was born. It was decent enough for a piece of furniture that would only be around for a few months. After our daughter grew out of it, we passed it over to one of our friends with a newborn, and then recouped it again when we had our second child. With our second child finally growing out of that bassinet, and with no plans on having another baby, the bassinet had no use to us anymore. With a house of four, our space had diminished further... so, not knowing anyone with a newborn to give it to, we needed to get rid of it fast.

A comparable bassinet would have sold for $200 to $300, but we didn't want to wait that long. We could arrange a time for someone to come by and pay us $50 or something, but that might involve an investment of time on our part, a scarcity we did not have. We could take it to Goodwill and drop it off as a donation for the tax write-off, but that would also require an investment of time... same problem. Despite the logic pointing us to post it on Craigslist, my wife had attached a huge amount of sentimental value to it—after all, it had protected both our newborn daughters in the most fragile and beautiful moments of their lives. My wife didn't want to just give away this bassinet to some random stranger who might snatch it up and resell it for a profit.

But, in the end, she gave in. I took the bassinet downstairs, placed it outside our closed garage door, and posted an ad on Craigslist saying, "Free bassinet. Great condition. First come, first served!" It was gone before sundown.

That evening, my wife was searching Craigslist for my original ad and found this post completely by accident:

A big, big thank you to the couple who gave this stuff away. I picked up the bassinet with the sheets, etc. in it a little while ago. Our bassinet had been damaged beyond repair in an accident, so we were really needing another. Many thanks!! I am just thrilled with the bassinet!

Our intent was not really charitable, but pragmatic. Still, it felt good. We gave up our control, let our bassinet go out into the world, and it found a good home. Letting the bassinet go was worth the risk.

Here's a little known fact about Woodstock—it was one massive act of piracy. Originally, the organizers had intended to charge for tickets but their three foot wooden fences were immediately pushed over by a wall of hippies. Following a tense moment of pondering legal action, the Woodstock organizers considered how many people were ignoring their legal rights, i.e., everyone, and deduced that any attempt to enforce their legal rights would lead to riots. Of course, nobody knows whether Woodstock would have retained its place in music history as the concert of all time if its organizers had been able to successfully charge for tickets, but it's safe to say that many people still talk about Woodstock because it was a free concert with the greatest musicians of their generation. Today, it's still possible to cash in on vintage Woodstock T-shirts. Think about that. Woodstock happened 40 years ago last year... and they're still selling T-Shirts. If that isn't the power of free, I don't know what is.

Many in entertainment sectors have an unhealthy fixation with the word, "free". They consider putting a free price on their content, or giving away copyable versions of their content, as synonymous with calling their content worthless. Price and value are distinct ideas, but they hear "free" and further arguments start to fall on deaf ears.

I've tried to use air and water as examples of how even "free" goods can still be enormously valuable, but the counter-arguments are that air and water aren't free because we still pay taxes to keep the air and water clean. Okay... there's some truth in that, I guess. Anyone in Los Angeles knows that water from the tap is expensive, even it feels free. However, this completely misses the point about abundance: you can go into any restaurant in America and ask for a glass of water and not be charged for it because it is so abundant. Water priced at $0.00 does not demean its value. Without water, we would die. Yet it is abundant, so its price is zero.

But fine, let's dance. I have the ultimate trump card—the outer core 3,200 miles below the Earth's surface. The outer core is an ocean of 4400°C nickel iron with insufficient pressure to be converted into a solid state. Because iron is electrically conducting, its swirling eddies produce a massive magnetic field extending beyond Earth by several thousand miles... a magnetic field which shields us all from lethal doses of radioactive solar winds. More than air, water, or even sunlight, Earth's swirling outer core of liquid metal frequently keeps us from burning to a crisp. Thus, the outer core is indisputably one of the most valuable things sustaining life on this planet. However, despite this incredible value, we pay nothing to sustain it. Years go by and we hardly even give it a thought, but without that liquid metal constantly churning thousands of miles beneath our feet, we would all die from solar radiation. Abundant means free, not worthless.

The hypothetical example of one million screwdrivers was to show that when you lower costs, you gain more buyers... and buyers become fans... and fans come back to buy more. Yet when you lower your costs to "free", you stop making money and start getting something else entirely, something potentially far more valuable than money—attention. Why is it more important? Because attention brings discovery, fans, opportunity and influence. The more fans, the more leverage you have to make money from other outlets.

That's where a lot of people in the Analog Age need to take a leap of faith. They're still making money off $25 DVDs. They control the distribution paradigms and it's worked very well for them, thank you very much. Why should they give that up? They'll just push for tighter Digital Rights Management and pay high-priced lawyers to send out cease-and-desist letters.

Here's how I see the two different approaches:

  1. Retain control and spend money on DRM, lawyers and marketing.
  2. Make money selling infinite goods. (MP3, MPEG, JPG, PDF)
  3. Have limited/niche attention, small fan base.
  4. Hope enough fans remain faithful.
  5. Be resentful about piracy.

  1. Cede control and save money on DRM, lawyers, and marketing.
  2. Don't make money with infinite goods by themselves.
  3. Get massive attention from freely distributed infinite goods.
  4. Leverage that massive attention to discover and nurture new fans.
  5. Make money selling scarce goods. (time-saving, convenience, authenticity, exclusivity, etc.)
  6. Hope your infinite goods get pirated more!

The ones who refuse to acknowledge any or all of these arguments seem to have a vested interest clouding their judgement, or they've never thought too much about the issues, or they have a monochromatic morality forged in a Analog Age. They think pirates are evil, so they push for increasingly stricter DRM. So I have to wonder: is the source of this conflict merely two incongruous ways of looking at the world? Media futurist Gerd Leonhard put it this way, and we'll use this eloquent piece to conclude this blog series:
After countless conversations and debates over the past 8 years, I have come to think that the DRM issue is largely a question of which reality one believes to be true—and we must address the solution as such, too. No research, no statistics, no hard facts, and no futurists will tell us conclusively whether the record companies should or should not use DRM when selling digital music. To make this decision will not be science but an art!

Do you believe that the sharing of music—and therefore its consumption, in general—needs to be controlled, that a certain amount of friction is required to extract any meaningful payments for music in a digital environment, that the average consumer will always try to avoid paying anything, if given any opportunity to do so, that it is impossible to sell something that is, to a large degree, also obtainable for free, and that the monetary value of music really is in 'the copy' of a song? Then you would indeed need to be a strong advocate of technical protection measures and digital rights management software—in your mind the control of those 0s & 1s would be a definitive prerequisite for any monetization. No control equals no income; a ‘free for all’ is the result of having too little control.

Or do you believe that a consumer will always pay for something that is easy, enjoyable and trouble-free to acquire and that has demonstrated, tangible and trusted value, that it’s not just the copy of a file or a piece of plastic that represents the real and inherent value of music, that friction can not be successfully re-inserted into our increasingly frictionless commerce environments, that our business problems cannot be solved with technological measures? Then you would be against DRM or TPMs, unless they could be 100% device-compatible, unobtrusive and behind-the-scenes, and indeed offer actual benefits to the end user—this certainly looks an exceedingly tall order that is, imho, beyond reach as far as digital music commerce is concerned.

Do you believe that music can be sold 'like water', i.e., as an ubiquitous asset that can both feel-like-free (like tap water), as well as be paid-for (like premium priced bottled water, a $100 billion business), or should music commerce remain strictly in the realm of units, copies and their various controlled physical or digital embodiments?

This is an article in a series called One Million Screwdrivers. You may read all the articles in this series by clicking here, or the other articles here:
  1. Introduction
  2. The Experiment
  3. Ripple Effects
  4. Lessons Learned
  5. The Bassinet Story

Thursday, March 25, 2010

One Million Screwdrivers: Lessons Learned (Part 4 of 5)

This is an article in a series called One Million Screwdrivers. You may read all the articles in this series by clicking here.

Is this story far-fetched? Perhaps. The hypothetical is conveniently divorced from actual economic concerns, like cost of production as determining market price. If a good costs more to produce than it can be sold for, it's pointless to keep producing that item... unless that item is a loss leader to sell another product or service, e.g., access to your expertise.

The Ebay thing might be a bit much, yet stranger things have happened. Even so, I hope it drives the point home that none of this would have happened if the screwdrivers not been given away for free. Before putting things out into the world, you never know what's going to come of them—the only way to know is to do it. In the above scenario, the story happened to capture the public's imagination and go viral. Not planned, of course, but still possible.

Of course, the math is simplified and exagerated to illustrate the basic principles in play, i.e., reducing unit price by a factor of ten does not mean buyers will also increase by a factor of ten to net the same revenue, at least not indefinitely. However, in the real world, evidence suggests that does happen for narrow windows: Valve co-founder Gabe Newell revealed that dropping the zombie game Left 4 Dead to half-price resulted in a 3,000% increase in sales which outsold the game's launch sales. Valve's weekend deep discount sales—reducing prices as much as 75%—resulted in a 1470% increase in sales. That is, if you were to sell a $10 game to 1,000 customers for $10,000 revenue, and temporarily drop the game's price to only $2.50, you'd gain an extra 14,700 customers—15,700 in all. At $2.50/game, that equals a revenue of $39,250 instead of only $10,000. Almost four times the revenue from dropping your price three quarters below what the market typically expects.

The actual numbers might be closer to this:

$49 retail price @ 10,000 customers = $490,000 revenue
$12.5 (75% retail) x 147,000 customers = $1.9 million revenue

Not only do you make more money this way, but you explode your fan base in one fell swoop. Of course, only a fraction of your new customers will be the kind of "true fan" that will buy anything you produce, but more consumers means more chances to sell them accessories and other similar products. More attention means more opportunities to convert neophytes into casual fans, and casual fans into true fans.

The most important question you should be asking is: If you can get more attention to convert more fans and make more money by drastically reducing the price of your product, why aren't you doing it? Is it because you still believe your product's true value is inextricably tied to its price? If so, then you quite literally pay a high price for that belief—you make less money and you get fewer fans.

The crucial difference between the above real-life software/game example and my hypothetical sucess story of one million screwdrivers is that one story is about an infinite good (a software game, which can be copied infinitely), and the other is a scarce good (the screwdriver, a physical object, which cannot be copied infinitely). Valve can make money from selling infinite goods (which can be easily pirated) because they're actually selling the convenience of their Steam platform, rather than the content by itself. For screwdrivers, there is true scarcity: over time, every screwdrivers will have been obtained and only the holders of those screwdrivers will have possession of the good. By contrast, a software game can be copied over and over and over again. The intrinsic nature of digital data is infinite abundance, and when supply is infinite, like water or air, its price is forced down to zero. This has nothing to do with the object's value, only its price. That's why Valve is selling the content's intangibles (i.e., convenience and time, which are scarce, and thus costly) bundled with the content (i.e., the software game, which can be abundantly found, and thus free).

Authors in particular worry about the devaluing their content if they let their content go for free. But take a work like the Bible: it is freely available online, in every hotel room, in any library... it is the very definition of abundant. It is, in effect, free. Yet, strangely, people keep buying it. So if people can get the Bible for free anywhere, why do they keep paying for it? Because they aren't buying the content, they're buying the stuff around the content. In the case of the Bible, they're buying the embodiment (a really nice leather bound edition with snazzy typesetting), personalization (a name emblazoned on the front), interpretation (historical context explanations), patronage (buying it from a specific organization as a form of donation), etc.

This is an article in a series called One Million Screwdrivers. You may read all the articles in this series by clicking here, or the other articles here:
  1. Introduction
  2. The Experiment
  3. Ripple Effects
  4. Lessons Learned
  5. The Bassinet Story (Friday 3/26 9:00 AM PST)

Wednesday, March 24, 2010

One Million Screwdrivers: Ripple Effects (Part 3 of 5)

This is an article in a series called One Million Screwdrivers. You may read all the articles in this series by clicking here.

Year Eight. Of course, you're now public enemy #1 to all screwdriver manufacturers. As predicted, some of those screwdriver manufacturers have indeed gone out of business, while others immediately stopped making screwdrivers and switched over to making other tools. The market adapted—some companies became extinct, some companies struggled, and other companies thrived by completely refocusing their business model on selling complimentary products... like screws.

But your seven year experiment has yielded unanticipated benefits. Your massive giveaway captured the attention of a local newspaper reporter who interviews you about this "seven year pricing experiment". The 1,000 word article—entitled "1 Million Screwdrivers"—is aggregated into sister newspapers, re-run in a national newspaper, goes online and gets indexed by Google.

Of the tens of thousands of people who read the widely distributed article, one is an influential Fortune 500 company executive. He tracks you down and asks you if you'd be willing to give a short presentation about your pricing experiments at his company's upcoming think tank retreat. Flattered, you accept and suddenly find yourself addressing a room of very wealthy people. After your presentation, one of the wealthy people in the audience approaches you and asks if you'll be a consultant for his fledging pet startup.

Word gets around town fast—you're quickly approached by many more people to be their consultants, too. Not long after that, someone in the media refers to you as a "resident expert on product pricing". Calls start coming in with offers for you to speak at more blue chip luncheons, and most people who call assume you charge a speaker's fee for your presentations. And a good thing, too—your time is so scarce now that you have to give priority to only the paid speaking engagements.

And then something really bizarre happens. A few geeky (but talented) no-name musicians read your story and write a hilarious song called "1 Million Screwdrivers" and post it on their blog. A few days go by and the song gets posted on I Am Bored. From there, it gets posted to Digg, then Myspace, Facebook, and Twitter. Some Lucasarts movie animators in between movie gigs create a jaw-dropping machinima video to accompany the song and they post it on YouTube. A month goes by and then—wham!—the song gets a million plays around the world. Someone on Facebook feels compelled to create a Facebook fan page called, "1 Million Fans for 1 Million Screwdrivers" and it charges ahead gathering fans like crazy. Like all things that go viral, you have—quite unintentionally—hit a tipping point. None of this has been done with your permission, but you make no move to stop the fervor, either. There seems to be no stopping the public's fixation about your story—or for your overtly banal screwdrivers—but all the unexpected publicity has put you increasingly in demand on the lecture circuit.

Eventually, someone realizes the screwdriver they own is actually one of these famous "1 Million Screwdrivers in that weird YouTube song", so they sell it on Ebay. Though they got the original screwdriver for free, that same screwdriver fetches an auction price of $10, far beyond the price of any comparable screwdriver on the market. Then, more people start selling their screwdrivers on Ebay, and this Ebay trading craze becomes a sub-culture thing. Someone creates their own T-shirts on Cafe Press with pictures of your screwdrivers on them. A software programmer writes a game mod for a popular first person shooter with your screwdriver as a weapon. Fan films sprout up with your screwdriver as their main plot element. Finally, a Hollywood producer sniffs around to see if you're open to having your story made into a movie... on and on it goes.

You return to your old warehouse. It's empty. Every last screwdriver has been sold or given away. You're about to turn out the lights...

...when you see one lonely screwdriver nestled in a crack between the floor and the wall.

As a final test, you tweet to your 100,000 followers (which you didn't have seven years ago) that you've found your last authentic screwdriver and you'd like to sell it for $1,000. The last time you sold these screwdrivers for $1,000—seven years ago—nobody bought them. This time, people scramble over themselves to buy it.

And then you get a phone call. It's that first wealthy executive who invited you to his think tank retreat which started this whole thing. You reminisce about the crazy rollercoaster ride it's been. He tells you he's setting up his own company based on your concept of giving away product for free—he'd very much like to buy your last screwdriver because of its sentimental to him and its historical value to his company. What's the name of his company? 1 Million Screwdrivers. Given the company's name, and this unique circumstance, he's prepared to make the purchase a massive publicity stunt to help launch his company... he offers you $1 million for that screwdriver.

You hold the screwdriver in your hand. The more you look at it, you realize this single screwdriver is the last object you have to remind you of your deceased uncle. It took you seven years and hundreds of thousands of screwdrivers but you finally understand that this screwdriver—the very last one of its kind—isn't even worth $1 million, or even $10 million.

This 50¢ screwdriver is, quite literally, priceless.

This is an article in a series called One Million Screwdrivers. You may read all the articles in this series by clicking here, or the other articles here:

  1. Introduction
  2. The Experiment
  3. Ripple Effects
  4. Lessons Learned (Thursday 3/25 9:00 AM PST)
  5. The Bassinet Story (Friday 3/26 9:00 AM PST)

Tuesday, March 23, 2010

One Million Screwdrivers: The Experiment (Part 2 of 5)

This is an article in a series called One Million Screwdrivers. You may read all the articles in this series by clicking here.

You choose to sell the screwdrivers without a clear plan in mind, but it all becomes a clearer plan after the first couple of years. You end up selling screwdrivers over seven years at seven different prices.

Year One. Initially, you have no idea what other screwdrivers should sell for and you can wait indefinitely until a sale happens so, on a lark, you price your screwdrivers at $1,000 each. What the hell, right? Let's see who bites. A whole year goes by... and nobody shows interest.

Year Two. You drop your price to $100 each. A whole year goes by and only one person shows interest. That one buyer pays $100 for a screwdriver just for the bragging rights—he seems rather affluent based on the Ferarri he drives up in, so perhaps $100 isn't really that much money to him anyway.

Year Three. Seeing that more buyers might buy if the unit price is lowered, you drop the price to $10. Over the next year, only 10 people show up to buy screwdrivers. It's not a lot of people, but it's a tenfold increase from the previous year. And your gross revenue is $100, the same amount you made in one year by selling one screwdriver for $100.

Year Four. You drop the unit price to $1... and 100 people come in to buy screwdrivers. Interesting. Same amount of money, more units sold.

Year Five. You drop the unit price to one dime. Now something really interesting happens. According to years past, you predict you'll sell 1,000 screwdrivers and earn another $100 ($0.10 X 1,000 = $100). However, the 1,000 people buying your screwdrivers see the great deal you're offering and buy two screwdrivers, or they tell their friends about your deal, or both. More units sold, more people come through your door. Instead of 1,000 screwdrivers being sold in 1 year, you've sold 10,000 screwdrivers in 1 month, netting $1,000—a tenfold increase in revenue in only a twelfth of the time. And you've accomplished this simply by offering your product for a fraction of what you'd previously sold it for. After a few phone calls, you soon realize the fair market price for a similar screwdriver is 50¢, five times your price. A-ha... that explains why so many people want your screwdrivers.

An unpleasant side effect to your boon: you're getting hate mail from all the other screwdriver manufacturers in town. They claim you're underpricing them, that your price comes across as "begging", that you're glutting the market and endangering their livelihood. If you keep doing what you're doing, they tell you, you'll end up training consumers to expect screwdrivers to cost no more than a dime. Eventually, you'll put us out of business for good.

Year Six. As another experiment, you drop the unit price to 1¢. Though some people think your screwdrivers must not be good enough if you're selling them for such a low price, you put up a big sign that says, "LIQUIDATION SALE", and this seems to put their mind at rest. Instead of grossing $1,000 in one month, you sell 150,000 screwdrivers in only two weeks, totaling $1,500. That's 50% more revenue than the previous year... in only half the time.

Year Seven. You still have over 600,000 screwdrivers in the warehouse. You've had these things for six years now and you really want them to be out of your sight. Sure, you could keep selling them for a penny (you're getting massive amounts of hate mail now)... but you have one final experiment to try: what if you let all your inventory go for free? How quickly could you get all those screwdrivers out of your warehouse? You post an ad on Craigslist: "FREE screwdrivers, brand new, never used, just need to get rid of them." A few people show in the first few hours, they take 10 each, then a deluge happens at lunch time, and by the evening, the warehouse is swamped. Amusingly, two of your screwdriver manufacturer competitors pull up with big trucks... one says he'll resell your screwdrivers for current retail prices, and the other—embittered by how your free screwdriver stunt has almost put him out of business—vows to dump your screwdrivers at the local dump. Even so, word gets around and in less than two days, the rest of screwdrivers are gone.

This is an article in a series called One Million Screwdrivers. You may read all the articles in this series by clicking here, or the other articles here:

  1. Introduction
  2. The Experiment
  3. Ripple Effects (Wednesday 3/24 9:00 AM PST)
  4. Lessons Learned (Thursday 3/25 9:00 AM PST)
  5. The Bassinet Story (Friday 3/26 9:00 AM PST)

Monday, March 22, 2010

One Million Screwdrivers: Introduction (Part 1 of 5)

This is an article in a series called One Million Screwdrivers. You may read all the articles in this series by clicking here.

A letter comes in the mail—a recently deceased uncle has listed you in his will. Apparently, your uncle owned a massive screwdriver factory which he had dissolved barely a month before he died: all the workers have already been let go, the factory parts are totally auctioned off, the factory's property has been sold. All that remains is the factory's sizable inventory—one million screwdrivers.

All these screwdrivers are packed safely away in a warehouse about a block away from your home, and the warehouse is owned outright. It even has an annuity fund to pay for the warehouse's future property taxes. Your uncle planned ahead.

So you've been presented with a really unique opportunity—you could sit on those million screwdrivers for the rest of your life and not even know they exist. Or you can sell the remaindered inventory, but with time on your side to decide how best to do it.

This is an article in a series called One Million Screwdrivers, which will be published all this week. You may read all the published articles in this series by clicking here, or the other articles here:

  1. Introduction
  2. The Experiment (Tuesday 3/23 9:00 AM PST)
  3. Ripple Effects (Wednesday 3/24 9:00 AM PST)
  4. Lessons Learned (Thursday 3/25 9:00 AM PST)
  5. The Bassinet Story (Friday 3/26 9:00 AM PST)

Sunday, March 14, 2010

Dams and Water Wheels

A story is told of three monks in the Middle Ages wondering about the number of teeth in a horse's mouth. One suggests their answer must lay within the greatest authority on all topics, the Holy Bible, and a long discussion then ensues about which passage in the Bible would contain the answer they seek. After much debate, one monk simply says, "Why don't we just go look at a horse to see for ourselves? There's a horse right there in our stable." Though shockingly pragmatic, the idea is also heretical for its inference that the Bible cannot be the authoritative source on all topics. The other two monks become violent and beat up the third monk for such outragous "arrogance."

This story sometimes comes to mind when I discuss my (allegedly radical) ideas about digital content distribution to old saws within the industry. For many people already well vested in their livlihood (or about to be well vested, or even hoping to be well vested), they put far too much energy in defending their version of the world as they wish it to be... at the expense of really seeing at the world as it currently is.

Of course, this is all my opinion, but it's worth emphasizing—and re-emphasizing, over and over, ad nauseum—that it took me ten years to change that opinion. I didn't merely flip a switch one morning and suddenly begin spouting radical ideas about digital distribution. Ten years ago, I began with a staunchly traditional position that DRM should be authoritarian and infringers of digital rights should be subject to harsh prosecution. Ten years ago, I felt piracy was ethically wrong, that piracy could be stopped, that piracy should be stopped, and that all those those millions of people around the world who used BitTorrent and Pirate Bay were thieves. Ten years ago, I felt the prices for movies, music, and software should only be set by content producers and if consumers didn't want to pay that price, they shouldn't pay. Ten years ago, I felt piracy would tear the system into shreds and consumers would be the only ones to blame. Ten years ago, I felt that if only producers could convince consumers that what they were all doing was wrong, things might turn around. If only producers could show the world the consequences of what they were doing would end with a wave of bankruptcies across all content creation industries... if only, if only, if only. That's how I felt ten years ago.

But a lot has happened in ten years. I've seen businesses adapt to change and thrive, and other businesses not adapt and fade from view. I've also seen that, in the right circumstances and despite what I want to be true, piracy can help as much as it can hurt. Thus, I have gradually changed my position from an arrogant (and financially dangerous) attitude of, "This is the way the world should be and if the world doesn't fit into my inflexible and narrow vision, I'll use every tool in my moral and legal arsenal to stop those who endanger that world vision." I consider this attitude arrogant because it's a not-too-distant grandchild of those monks saying, "The answer must be in the Bible. It has to be. To suggest otherwise is heresy." Whenever any radical and innovative business model threatens the status quo, the orthodoxy never waste time calling proponents of these "uppity" new models as "drinking the Kool-Aid", "careless", "foolhardy", and "devaluing the legacy". Sometimes, those recriminations are even justified, but sometimes they're not, and the diamond in the rough is being shaped before their very eyes... if only they could expand their worldview enough to see it.

Fortunately, I'm able to observe the world objectively. I have no vested interests clouding my judgment. I haven't pumped millions of dollars into a movie studio or a record company or software company, so I have the luxury of making predictions with zero financial benefit whether I'm right or wrong. One could argue that, because I have nothing to lose, my assessments and conclusions carry little weight. However, I feel exactly the opposite is true: because I have nothing to gain by my predictions and because I once held a contrary and traditional position—i.e., that "piracy is wrong"—my assessments and conclusions should carry even more weight than the arguments made by the establishment to conveniently maintain their current livelihood. To be honest, I don't want my conclusions to be right. I hate the conclusions I've arrived at. My conclusions point to a world of more effort and less money for content creators, where newer and more reliable revenue streams are frustrating to identify and exploit. Nonetheless, what I want or don't want doesn't make my conclusions feel any less true. I would hope others keep that clearly in mind whenever they are eager to discount my position.

Most people with vested interests try to force the rules of this new Digital Age onto an analog world ("This is the way the world should be."), but I prefer to look at the rules of the Digital Age as they actually exist ("Why don't we just go look at a horse to see for ourselves?") and draw conclusions from those observations without any specific end goal screaming to be met. What does the world actually look like? What are these new tools? How can they best be applied to maximize their usefulness? What can be accomplished with all these crazy new options? This means I don't start with a $15 million movie and say, "how can we bring a budget up to that amount by cracking down on piracy?" Instead, I ask, "Can we even crack down on piracy? If not, how do we use piracy to our advantage, and can a $15 million film be made? If not, what budget could be made with piracy? How can piracy help us?"

I don't feel the way I felt 10 years ago about digital content for a few reasons:

  • I no longer feel piracy can be stopped.
  • I don't see piracy as the threat I once thought it was. On the contrary, hyperdistribution could herald a new age of content distribution if we can ever shed our fear of it.
  • The Digital Age has a new set of ground rules most of us don't fully understand and, thus, we haven't completely embraced.
  • Instead of looking at the world by defending it as we think it ought to be, we should be thinking of how quickly we can adapt to it in order to minimize disruption.

When people don't seem to get what I'm saying, I sometimes shift the situation to a different timescape to illustrate the concepts in play. Let's rewind the clock to 1950:

Jobs were aplenty in America. You got a job, you worked for a corporation, you punched your card for forty years and left with a fat retirement check. If you were to transport those 1950's workers into today's fluid economy, they'd be shocked to see how company loyalty has evaporated and how commonplace it is for Americans to work three or four jobs in their lifetime. Of course, we live this reality. We grew up in it. It's normal. So we've already come to accept it all as a fact of life and dealt with its nasty implications. Unfortunately for our wayward time travelers, they'd decry this "injustice", call it unfair, and insist it be immediately rectified. And then we'd laugh at them like we would have laughed at horse-and-buggy drivers insisting we bring back the horse and carriage. Or typewriter manufacturers insisting we bring back typewriters. Or handwriting teachers insisting we bring back the quill. You can't put the genie back into the bottle.

We are in precisely such a situation now. We stand amid a swelling floe of evolving content distribution channels. Nobody has a crystal ball, including me. But history teaches us that the ones who always lose these sorts of battles are those who resist newer and more efficient technologies. Whenever more efficient technologies emerge to threaten the status quo, we always see same phases: vilification and violent intolerance, contempt and disparagement, reluctant acceptance, and inclusion into the orthodoxy. So doesn't it make more sense to start viewing newer technologies without bias and adopt them early on in order to maximize their intrinsic strengths before the competition does? Does it really make sense to apply Analog Age rules to a Digital Age?

This is why I became such a huge fan of Techdirt, which does a superb job by explaining basic economic principles, and how the Digital Age is simply acting out those basic economic principles. After a few months of reading Techdirt, I got a clear grasp on how to build a new business model following the new rules of the Digital Age:
  • Leverage the internet to distribute content as widely as possible.
  • Don't confuse price and value.
  • Use infinite goods to increase the price of scarce goods.
  • Connect with fans.
  • Give fans a true reason to buy by offering a non-copiable "generatives" like convenience, patronage, authenticity, exclusivity, personalization... and charge a premium price for those generatives.

By understanding how the world works in the Digital Age—and I mean by really looking at how the internet is used without bias for how it ought to be used (including a bias about how content has been previously paid for, what Marc Cuban calls "legacy delivery")—I firmly believe a powerful and unbeatable business model can be built. Why? Because instead of spending your resources trying to dam up a river, you're spending resources building a water wheel to harness the inherent power of that river. You can pay lawyers to fight the unwinable war on piracy, or you can spend that same money to connect with your customers more and create better scarce goods that are tailor-made for a Digital Age. Which approach seems to have the better competitive edge?

Feel free to ignore this last part, but if you don't embrace the internet's inherent power, you can be sure your competition will.

Thursday, March 11, 2010 — The Biracy Project: Filmmaking as Social Capitalism

Below is an article I wrote for last month, which you can see on Jawbone or download the PDF. The article is based off of an interview I did with David Geertz, which I'll also post in the near future. The interview is just over a half hour long and goes into many details only hinted at in this article.

The Biracy Project: Filmmaking as Social Capitalism

Synopsis: Discussing the Biracy Project and its platform SoKap, which could revolutionize how indie films are produced and distributed. (Guest contribution provided by Ross L. Pruden, filmmaker, blogger and lover of submarines. Find him at

Disclosure: After researching The Biracy Project, the author bought a basic membership.

2007 marked the beginning of the end for the international pre-sales market. At one film market, David Geertz was commiserating with a pre-sales agent about how film piracy was (apparently) gutting pre-sales. The pre-sales agent said, "If you could somehow turn those pirates into buyers..."

"Yeah," said Geertz, "like a birate, or an act of biracy." Then Geertz continued his thought, "But if I can perform an act of biracy, then what do I need you for? Isn't that your job? To perform risk mitigation by attaching pre-sales?"

The agent replied, "But I can't do that anymore."

Which got Geertz thinking... what if you could go straight to the buyers themselves and completely bypass all pre-sales risk mitigation?

Geertz realized that "crowdfunding", as the term is now called, could be just the first step of a more expansive model to entice donating fans to become project collaborators as well, known as "crowdsourcing". By developing a web site to track everyone's activities, and clocking their time in a virtual web site currency called "Krill", members would feel their input hadn't been wasted even if their work didn't get used in the film. Finally, collaborators become the perfect vehicle for promotion since they'd tell their friends and family about their project... from the first day they donated to Biracy until the Biracy film's premiere, and long after.

Three years later, Geertz is finally unveiling the fruits of that fateful conversation—The Biracy Project and its platform SoKap, which could revolutionize how indie films are produced and distributed in the digital age.

Biracy lets users participate in their film by offering membership in four tiers, with increased benefits for progressively higher tiers. A $25 Player membership gets you a pre-purchase of the film's DVD, a $50 Icon membership includes the DVD from the Player membership plus a feature length "making of" documentary, the $100 Mogul membership includes everything from the Player and Icon memberships plus the musical score, and the $200 Titan membership includes a book explaining the upcoming SoKap platform. Members can start at the lowest tier and upgrade to a higher tier whenever they wish. A free membership tier is also in the works.

The beating heart running Biracy is its platform, SoKap ( "We've lost sight of how important it is that artists get paid for their work," Geertz explains, "and that we can make money doing what we love." Early in the process, Geertz realized Biracy was trying to instill in people an act of "social capitalism", thus the origin of the loose acronym.

"The biracy project" Geertz explains, "and the platform it's built on—SoKap—is really just the beta test of all the tools we're actually building. Once we're out of beta, other filmmakers, people in the media, and other entrepreneurs will be able to use the tools we've built for them. You're not entitled to use the tools that we are using on Biracy—it'll be an à la carte thing, use as little or as much as you like."

Because Biracy is using crowdfunding, Geertz has to work extra hard to show how it's all legal—crowdfunding has legal constraints in the U.S. under the SEC's strict regulations. In Spain, fans can invest in film projects for financial gain, as is being done with The Cosmonaut (, but in the U.S., the Securities and Exchange Commission's "blue sky laws" have clear guidelines for compliance (called being "on-side"): to offer a loan or security investment, the SEC requires you have no more than 35 "unsophisticated investors", meaning someone with a $200,000 annual income, a $300,000 joint annual income, or a net worth exceeding $1 million. Breaking these guidelines puts your company "off-side" and subjects you to civil or criminal penalties.

It's no surprise, then, that Geertz is abundantly clear on this point: "Biracy is not an investment—it's a donation and pre-purchase of a product with benefits." Nevertheless, Geertz says, there are plans in the works to legally define the term "crowdfunding" so companies like Biracy don't get into trouble because of one SEC regulator's overzealous interpretation of the law. With a smile, Geertz adds, "We'd like to see those legal efforts paid for by crowdfunding."

Biracy is a rather appealing model to all sorts of filmmakers. Because of Biracy's ability to efficiently gather funding, build an interconnected fan base, and coordinate the outsourced work from fans, The Biracy Project has a massive potential to finance and streamline many parts of the filmmaking process. To boot, Biracy offers members a 15% referral commission for enlisting other members. Though that's a very clever way to help spread the word, one has to wonder if it undermines the validity of the referral... i.e., are Biracy members enthusiastic about their project because they really believe in it, or because they're getting a kickback?

Like other crowdfunding platforms (Kickstarter, IndieGoGo), Biracy offers the golden ticket to filmmakers in the digital age. Of all entertainment media, films have the highest fixed costs, so funding a film entirely from fan donations—not from financiers expecting to recoup their investment—leaves producers free from worry about piracy gutting their box office revenues. For producers who feel piracy only increases buzz, there's nothing to stop them from releasing their film under a Creative Commons license and leverage P2P networks to drive DVD sales for their "pre-paid" film.

Learn more at or at

Wednesday, February 17, 2010

Anatomy of a Sale (or Lack Thereof), part 2

I just wanted to watch a movie, that's all. No big deal. I was willing to pay good money for it, too.

But here's the thing—there's no DVD of it. Not in America, at least.

Rewind. Someone told me about a movie. It's research for another movie I'm writing. The movie came out in 1991. It starts two A-List actors (1 is still A-List).

Step 1. I'm willing to rent it. I check Netflix. Not listed.

Step 2. I'm willing to buy it. I check Amazon. The first listing is VHS. For $35. No way am I paying that amount for a VHS cassette. Seriously? If I'm going to buy this movie, I want to keep it for a long time. So I check to see if it's on DVD.

Step 3. Amazon has it on DVD but it says, "Region 2.0 encoding (This DVD will not play on most DVD players sold in the US or Canada [Region 1]. This item requires a region specific or multi-region DVD player and compatible TV." Fail.

Step 4. I check to see if it's listed there on DVD. Nope, only VHS. I could buy it for $18.00, but if I'm going to own a copy, I absolutely won't buy it on VHS. Does anyone even have a VHS anymore? Isn't the whole point of owning something to let you share the experience with your friends?

Step 5. I check Wikipedia to find out more about it. I find that the movie was released on VHS, and then a DVD was released in Europe, but the studio hasn't yet announced plans for a region 1 release, i.e., in the U.S.

So, now I come to the conclusion that a movie I'm willing to pay for isn't available to me. At all. I haven't even bothered to check iTunes because if it's not on Netflix, there's no way it will be on iTunes.

The clincher is that I would be willing to pay up to $10 or even $15 for a DVD. I guess I could scour the library for a copy (and the odds of an older film being at the library are about even), but if I'm going to get it at the library, that's essentially free to me... which leads us to...

Step 6. Watch Movies. Where I found the entire film posted on Youtube.

And we wonder why movie piracy is so commonplace?

Saturday, February 06, 2010

An Ode Before Dying

You think you sell a movie—you do not.
You think you sell a book—you do not.
You think you sell a song—you do not.

You sell an experience, something communicated, something elusive and ephemeral. Something mystical and transformative and inspiring. All these abstract things simply come in the shape of a movie, a book, or a song.

Never before has it been possible to strip away these experiences from the product... until now, the Digital Age.

The Digital Age lets us duplicate products infinitely. And, for the first time in human history, creators are not deprived of their original copy.

So how do creators sustain? What do they sell?

It's simple, if creators are willing to accept one simple fact:

Creators don't sell products, they sell experiences.

In fact, creators never sold products, although it must have always seemed that way. They just never saw it before because products and experiences have been so deeply entwined.

The Digital Age has changed all that... we can read a novel without buying a book. we can watch a movie without buying a movie ticket. we can listen to a song without buying a record.

So how do creators sustain? What do they sell?

They sell the experience.
They sell access to themselves.
They sell uniqueness.
They sell convenience.
They sell membership.
They sell customization.
They sell exclusivity.
They sell benefits.
They sell patronage.
They sell magic.
They sell the experience.

They sell that which cannot be felt, something that transports their customers to another place for a brief time. When customers buy a $500 shirt, they aren't being sold a simple shirt, they are being sold self-confidence.

Creators will sell the same thing they've always sold—intangibles—though some will stubbornly claim they (should) only sell the product. Those kinds of creators have never seen the distinction between experience and product because, before the Digital Age, intangibles have been inseparable from books, movie tickets and records.

The key to the Digital Age is to recognize that many existing products already embed intangibles, which is why those products are still being bought. However, once those intangibles stop being offered, or a competitor offers better intangibles, the customer will go elsewhere.

Creators can sustain. They will sustain. The market wants to sustain creators. Yet only the ones who realize that they don't sell products, but experiences. Only those creators are the ones worthy of survival in the Digital Age.

The rest will whine and commiserate as they slowly fade into obscurity.

And to them, we offer a fond, and sad, adieu.

Saturday, January 16, 2010

Ask The Right Questions

Justin Timberlake has over 120 revenue streams—only one of them is selling recorded music.—Matt Mason (link)

Jackie Barbosa wrote an excellent blog post yesterday which kicked off a flurry of Tweets between us about piracy in the entertainment industry. Jackie is smart enough to get that the publishing industry's claim that ebook piracy is costing the publishing industry "as much as $3 billion" is a bunch of hooey. An illegal ebook download is not equal to a lost sale—readers simply downloaded the ebook. Who knows if they would have actually paid for that download if they had been offered no other choice?

While Jackie ultimately concludes that she doesn't get too concerned when she sees her ebooks on a torrent site, she lays a harsh judgment on ebook pirates:
...these people are thieves, plain and simple. And just like a thief won’t buy the diamond bracelet because he can’t knock over the jewelry store, the ebook pirate won’t go and buy a legitimate copy if she can’t get it for free.

I get where she's coming from. It can be frustrating when you put a lot of work into something, put it up online... and then watch it get taken out of your control and given to the world in perpetuity.

And that's exactly where I think Jackie is seeing everything from the wrong perspective. She's seeing the world through a pre-digital lens. In a digital world, things get copied and with P2P networks, nothing can be effectively done to stop it. You can commiserate about it, reproach, bemoan, and even try to legislate... but you cannot enforce laws against it. For every P2P network you shut down, two more rise in its place. It is a losing battle. Do you want to go the rest of your life living in resentment and bitterness? Or do you want to accept that the world is changing around you, that your presumptions about how things ought to be might have to change accordingly, and upgrade your business model to leverage the internet's unique properties of infinite distribution to work for you rather than against you?

Jackie and I had the following conversation over Twitter:
Ross: Piracy is a market force saying, "the price for content is too high." When the price comes down, pirates turn into consumers.

Jackie: So bank robbery says bank fees are too high? Sorry, no.

Ross: The difference is whether piracy adds value—robbing banks removes value, pirating books increases their popularity.

Jackie: I'm sure piracy does increase some book's popularity. But unless that popularity leads to more $ sales, it's not adding value. Even the music industry hasn't given up the notion of charging for music in favor of ONLY other revenue streams.

Ross: ...which begs the question, what are you really selling—books or stories?

Jackie: That's like asking whether you're selling music or songs, in my opinion. The "book" is just how the story is delivered. A novel cannot be delivered by a live reading via the author (or anyone else). At best, only PORTIONS can be delivered that way.
Jackie: What I'm asking is where the viable revenue streams are if not from sales of books themselves? Show me the money.
Jackie: Even in the industry you cite as "proof" sharing is good (music), publishers still put a PRICE on their product. Books are the same as movies: they're entertainment. But I don't see how that relates to the discussion (unrestricted sharing).
Jackie: If all books are free, where is the revenue stream? WHEN/HOW does the author/publisher get paid for creating the entertainment?

Jackie's asking some well-intentioned questions, but they're mostly the wrong ones. She's still focused on the selling of a tangible—her books—rather than the intangible—her stories. When Jackie finally gets that she is a storyteller and not a bookseller, she'll start to mold a more sustainable business model around that concept.

Her question, "WHEN/HOW does the author/publisher get paid for creating the entertainment?" is foremost on the minds of all producers in the entertainment industry. How is what we're doing sustainable? How do we make money at this? How do we survive and thrive?

Counter-intuitively, when content is allowed to be free in the digital realm, it seems to bolster sales. Why? That doesn't make sense, does it? Consider the story of Matt Mason who wanted to release his book online for free alongside the hard copy version, but Matt's publisher denied his request. When Matt saw his ebook was being pirated, he again approached his publisher and said, "Look, it's already out there. At least if we release our own ebook, we can control it a little more. Maybe we can even find out something about our readership." His publisher agreed and released the book as a free PDF. A while later, a music bigwig heard about Matt's book, went to Matt's site and downloaded the PDF... and he was so impressed with the ebook, he went down to a brick and mortar bookseller and not only bought a hard copy for himself, but for everyone he knew. Without the free ebook available, Matt would have missed out on those sales.

So the questions Jackie should be asking herself is, what is she actually providing her readership? Is it the book, or is it the story in the book? What are the infinite goods and scarce goods in her business, and how can she leverage those infinite goods (the ones that can be copied infinitely on the internet) to increase the value of her scarce goods (the ones that cannot be copied on the internet) so that revenue streams flow to her and/or her publisher? How can she employ generatives to her maximum possible advantage?

Perhaps the hardest question of all: if Jackie can't find a sustainable business model for being an author, what does she do next? This is an extremely volatile question which I hate asking because so few people are willing to examine with unflinching honesty whether their business as it currently exists deserves to survive. Nobody wants to hear their business is slowly dying, but history is littered with businesses who were too stubborn to accept the decline of consumer demand for tangibles that no longer met the market's needs:
  1. The need for personal transportation is perennial, but the method shifted from horses and carriages to automobiles.
  2. The need to watch audiovisual arts is perennial, but the method shifted from film to VHS to DVD to P2P & streaming.
  3. The need for listening to music is perennial, but the method shifted from live performance to records to eight track tapes to tape cassettes to CDs to MP3s.
  4. The need to share news is perennial, but the method shifted from town criers to the printing press to desktop publishing to the internet.
  5. The need to read stories is perennial, but the method shifted from illuminating manuscripts to book printing to ebooks.

If you had built your business on any of those shifting methods, and only provided a tangible product or service ["tangible service" is an oxymoron] to the market, then your business was in danger of extinction (manuscript illuminators, town criers, horse and carriage drivers, typesetters, record makers, tape cassette makers, VHS makers, etc.). Yet if you build your business on a perennial market need and shift with current methods to fulfill the market need, then your business will be around as long as that need is around.

The good news for Jackie is that authors are in the business with the lowest possible fixed costs of any entertainment sector—compared to movies which have to employ up to hundreds of people to create that first unit, authors are the definition of svelte: 1 person, 1 room, 1 laptop. It can't get much easier, or cheaper, than that.

So I do think a sustainable business model for authors in the digital age exists, although those models may be so radically different from the current model that authors may not feel like they are "purely" authors anymore. Authors like Jackie complain that their primary revenue stream is being "stolen" by pirates, but look at Justin Timberlake: the guy is a musician who has secured over a hundred revenue streams which do not involve selling recorded music. Instead of resting his entire livelihood on one revenue stream, Timberlake is almost certainly hoping his fans pirate his music because the increased exposure will only make his other 100+ revenue streams increase in value. Can authors do likewise? More to the point, can they afford to not do likewise?

I've already done the broad sketches for a filmmaking model. I'd like to flesh that out more before speculating on other models so I won't offer my thoughts (yet) on what new revenue streams for authors might be. Nevertheless, I'd like to see somebody take a stab at coming up with new models for authors because the digital age isn't going away—in fact, the next generation will likely make that logical leap which we, fettered to our pre-internet analog childhood, are unable to stomach: that file sharing is easy, unstoppable, and commonplace. As long as artists find ways to thrive in the digital age, will it really matter to their fans how immoral file sharing might be?

Thursday, January 14, 2010

Random Screenplay Advice

Tripped over this while searching through emails today. A friend of mine—already very smart and a good writer—was interested in writing a screenplay. From my Out Box, January 24, 2007:

Sally Hogshead was a speaker at the Screenwriting Expo this year and she mentioned the way to success in your career is getting clear with what you can do that nobody else can, and then hammer at it persistently. I like both of your stories, a lot, and think they have a good chance of becoming excellent dramas with their uneasy mix of moral ambiguity. These kinds of stories set your work apart from everyone else.

Here's a good first step: break down the first story into its necessary scenes. Identify exactly where the major story points are: Setup, Turning Point #1, Development, Turning Point #2, Climax, and Resolution. (It sounds like you've done this already.) Then flesh out the number of scenes needed to establish each section, adding in detail and dialogue where needed. You'll have a good 4 to 5 page treatment when finished... I used that kind of outline/treatment as a rough guide when I wrote Arousal and wrote the first draft in about a month.

If you're still in love with your story after writing the treatment, great! If not, then keep reworking it until you are. Next step is writing the script, which needs a whole other bag of tricks that I can help you with when the time comes.

But a few disclaimers would be well placed here:

The most important thing to remember is that screenplays are a visual medium... not a novel. Screenplays, then, are a blueprint for a final product and until they're being produced, they are effectively a business card for the project. They need to read very well to get others excited about helping produce. Imagine that a screenplay reader is in a hurry for work and can only read a page... but your script is so good that they read 2, then 3, then 5, then 10... until they realize they're on page 60 and are so late for work that they might as well finish it. Writing with long novel-like paragraphs is not, in my opinion, the best way to write a screenplay. 3–4 line paragraphs at the max. Few long speeches. Lots of white space on the page. Leave the director to come up with the fancy visuals later, even if that director is you.

Another common confusion—the objective with scripts is not to make a film from that script, but to sell the script to make the film and THEN write the script that you want to film. Scripts change a lot from the time they're bought to the time they get produced, so first write a script that gets people excited about handing you money, then swap it with the exact words you want to film.

Finally, scripts aren't stage plays. Filmmaking involves collaboration and the established norm is that everyone wants to add their 2 cents, sometimes holding back money unless they get some creative control. If you can find an executive producer (the money guy) who gives you complete creative control, then you'll be very very lucky. It took me years to accept this horrid truth. Still, many talented people out there can actually improve my writing, so it's not always a bad thing.

Saturday, January 09, 2010

Biracy & Crowdfunding—Peril or Paradise?

While researching possible avenues of funding for a feature film, I've heard about crowdfunding over the years. Crowdfunding is fundraising from a large group of small donations instead of a small group of large donations. Several companies do crowdfunding now, and a few specialize for filmmaking. Here is an excellent collection of short videos of the top 15 crowdfunding companies in their own words.

I was recently contacted by David Geertz from The Biracy Project (@biracy) in my role as moderator for the Infinite Distribution Panel to help generate questions for a Biracy video Q&A. The panel had several great questions and Geertz personally responded to them. It was so helpful, Geertz said, that they might even do it on a weekly basis.

Crowdfunding has obvious advantages over traditional film financing, chiefly among them that filmmakers are able to find and connect directly with their fans even before they roll film. Whenever others are invited to come on board to have a say in which direction the ship is heading, it bestows ownership to them... which in turn sparks the sort of emotional investment to a project that advertisers salivate over. People who join crowdfunding projects want to see that project succeed—they have a natural incentive to participate in and promote their project. Anyone who understands the power of networks realizes that as the size of a network grows, its reach and influence increases geometrically. Crowdfunding locks in your funding and your audience at the same time. You can't really ask for a better scenario.

The question is—is it legal?

I'm not addressing the question of whether crowdfunding should be legal—I already feel strongly that it ought to be. Fans want to invest in films like buying stock in the stock market, and reap the same benefits as multimillion dollar film financiers, so why shouldn't fans be allowed that option? Unfortunately, America has a formidable legal obstacle—state laws called blue sky laws which "regulate the offering and sale of securities to protect the public from fraud." These laws were designed to protect unsophisticated investors from scam artists trying to swindle grandma out of her life's savings. For crowdfunding, the law seems not to fit anymore, but that's irrelevant—if the SEC decides you're violating their regulations, then it really doesn't matter how outdated the laws are. Are you able and willing to afford a proper legal defense to keep yourself out of orange overalls?

So the central issue to consider is whether crowdfunding is, in its current incarnation, legal under today's laws. If I join a crowdfunding operation, could I be involved in a class action lawsuit one day and/or criminal charges? Are all current crowdfunding operations simply a ticking time bomb? Whenever a new business model first emerges, existing legal codes often don't understand how to interpret legal code to accommodate the shifting market. Is this the case for crowdfunding?

I posed those questions to Biracy's Geertz on Twitter and I feel he answered them to my satisfaction. Before you see Geertz's reply, you ought to have a proper context of my own concerns because these kinds of articles made me extremely paranoid about crowdfunding. From Mark Litwak's site:

Question: We have a project and are interested in soliciting investors without violating SEC rules. What can we say that's legal but still gets the point across, and what is illegal?

Answer: The most important thing to say is that you are not making an offer. You are simply having a preliminary discussion with people. In order to take money from investors, you need to either register your company with the SEC, which costs a considerable sum, or fall into one of the limited offering exemptions. A major restriction on these limited offerings exemptions is that you cannot do any public solicitations like mass mailings and cold-callings. And you'll be limited to thirty-five unaccredited investors. An accredited investor is essentially a wealthy, sophisticated investor. Everyone else is an unaccredited investor. If you can live with those restrictions, the cost of complying with securities laws is considerably less but still significant. If you violate the securities laws, you can be subject to civil and criminal penalties. Link.

Another article:
In general, under the Securities Act of 1933, entrepreneurs who seek to sell stock in a business should register the securities with the Securities Exchange Commission plus comply with other often complex federal and state regulations. While this may seem daunting to a startup company like yours, the SEC provides some exceptions. One of the ways to bypass some regulatory requirements is by soliciting wealthy accredited investors, also known as "qualified investors."

Regulation D of the 1933 Securities Exchange Act defines accredited investors as individuals who have a net worth of $1 million or income of at least $200,000 in the two years prior to investment. For couples, the prior income requirement is $300,000. The SEC notes that income requirements are met only if there is a reasonable expectation that income levels will be maintained in the future.

Accredited investors can also include banks, insurance companies, small business investment companies and corporations, charitable organizations or partnerships with assets exceeding $5 million.

The thinking behind the financial means test is the presumption that wealthy investors are sophisticated about the risks associated with privately-held company investments and can "afford" to lose the entire investment.

Granted, families of more modest means invest in startup restaurants, retail establishments and service companies all the time without meeting accredited investor tests. They can without attracting regulatory attention because companies are generally permitted to raise money from up to 35 non-accredited investors, plus an unlimited number of accredited investors. Still the SEC does require that companies reject non-accredited investors who are not financially sophisticated and understand the risks associated with the investment. Link.

...and another article:
If a small contribution obtained via crowdfunding is actually an equity investment or even a loan, then crowdfunding companies may soon run afoul of securities laws. I forget the details but if you raise money from over a certain number of investors, you start being subject to all sorts of securities laws that are a pain.

If you ask me, those laws should be completely recrafted to allow crowdfunding and kick it into high gear. To me, crowdfunding is fuel for human capital and great projects that is currently untapped but has enormous potential to change the world as we know it. I'm sure there are some advocated at the SEC, the SBA, the Federal Reserve but, no doubt, bureaucracy is frustrating the heck out of them right now. Hopefully, we'll figure out how to tap into the power of crowdfunding soon.

The thing is, it does have to be regulated. I mean crowdfunding scams will be huge, once crowdfunding grows in popularity. When there's money involved, scammers will come.

There also needs to be some liquidity to crowdfunding shares. If people are going to make microinvestments, they will want to be able to profit from their investment. It will be a great day when a firm that raised $100,000 from 20,000 $5 investors sells out for a few million and everybody gets a tidy, albeit little, return on their investment. Link.

And a super recent article from Boing Boing:
Donors can get a little something in return through these sites if the projects they fund come to fruition, like a signed copy of a book that's produced (Kickstarter), or reimbursement in credit if a news organization buys the story (Spot.Us). But what if a crowdfunding site could offer donors a piece of the action, not just some thank-you goodies? That's what I would want, and I don't think I'm alone. I want investors for my schemes, not patrons, and if people support me to do something that flies, it would only please me to give them a cut.

But then I started talking about the scheme with lawyers, including Boingboing counsel Rob Rader, who has been extremely helpful. The legal terminology for my notion, it turns out, is "patronage-plus ex ante crowdfunding," at least in a recent article by Tim Kappel in the Loyola of Los Angeles Entertainment Law Review The short answer is, such a site would probably be illegal under U.S. federal securities law. "Securities" are defined as any investment whose return is dependent upon the effort of others. It's a one paragraph definition, very broad, hard to get around, and there's no de minimis dollar cutoff below which the regulations stop. A lemonade stand venture could be subject to SEC regulation.

Securities regulations don't apply if the investors are genuinely active in the day-to-day management of the venture-- but it isn't enough to just give them access to a project wiki and consider their suggestions; you must demonstrate that they are all critical to the venture's success. So much for that loophole.

Another possibility is the SEC's "Private Placement Exemption" under Regulation D, which allows unregulated investments if the number of investors is limited. Specifically, you can sell shares to at most 35 regular individuals (and an unlimited number of accredited investors, i.e. various institutions, plus people who have a net worth exceeding $1 million, an annual income over $200K, or a personal trust exceeding $5 million).

But Regulation D also prohibits any "general solicitation or general advertising" to let people know about the venture. The only published announcements of such investments are the cryptic "tombstone ads" that you sometimes see in the print versions of the Wall Street Journal or New York Times business section. These ads, which AFAIK have never been published online-only (although this might be possible) must be very limited in their disclosure. It might be OK to say "Paul Spinrad offers shares in a graphic novel based on the life of Elliot Smith" but that's about it. The announcement can't include anything that makes Kickstarter and Spot.Us so fun to browse through-- no details of the project, no wish lists, no video clips of people saying, "I'm so excited about this project-- it's got great indie film potential-- all I need is 4 months time and a round-trip ticket to Portland!"Link.

If you aren't a little nervous by now, then you have a heart of stone. Violating SEC regulations is serious business and could land you a princely fine and/or time in jail.

Geertz provided two Q&A videos and kicks it off by saying clearly that Biracy is not an investment, and thus should not be confused with a security—money given to Biracy is a donation, a membership fee, and a pre-ordering of a product. There is no financial remuneration as you would receive with an equity investment, be it stocks, company shares, or real estate. Thus, you don't fund films like multimillion film financiers for a jackpot if the film is a hit... instead, you get something called Kaps, a virtual currency. This is the key distinction—you don't get real money in return for your donation, just benefits with the company, like store credit. You can, however, earn money from commissions by referring others to Biracy, like a multilevel marketing company. It's clever.

If Biracy proves itself to be a sustainable crowdfunding model, then its founders will soon launch to let other producers benefit from Biracy's model. As I understand it, the only danger in violating SEC regulations is to the company, not its donors, so I think I'll invest in donate to Biracy today. However, were I to use Sokap as a Producer, I'd feel obliged to run all this through my own lawyer before committing any resources to it. Why? Because you never really know how governments react to radical new business models. Once crowdfunding begins to become popular, all it takes is one egregious crowdfunding scandal to push the SEC towards clamping down on "risky new businesses using securities law loopholes to rip off unsuspecting victims". Then it all turns into a make or break acid test on how clear the law is about crowdfunding. Bunch of hooey if you ask me, but it wouldn't surprise me in the slightest. If I were a crowdfunding company, I'd probably approach other crowdfunding companies and pool our resources to get a lobbyist in Washington to update SEC blue sky laws so crowdfunding isn't just legal, but actually fulfills the promise of film investing—to make real money on films like multimillion dollar film financiers... but on a micro level.

Here are Biracy's two Q&A videos by David Geertz:
Q&A: Is it an investment? Part 1
Q&A: Is it an investment? Part 2