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?

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.

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?

NOTHING BUT BLUE SKY
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?

THE CAUSE FOR CONCERN
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.

BIRACY: "IT'S NOT AN INVESTMENT"
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 SoKap.com 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

ELWO: Starting with CwF + RtB

Quite late in the site development of EatLessworkout.com, I decided to use it as an experiment in CwF + RtB despite numerous unresolved technical challenges, e.g., I had no storefront, I had no forum to build a community, my login system wasn't yet as sturdy as I wanted. I could have kept the site under wraps until all these obstacles were completely addressed but I felt a January 1 launch was more of a symbolic step, a way to shatter the typical "analysis paralysis" one can succumb to when working all alone, in the dark. Even if the site wasn't totally polished and new, I wanted to get the ball rolling.

In all candor, it hadn't even occurred to me to employ a CwF+RTB approach. I was late to the game in understanding the value of CwF, so I had a very slow realization that this site could use it. I had been planning on selling various scarce goods like apparel and books, so why not?

CHALLENGES
Connect with Fans

• Create sturdy Login System
  
• Install Forum

Reason to Buy

• Choose Storefront
  
• Create merchandise

My homework was straightforward:

1. Browse over Techdirt's List of Packages
   
2. Read about Techdirt's CwF+RtB experiment
   
3. Brush up on Mike Masnick's Grand Unified Theory on The Economics of Free

Next Up: apply the steps listed in the Grand Unified Theory to Eatlessworkout.com