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