Book Publishing After the JOBS Act Revolution

On Monday, the US Senate confirmed Mary Jo White as the new head of the Securities and Exchange Commission (the SEC). The book industry will never be the same. No, that's not a non sequitur.

A year ago, a bipartisan majority in Congress passed the "Jumpstart Our Business Startups" or JOBS Act, and President Obama signed the legislation on April 5, 2012, thus accomplishing the first major overhaul of the nation's securities laws in over forty years. Perhaps the most far-reaching provision of the JOBS Act is the legalization of equity crowd funding. But not quite yet. The SEC has not published the rules that would implement the JOBS Act, and so it's not yet legal to crowd fund a business, unless your crowd is all millionaires.

#strangersproject

"But what about Kickstarter?" you may be asking yourself. "Isn't that legal?"

Kickstarter and businesses like it (Unglue.it, which I run, is one) take great pains to prevent projects on the site from offering any sort of tangible equity. Instead of equity-based crowd funding, these site offer rewards-based projects and products. People become backers on Kickstarter because of the rewards they get if the project a success. In many ways, Kickstarter is just a site where creators pre-sell products that don't exist. A supporter on Unglue.it might get a signed manuscript or some other reward,  but it's the intangible equity of making a book free to the world that drives the site.

By contrast, the backers on an equity-based crowd funding platform could receive shares in a business.  So on a crowd-funding site for books, the backers might become investors in the individual books, and would make money if the books turned a profit. If you happened to invest in Fifty Shades...

From an author's point of view, this would completely change the game of publishing. Instead of relying on an insider network of literary agents who market book properties to publishers, an author would put proposals on a book-funding site. They'd line up a team of free-lance editors, illustrators, designers and developers, and the literary proposal would look like a mini-business plan. (More likely the author would seek help from a new class of social-media-savvy literary product-manager-agents who specialize in marketing to the crowd funders.) The crowd – probably consisting of voracious readers hoping to earn a little money from their obsession- would fund the books that had the best chance of success. That same crowd would be the marketing vanguard for the book when it's finally published; how can corporate publishing compete with that?

There's nothing intrinsic about crowd-funding that restricts this sort of fund-raising to unknown authors looking for a first advance. The JOBS act restricts the amount raised from "unqualified investors" to $1,000,000, so the really big name authors would have to tap the "qualified investor" funding market. (An individual with more than a million dollars in assets excluding home and vehicles is considered "qualified")

Once equity crowd-funding becomes established for books (and it WILL happen!), incumbent publishing houses will have lost, at a stroke, their oligopoly on books as investment vehicles. Already, publishers are outsourcing their design, editorial, production, distribution and sales functions; providing capital is their last bastion of essential function. They will have to participate in the new markets or they will dissipate into irrelevancy.

The reason the SEC has not issued the new regulations implementing JOBS is apparently because the previous Chairwoman, Mary Schapiro, had reservations about opening the gates to crowd-funding. The SEC's mindset is to protect ordinary investors from being fleeced by Wall Street sharks.  One would assume that President Obama's new appointee will be motivated to implement what could be a signature accomplishment of the Obama administration. So Monday's confirmation of Mary Jo White could signal the start of a new era of American investment.

Tim Draper at SVCrowdFund
by Return On Change

I had not paid attention to the possibilities of equity crowd funding for books until I attended last week's "SVCrowdFund" conference in Palo Alto. There I met many of the people who had been instrumental in getting the JOBS Act introduced and passed. There was electricity in the air, and my head is still spinning.

What's needed to make equity crowd funding for books a reality is a platform that has both crowd funding and publishing functions. Mostly, investors in books need to be protected from the sort of accounting shenanigans that prevent advances from earning out and royalties from amounting to more than a few pennies per copy. They also need some insurance against authors who don't deliver their promised manuscripts. All parties need sound legal agreements, business plan templates and investment entities. But above all, none of it will work without copious transparency and openness.

I've been trying to think some of these things through. It's a pretty big project, needing a variety of expertise. If you'd like to join me and others in some discussion, please let me know, and I'll organize something. Or leave a comment.

Resources
Community/Crowd Funding for Books

• Unglue.it
• PubSlush
• Unbound
• Singularity & Co.
• Knowledge Unlatched
• TenPages

Disaggregated Publishing

• Smashwords
• BiblioCrunch
• PressBooks
• CreateSpace
• LuLu

JOBS Act

• Text of the Bill (thomas.loc.gov)
• SEC impedes crowd-funding revolution (bankrate.com)
• Slow-moving SEC blamed for Blocking JOBS Act (politico)
• JOBS Act, One Year Later: Hang Tight, Equity Crowdfunding Is Coming (news.terra.com)
• Massolution Crowdfunding Report
• Crowdfunding Industry Celebrates First Anniversary of JOBS Act Despite Delays (techcrunch)

Stripe, Balanced, WePay for Payments: Not big enough to #fail

When Amazon Payments first told us they wouldn't allow our crowd-funding business to continue using their system, we thought it was a phishing attack. That's because a robot sent it, and what does a robot know? But it turned out they were serious, they had to cut us off, because what if we destroyed civilization as we know it? Would they be on the hook for it?

Having dealt with Amazon Payments and Paypal, I dreaded what we'd have to go through. But now, after learning more than I ever wanted to know about the online payments industry, I feel that getting booted by Amazon was the best thing that could have happened to unglue.it. There's a new generation of payments companies out there, and when the big payments companies have their Lehmann-Bear-Stearns-Brothers moment, you'll be happy if you escaped in time.

To understand what makes payments companies tick, you have to understand something about the risks they take on, and the ways they try to mitigate risk. For a merchant, taking a credit card means you don't have to worry about whether someone's credit is good. For a consumer, paying with a credit card means you have some recourse if a merchant tries to cheat you. Credit card fraud is probably older than credit cards, and credit card companies have decades of experience detecting fraud and reducing its cost.

Internet commerce introduced entirely new categories of risks, and conventional payments providers were not eager to change. To address the needs of a new era, a number of payments companies came into existence, most notably, Paypal. As Paypal took off, companies like Amazon, Apple, Ebay and Google did not stand idly by.

But anyone who's used Paypal, Amazon Payments, or Google Wallet recently can't help but notice that these services have calcified. Even worse is that they've metastasized as impersonal, unresponsive machines. In the payments biz, calcification has advantages. Consumers have learned to trust these companies and their brands, and the companies have in turn done their best to turn into rocks of calcite stability.

But if you want to change the world with your fantastic start-up, you're screwed. If you're doing something new, the big guys can't evaluate your risk profile. Because they're machines. For changing the world, you need people, or at least cyborgs. You need high-powered big-data risk analysis supplementing the judgments of seriously smart people. And over the last month, I've found some of this at three different companies.

First, let me tell you about some companies we didn't pursue. Dwolla is really interesting, but we thought it would be hard to sell Dwolla and its requirement for direct bank account access to our core demographic. If our users were high-involvement, high frequency users, we might feel differently. Similarly, the marketing barriers to using things like bitcoin are prohibitive at this time. Mobile payments solutions such as Square aren't so relevant for our application.

Another company we were interested in was Braintree Payments. We reached out to them, but they told us that three weeks prior to our request, their banking networks had told them to stop supporting crowdfunding businesses.

So we looked at WePay, Balanced, and Stripe. Three breaths of fresh air.

Of these three the company that most closely replicates the Amazon/Paypal model is WePay. Like Amazon/Paypal, WePay allows users to create a WePay account. As WePay becomes more and more accepted, consumers who might be hesitant to give credit card info to an unfamiliar service like Unglue.it will recognize the WePay brand and grant access to their WePay account, if they already have one, via OAuth. If the user doesn't have a WePay account, the the marketplace can create one on their behalf. When everything works, friction in the transaction drops dramatically.

Wepay's API (which was not available when we were looking for a payments provider a year ago) allows all the key functions Gluejar would need to build a crowdfunding application. These include conditional and delayed payments. For example, WePay is the payments provider for GoFundMe. The biggest downside for us is that Wepay is quite specific about only allowing payees who are US citizens. Still, we were able to identify a work-around for our non-US rights-holders. Balanced and Stripe had similar issues and work arounds.

Balanced, the smallest of the three companies we talked to, is in many ways the most exciting. They're focused on providing solutions specifically tailored to markets. They've baked the concepts of multiple buyers and multiple sellers into their well-documented API, and offer features such as the ability to escrow payments into the marketplace account. If you so much as browse their website you'll be given an API key and be offered the chance to do a test transaction.

Markets present rather different risk profiles to a payment provider than do simple merchants. The diversity of participants and flow of payments makes it harder to detect fraud. But if you have smart, experienced people involved, the risks can be assessed and mitigated. Fraud detection algorithms can be optimized for markets. The possibilities of markets enabled by the internet are unfathomable. For example, last week I learned of a company, VoiceBunny, that has built a marketplace for voice talents. Crowdvoicing! You feed some text into an API and soon, someone with a great voice will speak it for you. They're using Paypal now, but they would be smart to look at Balanced.

GitTip IS using balanced, after a fiasco with FeeFighters and finding their business model incompatible with Stripe's underwriters. Gittip's founder, Chad Whitacre, had to "understand and mitigate the risks of running a marketplace", and Balanced is helping him do that.

Stripe was the most "boring" payments company we looked at. I use the word "boring" with much admiration, because they're focusing on the relatively boring old problem of enabling internet merchants to take credit cards and just doing a better job of it. On the implementation side, they've succeeded brilliantly, with an API and developer support that just makes you want to throw your Paypal code into the trash and drink some good bubbly to celebrate its demise.

The folks at Stripe took the time to understand the issues of payment risk inherent in our business model, and what we're doing to address it. To be able to use Stripe for our marketplace, we would need to take some responsibility for delivering the Creative-Commons Licensed eBooks that our crowd is funding. It means that we can't work like Kickstarter, which disclaims any and all responsibility for completion and delivery of the projects on its website. Since that quality control and delivery assurance is a big part of the extra value we provide over Kickstarter, Stripe is a viable option for us. As are Balanced and WePay.

In deciding among these three great companies, the questions we asked ourselves were more about what we want to be than anything else. Do we require the scaling characteristics of a marketplace or are we just a merchant that wants to take creditcards? Do we want a payment network or can we stand on our own? As the world of internet payments develops, which company will develop solutions aligned with our particular needs?

I'm not going to say which company we've settled on until we make sure that everything works, but I've very sure that whether it's that one or one of the others, we'll be in a much happier space than we were with Amazon or Paypal. If you are considering a switch from a payments company that is too big to care about your success, or if you are deciding on a provider for a new application, you should really look at the new companies. A healthy internet economy needs a diversity of payments providers who employ more than just algorithms, who support businesses rather than accounts.

Why I'm not mad at Amazon

Amazon seems moderately competent to me. That puts them in the top decile of large American corporations. So when Sarah Houghton, the "Librarian in Black" tweeted me "I hope you won't mind if I'm still mad at them ;)" I realized that I'm not mad at Amazon at all. A big company acting like a big company is not the sort of thing I get mad at. I've worked for one of the biggest companies in the world (at least it used to be!)  So when Amazon forces my small company to suspend crowdfunding because of its big-company traits, I find it hard to get too worked up.

But let me tell you the whole story.

Twelve years ago, my company, which was named "Openly Informatics" at the time, launched a book-linking service called "LinkBaton". We offered users the ability to link to the bookstore or library of their choice. Our value proposition for websites was that by letting users pick their favorite bookstore- Amazon or BN or whatever, they'd get more affiliate commissions. Meanwhile, we'd make money by getting good search optimization for our links. The problem with the business was that Amazon was so good at converting traffic to sales that any diversion of traffic to a non-Amazon site would reduce rather than increase a website's revenue. Still, our traffic built up, and at our peak, we were driving 200 transactions per day and getting nice sales commissions through Amazon Associates. Our peak day was September 10, 2001.

But that's another story entirely.

So we "pivoted" into library software, linking to journal articles instead of books. That turned out to be successful, and I ended up selling the business and the name, but not the company, to a big non-profit in the library space. I worked there a little over three years, met some wonderful people, and learned a whole lot.

When I left that job, I reactivated the company (now called "Gluejar") and did some odds and ends, consulting, selling some books through Amazon Marketplace, and blogging about ebooks and libraries. Amazon was happy to give Gluejar a business account.

Last year, I decided that creating a public sector for ebooks was an important thing to work on, and that crowdfunding was the way to do it. Unglue.it was born. The main technical uncertainty was the payment system. I hired some engineers and we compared various providers and chose PayPal, mostly because they offer better international coverage than Amazon Payments. Also we were hesitant to use Amazon because book publishers hate Amazon- they're jealous of Amazon's prowess in  e-commerce.

But Amazon Web Services is amazing. We have all our servers in the Amazon cloud.

And then we waited for PayPal to turn us on. That was January. We're still waiting. It seems PayPal has been reevaluating their stance toward crowdfunding businesses.

In April, we felt we'd waited long enough and decided to look at Amazon again. Kickstarter was seeing more and more success with Amazon Payments, so we figured they really had their act together. We already had a business account, we just had to get approved for Flexible Payment System (FPS) access. We verified our bank account, and 2 weeks later, FPS was turned on. With real money. Amazon is so awesome!

After all sorts of testing, we launched the website on May 17. One month later, our first campaign succeeded. We had supporting tweets from CoryDoctorow. And TimOreilly. And Weezer, goddammit! We carefully ran 259 payment authorizations, and real money appeared in our account. An ebook, Oral Literature in Africa, will be free to the world! Everything just worked.

Two weeks ago, I got this very phishy email:

Greetings from Amazon Payments,
Thank you for registering with Amazon Payments. We appreciate your interest in our product.
Unfortunately, at this time, we are not able to approve your request for an Amazon Payments business account based on our review of your intended use of our payments service.
As stated in our Acceptable Use Policy, the following product or services are prohibited from using Amazon Payments:
• Donations and Charitable Solicitations - includes charities and non-profit organizations without a valid 501(c)(3) tax exempt status, charitable solicitations, commercial fundraisers (including commercial co-venturers), or any activity associated with the solicitation of donations.
A member of our business team will be in contact with you to further discuss your business model and use of Amazon Payments.
---------------------
We have temporarily activated your account. Please initiate a new transaction to withdraw funds into your bank account.
Sincerely,
Account Specialist
Amazon Payments
https://payments.amazon.com

We thought it was a phishing attack because

1. They didn't know we'd had a business account for 3 years
2. They said nothing about FPS
3. The action requested was to make a withdrawal. Huh?
4. Donations? If what we're doing is asking for donations, when we commit to deliver ebook licenses for contributions, then what is Kickstarter, which promises squat, doing??

So the next morning, I called Amazon Payments customer service. The representative confirmed that nothing had changed in our account. But there was a note from the "verification team". And it was impossible, even for her, to talk to the verification team. So she said we should reply to the phishy email, and wait for the "member of the business team" to contact us.

So I replied, and the passive-agressive robot at the other end seemed to either want a human to intervene or to nuke our account. That scared us, because the account was linked to AWS and all sorts of good things. We felt confident that when we could speak with an actual human, all the misunderstandings would melt away. And so, after a week of not hearing more, I went away for a week at the New Jersey shore.

On Tuesday afternoon, I finally got an email from a human at Amazon Payments who knew what was going on, a Senior Account Manager. We scheduled a call for Wednesday noon. (we sleep late here at the beach) He was really nice and treated me with utmost respect. I explained my company's long history with Amazon and our crowdfunding achievements to date. He explained his much shorter history with Amazon and expressed admiration for what we were doing. He then explained some of the regulatory and contractual burdens that Amazon Payments (an entity separate from Amazon) has to meet, and how everything was more complicated with crowdfunding accounts. As a trivial example, they have to verify that their payments are not going towards alcohol or firearms. He did not mention nuclear weapons or drug money laundering, but I extrapolated. And it seems that Amazon has to spend money to do all this verification. They discovered all this crap because they're doing payments for Kickstarter. And until they figure out how to make sure that Kickstarter is not funding alcohol, drugs, nuclear weapons, prostitution and credit-default swaps, they've decided not to accept any more crowdfunding accounts.

I make it sound a bit crazy, but that's the world we live in. Think about it: how would you make sure the thousand business partners of your thousand business partners aren't dealing cocaine-tipped Stinger missile futures contracts on the side? And the questions we've gotten from the Paypal people were heading in the same direction, so I'm inclined to believe Amazon Payments Guy. I think it's rather unlikely that Amazon is singling us out because we're funding free ebooks, or, as has was suggested on Twitter and Hacker News, that we threaten Amazon's Kindle business. In my dreams. (Which will come true!)

So we had to suspend our ungluing campaigns. Striking a blow against arms dealing and drug money launderers everywhere.

It would have been nice if, back in April, we had gotten a clear signal from Amazon that they weren't doing new crowdfunding businesses. Most likely, we would have gotten that signal in April if not for our 3 year old business account. I can easily imagine a meeting inside Amazon where some participants wanted to go full blast on crowdfunding and others wanted to ban it, resulting in a compromise position of no new crowdfunding "for now", but no announcement either. The crack we fell into was just collateral damage. Small companies that get shoved aside are not Amazon's problem. But no, I'm not mad about it. Did I mention how amazing AWS is?

I'm curious though. If it was me running payments at Amazon, I'd see this mess as an opportunity. If Amazon had tighter, front-to-back control of crowdfunding, it could do it better, more efficiently. If it was me running payments at Amazon, I'd set up a better-designed crowdfunding marketplace. No wait! If it was me running payments at Amazon, I would buy Kickstarter!

And based on sheer speculation, it's entirely possible that Amazon is right now trying to buy Kickstarter. In October 2009, Kickstarter said it was working to support international projects   and as of 2012, nothing has happened. Why dyaspose?

As for our relaunch, we'll be looking at companies like Wepay, Dwolla, Stripe, Balanced, Braintree and a few others. Maybe the regulatory crap is easier to deal with in a smaller company that can know its customers. I'd love to hear suggestions. We're also working on a way to decouple our market from payment providers entirely. Who knows, maybe Paypal will come to our rescue. whatever happens, we'll be back sooner than you'd think.

Until then, if you like our model for ungluing ebooks, please register on the site. Or start a nuclear reactor project on Kickstarter.

Update: Here's the followup post.

Structures to Build

Being a scientist means asking good questions. A good question is one that you don't know the answer to, but the answer has consequences. In designing experiments, a good scientist can't worry so much about the consequences of the answer, because the truth is more important.

Being an entrepreneur also means dealing with questions you don't know the answer to. But the consequences matter much more than the answer. The entrepreneur does experiments too, but the object is to obtain a good outcome, not to learn the truth.

Experimentation has never been more important for the word of books and the stories they tell. We don't know how books will be distributed ten years from now. We don't even know if public libraries will exist. We hardly know how verbal stories will be told in 10 years. The answers to these questions are of great import to our societies and to the generations that will come. Since I think of myself as both a scientist and an entrepreneur, I have a lot of questions to answer.

The Uni Project- Home Stretch

While I'm busy with the experiment in the business of books that is Gluejar, I can't help but be fascinated other sorts of experiments that are in progress, and which are worthy of public support. While I'm sure that interesting experiments are being conducted in academic and government institutions and that many of these are being supported by foundations and research agencies, the most audacious experiments I know of are being conducted by passionate individuals and being funded by in non-traditional venues such as Kickstarter.

One of these is the Uni Project. Last year, I wrote about the Chinatown Storefront Library. Never intended to be more than a temporary installation, it has left a legacy of understanding of the ways a space designed for reading and books can interact with and enrich a community. The team behind that project, Sam and Leslie Davol, wondered whether structures could designed specifically to be temporary, itinerant libraries- quick to deploy, easy to operate, and dramatic to see. Working with Professor J. Meejin Yoon of MIT’s School of Architecture and Planning, they came up with a concept for a modular system of stackable cubes, each of which could contain a micro-collection of library materials.

I don't know whether this idea will work. But I do know how to help them find out: support them on Kickstarter. The project is currently 90% funded; they have 6 more days to raise another $1900. Update 8/11: The Uni achieved its goal with 3 days to spare!



I learned about another compelling experiment last week. This one aims to have people all around the New York City area contribute to a location based story, using an augmented-reality view of the twin towers as a unifying theme. Founded by Brian August, a New York technology executive who describes himself as "obsessed with the twin towers" 110 Stories will be an iPhone app that aims to both inspire and document the stories of the millions of us who saw the twin towers of the World Trade Center almost every day until they were destroyed on 9/11 almost ten years ago. Although the augmented reality feature gets the buzz, I think the story-telling aspects will be a lot more interesting in the long term. Imagine a location-aware ebook using the technology that Liza Daly demonstrated last year.

110 Stories

As of tonight, 110 stories has blown through its goal of $25,000 with the help of 423 backers, and the fundraising campaign has 4 days to go.

As we build Gluejar's ungluing books website, we're trying to work out whether the "only six days left" aspect of Kickstarter projects is a necessary ingredient for a crowd-funding site. Since we'll be working to "unglue" books that have already been written and published, they won't disappear if a fundraising goal isn't reached by a given cutoff date. A rights holder that's willing to release a creative commons edition of a book for $10,000 on July 31 will probably still be willing to do so on August 15, so there's not the same time-pressure in an ungluing campaigns.

Questions to answer. Towers to build.

Unbound wants to be the Kickstarter for Books

... and what they really are is the editor-curated, agent-filtered Gluejar for books that haven't been written.

Ignoring the fact that tomorrow is Memorial Day (and why aren't you Brits out barbecuing anyway?), I feel compelled to write promptly about today's unveiling of Unbound, because many of the words being used to describe Unbound are similar to things I've written about Gluejar.

One of my early attempts to describe our model of "Ungluing eBooks" was that Gluejar would be "like Kickstarter for ten million books". I found that approximately 50% of the subjects tested were mystified by that description, and the other 50% got totally the wrong idea.

So the introduction of Unbound allows me the chance to compare and contrast Unbound, Kickstarter, and GlueJar.

Business model

Unbound is a conventional publisher that asks readers to pre-fund some or all of the fixed cost of producing a book that hasn't been written yet. Unbound tells you how many supporters a book needs, but not how much cash. Unbound doesn't tell you how much money they get or how much the authors get, and once a project is subscribed, Unbound publishes the book, and splits net profits 50/50 with the author.

Kickstarter is not a publisher at all. They just let creators ask for a specific amount of money to support their projects, including projects that might result in the production of a book. Kickstarter takes a 5% fee from funds raised; 100% of subsequent profits from a book go to the creator.

Gluejar won't be a publisher as the term is currently understood.  Gluejar will allow book lovers to pledge support for making books (that already exist) free to the world in a creative-commons licensed ebook edition. Authors retain commercial rights for print and other subsidiary rights. The price is set by the rights holder to match or exceed the income they would expect for future sales of the ebook; Gluejar takes a fee similar to Kickstarter's from funds raised.

Selection Process

Despite their slogan "Books are now in your hands", Unbound is using a selection process that's pretty much identical to how it already works. Book proposals will be carefully curated, and Unbound is only going to deal with submissions coming from literary agents. So if you're Monty Python's Terry Jones, great. I feel so empowered.

Kickstarter also reviews projects rather carefully to ensure quality. But anyone can propose a project, and it's clear from the projects on the site that it's relatively open to newcomers and nobodies with good ideas. It's really the crowd that decides what flies.

Gluejar will allow patrons to pick books for themselves. Although there are a huge number of books out there, you already know which ones you love. We're not sure how to extend the concept to new books or new authors.

Risks

Because Unbound acts as the publisher, supporters have a reasonable assurance that a completed project will actually deliver a book. On the downside, a book that has already been funded might turn out to be less than promised. The incentives encourage the author to split a narrative into multiple volumes, and if a book turns out to be bad, or perhaps just dull, the supporters don't get their money back. I don't know what Unbound means when it says that "All unused credits expire after 30 days."

Kickstarter doesn't do anything to assure that projects get completed. Supporters have to judge for themselves whether the creator is honest and worth supporting.

Gluejar will act as a trusted third party to make sure that good quality, Creative Commons editions are delivered to patrons of a successful pledge campaign. What Gluejar can't guarantee is that a rights holder with all the needed rights for relicensing a particular book will exist. That's why we'll let supporters spread their pledges onto lists of books.

Bottom Line

Unbound has launched with a very nicely done website. They've done a nice job of setting up reward levels and website features matched to book publishing. But Unbound is profoundly timid about putting publishing into the hands of the reader. It's more of a brilliant marketing gimmick than a publishing revolution; they've mapped out a healthy way to pre-sell an ebook for £10.


Thanks to @pablod, @julietalionetti and @muttinmall for a great discussion bringing out some of these issues.

Related articles

• Unbound Launches It's Kickstarter-Byliner Hybrid For Celebrity Authors (techcrunch.com)
• Hay Festival 2011: New site Unbound gives readers the power of publishing (telegraph.co.uk)
• New crowdfunded publishing project signs up major names (guardian.co.uk)

Open Access eBooks, Part 3. Business Models for Creation

Here's the third section of my draft of a book chapter for a book edited by No Shelf Required's Sue Polanka. I previously posted the introduction; and What does Open Access mean for eBooks subsequent posts will cover Open Access E-Books in Libraries and a Conclusion. Note that while the blog always uses "ebook" as one word, the book will use the hyphenated form, "e-book". The comments on the second section prompted me to make significant revisions, which I have posted.

Business Models for Creation of Open Access E-Books

Any model for e-book publishing must have a business model for recouping the expenses of production: reviewing, editing, formatting, design, etc. In this section, we’ll review methods that can be used to support Open Access e-book publishing.

In 2009 Cory Doctorow put together a collection of short stories called “With a Little Help” and documented the process of publishing it in a series of columns on Publisher’s Weekly. He used a variety of business models to support the project, as detailed below, and the e-book version was released under a Creative Common License.

DIY publishing models

One way to meet the costs of e-book production is to keep those costs close to zero. Free blogging sites have made it simple for authors to produce blogs and other sorts of websites; additional tools are available to add keywords, links, and images. Other tools can convert a blog or similar website to the EPUB e-book format; EPUB export is available in Apple’s Pages word processor and it’s likely that other programs will soon follow suit.

Given these tools, authors can produce e-books on their own, with no other expense than the value of their time. For With a Little Help Doctorow did most of the production himself; as the title suggests, he got friends to help out with things such as cover and book design.

In the “Do It Yourself” or DIY model, there are essentially no expenses to recoup. If the author wants to earn something, additional money needs to be spent on an ISBN and a bit more to get metadata into a feed for Amazon. But if income is not the object, the e-book can simply be posted on a website and made available to the world. A CC license allows the e-books to be distributed in a wide variety of channels.

In fact, with the consent of the editor, this book chapter will be released as a DIY Open Access e-book in EPUB format, with a CC BY-ND license. The author hopes to profit primarily from the experience of doing so.

Freemium models

“Freemium” refers to the business model, common on websites, to offer one level of service for free, and then, when the user is solidly hooked on the use of the service, to offer them a premium level of service for a fee. The difficulty of this model is to have a service that’s attractive enough at the free level of service to drive premium conversions, and at the same time to have the free service be limited enough that upgrades deliver significant value.

In the e-book space, the traditional premium service is typically either the print version or an updated or otherwise enhanced digital edition. O’Reilly has used this model to great effect, by allowing authors to make free PDF versions available on websites while O’Reilly sells print versions through traditional channels.

In Doctorow’s project, he offered Print-on-demand versions through Lulu.com for $18 each, along with 250 “super-limited hardcovers” for $275 each: These were hand-bound on acid-free paper and included original paper “ephemera”, and came with a memory card with the full text of the book and audiobook. The $275 version turned out to be the big moneymaker.

As e-book readers become preferred over print by users, using print as a revenue engine may run out of steam. Bloomsbury Academic is building a platform that also uses e-book versions as the premium. While CC noncommercial versions are available for reading online, the books will also be issued for purchase in print and on Kindle and Sony readers. It’s possible that publishers will look at enhancing e-books with supplementary content or deep semantic mark-up as their revenue driver; a bare-bones Open Access version would serve as promotional vehicles for the core product.

Advertising and promotional models

Cost-free and Open-Access content can promote more than just a premium edition of the same content. E-Book formats are much like HTML web sites in that they can embed links; even javascript functionality is becoming available in e-book content. Publishers can use these types of functionality to generate revenue through advertising. A quick look at iPad or Android App Stores reveals a huge selection of free, advertising-supported Apps, including many apps that simply wrap e-book content.

In one scenario where this might happen, an author of a book series might produce an OA electronic version of the first in the series. The free e-book could have embedded links or “in-app purchase” buttons for subsequent books in the series. OA E-books might also be supported by contextual links and/or product placement; imagine a story featuring a sports car where the brand and model of the car are chosen based on support from a car company.

Another type of promotion that can be furthered by all types of free e-books is personal brand-building. It could be argued that Cory Doctorow’s biggest payoff from the With a Little Help project was that it increased his fame and thus his ability to make money on appearances, commissions, and on the Boing-Boing website. (One story in the collection was a $10,000 commission) Seth Godin

Public funding

Some books, such as those relating to education, public health, political or social advocacy, or scientific research, fulfill a public purpose. Publication of these books using a form of Open Access will further their public purpose. The costs of production and release of these-books can financed by foundations, charities, political action committees, private individuals, or governments.

European governments have joined together to fund the digitization and distribution of cultural heritage works through Europeana. Funded by the European Commission and national ministries of culture, Europeana acts as a portal enabling distribution of large numbers of OA e-books. In the US, books created by the federal government belong by law to the public domain, but there’s no centralized funding of OA e-books or their distribution.

In developing countries, governments seeking to provide textbooks to large numbers of student will eventually find that producing e-textbooks, released for free, is the only scalable method of providing for their national educational needs. Many states in India, for example, already release their state-published textbooks on an OA basis.

A variation on public funding for OA e-books in the context of academic monograph publishing has been proposed by Frances Pinter. Her idea is for libraries to join together in a cooperative, diverting a fraction of their acquisition budgets to fund the fixed costs of producing new monographs by university and commercial scholarly presses, which would then be made Open Access. She estimates that individual libraries could save over 75%, depending on the participation rate.

Another sort of public funding model with a long history of use is the “tip-jar”, or more profitably, the pay-what-you want model. Here, the creator urges his audience to leave some money as a “thank you” in return for value received. Doctorow reported receiving over $1200 using a Paypal-powered donation box, which actually did better than his print-on-demand offering.

Crowd-sourcing

Wikipedia and the more specialized wiki sites it has spawned are excellent examples of Internet resources created by large numbers of individuals working together virtually. These volunteer collaborations have replaced printed encyclopedias for most people, and might be considered to be the largest, most dynamic Open Access e-books in existence. Most users wouldn’t consider these websites to be books, even though the printed equivalents certainly were.

An organization called “Distributed Proofreaders” (DP) is an aggregation of volunteer effort clearly focused on e-books. Many of the digital texts in Project Gutenberg have been produced by DP volunteers who check and correct OCR transcriptions of scanned books. While OCR (optical character recognition) can be very accurate for modern books, books and magazines printed in the nineteenth century and earlier present a variety of challenges. The resulting digitized works are dedicated to the public domain.

Crowd-funding

The model that the author is working on at Gluejar Inc. is crowd funding. It’s analogous to the method that public radio and public television is funded in the U.S., except that every book that’s to be released with a Creative Commons license has a fund drive of its own. Once the producer’s price has been matched by reader pledges, an Open Access e-book is released. The pledge drives are managed by a website.

Authors have used crowd-funding websites such as kickstarter.com to cover the expenses of completing a new book. For example, Mur Lafferty raised over $19,000 from more than 250 backers to fund book design, cover design, and e-book conversion for a fantasy audio series. In a few cases, the projects use Creative Commons licenses. Stephen Duncombe, a Professor at NYU, has been trying to raise $3500 to fund the further production of an open-source version of Sir Thomas More’s Utopia, which is distributed with a CC BY-SA license. (Of course the underlying work is in the public domain, but the new translations, annotations, and commentary is subject to copyright.)

To get a better idea of how crowd-funding might scale to large numbers of books, consider the author of a romance series. Rights for the earliest books in the series have reverted to her, but there’s no cash to convert the book to e-book formats. She contacts the pledge-drive website, and enters an offer to release the first book under a Creative Commons license in exchange for a lump sum payment that she considers to be fair and which covers the conversion to e-book. Fans of the series can then go to the site and pledge support. If the author's offer price is met, supporters get billed, and the author gets the payment. The resulting e-book file is sent to all the people who have pledged, and put on a feed for the rest of the world to pick up. Since the e-book is now Creative Commons licensed, it can be redistributed for free.

In another scenario, a reader launches the pledge campaign, perhaps someone who has found the book in a library. The library metadata is pushed to the pledge-drive site and other fans can pledge their support. Eventually, the pledge amount gets big enough to attract notice from rights holders, who can then show up, deliver the e-book, and take the cash off the table and divide it among themselves.

Notes:

1. Cory Doctorow's With a Little Help Project
   
2. Bloomsbury Academic
   
3. Seth Godin's What Matters Now
   
4. Europeana
   
5. Distributed Proofreaders
   
6. Mur Lafferty's Kickstarter Project- The Afterlife Series: Heaven, Hell, Earth, Wasteland, War
   
7. Stephen Duncombe's Open Utopia project on Kickstarter:The Open Utopia: A New Kind of Old Book 

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Bounty Markets for Open-Access eBooks

In January 1773, Wolfgang Amadeus Mozart placed advertisements asking patrons to "subscribe" to the three piano concertos he was writing. If he received enough support, the concertos would be finished by April, and subscribers would receive beautifully copied manuscripts. More importantly, they would have the pleasure of supporting the creation of a great work, which would be performed around the world. The  resulting concertos, K413-415 are today considered important works, but it took quite a long time for Mozart to gather enough subscribers.

This old model for publishing was modernized with the addition of cryptographic assurance layers by cryptographers John Kelsey and Bruce Schneier, who started their examination of intellectual property business models with a deep pessimism about the long-term technical viability of digital rights management systems. Kelsey and Schneier dubbed their system "the street performer protocol" in tribute to a friend who friend who had travelled Europe earning money with bagpipe performances. Presumably, the friend found that he could earn more money by passing the hat before or during a performance rather than after.

Street Performer Protocol is a fund raising method designed to support the free release of a creative work. The creator agrees to release the work only after a threshold amount of money is pledged by supporters. For this reason, the method has been termed a "threshold pledge system". Kelsey and Schneier describe how a third party, who they term the "publisher" can provide supporters with a layer of assurance that the creator will live up to his end of the bargain if the threshold is reached; otherwise, pledges are refunded to the supporters.

Another term that has been used for systems of this sort is "ransom publishing", which is particularly apt when an author gives away the first few chapters of a novel, but holds the rest of the chapters hostage until a suitable ransom is paid by readers who want to read the cliffhanger ending.

Somehow I doubt that a cryptographic assurance layer would have helped much with Mozart's concertos. Nor do I think that Mozart would have had much success giving out the first movement before asking for contributions.

What might have helped Mozart a lot, however, would be a market.

Markets function by bringing together many buyers, many products, and many sellers. If Mozart had been able to offer subscriptions to every music lover in the world, and those music lovers had easy access to all the composers in the world, Mozart would have been a very wealthy man.

Web sites that attempt to create markets for creative work around threshold pledge systems are definitely a trend. Kickstarter is perhaps the best example- They provide opportunities for creative people to solicit support for worthy projects. In many cases, the creators provide benefits for people who have supported their work. Another example is FashionStake, a website which lets ordinary people support fashion designers by pre-ordering designs before they hit stores. Supporters of successful projects thus get special access and special prices for the latest designs from the world’s top designers.

FashionStake

Kickstarter and FashionStake share several characteristics. The number of projects available for support is not huge; there are selection filters that have a side effect of preventing significant competition between projects. Also, there is an assumption that projects will not be executed if the threshold funding is not reached. The incentive to keep the threshold price low is that projects priced too high will not achieve their support threshold, and thus won't receive any funding at all.

I've been thinking about how to apply threshold pledge systems to the sponsorship of open access for ebooks. I believe that with some modest but essential innovations, a sort of threshold pledge market could become a powerful economic force in many segments of the ebook business.

The first innovation would be to create a market that covered ALL books. According to the Google Books team, there are over 100 million books that can be identified in the world; a relatively small fraction of them are out of copyright, and an even smaller fraction of them are available as open-access ebooks. Why not let people sponsor any and every book they cared about?

Note that these books have already been written and published, so the sponsors are not being patrons of artistic creation, as in Kickstarter, FashionStake, and Mozart's concerto subscribers, instead, they are posting a reward for conversion to open access. It's wrong to think of this as "ransom publishing"- a parent doesn't kidnap their own child! A better way to think of it is posting a "bounty" for the delivery of the ebook into a Creative Commons compatible license.

A second innovation follows from the first. If you allow the posting of a bounty on any book, then a lot of books will get only minimal sponsorship. Many of these books may be "orphans", without known rightsholders for the public to purchase ebook rights from. The only way to keep sponsorship dollars from sitting unused is to allow them to be posted to many books at once. The first book to claim a bounty would take home the money.

Multiple commitment of sponsorship dollars has two interesting effects. First, it magnifies the impact of sponsorship dollars. An commitment ratio of 100 to one allows 10 million dollars of support to look like a billion dollars offered to rightsholders. Smart rightsholders who participate at the right time could walk away with sizeable rewards. Second, multiple commitment puts rightsholders in competition with each other for sponsorship dollars. If two books share many sponsors the bounty for one book would go down significantly when the owners of the other book decide to accept their posted bounty. Rightsholders are thus discouraged from waiting too long for sponsorship dollars to build.

None of this will work if sponsors don't get something for their money. It seems to me that the released ebooks should include some sort of recognition text, but maybe just loading the sponsor's devices automagically with released ebooks would be enough. Given some format validation, the released ebooks would slide easily into Google Books, OpenLibrary, Feedbooks, other places- LibraryThing, GoodReads, WeRead, GetGlue and devices/apps- Kindle, Kobo, Nook, iBooks, Ibis Reader. Perhaps most importantly, the released ebooks could be curated and preserved by libraries around the world, something that can't happen properly with today's copyright system. That alone would be enough to get me to participate.

Mozart would approve, I think.

Next week: who would create a market to help people post bounties for the release of ebooks?