In this post, I kick off a series on the private provision of public goods, by taking a good look at Kickstarter and the Street Performer Protocol.

Crowd funding really took off in 2012. From my personal perspective, the most visible embodiment of this trend was the emergence of Kickstarter as a means of funding game development projects. Double Fine Adventure was one of the first projects that brought this concept to public attention by raising $3.3 million. This was quickly followed by the success of such projects as The Banner Saga ($723k), Shadowrun Returns ($1.8m), Star Citizen ($2.1m) and Project Eternity ($4.0m). Of all of these, I think The Banner Saga stands out, as it is a very original project by a comparatively unknown team, whereas the other projects capitalized on well-established concepts and the fame of their celebrity project-leaders.

When I first encountered Kickstarter, I became very excited, not just because of the addictive warm-glow effect of making great projects happen, but also because Kickstarter struck me as the first large-scale, widely popular implementation of the Street Performer Protocol. The Street Performer Protocol is a brand name coined in the 90s by Steven Schear, John Kelsey and Bruce Schneier for a very simple and very old mechanism for fundraising: Artists announce that they will do a public performance if the audience as a whole pays a fixed total amount (or more). If enough spectators chip in to reach this threshold, the artists collect the money and perform. Otherwise, nobody pays anything and there is no performance. This is essentially how Kickstarter operates.

Now, back in the 90s, the Street Performer Protocol (SPP) was heralded as a mechanism for funding public goods. A public good is a good that, once it is created, can be enjoyed by anybody without being “used up”. (See the end of this post for more details on the term.) Software and computer games make excellent examples of public goods in that they can be copied perfectly at a vanishingly small cost.

Commercial publishers of software and games often impose legal and technical restrictions on copying. They create use-exclusions in order to be able to sell the software like a classical private good. While this is a perfectly valid business model, it seems wasteful because it prevents people from using the software who could benefit from it at no additional cost. By contrast, the open source / free software model of software development ensures that free copying is possible, both legally and technically. But if software is to be made available as a public good without use-exclusions, how is its development to be funded? People hoped the SPP might provide an answer to this question, and, sure enough, the SPP soon had important successes. For example, in 2002, Ton Roosendaal managed to raise €100,000 in order to buy the rights to the 3d software Blender (that he created) from the creditors of his bankrupt company NaN and released Blender under the GPL. But despite such isolated successes the SPP did not gain widespread adoption, and cross-subsidies remained/became the primary source of funding for open source software projects.

With all of this in mind, I became very excited when I discovered how successful Kickstarter was. Did we finally have a working way of financing the private provision of public goods directly? My enthusiasm led me to contribute funds to a couple of projects on Kickstarter, which has been a great experience all around. But. This experience also made it clear that, contrary to my first hopes, Kickstarter is not about the provision of public goods and it is not used to implement the SPP - at least judging by the way it is used in the game development community.

None of the games mentioned above are going to be released as a public good when they are completed. Instead, they are going to be sold, with the profit to be shared by the development studio, possible publishers and whatever investors they may have. The Kickstarter backers are not investors in this context. Their pledge is not a contribution towards the creation of a public good, it just buys a single license for a future product and is thus seen as, merely, a pre-order. From this point of view, customers buy a product years in advance that they know virtually nothing about. Moreover they self-select for price targeting by voluntarily paying much more than price of the pre-order. (This price targeting is significant. All aforementioned projects had individual backers pledging more than $10,000 dollars and a significant percentage of backers pledged more than double the price of the respective pre-order.) In exchange for these additional funds, they get additional merchandise of limited value and the warm-glow effect of being part of a project they care about.

To be sure, this long-term pre-order model of funding games does potentially have great positive effects. When an audience not only buys the product but funds the creation process from the start, stakeholders become the key financiers of the project, which may lead to fewer conflicts of interest. Development teams achieve greater creative independence, they can follow their instincts and have to worry less about mass market appeal and investor interests. In the most optimistic scenario, this can lead to a more satisfying experience, both for the developers and for the customers.

Nonetheless, treating a Kickstarter pledge as a “pre-order” sounds just wrong to me, for several reasons. First of all, backers take on a large amount of risk with their pledge. They have no guarantees that the product is going to be delivered, they have no influence on the creation process, they have no information about the product they are buying, the price they pay is, on average, way above the final market price of the product, and they receive none of the revenues made by selling the final product. In short, if Kickstarter is used to create software that is going to be sold for-profit, then backers make a huge investment, reap none of the profits that arise from their investment, carry a large share of the risk, and end up paying much more than customers who buy the product after it has been released.

To be clear: I do think that all of the aforementioned projects are run by development studios with the best intentions. And while contributing on Kickstarter does have a warm-glow effect that can be addictive, I am convinced that most backers are rational in their decision. The huge transfer payment from backers to developers inherent in the pre-order funding model described above is a deliberate decision to fund art that would not be created without such a payment. But for studios to dismiss this huge gift as a pre-order and then to sell the resulting product exclusively for their own profit strikes a wrong chord with me.

Now, the pre-order model is certainly not the only way Kickstarter is used. The are projects, such as Chris Granger’s wonderful Light Table project, that were created with the explicit purpose of producing open source software. The Light Table Kickstarter project raised $316,720 and makes a prime example of the use of the Street Performer Protocol for funding a public good. I do hope that other Kickstarter projects will have the courage to ask backers for money, even if they pledge to make their final product open source upon release. In my view, this would be a much fairer deal. Projects such as LightTable (and Blender ten years ago) show that this can work, despite the fact that it is not rational in a strict economic sense for an individual backer to donate money to such a development project. If this mode of using Kickstarter catches on, we will have a truly new way of financing public goods. Such a mechanism would have a huge impact, given that an ever-growing share of the global economy deals in virtual goods that could in principle be turned into public goods.

So, I do still have hopes for more public good projects on Kickstarter. But hope is not good enough!

Therefore, I will use this post to kick off a series of posts on the economics of public goods, dealing with questions such as: What other mechanisms for funding public goods are out there? What tools do we need to analyse such mechanisms? What are the theoretical limits? How would a funding platform for the private provision of public goods have to work in order to be widely successful?

Addendum: One paragraph introduction to public goods. A public good is a good that, once it is created, can be enjoyed by anybody without being “used up”. Anyone can stand by and watch a street performance, once it is happening. Anyone can walk on a street, once it is built. And anyone can make a copy of a digital movie, once it has been created, without anyone having “less” of the movie. Of course this is not quite true. A performance may become too crowded for new arrivals to see anything, and a street may become too congested for anybody to walk or drive. So, under extreme conditions there is some rivalry in the consumption of these good, but in most cases one more onlooker or one more pedestrian does not “cost” anything, which makes these goods non-rival. Now, as far as digital movies are concerned, their copying is perfectly non-rival as both copies are identical and nobody has “less” of the movie. However, there are often many legal and technological barriers in place to prevent consumers from copying. That is, the industry tries (with moderate success) to exclude consumers from obtaining a copy the movie, if they did not pay for it. When these restrictions are not in place, there is nothing preventing a consumer from making a copy, and the movie becomes a public good without use-exclusions. A pure public good is perfectly non-rival and non-excludable. In practice, public goods often have some limited rivalry, but it may still be instructive to think about them as public goods as they are non-rival in most cases. For my purposes, I do not include non-excludability in my definition of a public good, as the role of use-exclusions in the funding of public goods is precisely what I want to discuss.