# The Incentives of Fair Crowdfunding

Can fair crowdfunding resolve the conflict over copyright? Or, as Cory Doctorow put it yesterday:

Does the Average Cost Threshold Protocol incentivize content creators to “sue the Internet”?

Very short answer: The incentive for creators to sue the Internet is very small (much smaller than usual) but not zero.

Short answer: The Average Cost Threshold Protocol (ACTP) drastically reduces the incentive of content creators to sue people, as creators’ costs are covered from the start. Moreover it drastically reduces the incentive for people to copy content outside of what is allowed by the protocol, because buyer’s payments are used to lower the price (for themselves and others) and to eventually release the content under a copyleft license.

That said, there is a “sales phase” in the protocol where such incentives exist, even if they are limited. However, this drawback is outweighed by the protocol’s key advantages:

• Creators can expect to raise significantly more money than with funding models that employ only copyleft licenses.
• Creators and users agree from the outset on a clear path towards release of the content under a copyleft license.

Moreover the protocol can be modified so that creators have no incentive whatsoever to sue the Internet - however, in this case creators also lack an economic incentive to deliver a great product.

Long answer: Here are the key reasons why creators have very little incentive to sue the internet, if they choose to adopt the ACTP.

• The protocol guarantees that creators’ costs are covered before content is ever released. This drastically reduces the creators’ financial risk, which in turn reduces the threat unlicensed copies pose to creators.
• Costs are covered by users, not investors. This frees creators from having to worry about paying back loans or maximizing their return on equity. Thus the creators’ economic goal is to maximize user value not shareholder value.
• The ACTP provides a clear path towards releasing the content under a copyleft license. By adopting the ACTP, creators subscribe willingly to this goal.
• Creators’ profits are maximized if and only if the content is released under a copyleft license, at the end of ACTP. This means that creators’ have an incentive to work towards the goal of releasing the content for free.

That being said, the ACTP does have a “sales phase” where the content is available only under a “closed” copyright license and people have to buy access. In this sales phase, users have an economic incentive to obtain unlicensed copies.

• Creators receive a share of the revenues earned during the sales phase as profit. They thus have an incentive to sue people who avoid paying for access in the sales phase.
• However, if there are enough buyers to “free” the content and cause its release under a copyleft license, then the creators do not care how many people made unlicensed copied during the sales phase: their profits in this case are fixed from the start.
• The ACTP could be modified so that creators do not receive any profits during the sales phase. All revenues from sales could go towards lowering the price by refunding previous buyers/backers. In this case creators do not have any incentive whatsoever to sue the Internet, at any point in time. However, I do not think that this is a good idea. Because in this case, creators’ do not receive any revenue after the initial fundraising campaign and thus they have no economic incentive to make their product shine and promote it accordingly.

Moreover, the ACTP provides incentives for users to actively participate in the sales phase of the protocol by paying, instead of by making or obtaining unlicensed copies:

• In the short term, the more people pay, the faster the price will drop. As a buyer this means you yourself will get a larger refund and at the same time you will enable other people to afford access.
• In the long run, the more people pay, the sooner will the content be released freely, under a copyleft license.

The sales phase thus becomes a cooperative game among users, where they can help each other by lowering the price in the short term and ultimately “freeing” the content for everyone. This of course has the drawback that it might cause cooperative users (who buy) to sue uncooperative users (who make or obtain unlicensed copies). But the amount of refund money cooperative users stand to loose from unlicensed copies is very limited, so I hope this is not going to be an issue. Users who obtain unlicensed copies hurt themselves by making it less likely that the content is eventually going to be officially released under a copyleft license.

But why should we have a “sales phase” at all? Would it not be better to release the content under a copyleft license right away? The reason is a phenomenon that has been well-studied in the economics literature: By restricting access to content during the sales phase, it is possible to raise significantly larger amounts of funds for the creation of digital content than would otherwise be possible. In economics jargon: It is significantly easier to raise funds for the private provision of a public good with use exclusions than for the private provision of a pure public good without use exclusions. The amount of money we can raise for content that is going to published under a copyleft license from the start grows on the order of $\sqrt{n}$ where $n$ is the number of people in the economy. If we introduce use exclusions, on the other hand, the amount of money grows on the order of $n$. This is a difference of several orders of magnitude, with a huge potential impact in practice! (I will write more about these results in a future post. In the meantime I recommend this post and these two articles.) The ACTP aims to strike a balance between the conflicting goals of publishing free content and raising funds by employing use exclusions in an intermediate phase and providing a clear path towards release under a copyleft license.

Bottom-line: The ACTP does a far better job of aligning incentives than any other mechanism for funding digital content that I know. I think it goes a long way towards resolving the economic conflict over copyright and I can’t wait to put it into practice and try it out.