PIPA and SOPA -- FairPay and the Death of Piracy

[Update 9/13/16 -- PIPA and SOPA are long dead, but this issue of piracy and related issues of ad-blocking remain at the center of the content industry.  The larger points here are as relevant as ever.]

Sabers are rattling this week with the consideration of seemingly draconian measures to stop Internet piracy of copyrighted materials.  The FairPay model for monetizing content puts this issue into interesting perspective. It suggests the way to end piracy is not to reduce the supply, but to reduce the demand.

Basic objectives:

First, let's get back to basics. What is the real objective here?  Copyright and ownership of intellectual property are not ends in themselves, but means to a larger end.  This larger end, is clear in the Constitution: "To promote the Progress of Science and useful Arts, by securing for limited Times to Authors and Inventors the exclusive Right to their respective Writings and Discoveries."

• Thus copyright is clearly only a means "To promote the Progress of Science and useful Arts." 
• It would be foolish to apply measures to protect copyright that impede "the Progress of Science and useful Arts" more than they promote it.

The problem with PIPA and SOPA is that they seem to overstep the objective, and to enhance a means at potentially high cost to the desired end.

• The real issue is that the Internet has facilitated piracy to the point that it threatens the ability of creators of writings and other arts to earn reasonable compensation for their work, and thus threatens the progress we seek for society.  If creators lack fair compensation, fewer will create, and society will lose.
• We (society) support IP ownership to the extent that it is good for society, not the other way around. 

So the challenge is to find better ways to ensure the fair compensation of creators for the good of society. The Internet is a tidal change, and we must learn to channel the tide, and harness it, not try to stop it.

Fairness and Piracy:

Robert Levine's "Free Ride" provides a nice summary of many of the issues of piracy, and makes it clear that some level of piracy is inevitable, with a level that depends on a number of factors, including:

1. The ease and effectiveness of piracy relative to any issues of quality and risk.
2. The ease and effectiveness of legitimate sources.
3. The cost of legitimate access (relative to piracy)
4. Social and ethical factors relating to the legitimacy of the IP owner, and the fairness of stealing from them (stealing service, not bits).

It is well known that the Internet has shifted at least #1 and #4 toward piracy.

I suggest the real solution is not laws and other efforts to shift #1 (although some modest improvement may be gained), but to shift #2-4, and especially #4.  The value of shifting #2 and #3 are well known, and summarized by Levine.  What is less clear is how important #4, fairness, is.

Robin Hood, FairPay, and the death of piracy

As described elsewhere on this blog, FairPay is a new model for transactions related to copyrighted content that lets buyers pay what they think fair, within limits.

• When buyers can buy legitimately for a price they accept as fair, the cost becomes a non-issue.  Those who have limited means or get little value can still buy for a price that considers those factors fairly.
• When buyers can buy legitimately for a price they accept as fair, the fairness of piracy becomes clearly insupportable for all but the most sociopathic. It is hard to argue that "information wants to be free" (as in free beer), when it is free enough.

Piracy is a tax imposed by the people on sellers of IP, a Robin Hood tax. When the price of content seems onerous, people feel they should not have to pay for it, and piracy appears justified. It is seen as noble for the poor to steal from the oppressive rich.

Killing the demand for piracy, not the supply

As with any illegitimate product, it is generally easier and more effective to reduce demand, not to choke off supply.  That is best done not by legislation, but by making the legitimate alternative more attractive.

There are a number of interrelated levers to move in that direction:

• FairPay pricing is a significant step in the right direction, one that also supports the following steps. It makes prices more suited to individual buyers needs, values, and ability to pay. Copyright owners are given the right to extract "monopoly rents," but must balance that with the quid pro quo of society's desire to benefit from their creations.
• Making sellers more legitimate in the eyes of consumers is also a major factor. To the extent the IP owners are seen as evil and rigid, faceless corporations that exploit their consumers (and their creators), it is easy to justify stealing from them. Showing that they listen to consumers and can be flexible in pricing will greatly increase perceived legitimacy and deservedness.
• Getting sellers to be more clearly respectful of creators can also have a big effect. Many studios (such as music labels) are perceived as sharing little of their profit with their artists. While they do have real costs of nurturing, marketing, and managing, clearly the Internet is shifting that toward what Seth Godin calls "skinnier" models. IP aggregators must either get skinny, or demonstrate why they deserve the share they get, and be transparent about how much they share with the creators.

FairPay is not essential to all of these levers, but it can contribute significantly to all of them.

When buyers set prices, no man will be a pirate. That may not be true in every case, but it is true enough.

Price Discrimination Can Be Good!

An interesting NYTimes report by Nick Bilton talks about the Uber online service for ordering a car service, and how the workings of supply and demand can seriously disrupt customer relationships. The issue was a "surge pricing" feature that raised the cost of a ride to a New Years party, which cost $27 to get there, to make the ride home cost $135. Bilton nicely summarizes the issues in dynamic pricing.

I posted a comment on that article suggesting that FairPay provides a solution to this problem -- a solution based on using the Internet to facilitate a relationship view of price negotiation, instead of a single transaction view. This post elaborates a bit on my comments, and highlights one of the major advantages of FairPay that make it more attractive and more economically efficient than conventional methods.

The real problem of dynamic pricing (described in the article) is one that can now be fixed in a “post-modern” economy. The problem with dynamic pricing is that it is set unilaterally by the seller, and imposed on the buyer  on a take it or leave it basis. This is also called price discrimination (and in some cases, price discrimination is actually illegal). But as Bilton says, such discrimination is economically optimal. That is why it is widely used in the hotel, airline, and car rental businesses. There buyers do live with it -- but still with considerable resentment. I suggest the way to make it acceptable to buyers is to involve them in the pricing decision.

That is one of the key features of FairPay.  FairPay sets prices based on a dialog with the customer, and uses Internet tracking of such prices to manage fairness over a long-term customer relationship.  The long term relationship view is as suggested by Liran Einav (a Stanford economist) in the article). With FairPay, customers have significant participation in pricing, and can be asked by sellers to include a dynamic premium (such as for peak time surges) -- but they can decide just how extreme that premium should be. Sellers get to determine if the buyer is generally being fair about that, and continue to allow FairPay pricing in the future to those who are reasonably fair. True, few buyers might accept a price of $135, but many might accept $50-75 and some even more. The seller can also be more restrictive during peak times, offering surge period FairPay pricing only to those who who have a history of agreeing to a reasonable level of surge premium, while let less flexible users might be permitted to use FairPay pricing only during times of normal demand. Thus "discrimination" can be good, when done within reason, at agreed-upon levels, based on mutually understood reasons.

Another factor in customer acceptance is predictability, as in the cited quote of Dirk Bergemann (economist from Yale). I suggest this is really a problem with unpleasant surprises, and with price changes that seem unfair.  The perceived unfairness of dynamic prices and discrimination, such as with the New Year's surge, or for snow shovels or flashlights after a storm, is the "unfair" external imposition of higher prices. Here again, when the customer gets to set the level of dynamic premium, that changes it to a fair process.

Of course dynamic discrimination should also apply in the other direction, to provide discounts at slow times, as well! That is an equal part of fairness, and FairPay can provide that too. When there is lots of supply and little demand, the customer should be given the freedom to set a lower price (within reason). FairPay brings that kind of sensibility back into pricing. The time-honored practice of individual negotiation allowed such issues to be factored in as appropriate and agreeable. We lost that in 20th century mass-marketing, but the Internet now lets us regain that in a new and better way. That is described more fully elsewhere in this blog, and the Web site.

I suggest FairPay could be a very effective solution for Uber, and for many others like them.

[UPDATE 8/1/16:] See additional comments in this newer post:  Price Discrimination for the Good!

The War over the "Free Ride" (Robert Levine's Book), and the FairPay Win-Win Solution

Robert Levine's "Free Ride" is an important study, but a partisan one, as you can judge from its subtitle: "How Digital Parasites are Destroying the Culture Business, and How the Culture Business Can Fight Back."  It explains that competing interests are at war, old business models for creator's and seller's rights have been disrupted, and new business models are needed.  However, it is unable to offer much satisfying guidance to a solution.

This is a very valuable book (with more balance than one might expect), and a very good history and economics lesson. Levine provides a good grounding for "how to fight the last war"--a war of creative rights versus technology (and the double edged sword of new freedoms it offers). It does provide some of the balance we need to accept that both sides are legitimate (to a degree). Levine warns that "over the nest decade, we will chose between two competing visions for the online world...more like cable television ...[or] more like the Internet. ...It is really about commence or chaos. ...A completely closed system would indeed defeat the purpose of the Internet...But so would an absolutely open one...  We'd have a twenty-first century communications infrastructure supporting a seventeenth-century economy, where artists need patrons and only physical items have value." A very good statement of the problem...

He offers only one potential solution:  a compromise, and one that is old, awkward, and unappealing in many ways. What we really need is something new, a twenty-first century synthesis, one that offers a win-win solution, not just variations on the old zero-sum battles.   I suggest FairPay offers the kind of forward-looking synthesis we need, as I will explain in a moment.

For an excellent review of "Free Ride" by an expert in the space, check out "Robert Levine Tells the Rest of the Story" on Bill Rosenblatt's blog.  As Bill says:

If Jaron Lanier’s You Are Not a Gadget from last year is the philosophical tract on which a new movement in favor of content creators’ rights has been founded, then Free Ride provides the  factual foundation on which such a movement should be based. ...

Yet Levine is hardly an apologist for the media industry.  For example, he agrees that the term of copyright and statutory damages for infringement under U.S. law are way too long and large, and he finds the media industry just as guilty as anyone else of funding “research studies” that produce blatantly biased results.  In fact, Levine’s journalistic instincts often get the better of him as he feels compelled to balance every factual assertion that bolsters his point with a counterfactual that softens it; the book ends up being far more balanced than its polemic subtitle suggests.

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My interest here is in looking forward to a better solution. As Levine explains in depth, we have been facing a problem that has had no well-balanced solution in sight.  He presents a strong case for the rights of creators, and the practical necessity of incentivizing costly creations.  He recognizes that piracy is hard to stop, and that part of the cure is to make it easy for consumers to buy what they want in the form they want, and he gives an excellent history of failed attempts to find better business models. "The real issue is how to establish a functioning market for content online."  "A decade after Napster, labels of all sizes are still struggling to reinvent their businesses." Quoting Jeff Zucker, on "Business models to support the digital revolution...we are still very much in the beginning."

It seems that no one has yet found the right synthesis.  Levine does take a a bit of a stab at it, presenting a case for blanket licensing (or collective licensing), much like the model used for licensing music rights on radio via ASCAP and BMI, as the only viable way to address the current dilemma.  I, too, have for many years seen it as the only systematic compromise in sight. But there are serious problems with it, as nicely summarized by Rosenblatt:  "...the many shortcomings of copyright and content licensing under such systems in Europe (and elsewhere): inequitable royalty distribution, irrational levy schemes, opaque accounting, inefficiencies, resistance to new business models, cross-border chaos, and more."

From the perspective of FairPay, the fundamental problem with blanket licensing is that it is not grounded in the dynamics of market forces, but is clumsily pre-set by bureaucratic mandates that cannot adapt to varying real-world contexts.

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In contrast, FairPay applies the power of the networked digital marketplace to bring twenty-first century solutions to the very problems it creates.  FairPay offers not a compromise within the old paradigm, but a radically new kind of synthesis -- one that changes the fundamental nature of sales transaction and the play of  market forces -- to find a dynamic, adaptive, and nuanced solution to the problem of balancing creator and consumer rights. FairPay changes the rules to create more win-win marketplace, that expands the digital economy, and the opportunities for both creators and their consumers.

FairPay provides an institutional framework for deep two-way connections between consumers and creators/businesses--in the form of individual dialogs about the value of offerings, as actually realized by each user in their specific contexts. This can be done with a structured balance of powers in which the consumer sets an individualized price they think fair, and the creator/business continues to permit such transactions as long as they agree that consumer is "fair" about the price, using the power of networked markets to make that assessment. That can improve margins and market efficiency for creators/sellers, and can empower relationships based on fair value exchange (a buyer-agreed-to form of price discrimination). Think of a privilege that is earned and maintained -- a zone of pricing freedom, a "FairPay Zone." The details of how FairPay does this are in the sidebar, the related Web site, and the many posts here.

FairPay is not the answer for all offerings in all markets, but I think it can pervade many segments--and that its more collaborative model for marketplace relationships will fundamentally change a large segment of our economy. I suggest, that just as mass marketing changed the fundamental nature of commerce a century ago-- and disconnected sellers from buyers--relationship dialogs of the kind used in FairPay can remedy that and create a new and higher level of engagement.  That dialog and engagement create and guide a new force for funding "The Culture Business" that Levine is rightly concerned about -- a new paradigm for the invisible hand.

Tom Friedman's "Help Wanted" -- FairPay as a step toward freedom

I commented at NYTimes.com on Tom Friedman's 12/18 column that suggested the emergence of a new level of democracy in many domains, in which consumers are gaining more equal power with organizations of all kinds.  We are only at the beginning stages of this (as Friedman quotes Dov Seidman): "when people are creating a lot of ‘freedom from’ things — freedom from oppression or whatever system is in their way — but have not yet scaled the values and built the institutional frameworks that enable ‘freedom to’ — freedom to build a career, a business or a meaningful life.” Friedman observes that we need leadership to find the "to."

FairPay is an attempt to suggest one "freedom to" that can change the world of commerce for the better -- the freedom to set prices, constrained only by a responsibility to be fair about it.  FairPay also provides an institutional framework -- an architecture for dialogs with customers that enable the freedom to do just that.  The FariPay framework works by linking that consumer freedom to set prices to complementary methods that give sellers the freedom to manage the pricing risk related to that new buyer freedom.

My comment on NYTimes.com, Friedman column, 12/18/11, 11:12pm:

This is very apparent in the world of digital commerce, and I have suggestions on how "freedom from" will lead to "freedom to." The crisis in pricing digital offerings and the revolt that "content wants to be free" is just a start.

We moved a century ago from negotiated prices to seller-imposed prices and widespread price “discrimination” by sellers that enabled efficient mass marketing, but distanced the seller from the consumer. Now digital products and networks have changed the game, and we have movements to free, "freemium," and even "pay what you want" and "name your own price." Digital businesses have found it challenging to adjust to this, and no current models really do the job.

I suggest the next stage of institutional framework for a "freedom to" will bring deep two-way connections of consumers and businesses--in the form of individual dialogs about the value of offerings, as actually realized by each user in their specific contexts. This can be done with a structured balance of powers in which the consumer sets an individualized price they think fair, and the business continues to permit such transactions as long as they agree that consumer is "fair" about the price. That can improve margins and efficiency, and empower relationships based on fair value exchange (a buyer-agreed-to form of price discrimination). Think of a privilege that is earned and maintained -- a zone of pricing freedom, a "FairPay Zone." (This is described in my blog by that name.)

FairPay: "Better Strategies for Monetizing Digital Offerings" MIT Enterprise Forum 12/1/11

It was very gratifying to present FairPay to an audience of about 100 at last night's MIT Enterprise Forum of NYC panel session on "Better Strategies for Monetizing Digital Offerings: Thinking Out of the Box while Looking across Industry Silos."  (more commentary below...)

Video and slides of FairPay presentation:

 

(If any problem viewing the slides, click the "slideshare" button above)(Links to full session below)

After a nice overview by our moderator Dr. Howard Morgan (Co-Founder and Partner, First Round Capital) we got into the perspectives of a diverse array of panelists.  

• Paul Smurl (Vice President, NYTimes.com) shared insights into the closely watched Digital Subscription paywall strategy at the Times, which has gone even better than they expected to meet the challenge of generating reader revenue without loss of ad traffic--and given a boost to print as well.  
• Betsy Morgan (President, TheBlaze.com, formerly of HuffPost and CBS Digital) noted how they were  monetizing Glen Beck's TV offerings with direct OTT (Over The Top) subscription services, that are already generating $10 per month from 230,000 subscribers.  That may seem small compared to the Fox audience, but when you consider the share to Beck, that gets very interesting.
• Shawn Price (President, Zuora.com) provided insights on what Zuora calls "The Subscription Economy," based on work with over 500 companies.  He noted the power of a flexible platform like Zuora's to adapt in real time with some 100 different control parameters, and how it makes it manageable for content and service providers to apply very advanced and nimble e-commerce strategies.
• I provided a more radical perspective on how we might rethink the whole structure of how we monetize digital offerings, including basic issues of transaction and pricing architecture, to create a new kind of deep real-time dialog with customers about value.  Key themes were
  --the need to take a holistic view of relationships, not just transactions,
  --the power of a simple shift to "Pay as You Exit," an opportunity that has generally been ignored, and
  --the opportunity to apply a new level of detailed market research that is fully integrated with every transaction.

All of the speakers noted how important it was was know your customers and track them in real time, and how some aggregators/distributors (notably Apple) impede that critical task in a way that can ultimately be very limiting to sellers of digital offerings.

I was very pleased with the response to my presentation of FairPay, and to my latest attempts to make it easier to understand.  The challenge is that while FairPay is quite simple in its basic concept, it changes many of our core assumptions about doing business at many levels, and has very deep ramifications in ways that take some thought to fully understand and appreciate.  The discussions and questions on how and where FairPay works indicated that many people found food for thought.

The posted slides may show some of this, and I expect the video should be available soon (to be linked below).  I also plan to adapt this presentation to add better explanations to the Web site and this blog.

My thanks to the other speakers, and to the audience for a very stimulating session.

...And for anyone who wants a really detailed preview of what I suggest are groundbreaking ideas on where the future of digital media business will go (or just needs help getting to sleep), the USPTO published my FairPay patent application yesterday.

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Video (full event, by speaker)
MITEF-NYC event page, with video and slides
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FairPay Presentation

FairPay for The Subscription Economy -- My Dinner with Zuora and Friends

Zuora is a hot new company, an offshoot of Salesforce.com, that is focused on what they call "The Subscription Economy." This is very much in tune with the ideas about FairPay that I am developing, and I recently had a very nice chat with their regional account executive. He invited me to a very informal dinner he had been planning for some local customers and prospects, with the idea that they would find it interesting to hear about FairPay, and that that would be a good conversation-starter for some information exchange on subscription services in general.

The dinner proved very enjoyable, and generated much good discussion.  It reinforced the idea that FairPay might help solve many difficult problems related to pricing of content and services, and that it offers a very promising re-architecting of how subscriptions can work. As always, I enjoyed interacting with bright people facing the real challenges of digital commerce, and helping them to see things from new angles.  We discussed many of the themes covered in this blog and on the FairPay Web site, and the positive feedback was gratifying.

"The Subscription Economy" is directly supportive of my suggestion that the solution to many current problems is to shift from a transaction-level view, to an overall relationship view.  With digital offerings, it is not important that every transaction be priced right, but rather that the entire relationship be managed to grow in mutual value, and to move toward more effective pricing over the life of the relationship.  It is a matter of managing a subscription relationship.  What FairPay adds is a radically new concept of just how subscription relationships can work, and be managed, more effectively.  FairPay emphasizes that such relationships should continually adapt to current needs and future expectations, based on a dialog by both parties, and provides a new paradigm for doing that in a more win-win manner.

Zuora offers a nice white paper on "The Subscription Economy" on its Web site.  As it says, the old model is linear, one-time transactions that go from lead to cash. Subscription Commerce refocuses the objective to not just seek cash from the transaction, but to seek renewal.  That leads to ongoing revenue streams that can be grown, in terms of frequency, add-ons, usage, and upgrades.  That, in turn, leads to much greater revenue opportunity, and involves changes (and ongoing adaptation) in product and pricing strategy, customer subscription management, billing and payments, and analytics. Zuora offers SaaS services to facilitate those changes.  FairPay is based on the same ideas, with some further variations, and it can fit very nicely on top of a rich subscription platform like Zuora.  (Of course FairPay should fit well with any reasonably flexible subscription platform.)

I look forward to further discussions with Zuora and its customers.  As noted before, I will be on a panel with Shawn Price, President of Zuora, presented by the MIT Enterprise Forum of NYC the evening of 12/1, on "Better Strategies for Monetizing Digital Offerings."  If you have read this far, you should attend!

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[More recent posts also discuss Zuora and my involvement speaking on FairPay at their events.]

Consultant John Blossom: "Pay as You Exit: FairPay Explores New Content Pricing Discovery Regimes"

"FairPay's concept is fairly simple, but intriguingly powerful."  That comes from a very nice overview of FairPay and its potential value by John Blossom, President of Shore Communications, an award-winniing strategy and marketing consultant to content providers, on his ContentBlogger blog.

John begins with the amusing story of an early step toward FairPay in the classic "Our Gang" (aka "Little Rascals") film comedy episode titled "Pay As You Exit."

"It seems strange in a way to think that such an idea might actually help to save today's premium content sellers from their often rigid pricing regimes that seem to hold back their growth potential..." He goes on to explain how this derives from what I have called "The Long Tail of Price Sensitivity"  He adds:

John highlights the value of FairPay as a "pricing discovery" regime. "The key to all of this is the profile data, of course, which is where Reisman may have his finger on a very valuable idea. FairPay is in essence real-time market research tool, enabling media providers to get more sophisticated insights into real willingness to pay for specific content under specific circumstances."

His conclusion: "While it's very early days for the FairPay model, it could turn out to be a tool that content producers could use to experiment with pricing in new and exciting ways that could lead to higher margins and deeper market penetration for their content - two concepts that could lead to more happy endings on their bottom lines."

Of course these snippets do not do justice to John's well reasoned exposition (and his recounting of the Our Gang episode) -- Please read John's full post.

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[UPDATE:  Video of the Our Gang "Pay As You Exit" short (11 minutes) is now on YouTube. The key offering scene is at about 1:30-2:20 and the results at about 10:00-10:10, but all of it is amusing. (The specific videos are often removed, but posting can usually be found by searching for "our gang" "pay as you exit." or "little rascals" "pay as you exit")]

MIT Enterprise Forum of NYC 12/1/11 Symposium will Include FairPay

"Better Strategies for Monetizing Digital Offerings: 
Thinking Out of the Box while Looking across Industry Silos."

[Update: see event report with video and slides.]

That is the theme of the session that I am helping to organize, and will be a panelist at.  The full slate is:

Moderator:
- Dr. Howard Morgan, Co-Founder and Partner, First Round Capital

Speakers:
- Betsy Morgan, President, TheBlaze.com
- Shawn Price, President, Zuora.com
- Richard Reisman, President, Teleshuttle Corporation
- Paul Smurl, Vice President, NYTimes.com

I suggest this will be an outstanding session--we expect to generate a very interesting dialog on strategy and innovation, both incremental improvements, and more radical directions.  (And we may still add one more panelist to represent the music or video industry.)

Register at MITEF-NYC.

The concept is:

Monetizing digital offerings is a continuing challenge. Advertising can generally generate only some of the revenue required, so customer payments appear to remain essential for most businesses. Freemium was a good starting point, and now soft pay walls are being tested. Shifting music and film from purchase to subscription is emerging as a sea change.

What else is new? What can be applied across verticals? Do we need to rethink the value proposition and customer relationship? How successful are strategies to apply social influence and "pay what you want"?

This session will look broadly at how content businesses such as publishing, music, and video are transforming themselves to achieve economic viability:

Among the issues we will discuss:
- What strategies are they adopting?
- What can these verticals learn from one-another?
- How far out of the box can solutions go?

I will present a brief overview of FairPay, and will be available to address questions during the Q&A, and afterwards.

We hope to see you at this exciting event.

First Commercial Use of FairPay Revenue Strategy -- Ennovent: Innovations for Sustainability

I am very pleased to report that ennovent has become the first commercial venture to undertake use of the FairPay pricing system, a radically new approach to pricing digital offerings (see sidebar).

Ennovent began the public soft launch of its Global Network today, September 14.  Peter Scheuch, ennovent's managing director, contacted me in June saying "...we think that the FairPay model could be a great revenue model for us." He found the concept "very exciting."

[Update:  additional comments on ennovent's use of FairPay are in the October 11 press release.]

Ennovent is a very interesting startup, carving out a new role as an online global venture network that "...connects entrepreneurs, investors and experts..." (quoting from ennovent):

• "Ennovent is a for-profit enterprise established to promote entrepreneurs, who advance disruptive innovations for sustainability at the base of the economic pyramid"
• "We promote disruptive innovations, crowdsourced globally through our network, scaled locally in India by a multi-disciplinary team and partners and financed through our fund."

The appeal of FairPay to ennovent is that they face a pricing dilemma -- it is very hard for them to price their services.

• They will support a wide variety of crowdsourcing requests for funding, support services, and full-time, temporary, or volunteer staffing. Given the very broad range of value that might result from satisfying such requests, and the similarly variable range of results, they had little clue as to how to decide on a fair price for each request. Request value could vary in terms as how well the request was satisfied and the number and quality of responses, as well as the requestor's ability to pay.  No matter what price was set, it would  be too low in many cases, or too high in many others.
• As a for-profit service with strong ethical values, there seemed to be no good solution to setting fair prices -- until they learned of FairPay.

Peter saw how FairPay could relieve him of the impossible burden of setting the "right" price for such widely varying services, and instead apply an adaptive process to allow users to determine what price seemed fair to them, and to give ennovent the ability to judge and influence that through a user dialog. FairPay provided a structure for such dialog that could be responsive to extreme differences in value obtained, results, costs incurred by ennovent, and the user's ability to pay.

I began to work with ennovent to help apply FairPay in a trial use.  We developed a plan for a phased implementation that would ease in as the service matured.  This exploits the reality that ennovent must first grow a network of members (entrepreneurs, investors, and experts/solution providers), which meant that the use--and the value--of the request process would  build slowly.  That evolution suggested a strategy for early stage use of FairPay in a way that allows maximum information-gathering, and that limits investment and risk.

Ennovent is starting with the "Free Trial/Survey Mode" of FairPay that I described in an earlier post. In addition to easing implementation, this will give them a rich base of market survey data for setting suggested prices in FairPay, and for setting the conventional set prices that will serve as an optional alternative to FairPay.

I hope you will check out the ennovent site.  Apart from its pioneering use of FairPay, it promises to be very interesting service, and to provide great social value. At this early stage there is not yet much visible of FairPay, but that is expected to grow over the next few months.

And of course I would be happy to work with others who might be interested in a similar collaboration.

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Link to Ennovent's press release: "Ennovent Launches the Global Network")

[Update:  additional comments on ennovent's use of FairPay are in the October 11 press release.]

Re-inventing Value Exchange For Digital Offerings -- A Radically New Approach to Business Relationships

Imagine a market Nirvana for digital offerings. Think beyond the traditional value exchange processes and protocols and re-envision how buyers and sellers might interact in a world with a networked marketplace.

I suggest FairPay offers the path to that market Nirvana, and that it is now very practical. Here is an overview (based on the recent rework of the FairPay home page).

First let us look at what the consumer wants, and FairPay delivers:

Consumers  -- Pay only what seems fair to you: Pay what you want for products or services -- after you try them Make every purchase on a trial basis--so you can always be sure to get fair value for your money Agree to set your price fairly--in your judgment--and explain why you think it is fair Do that as long as you can convince the seller that you are being fair

Of course free is even more ideal (for the buyer alone), but we know there is no free lunch -- someone pays. The question is how to make the market work for the consumer, and still motivate sellers to sell and creators to create. "Fair Pay What You Want" (as just described in the box) clearly comes rather close to a practical ideal for a large mass of consumers.


The bigger challenge is how to make our new "ideal" market system work for businesses? -- to ensure that they get a fair price, to enable them to stay in business and continue to deliver value. Here is how FairPay does that, as well:

Businesses  -- Get the most revenue from the most customers by continuously learning what each one values: Engage in real dialog with each of your customers on the value they get from your products or services Make a trial offer to every potential customer who sees potential value and is fair-minded Let your customers self-select into segments (based on usage, value perception, willingness and ability to pay, ...) Limit your risk from those trial offers by tracking the results for each buyer, and limiting future offers if you judge that buyer to not pay fairly Continue to make every offer a trial... ...as long as each buyer continues paying fairly--in your judgment

Ordinary "Pay What You Want" pricing  has been shown to work well for special offers.  ...With FairPay (short for "Fair Pay What You Want"), every offer is a special offer.  

• FairPay changes the game from single transactions to an ongoing relationship of continuing transactions. 
• That enables a whole new balancing dynamic that drives to a better market equilibrium, over a wide range of relationships and value perceptions.

FairPay works through a very simple balancing dynamic: 1. Selectively offer to let the buyer set any price the buyer considers fair -- after the sale (Fair Pay What You Want, post-sale). 2. Track that price and determine whether the seller agrees that is fair, and use that information to let the seller decide whether to make further offers of that kind to that buyer in the future.

I suggest this gets us as close as possible to market Nirvana. The buyer always pays a price he considers fair, and seller gets to sell to every buyer who set prices fairly (in the seller's judgment).  The seller is also able to limit his risk, in way that trades a managed level of small loses for a large expansion of his market to the entire population who value his offering. Some will pay better than others, but for all who pay fairly, the seller gains revenue. And for those who the seller judges to not pay fairly, FairPay offers are restricted, and conventional set-price selling remains the fallback.

Thus FairPay exploits the power of the networked marketplace to offer as a participative pricing process that combines the user freedom of pay-what-you-want pricing, with a new level of feedback, accountability, and seller control of future offers to make it fair to both buyers and sellers.

For more on how that works, see the FairPay site (How Does FairPay Work?), and many of the posts on this blog.

FairPay “Free Trial”/“Survey” Mode – Easing into the Waters -- And Understanding Your Customers

[***Update 8/11/17 -- Voluntary Payment Mode:

Most of the focus of FairPay is on a balanced use, as a repeated game in which the buyer has full power to set the price after each cycle of experience, but the seller maintains equal power over the pricing relationship by continuing the game to offer ongoing experiences only if they judge pricing to be sufficiently fair (referred to below as Full FP (Revenue-Gated) Mode). The criteria for fairness can be as strict or lenient as the seller wishes.

However, there are important use cases where a more purely voluntary payment regime is desired permanently, such as for public service journalism and many non-profit services. For example many membership-oriented journalism services are happy to make membership payments purely voluntary, and still provide access to their journalism to those who choose not to pay. A simplified variation on FairPay supports such a Voluntary Payment Mode -- described below as Real-Payment Survey Mode. This uses much the same process as full FairPay, but simplifies the seller controls to apply soft nudging to personalized suggested contribution levels, still based on individual value factors, but using only carrots, and not the stick of withdrawing FairPay privileges.]  

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I have recently been working with a startup company that is working toward introducing FairPay pricing for their new service (details on that to follow).  That collaboration has led me to some interesting ideas on how you can best phase FairPay in, to get some basic functions at low cost -- and to learn a great deal about your market, so you can better manage your investment and your risk -- and improve your business overall.

Whether for an entirely new business, or for a new pricing approach in an established business:

• key questions about FairPay are how hard is it to integrate with your pricing systems, and to what extent might it put revenue at risk?
• key benefits of FairPay are as a learning process, centered on dialog with your customers, about what they want from you, and how they value it.

Here is a way sellers can begin to get the benefits, without incurring much of the cost, and none of the risk.

(Note, this post deals with strategies for introducing FairPay in a gradually phased manner, and assumes a basic understanding of FairPay concepts -- see the sidebar, and other posts and the FairPay Web site for the basics.)

The idea is to use FP in a startup mode to provide ongoing on a “free trial” basis, while a new service is in a “provisional use” mode, and then, after that, to phase in use of the full FP feedback and control processes.

• This approach is especially suited to new lines of business where the value proposition may be uncertain or temporarily limited (such as beta tests, pilots, etc.).  Limitations may be due to lack of system function or lack of critical mass network effects, such as those affecting content richness, community participation, etc.  
• This provisional use of a subset of FP processes can be beneficial, even before full use of FP is pursued.  This opportunity may be common to many startup businesses, or to new services within existing businesses. It can also be applied in existing businesses by taking services that had been in a standard service tier, and shifting them to a premium tier on a trial basis.

The objective is to position FP pricing to provide benefits (and not impediments) even in early stages, and to set the stage for a transition to full function as the service matures:

·         Initially, FP Free Trial Mode should stay largely out of the way, behaving generally as a conventional “free trial,” with the addition of some key features:

o   The initial objective is to serve as a learning platform, apart from any revenue generation, to obtain customer “survey” data related to the potential value of the service.  This role can integrate with other customer feedback to focus on the perceived value exchange, to better understand the benefits and problems in using the service by the consumer -- both reflecting the current state of the service (and its content and community), and looking forward to what can be expected when it matures. 

o   From this perspective, FP Free Trial Mode can be thought of also as a FP Survey Mode, in which data on willingness to pay is collected, but is not used to limit continuing use, even if users do not pay.  Depending on the situation--or in successive phases--users might be asked:

1.      to simply say what they “would” be willing to pay without actually making any payment (No-Payment Survey Mode),. 

2.      to actually pay what they think fair (Real-Payment Survey Mode), with the understanding that all payments are entirely voluntary (pure PWYW, in arrears, or "pay as you exit") and there are no adverse consequences (no reputational harm) for non-payment. [***As per the above update, this can also be applied permanently, as Voluntary Payment Mode.]

o   A secondary objective is to set the stage for Full FP (Revenue-Gated) Mode use, by facilitating learning by both customers and the service provider on how FP is best applied to the particular services.  This would educate customers on basic concepts of the FP process, and help the service provider learn where to apply FP, how to frame offers, how to suggest prices and assess fairness, and the like, in the context of their particular services and customer base.

o   To aid in customer understanding, it might be clearly stated that FP is currently in Free Trial Mode for some or all services, and that a future transition to Full FP Mode was planned.

These modes can be enabled before a full FP system infrastructure is built, since they require none of the real time feedback analysis, buyer fairness reputation rating, and reputation-based offer gating of a full FP service.  Thus this level of FairPay requires modest development investment.

·         As the service matures, the Full FP (Revenue-Gated) Mode can be completely implemented and gradually turned on--with any desired phasing as to customer segments and service categories.  Full FP (Gated Revenue) Mode would enforce FP “fairness-gating”-- limiting access by buyers that develop a reputation for failing to pay fairly.  This can overlap with continuing use of FP Trial Mode for other customers and/or other service categories.

o   The shift to FP Gated Revenue Mode might be related to achieving a level of maturity as to service robustness, critical mass scale (in content and/or community), initial education of customers on FP concepts--and to scale-driven needs for revenue. 

o   This shift can be phased in (sector-by-sector, if desired), using an appropriate change management process.  Customer communications and dialog can be applied to prepare customers for this change (to include customer reputation rating and gating of offers), to identify any issues or concerns and ensure that they are recognized and addressed.   It would be made clear to users that gating was being activated, why the time for that was right, and what changes to expect.

The result of this staging approach is that FairPay can begin quickly to create a lightweight dialog with customers about value, and to generate valuable data long before it is integrated into actual payment processes.  In this way it imposes minimal burden on customers, and also allows the development work of building the full FairPay infrastructure to be phased.

Indie Games Generate $ Millions with Pay What You Want

For those that think there is no real money in Pay What You Want (PWYW) pricing, the growing success of the Humble Indie Bundle suggests otherwise. Their first four promotions have raised over $6.1MM,** with the last one just ending at $2.2MM [now much more**].  It has been reported that the venture behind these offers has raised $4.7MM in VC funding [now more**]. Their model includes payments to the game developers, the distributor, and charities including EFF.*

EFF has posted a nice summary, observing that "While the record labels, movie studios, and video game producers have not figured out a way to compete with free, others have...as the Humble Bundle has shown us, it is possible, with creators and distributors finding new and exciting ways to compete with free. ... when done right – developers, content providers, and even those who provide the business model can successfully compete with free." Additional details are in a Wikipedia entry.

All of this adds to my suggestion that FairPay (which augments PWYW with feedback processes that incentivise buyers to be fair to sellers, as described on the sidebar) can take this from a promotional tool to a mainstream business model for ongoing use.  Indie games and music are a great place to start, since that Long Tail content is where basic PWYW selling is already gaining traction.***

My previous post, How Indies Can Disrupt the Disruptor - A Disruptive Revenue Model for Music and Games, addresses this in more detail -- suggesting how indie distributors can take on iTunes to change the game, starting with the Long Tail, and moving toward the mainstream.

(*The charitable element is also a notable factor in the Humble Indie Bundle, at two levels. One is true charity, in the form of EFF and others. The other is a charity-like feature, in that the structure of the Humble Bundle revenue is for lightweight (and buyer controllable) contributions to the distributor, such that the significant share to the game creator ("developer"), analogous to the artist, musician, etc., provides a social-benefit motivation to pay -- rewarding the creator, and enabling further creation.  See other charity-related posts.)

Updates:-------------

**[9/21/14:  Wikipedia on Humble Indie Bundle reports this as a total of $30MM, in addition to $20 million to charity, as of 8/23/13.  CrunchBase reports funding of $9.2 million. Check there for further updates.] 

***[1/17/12:  For general insight into real uses and experiments see "Pay What You Want -- Still Crazy After All These Years?," and Wikipedia on PWYW.]

How Indies Can Disrupt the Disruptor - A Disruptive Revenue Model for Music and Games

Having recently heard a fundraising pitch by indie music distributor Nogeno, and looked at competitors like Bandcamp, I was again struck by the potential of FairPay pricing to change the game -- for the music business and/or the game business.

Both music and games are dominated by the Apple iTunes Store, which disrupted the old distribution models.  But there are many chinks in iTunes' armor -- one is that significant numbers of independent bands (and game developers)--and their fans--chafe at the economic constraints of the iTunes Store, and seek better ways to manage the value-exchange with their fans.

• Many indie artists and programmers have found Pay-What-You-Want (PWYW) pricing to be a surprisingly effective way to price, whether in temporary promotions a-la Radiohead, or as ongoing model.
• Indie distributors such as Bandcamp and Nogeno offer creators a range of payment models, including conventional fixed price and PWYW (with or without a minimum floor price).
• Bandcamp reports on their home page that "On name-your-price [PWYW] albums, fans pay an average of 50% more than whatever you set as your minimum."  They offer additional guidance (and more) on using PWYW...and on drawing on the buyer appeal of the larger share they give to the artist.

While PWYW is clearly effective at the margins, there are obvious concerns about its practicality for broad use.

As explained elsewhere in this blog (see sidebar) FairPay adds a structured feedback process to enable a long view of pricing over an ongoing relationship, not just single sales, to make its "Fair Pay What You Want" model work far better and more broadly.  FairPay is offered selectively, as a privilege to those who demonstrate that they pay fairly.  An example of how this applies in the music business was in one of my early posts.

With regard to the indie opportunity there are two points to emphasize:

1. FairPay is especially relevant to indie distributors, because their music (or games) are mostly Long Tail items (less mass-market), where PWYW and FairPay can be especially effective in increasing revenue, and where sellers are willing to take more risk to get wide exposure.  The artists are struggling for recognition (and compensation), and fans feel stronger connection to these struggling artists, and want to compensate them for their creations.
2. FaiPay enables the aggregator/seller to establish an entirely new infomediary role, as keeper of the FairPay Reputation Database that tracks how each of their individual buyers behaves in terms of pricing fairness. That database is much like a credit rating database--offering important data usable by any potential seller. This reputation data is what is used to determine whether a buyer pays fairly and should be entitled to make purchases on a FairPay basis (depending on the risk level implied by their reputation from previous purchases).  The more complete the Reputation Database, the more effectively FairPay prcing works to maximize revenue and minimize risk.

This second point offers distribution aggregators like Bandcamp and Nogeno to create a strategic asset that will differentiate them from competitors and raise a barrier to competition.  Once FairPay gets critical mass, this database will have extensive pricing reputation data on many customers--something that will take time and money for a competitor to duplicate.

The combination of both points offers a path to disrupting the dominance of the iTunes Store (and other mass-market aggregators).

1. The Long Tail focus of the indie market will be especially supportive of the FairPay model, because of the greater willingness of sellers to take a risk on their buyers.
2. The buyers will behave well because they will know they are supporting the creators of the product (artists and/or programmers), not the Apple 30% vig, or the suits in the studios.
3. The initial success that builds will grow a FairPay Reputation Database that will increase the effectiveness of FairPay pricing and enable it to be used with decreasing risk for increasing numbers of products and buyers.
4. That can greatly increase the appeal of the indie distributor, and widen its appeal to increasingly take share from iTunes and other mainstream aggregators.

Of course iTunes can offer FairPay as well, and build its own database.  The indies would still have the advantage of a higher share going to the artist, and thus a better value proposition than the big guys.  

Thus the indies might not take over the world, but--in any case--they could disrupt the current models in a way that makes a better value proposition to consumers and creators, and increases the net opportunity for indies.

Guiding FairPay Pricing for Control and Predictability

One of the common concerns sellers have about buyer-set FairPay pricing is that they will lose control and predictability in their pricing and revenue.  I suggest this is actually much less of a problem than it might seem, in spite of the buyer freedom to "pay what you think fair."  There are a number of aspects to this issue, but one especially powerful strategy deserves greater attention.

In many situations, one of the best ways to manage FairPay pricing may be to rely heavily on a suggested pricing structure, and to frame the setting of FairPay prices by the buyer in terms of a differential from the suggested price.  Here is an example of how that can work for the seller.  (For a basic introduction to the concepts of FairPay pricing, see the sidebar at right.)

1. When making the offer, provide the suggested price schedule, so the buyer has a clear idea what you will  be expecting.  The buyer can still be completely free to price as he feels fair, but will know the seller's reference point.   
2. After usage, provide the buyer with the suggested price based on that schedule. The schedule might be a single price, or might provide whatever level of structure you think the buyer might grasp.  The suggested structure might explicitly take into account such factors as usage/volume levels (counts/times, etc.), categories of product/service used (basic or premium, etc.), buyer demographics (business/consumer/student/retired, etc.), indicators of value obtained, adjustments for any problems, etc.  (This schedule could be customized to the buyer, but showing how it varies can help frame the buyer's understanding.)
3. Provide a price-setting form that presents the suggested price and its rationale, and asks the user to set a price as the suggested price plus or minus a differential (whether a percentage or a dollar differential).
4. Include in the form a set of multiple choice (and optional free text) inputs to enable the buyer to explain the reasons why he thinks the differential is fair.  Depending on what is already in the suggested price rationale, these reasons might relate to additional aspects, such as usage/volume, product value perception, buyer circumstances, problems, etc.
5. Determine a fairness rating for the price (the differential), as explained by the buyer -- unfair, marginally fair, fair, very fair, generous, etc.
6. Provide feedback from the seller back to the buyer on the seller's view, in terms of this fairness rating. (This can be clear and explicit, but can also be left fuzzy, and just implicit in how the offers are made.) 

This provides a shared frame of reference that can guide the buyer to price more or less closely to the suggested amount, and provides a basis for communication and judgement as to the fairness of any differential.

This structuring works within the broader FairPay pricing feedback process, in which sellers communicate back to buyer regarding fairness, and determine whether to make more and better product/service offers, or to warn and restrict the buyer, or to disqualify them from further FairPay offers.  That broader process provides the primary method of control:  

• The seller controls an offer management process that stages their offers in an ongoing relationship  (such as a subscription).
• That staging enables the seller to limit the value at risk (at any given stage) to buyers who have not established a reputation for paying fairly, and to extend that as the relationship warrants.  Offers can be managed to limit the value of the unfair exceptions, and to minimize their number.  

With this combination of offer framing, suggested prices, and feedback-driven incentives to price fairly, sellers should generally obtain FairPay prices that average very near to their suggested prices.

(Of course the idea here is to guide the buyer, but not to be deaf to buyer feedback. FairPay is a dialog about value, and it takes two to have a real dialog.  If there is a pattern of buyers pricing below suggested values in any context, that is an indication that buyers are not satisfied with the value received in that context. Such a situation should be understood as a disagreement as to value that the seller needs to address, whether by changing the perceptions of the value, the realities of the value, or the price suggested in exchange for that value.)

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(Also, as suggested elsewhere, this may work best where a conventional set-price offering remains the default for those who do not price "fairly."  I suggest setting the suggested FairPay prices somewhat below the set non-FairPay prices to give the effect of a relationship discount to those in the FairPay zone, and thus add to their incentive to maintain that FairPay privilege.)

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*** This post has been moved to my other blog, Reisman on User-Centered Media ***