Digital sharecropping, Kickstarter-style

It’s hard to predict how important Kickstarter, the buzzy crowdfunding site, will ultimately prove to be (ask me in three years), but, for the moment, it seems to deserve all the accolades it’s scooping up. The bake-sale-at-web-scale operation is reportedly distributing cash donations to artists and other creative types worth about as much as the the total funding doled out by the National Endowment for the Arts — and Kickstarter is growing in a way the NEA is not. At a time when taxpayers and politicians are cutting back public support of the arts and many creative industries are in a state of uncertainty, if not disarray, having a simple means of pitching a project to millions of generous would-be donors seems like a godsend. The fact that Kickstarter is a for-profit company backed by millions in venture capital makes the phenomenon seem all the sweeter in a way. The rich capitalist and the struggling artist lie down peacefully together in the Internet meadow, like the fabled lion and lamb.

To all appearances, Kickstarter provides a welcome relief from the pervasive Web 2.0 digital-sharecropping business model, in which a company like Facebook gives people a little plot of online turf and a set of tools to work it, and then, through ad sales or other commercial means, reaps the monetary rewards from the combined labor of all its sharecroppers. The “users” who “generate content” for social media companies may attract attention or prestige as a result of the work they do, or simply gain the satisfaction of being part of a community, but what they don’t get is paid. Kickstarter, by contrast, gives the bulk of the cash it generates to the creators, with the company and its partners pocketing just a modest vig, a mere 10 percent of the proceeds. When we sign up with Kickstarter, it feels liberating, writes Josh MacPhee in the new issue of The Baffler, because we’re “rejecting the usual game of winners and losers that comes with capitalism and turning to a model that allows everyone to win — one that combines the freedom of self-employment with the shared experiences of community building.”

But is it really so simple? After MacPhee recently raised money for a project through Kickstarter, he began to get a little suspicious of the company. In his article, he peels back the layers of Kickstarter’s economic onion, and what he discovers is something a good deal less pure and a good deal more complicated than what appears on the surface. The company, he writes, “cultivates the illusion that when you use its fundraising tools, you are opting out of wage labor.” But in fact Kickstarter “manages goods, services, and labor in ways that are quite familiar”:

The Kickstarter platform and website might not look like a shop floor, but when you are there, you are working. The exchange goes like this: rather than work for a wage with minimum protections and some semblance of benefits, you marshal all your friends, and their friends, to ante up small amounts of money for your project. If you reach your goal, you get to keep the money you raise, but Kickstarter peels off a dime for every dollar your family and friends chip in. Then a nickel of that dime goes to Kickstarter’s exclusive money broker, Amazon.com, for processing the financials. So Kickstarter’s gross revenue is 5 percent of all the money brought in by all of our projects. (On four recent, celebrated, multimillion-dollar projects alone, Kickstarter brought in more than $1,175,000.) Since Internet infrastructure is relatively inexpensive, the costs of running a website that doesn’t produce or distribute any material goods is limited. The scaling up of web traffic doesn’t translate to an equal scale-up in costs, and at a certain point, costs max out, and profit skyrockets.

But, still, you keep 90 percent of what you raise, assuming you reach your goal. That’s a pretty good return on your efforts, right? MacPhee has doubts:

Well, say you run a campaign for $10,000—somewhere between a third to two-thirds of what a struggling artist might make in a year. You send out thousands of emails about your campaign, post it on dozens of friends’ Facebook pages, send out lots of tweets, talk it up with everyone you meet, and try to get as many people as possible to do the same. You’re a popular person living in a major city, with an active social network and a compelling project, so you hit your mark—$10,000 is pledged. Kickstarter and Amazon take 10 percent right off the top, so now you are down to $9,000. If the money is coming in to you as an individual, Kickstarter treats you like a self-employed contractor, so it’s on you to figure out your tax burden and pay it, likely at least another 15 percent, so now you’re at $7,650. For a $10,000 campaign, you will have around 200 donors, of whom 150 will want rewards. If your rewards are physical objects, and you were generous in your offerings (a good idea when raising money), you’re going to have to wrap 150 packages, all of which need shipping supplies and postage to get to their destinations. On average, you’re likely spending $8 per package, so that’s another $1,200 off your total; so now you’re at $6,450. Within a few weeks a third of the money you raised is gone, and you haven’t begun to spend it on the project you were raising it for.

Odds are, MacPhee continues, you’ve probably also asked some of your friends to help you out with your little fundraising drive. That’s more unpaid labor — maybe a lot of it. You and your pals may not think of what you’re doing as “unpaid labor” — except maybe as a labor of love — but that’s what it is to the small group of entrepreneurs and investors that’s scooping the 10 percent off the top of what is, in the aggregate, a very large pile of money:

Kickstarter and Amazon made a grand sitting back and watching you do all that work. This is money they made not only on your friends directly paying it, but also on using you to tap into a deep-seated belief in our culture that volunteering is an important social value. Kickstarter gets its rentier-style money, you get a small portion to fund your project, and everyone else gets to bask in the glow of how wonderful it was for them to participate. What could be more exciting to venture capitalists and CEOs than a way to make money that on the surface seems completely non-coercive and non-exploitative of the raw materials, labor, and consumers involved?

MacPhee goes on to argue that Kickstarter isn’t all that different from a Tupperware-style pyramid operation. It grows by infiltrating its members’ personal networks of friends and acquaintances, through which it recruits an ever growing number of project-launchers and project-funders eager to donate their time and their money to the cause. Maybe MacPhee, in formulating his lengthy indictment, is guilty of overreaching, of finding nefarious dealings in every nook and cranny of what is, at least at some level, a worthy, socially productive business. Then again, when you have venture capitalists and entrepreneurs selling charity to the masses, it’s probably a good idea to do a little digging, to see who’s doing the work and who’s getting the money.

16 Comments

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16 Responses to Digital sharecropping, Kickstarter-style

  1. diegoe

    It suddenly sounds like a better idea to just create mydomain.com/fund-me, than direct people to crowdfunding pages.

    I wonder how many funders actually browse those sites and “shop” for interesting projects to donate money to. I guess not many.

  2. Any high-traffic website or payment processor costs money. The substance of MacPhee’s complaint appears to be that Kickstarter and Amazon get a proportional 10% fee of all money raised, rather than a fixed fee or one that depends on the actual cost to these services for hosting & payment.

    Then again, why are percentage fees so popular? They are like taxation, but like progressive taxation: they fleece the rich and go easy on the poor. Only evil selfish people who read Ayn Rand could possibly oppose that! If percentage-based fees are the victory of rentier capitalism, that victory was achieved by exploiting the socialist mindset itself…

  3. Nick

    MacPhee has several complaints, of varying degrees of persuasiveness. I’d suggest, though, that the substance of his main complaint is that a charitable exchange might best be run as a charity itself. Which seems reasonable.

    (He’s in error, of course, when he writes that “at a certain point” in the scaling up of web traffic, a site’s “costs max out.”)

  4. I don’t see any connection between Facebook and Kickstarter. One is a social hub with a devious hidden money element, and the other is an extremely transparent and deliberate funding tool with known risks. Nobody wants Kickstarter itself to produce content, and everybody knows that you have to adjust your fund goal to accommodate the expenses involved.

    And MacPhee must be speaking for himself when he talks about begging friends for cash. Successful crowd funding have this little thing called “wider appeal”.

  5. Nick

    I don’t see any connection between Facebook and Kickstarter.

    I’d suggest that the connection, in this particular context, is that they both profit by creating a system in which they’re able to harvest the monetary value of a very large amount of unpaid labor, labor that their “community members” are happy to contribute because they don’t see themselves as “working.” (There’s nothing necessarily “devious” about such an arrangement.) Beyond that, I don’t see much connection either.

  6. The problem is that only MacPhee claims that Kickstarter is supposed to be a charity. Kickstarter positions itself as a business to help other businesses, not online Girl Scout Cookie sales or an alternative to government funding. Quoted from Kickstarter’s FAQ:

    Kickstarter does not allow charity, cause, or “fund my life” projects.
    http://www.kickstarter.com/help/faq/kickstarter%20basics

    Kickstarter is an entirely profit-oriented investment platform and makes no bones about that. For the same reason, it’s certainly true that nobody should contribute free labor to Kickstarter projects.

  7. Nick

    Kickstarter is an entirely profit-oriented investment platform

    I’m not sure that nails what it is, either. From that same faq: “Kickstarter cannot be used to offer financial returns or equity, or to solicit loans. Some projects that are funded on Kickstarter may go on to make money, but backers are supporting projects to help them come to life, not financially profit.”

    That sounds to me like it’s encouraging not “profit-oriented investment” but rather charitable giving (“charitable” not in a legal sense, which as you point out it prohibits, but in a real sense nonetheless). I think this identity confusion works to Kickstarter’s benefit, but is also the source of some of the tensions MacPhee describes.

  8. That passage is admittedly somewhat confusing. In my reading, the financial profit must always go to the project owners (plus Kickstarter & Amazon). What backers get is the promised product, though, so they aren’t really supposed to donate charitably.

    Then again… funding options often include higher tiers with outrageous costs that vastly exceed the extra product value on offer. In those cases one might call the process deceptive. Due to percentage-based fees, Kickstarter & Amazon get the most money exactly from those people who invest “charitably” for the benefit of project owners and low-tier backers.

  9. Nick

    By the way, I should point out that “charitable exchange” was my term, not MacPhee’s. I should again point people over to his article before I muddy the waters any further.

  10. Don’t assume that venture capitalists are some sinister force manipulating the desires of earnest artists – the people running Kickstarter I suspect are as arty as the people who use the site and have as much belief in it as thier users have in it as ‘alternative capitalism’, which is of course capitalism by another name

  11. I would be the last guy to defend the corp. in most any case, but Amazon does have huge costs and investments in infrastructure, security controls, etc. etc. I think there is something to this argument, but people do have to get paid for providing a service. Maybe depending on the type of project the KS commission could simply lower or max out at a certain level.

  12. Off-topic to this post, but in one of previous posts of yours it was discussed if more information always means better.
    psychologytoday publishes results of research on that topic
    http://www.psychologytoday.com/blog/glue/201212/why-too-much-data-disables-your-decision-making

  13. Daniel Cole

    Nick, I don’t know how familiar you are with The Baffler in general, but incendiary stories like this are their bread and butter. Most of their stories seem to be deliberately hyperbolic, and from whatever port they depart( Kickstarter, This American Life, The Daily Show) an attack on the middle left for not being the far left is the ship they all board in the end. That isn’t to discount this piece or it’s politics ( I just as often agree with them), I’m just saying you should be aware that these people have a definite agenda.

    On Kickstarter, the Steve Albini/Amanda Palmer tiff (http://artsbeat.blogs.nytimes.com/2012/09/12/rockers-playing-for-beer-fair-play/) is a good example of the potential flip side of MacPhee’s point. When things tend toward excess, such as a rocker raising $1.2 million for an album and then asking musicians to play for free on tour, the DIY/charity angle starts to look a little suspect once again.

  14. Tom Lord

    There’s a somewhat different way to parse Kickstarter in terms of oligopolies that are created by the regulatory regime. I will make the informed *guess* that this is closer to its original conception:

    Kickstarter seeks to solve two perceived inefficiencies in (1) capital formation for new ventures; (2) transaction processing for cash transfers.

    Capital formation is heavily regulated in the U.S., especially when it comes to making offers to the general public. A private concern may not freely offer stock or bonds in any serious amount without jumping through regulatory hurdles. Creative projects are traditionally tempted to bypass these regulations .. and to get in trouble. A textbook example is the way the SEC tends to crack down on film projects that take out an ad in Variety looking for backers to fund a new film project without first making necessary filings and taking steps to protect naive investors — this is a good way to get in serious legal trouble (such a good way to get in trouble it doesn’t happen all that much). But what about going legit? If you do it on the cheap it might cost $1,500 dollars or so just to form a legal entity, set up bank accounts, get legal help and even begin to get to the point where you might “cleanly” seek investors. Realistically, it’s hard to get out the door without counting on blowing more like $10K (before spending a dime on any actual products or services). Kickstarter ends-around that (somewhat) for some projects. Kickstarter’s contributions here are a system of contracts and their rules about the kinds of rewards that are permitted. In this view, if innovators are getting a bad deal by requesting $10K funding but then immediately losing a third of it before spending a dime on the project … well, they would have had to spend similar sums up-front before raising capital by some other means.

    Kickstarter’s source of efficiency *here* is in the form of all the projects that don’t achieve funding — failed kickstarters. Each of those, in some sense, represents projects that never would have been tried or that would have spent thousands of dollars before failing. Kickstarter alleges to lower the cost of failing, and therefore to raise the number of attempts.

    As for transaction costs: that’s the rent Amazon and Kickstarter take. As with capital formation, the problem is the cost of entry. It’s certainly quite possible to collect money much more efficiently than a 10% transaction cost but only by putting up money up front for things like a vendor account with a credit card processor. Even with a vendor account the costs are terribly high unless you are moving a lot of money.

    Kickstarter could be compared and contrasted to a common practice among successful non-profits who decide to facilitate funding for external projects. The pattern goes like this: Alice has a great idea for a non-profit venture (that may well still pay some wages to the people doing the work, as well as paying for non-labor inputs). Bob controls a non-profit who’s mission is consistent with Alice’s project. Bob can agree (carefully, within regulatory boundaries) to accept contributions ear-marked for Alice’s project and to efficiently transfer funds to Alice, even though Alice’s project is a separate legal entity. This approach to capital formation is venerable and works well, but doesn’t apply if Alice’s goals include profit or her project doesn’t fit a the public benefit charter of Bob’s org.

    So that’s what Kickstarter is, in some sense: a for-profit entity dancing the regulatory hurdles to play a role similar to Bob’s for projects similar to Alice’s — in the for-profit domain. The rest is clever marketing.

    Two oligopolies — one on venture capital and another on electronic money transfers — create the regulation-supported inefficiencies that Kickstarter exploits. Those high barriers to competing against Kickstarter support their rent-seeking.

    (From this perspective, btw, the Kickstarter answer to all the volunteer labor that goes into offerings would be this (essentially circular) response: that it is no different for ventures that raise money in more conventional ways. How many kids trying to pitch Y Combinator, for example, are subsidized by their friends and family along the way? If you regard those communities of subsidy as private welfare for friends, the “win” for those volunteers is the chance of getting a recipient off the privatized dole.)

    That’s where MacPhee’s alaysis fits right in. The very high level of demand for KS-style funding means that celebrity projects will tend to crowd out others … it fails by becoming largely a way for people who have plenty of other means to nevertheless use KS to raise money with few strings attached; or as an inexpensive way for those who could afford much more to anyway use KS to conduct market research.

    Here’s the point: “communizing” Kickstarter can’t help because it won’t eliminate the regulatory sources of the inefficiency. Maybe a cooperative KS could lower its transaction costs marginally but it couldn’t reduce the costs of shipping “rewards”. Only an alternative kind of financial instrument .. say, a form of profit-sharing, could really lower the costs of KS-style money. But such instruments would fall under much stricter and more costly SEC rules, for example. Similarly, no KS-alternative is likely anytime soon to seriously lower the costs of transferring money electronically, not for small vendors.

    My pessimistic view is that, for the most part, KS-style funding excels for kinds of products whose patterns of production and consumption are intrinsically exploitative. The tragedy is less that there are more efficient ways to fund such projects and more that these aren’t, on average, the kinds of projects we want to encourage as a matter of public policy.

    As for arts funding: lower the cost of living, create more entitlement floors under the cost of labor, heavily tax the upward distribution of income… in short, give communities a lot more breathing room … and I’d bet the arts will flourish.

  15. Walpurgis Nacht

    The first comments hits the nail on the head: “I wonder how many funders actually browse those sites and “shop” for interesting projects to donate money to. I guess not many.”

    That’s exactly the problem with Kickstarter, and that’s why it’s an Amway/Tupperware type institution. People use it a way to legitimize asking their friends for money so they can pursue their art. I guess it’s like Beethoven flattering a countess or something, except with guilt and pressure instead of flattery, and without the singular immortality of the dedication. Basically an artist can tap up all his or her friends, and then feel as if he or she has embarked on a “successful” endeavor for which the public has voted with its feet, removing the need to compete in any kind of bona fide marketplace. It’s fine and well asking your friends to come to gigs and then charging them admission when you’ve lugged your gear to the venue, but it’s another thing entirely to sell them tickets you’ve “pre-bought” from a shifty promoter. Kickstarter merely removes the shifty promoter and places the artist in that role.

  16. LintMan

    I think MacPhee’s off the mark here in a number of ways. First, MacPhee frames the discussion in terms of a young artist, I don’t think that’s the proper perspective – especially when he goes on to talk about who’s making money. While some Kickstarter projects involve artists, many others involve software developers, hardware developers, documentary filmmakers, chefs, inventors, etc. They all have different goals, but generally one thing in common: they are trying to make something, and make a bit of money on it. So the one word I’d use to sum them all up is “entrepreneur”. The people asking for money on Kickstarter are not charities, and most of the people donating expect value in return for their donations. That is not charity, even if the donators’ good will makes them inclined to be more generous.

    Kickstarter is not “just a parasite” on the process: they provide these entrepreneurs with the platform and forum for doing their promotion, and a very bright spotlight to help interested backs find them. In opposite of what diegoe above guesses, from what I’ve seen, the biggest single source of backer referrals for most KS projects is the KS web site itself – it offers lists of active projects filtered by category (art/technology/games/etc), location, “ending soon”, “just started”, “most popular”, etc along with stuff like “staff picks”. They also provide a level of assurance that you can won’t pay anything if the project doesn’t hit its funding goal, and you can always pull your money back out (before the drive closes) if you change your mind. They also provide (via Amazon) all the payment processing services including international payments and billing hassles/risks like non-payment or credit card chargebacks. And don’t forget that of the 5% Amazon gets, probably at least half of that is going to the credit card companies themselves. Also, despite the legalese, Kickstarter will be a fat target for the class action suit when one of those multimillion dollar projects inevitably fails in some spectactular way. Kickstarter is also not the only game in town – there are quite a few other crowdfunding sites and of course the entrepreneurs are free to directly raise the money themselves without any crowdfunding site taking a cut. The fact that so many projects do use Kickstarter shows that it is providing value.

    Also, the basic original intent for Kickstarter is right there in its name: to provide people with a good idea for a product the financial backing to cover the startup development costs to bring their product to market. It’s expanded beyond that, but that’s the basic idea. When everything is completed, if they executed well, they will have a finished product ready for sale — at a profit, without being in a hole from the development startup costs. A successful Kickstarter project is not the end goal – it’s just the beginning.

    As for only getting “$6450 of the $10000″ kickstarter – most of that is basically the cost of doing business (and that’s pretty much what they are doing here — starting a business): tax, the credit card fees, the cost of the “rewards” and shipping for them. (The “reward” is very frequently the product they are developing). That’s all stuff they’ll pretty much be paying whether or not they use Kickstarter. All of that should be taken into account when they plan how much they need to ask for. If they need a full $10K for development costs, they need to add all the overhead on top of that, and ask for that amount. Nothing insidious here.