Funding Mechanisms

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From an overview article by Roger Clarke on Business Models to Support Content Commons.

Who can fund?

Roger Clarke [1]:

"Answers to 'Who pays?' can be classified into three categories: content-consumers, content-providers, and third parties.

Consumers Pay

The mainstream approach is for a stream of revenue to be provided by the consumers of the content. Many variants exist, the most common being cash payment (or its equivalent, such as by credit-card) at the time of consumption. Barter (payment in kind rather than cash) and 'knock-for-knock' arrangements also come into play.

An appreciation of business models depends, however, upon a deeper understanding of the nature of reciprocity in markets. The assumption is commonly made that value-exchange is necessarily immediate and reciprocal. There are, however, many circumstances in which value-exchange is not direct and/or is not reciprocal; and these patterns occur frequently in Internet transactions.

In Rheingold, attention was drawn to the difference between conventional 'horse-trading' and equally conventional but less-studied 'barn-raising'. On the prairies, a newcomer or a longstanding member of the community who has suffered adversity such as a fire, may be incapable of paying for the materials and labour to build a barn. Winter is approaching, the unprotected hay will quickly deteriorate, and by mid-winter the animals will have starved to death.

When neighbours gather on a Saturday to build the much-needed barn, they may be acting out of altruism (which is disparaged by conventional economics as evidence of a 'gift economy'). But they may be participating in a market describable by an appropriate economics. They may be relying on deferred reciprocity, knowing that one day they'll be in a similar position (or, indeed, if they enjoyed similar support at some time in the past, that they're repaying an old debt). Or they may perceive it to be a transaction in 'community economics', with indirect reciprocity existing in the form of a benefit that will be received in a different form, from someone else in the community. The 'cooking pot' metaphor21 is another means of explaining indirect reciprocity. Yet another is the 'honey-pot' metaphor to describe contemporary electronic publishing.22

With the advantage of a new, or an old, but in either case an alternative, economics, other mainstream, non-cyberspace examples of deferred and indirect reciprocity are easy to find, such as loans and subscription fees (which involve deferred reciprocation); gratis access for limited time or functionality but thereafter for-fee (conditional deferred reciprocation); and debt-factoring (indirect reciprocation).

Producers Pay

There are various circumstances in which the producer pays, e.g.:

government agencies deliver content and services in accordance with their mission statements;

business enterprises disclose information under a legal obligation; and

individuals publish under 'vanity press' arrangements.

An example of unintended producer-pays is pre-publication in anticipation of indirect reciprocation or deferred reciprocation. Additional circumstances discussed in later sub-sections include cross-subsidy, loss-leaders, and the generation of network effects.

Third Parties Pay

The most common examples of third parties are advertisers and sponsors. These are organisations that perceive sufficient benefit in exposure, brand-building or referrals of customers, to provide the funding for the goods or services in question.

The business of advertising on the Web has changed significantly since about 2000. A company called Overture (which was taken over by Yahoo! in 2003) established a scheme whereby advertisements were displayed in users' browser-windows, and those that were clicked on resulted in a payment by the advertiser to the organisations that caused the ad to appear there. This is sometimes referred to as a 'pay per click' scheme. Such schemes are generally dependent on surreptitious mechanisms, commonly known as 'adware', a sub-category of spyware. Google's AdWords is a well-known application of the idea.

Pay per click advertising has been further refined, in two key ways. The first is that advertisers pay intermediaries in order to get priority-placement of their ads. The second is that the intermediaries are achieving better targeting of ads, by analysing the content of the web-page that the user is about to have displayed and inserting ads that bear some relationship to the apparent topic the user in interested in.

A further level of sophistication has been added. Owners of web-sites can set space aside on their pages into which advertising intermediaries can insert ads. The process is a form of Web syndication, and participating web-sites are referred to as 'affiliates'. Google's AdSense is a well-known application of the idea.

Another form of third-party funding is patronage, where the benefits to the payer are psychic in nature, as arises with commissions of artistic and musical works, and donations to community service organisations. A current example of significance is the support for the open-content encyclopaedia Wikipedia.

A further category is vital, and yet often overlooked. The term 'subsidy' is derided by conventional economists, and only tolerated in circumstances in which 'market failure' exists. Yet, despite their urgings, significant proportions of all national economies involve 'transfer payments' from one organisation or person to another that are not directly linked to reciprocation by the payee.

A particular category of subsidy that economists find less distasteful is 'cross-subsidy'. This refers to subsidy within an organisation, whereby it funds one 'losing' activity from the proceeds of another, more financially successful activity. A particular version of 'cross-subsidy' is precisely how all 'big business' works. In the terms used by the Boston school of consultancy, 'cash cows' (parts of the business currently exploiting monopolies to extract super-profits) are used to fund 'rising stars' (which currently need cash injections but which are expected to become future 'cash cows'). The process of cross-subsidisation, whether within a conglomerate, in venture capitalism, or by the personally wealthy, is described by the dignified term 'portfolio management'." (