Over the past week a controversy ignited the crowdfunding stratum of the internet. It was important for that group of people, and also impacted my work directly. It seems to be over now, but could well resume. There may be implications for the digital economy in general.
Earlier this month crowdfunding and creator support network Patreon announced it would change its fee structure, which sounds like a pretty obscure or arcane development. Patreon allows people to contribute regularly to creators they admire and wish to support. (I’m one of them, and am grateful to my dozens of supporters. Join them!)
In essence, the change involved charging supporters more for what they were already giving. Patreon described this as a way of making sure creators received more funds, as the site moved financial transaction costs from creators to supporters.
Aside from Patreon’s existing 5% fee, a creator’s income on Patreon often varied from month to month because of third-party processing fees. And, patrons may not have been aware that creators actually take home a lower percentage of their intended pledges because of those fees.
Things would be better for creators, in other words:
Yet a backlash began at once. Supporters felt mistreated by the sudden rise in fees. Creators feared losing the smallest contributions, $1/month, as the new payments would be $1.38 instead. Those lower amounts were actually charged the most, proportionally. Everyone involved felt surprised by the decision, as Patreon consulted few (if any) of us. Creators felt forced into the position of asking more from supporters without a good reason, and without the choice to not do so.
Suspicions grew about Patreon’s motives. Was it really about handling a scheduling bug? Was the site actually trying to make creators a little happier, or were its directors aiming instead to bring in more cash under pressure from venture capital investors? Was Patreon deliberately attempting to discourage low-value subscriptions, since they didn’t bring in much money for the company?
A week of dismay followed, expressed through social media (for example). People started investigating alternative platforms, like Liberapay, or Kickstarter’s forthcoming and oddly named Drip. Some creators explored changing their support structure to redress the cost change. Others, like one of Mastodon’s inventors, stated that they had already lost $1 and related supporters, or as shown here:
Tony C. Smith, podcast leader extraordinaire, cut loose.
Personally, I was stunned by the announcement. This wasn’t something Patreon had ever consulted with me about. It was just crammed into my work by fiat. Most of my supporters are in the $1 range.
I asked my supporters what they thought about this via a Patreon site post, and they responded energetically and thoughtfully. Some urged me to look into alternative sites. None left me, for which I’m very grateful.
Yesterday, Patreon changed its mind.
A blog post from CEO Jack Conte (Twitter) ate some very public humble pie. The headline:
We messed up. We’re sorry, and we’re not rolling out the fees change.
“Many of you lost patrons, and you lost income. No apology will make up for that, but nevertheless, I’m sorry.” Conte admitted to a variety of mistakes, and backed off of the new policy. He even opened a survey for our reactions.
At the same time the Patreon Twitter account announced it was reaching out to supporters who had left off supporting creators.
So what’s next? What can we learn from this story?
Patreon has suffered a massive reputational hit. They are going to have to work hard to rebuild from that.
Conte apparently still wants to revise the payment system. I’m not sure how they can do this without either a massive consultation phase (which is fine by me) or some new idea, perhaps exfiltrated from the fintech world.
Meanwhile, this debacle opens up the possibility that competing businesses will grow. Although it’s a small world, Patreon-style crowdfunding certainly has the ability to grab attention, and where attention heads, dollars can follow.
Personally, I’m very nervous. Patreon revealed a dark side this month, a willingness to unilaterally impose its desires across its user base. Treating it as another VC-fueled company, as one platform among others, means I need to be especially careful. I’m making plans to move to another site if the need returns, and to export content for safekeeping.
More broadly, this story is part of two other, bigger stories. One is the continuing power of people using social media to exert pressure on decision-makers. I don’t write this in a utopian way. After all, some of that pressure can be heinous (think trolls), and decision-makers can withstand that force (think FCC on net neutrality). But this time the cause was good and the power applied successfully.
The other story the affaire Patreon connects with is the tale of escalating income inequality. Consider the massive imbalance between the supermajority of creators who earn a bit of funding from the site versus the 2% who make enough to at least survive.
Today, successful Patreon creators include Chapo Trap House, a lefty podcast with 19,837 patrons at the time of writing paying $88,074 a month; the news commentator and YouTuber Philip DeFranco (13,823 patrons paying an amount that is undisclosed, but is enough to put him in the top 20 creators on the site); and the gaming YouTuber Nerd³ (4,494 patrons, $8,003 per month).
I would add conservative professor Jordan Peterson, who makes tens of thousands of dollars per month on the site. That 2% doesn’t mean all are getting rich. Instead, “only 1,393 — 2 percent — make [at least] the equivalent of federal minimum wage of $7.25 an hour, or $1,160 a month, in October 2017.” Like so:
In other words, Patreon’s creator support world roughly mimics the macroeconomics of skewed income distribution.
That’s interesting, but more important is how this data might shape Patreon’s strategy in a pro-2% way. One venture capitalist ran a post this year which includes the understanding that “Patreon’s true north star metric is active, financially successful Creators.” Why? They attract more users, but also bring in more revenue to the site:
Patreon monetizes by taking a 5% cut of transactions — which the company is points out is 6 to 10 times below average take rates in creative industries — so it makes sense that the they would want to optimize its growth around Creators whom they count as “financially successful.” A Creator earning a very low amount through the platform won’t meaningfully contribute to Patreon’s monetization model, nor to its viral loop…
Put more clearly, “Raviv explains, ‘We’d rather have our GMV [gross merchandise volume] be made up of fewer, but truly life-changed creators rather than a lot of creators making a few dollars.'” This is also for marketing reasons, as the spectacular successes – the Chapos, the Petersons – are more likely to bring in more creators and supporters than the rest.
Who is this Raviv? That’s Tal Raviv, “Growth & Platform at Patreon”, according to LinkedIn.
I don’t know if this is Patreon’s strategy looking ahead to 2018, but it could well be. After all, as income and wealth inequality continue to boom, one way to accumulate funds is to go after a handful of the elite, rather than expending a lot of time approaching large numbers of people with little money to contribute. This is an issue for nonprofits as well as businesses, and I’ve heard the idea expressed from more academic and cultural fundraisers than I can remember. In other words, Patreon ultimately isn’t the point here. It’s an example of a far larger trend sweeping throughout society.
Let me climb down from macroeconomic heights and turn to you, dear reader. What do you make of this Patreon affair?
Apart from the blindsiding of creators, which they deserve their share of fury directed against them, I’m sensitive to the problem of small payments and how difficult it is to sustain a business built on users spending one dollar a month. Moving that dollar between two people costs a lot of money, unfortunately. I’m working on an app that will depend on small payments, smaller and much more frequent than $1/month, and the economics just aren’t working in dollars. The fees and per transaction costs demanded by payment processors are driving us to consider alternate currencies like Bitcoin, but none of these are close to being ready for this purpose.
I hear you, kgsoto.
Back in the day I used to work at a used book shop. We had a strong credit card minimum, because the charges really added up.
Good luck with your app!
Leaving aside the “macroeconomics” for a moment, it seems to me that Patreon is being very inefficient in how it handles transactions and that that is where their opportunity lies. Apple aggregates a bunch of small transactions (iTunes singles) into larger ones before processing them in order to save fees. Patreon could develop a strategy for doing something similar. For instance, supporters below a certain monthly amount pay a yearly support instead. The skewed percentage of transaction fees to actual donation is a product of the 10X difference of a $1 monthly contribution vs. a $10 monthly contribution. The solution, therefore, is to charge a fee on $10 contributions and not $1 contributions. One way to do that is to aggregate those $1 monthly contributions into $12 yearly contributions. Another way is to aggregate multiple $1 monthly contributions (not sure of the data on this but I assume that $1 contributors are more likely to contribute to multiple creators) into one transaction every month and then distribute from there. The effect to the contributor and creator is therefore minimized.
I don’t necessarily see the darker side of the economic argument that you do. Jack Conte is a creator (half of Pamplemous) and he started Patreon with the best of intentions. There may be other business pressures (or naiveté) driving him to make these kinds of decisions (I’ve heard theories that Venture Funders are to blame – not endorsing that but it’s out there).
Of course, the fundamental problem is really with the credit cards charging such fees in the first place. They already get users with exorbitant interest rates and other gambits, they could cut merchants, especially small merchants such as Patreon, some slack. That would also solve the problem.
I think Patreon has good intentions. I just think they need a better process/technical solution to what is obviously a problem for them and those that depend on the service – even to a small extent.
Good point about aggregation.
I don’t know Conte, since I don’t know Pamplemous.
This was a great post Bryan! One of my friends explained to me that Patreon had fell into this new pricing system. As it appeared, he told me at the time he didn’t know if Patreon would make it as a platform. Sadly, this done shine light on the fact that Patreon is losing money somewhere. Hopefully, they can come up with a better way to increase their revenue without coming to a shutdown.
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