License Pricing, Content Diversity, and the Value of the Little Guy

I am not an emoticon person. They are almost without fail cheesy and reductive. That said, throughout Chapter Six of “Copyright’s Paradox,” I drew little frowny faces in the margin to denote where Netanel was pushing his sob story of the little guy on us the hardest. The documentarian Jon Else, unable to use The Simpsons, came up every other page. Poor Else. Who suffers when copyright holders charge whatever they want? Big companies don’t suffer, someone Else suffers. It could be you. It could be all of us! (Hard to believe this providential eponymy escaped the author, right?)

This post will focus on Chapter Six, free speech, and issues of pricing copyright usage. I do not argue that Netanel’s call to arms or policy position is wrong in a normative sense, but I believe the premises on which he relies are empirically false, that his hand-waving and lip-service in the neighborhood of economic analysis are far from thorough, and that while he happily monetizes the predatory nature and disadvantages of oligopoly power in copyrighted materials, he presumes without valuation that the speech of the independent artist ought to be furthered at the expense of the current copyright holder (relative to their profits if they set their own licensing fee). To be clear, this post will make me sound like I favor the status quo, and that I do not. It simply seems to me that Netanel wants to change the rules for copyright in a way that will drastically affect the calculus of content producers and that rather than admit his vision will change production, he claims big companies will continue to act as they do now and we will simply gain the benefit of new speakers at the lower end of the economic spectrum. That cannot be so.

Making Hits

Let’s say you step up to a roulette table in Vegas. If you put your money down on a single number, the payout is 35 to 1. The allure of roulette is that you can hit a big payoff relative to your investment. The winner-take-all structure in fields that sell creative expression is, loosely, similar: you expect to lose most of the time, but every once in a while, you’ll get a big hit. (p. 132) Think of an entertainment industry, say film (where 5% of film earns about 85% of all profit), as high stakes roulette (except film has better expected value per dollar invested, we assume). Now, imagine you were considering playing roulette and someone named Neil came along and told you “Part of the payout for a hit will be taken away; you’ll now get 32 to 1 on a hit, but don’t worry, the three dollar difference is going to subsidize the poor roulette players’ bets.” Wouldn’t that make you less likely to sit down and play roulette and more likely take your money and find another game with the same expected value as roulette had before (35 to 1 for a hit)? This seems obvious to us, and yet, as we will see below, it is precisely what Netanel denies.

Profits, Viewpoint Diversity, and Empirical Considerations

In his “Risk and Rent” section, Netanel claims 1) that the risk multiplier and high rent “greatly [] overstate the true competitive price benchmark” and 2) that “major, mass media copyright industries... manage risk without need of significant excess profits on successful works.” (p. 135) He backs up the first claim by telling us that “media conglomerates generally earn profits of up to 20 percent,” leaps and bounds ahead of industrial corporations, retailers, and the oil companies. I suppose that’s why everyone would rather invest in media than oil: it has better returns and is lower risk. In fact, I hear President Bush is considering invading India to gain control of Bollywood.

Moving on, Netanel supports his second claim by going to the whip and insisting that media companies never produce anything new and that more money in their hands necessarily means the promulgation of less diverse works. (p. 137) This is one of his claims which I believe is simply empirically wrong. For example, over the last 20 years, and particularly over the last 5, major movie studios have used their money to bid record prices on completed non-studio films at Sundance, Cannes, etc.  The winner-take-all system means that the studio that buys “Blair Witch” or “Little Miss Sunshine” as a completed product is in great shape.

Further, if all the other texts we’ve read are right, the internet and increased availability of media results in specialization of interests. To put it in Netanel’s terms, while media goods are “solidarity goods” that have added value where more people consume them, they are also “associative goods” that have value because they are consumed by the right people. (p. 133) That is, it is important to me that I am NOT be in the group of people to see the last Michael Bay movie (Transformers) and AM in the group to see the last Coen Brothers movie (No Country for Old Men). The market is too smart to, as Netanel flatly puts it, “narrow public discourse” and “appeal to the lowest common denominator of the consumer public.” (p. 145) Certainly we see that, but it doesn’t always work (for example, Chevy focus grouped their new line of cars a few years ago and 80% of respondents liked them but few people loved them, and the cars sold very, very poorly), and the lowest common denominator productions are supplemented by investment in specialty fields (because in many industries, the highest returns are on things people love rather than merely tolerate in the background like muzak). This is why record labels like Universal Music Group buy up and maintain specialty labels like Interscope, which in turn owns Shady records, which in turn owns G-Unit records, etc. This kind of specialization undermines Netanel’s account, which would suggest that media conglomerates create only cookie cutter products. Henry Ford said the customer can have a car in “any color he wants so long as it’s black.” Netanel’s account suggests the customer can have any media he wants as long as it “appeal[s] to the lowest common denominator of the consumer public,” and I think that account is woefully flat-footed.

The account I give suggests that mainstream success helps pay for specialty studios and their distribution (Weinstein Company, Warner Independent, etc.) and vis-versa. The point of buying a lot of lottery tickets is to reduce volatility in returns. In a winner-take-all system, owning multiple specialty items that can dominate even a niche market is doing exactly that (or, best case scenario, specialty items that might have cross-over appeal and make it into the mainstream, e.g. “March of the Penguins”). To suggest, as Netanel does, that an oligopoly of corporate speakers results in a lack of viewpoint diversity is not as obvious or strong a point as he apparently takes it to be. Besides if Netanel’s right and major producers are currently afraid to deviate from the mainstream, wouldn’t that mean that they would become more conservative and produce even fewer specialty items if he took away their right to charge high licensing fees?

Monetizing Evil Profiteers and Valuing Independent Speakers

Netanel argues that free speech considerations are foundational in copyright law and that market analysis cannot be executed in the purely quantitative fantasy world of economic textbooks. Rather, he says, “value judgments about the types and mix of expression and speakers we want our copyright system to foster” are built into any economic analysis of expression and copyright. (p. 128) His systematic valuation of expressive speech as an unquantifiable good, however, dismisses the foundational economic considerations in copyright law. While he takes note of market issues, he ignores them and presumes a small-time documentarian’s free speech as a self-explicatory good that practically outweighs the preexisting expression it wishes to include in the first place (The Simpsons). 

Not all speech is equally valuable, Netanel reminds us. The Supreme Court has told us that obscenity, commercial speech, etc. are not on the same footing with political expression, journalism, and things of that nature. There is, in fact, a way to value speech at least insofar as this kind is more important than that kind to public discourse. When we enter a world of artistic speech, Netanel is concerned with protecting the little guy. But the purpose of copyright is to incentivize the generation of creative works. Netanel claims that Fox is more than adequately compensated for its creation (The Simpsons) without its $10,000 flat-rate licensing fee. I agree that Fox is making plenty of money, but I don’t accept Netanel’s conclusion (or presumption, sometimes I can’t tell) that Fox isn’t counting on that money as part of the winner-take-all system in which they participate. Netanel seems interested in leveling the playing field, but it feels more like he wants to rewrite the rulebook: homeruns are now worth less, power hitters should swing for average, box office megahits should give way to arthouse films, etc., etc.

Again, I understand his worries, but at the same time, the largest film studios and record companies (and micro-budget documentary filmmakers and smalltime artists) all do what they do, in part, because of the lottery-ticket potential of any given creation. To say that the lotto winner must (effectively) subsidize likely future losers (by not maximizing profits from their copyright) drives away potential investors and creators. And it is this fact that he seems to me to underestimate. Netanel looks to and rightly dismisses historical cost and average price per unit, but he then inadequately considers “normal profits” from some “‘typical’ alternative venture.” (p. 127) For those of you who took Network Industries, you’ll remember the problems this kind of pricing got us into (see Southwestern Bell, Hope Gas, and Duquesne). It’s a messy balancing of considerations that can become Three Card Monte. I’m not saying Netanel is wrong to try to figure out a measure of appropriate price rather than letting copyright holders set their own, I’m just saying that it’s more difficult than I’ve seen him admit thus far and that in the face of that difficulty he would rather trash the current system to facilitate the use of a Simpsons clip in the background of a documentary than make slow steps toward some slight cabining of copyright. And who will get down to the nitty-gritty and try to set the price in the trenches? Maybe Netanel hopes it will be someone Else.

 

Comments

[Max Schleusener]

My claims about independent film were correct regarding the backward-looking bidding at film festivals, but the potential bidders going into Cannes this week (independent film divisions of major studios) are not looking so hot: http://www.nytimes.com/2008/05/14/movies/14cann.html?ref=arts: "there are suddenly fewer companies shopping for movies. Last week Warner Brothers shut down two of its specialty divisions, Warner Independent Pictures and Picturehouse, a move that followed the downsizing earlier this year of another of its subsidiaries, New Line Cinema." Wow, this NYT article could not have come at a worse time for my post.

I blame the lack of independent film support on the weak dollar and, um, all those kids and their piracy. We need more prosecution of those copyright infringers! How dare they?

[Ross Tucker]

"To say that the lotto winner must (effectively) subsidize likely future losers (by not maximizing profits from their copyright) drives away potential investors and creators."

Sorry to take one of your arguments out of context, but this reasoning would suggest that copyright holders should have absolute property rights in their works, with no fair use (allowing criticism or commentary, parody, etc), no limited term, etc. Owners of intellectual property will always argue for the most robust rights possible saying that otherwise they don't have maximum incentives for creation. Patent holders would love to have longer patent terms, which might on the margin lead to more R&D going to discovering new drugs, for example. At some point a copyright becomes so broad that expanding it would lead to negligible increases in incentives for creation, and the public may suffer by always having to pay a monopoly price for whatever is created. I think that copyright is really broad right now, such that paring it back a little won't have a huge effect on the incentives for creation.

[Christopher James]

Ross,

I think you read too much into Max's argument. Context here is important. The thrust of that paragraph, I think (and correct me if necessary, Max), is that Netanel assumes too much as an empirical matter. Netanel argues that granting the Elses of the world the right to use clips such as this without rightsholder approval would not significantly impact the ex ante creation incentive of authors and creators because they're already making money hand over fist and don't need these fees in order to create. Max argues that Netanel does a woefully inadequate job of proving this, and wonders whether the ability to charge these huge licensing fees is part of the ex ante creator calculus; if so, denying them this right would indeed have an impact on their creation incentives, and it's in no way clear, then, that the amount of creation gained by small uses w/o a license would outweigh the amount of original creation lost. Diversity of creative output is arguably another matter, as is the normative question of the scope of individual copyright. To state, as Max does, that removing this right will have SOME effect on ex ante creation incentives is in no way an endorsement of absolute property rights in creative works.

That clarified (hopefully), I think I--as an empirical matter--side with Netanel. This view purely rests (as it must in the absence of solid data) on my mere intuition that such licensing fees are not a key element of a media conglomerate's ex ante creation calculus. I do think, though, that Netanel should not so blithely and dismissively characterize big media as fat cats with hordes of cash that will go unaffected by incentive shifts. Changes in law will change their behavior, without a doubt. The key is whether or not this shift is a good thing on the whole, and Netanel hits this close question with the blunt hammer of demagoguery when it requires careful cutting with a scalpel. It's far from convincing to make one's case so resoundingly in a world where empirics are few to nonexistent. (In the absence of verifiability, I could argue that I can dunk like LeBron James.)

I think Netanel's other big problem is his assumption--made throughout the book--that judges, regulatory bodies, and other actors can somehow adequately calculate rates for licenses such as this. I'm not at all convinced that the valuations reached by individual entities will in any way offer an improvement over a rightsholder's rate.

[Max]

The opinion I posted is polemical and overstates the problem. It was meant to bring contrast to, what I thought was, Netanel's lack of explanation. I don't actually disagree with him all that much, but, as Chris rightly pointed out, I want a more thorough picture of what's going on and what the changes will look like (if he's right, which he may be). Maybe the last three chapters of the book have the answer, but I think the account of the problem he gives in chapter six is oversimplified and not sufficiently supported by fact.