Valuing Copyright

In Chapters 4 through 6, Netanel outlines the history of copyright from the founding until the present day and suggests that copyright as currently constituted is anything but an “engine of free expression.” He argues that the treatment of copyright as a property interest has led to a system rife with free speech abuses, and lays out an initial proposal for determining the appropriate value of a license in a copyrighted work. While I am sympathetic to some of the problems that Netanel is seeking to address, I am skeptical about the workability of his proposed valuation scheme.

How Broken Is The Copyright Regime?

While this section of the book is still obviously influenced in parts by some of the biases that we discussed in class, overall it offers a more even-handed treatment of some of the most severe copyright issues. For example, Netanel points out that he is not advocating a system in which anyone can use any copyrighted work for anything they want, but rather is only proposing that we should consider how we can curb some of the worst abuses perpetrated within the current system of copyright. While I appreciated his recognition that the desire of an individual for self-expression cannot be the absolute and only priority of a copyright regime, I found myself wondering again how prevalent the abuses that he describes are. He asserts that the anecdotal cases that he references are “typical,” but it is unclear to me whether these anecdotes are a relatively small number in the whole universe of potential copyright cases, or if copyright enforcement is in fact leading disproportionately to abuse (p. 113). While I realize empirical evidence of this type would be hard to come by given that the copyright universe is so large, I think that it would be helpful in determining whether the system is fundamentally broken, or whether we are simply seeing are isolated instances of overzealous copyright-holders.

Valuing A Copyright License

I think that Netanel’s proposal in Chapter 6 for placing value on copyright licenses is an interesting one. On its face, it appears fairly sound – it accounts for market power and, in the case of large media conglomerates, does not seek to price the copyright without considering that the value of a single copyright will frequently be dependent on a company’s entire copyright portfolio. (For every hit, a studio has also financed many misses.) However, I thought that Netanel glossed over several potential complications that would make such a scheme less straightforward than it initially seems.

First, particularly in the case of large media conglomerates, I am curious to know how far Netanal would want to cast the “net” in terms of determining market power and the extent to which a company has invested in copyrighted works. I am thinking specifically of a situation where you have several sister companies held by a parent company that has input in its business operations – would the market inquiry be extended to all involved companies? On a related note, most large media companies’ operations are diversified such that profits are derived both from  a huge number of sources. Could this valuation really adequately account for the balancing and cost-benefit analysis undertaken by each company with respect to any given copyrighted work as a small part of the totality of its business?

The above are just several question of practicality, but the scheme suggested by Netanel has an even greater potential practical flaw – that of administrability. Even if Netanel (or anyone) were to answer the above questions and flesh out a fully operational scheme for valuing copyright licenses, is this really the kind of scheme that we think judges will be capable of administering? I am currently taking Antitrust, and one thing that is quite clear from the cases that we have been reading is that judges frequently misunderstand the concepts of market power or the relevant market for a good. Netanel’s pricing scheme seems fairly fact and labor-intensive, which on the one hand might be quite good, because it could result in more accurate pricing than a less fine-grained system. On the other hand, I have grave doubts about the ability of judges across the board to be able to undertake the kind of technical analysis that would be required to produce the “right” answer under this scheme.

Unconsidered Pitfalls?

I imagine that Netanel will flesh out some of the issues that I raise as we move through the final chapters of the book, so it is possible that he will cover some of the pitfalls of a new copyright regime that currently seem to be unconsidered. Chief among these is what the practical effect of a compulsory licensing scheme would be. An initial reading of Chapter 6 would suggest that a copyright license would be priced without regard for the license-seeker’s ability to pay. Netanel suggests that the “fair market value” for licensing “The Simpsons” might be $5,000 instead of $10,000. Taking this hypothetical as true, do we think this decrease in pricing would have changed much for the independent filmmaker in question? Yes, $5,000 is less than $10,000, but does is this new “market” price really attainable for a film on a shoestring budget? If the filmmaker can pay with the new $5,000 discount, than his problem is solved.

However, I found myself wondering what Netanel would suggest as a solution if the $5,000 market price was still too steep. The way I see it, there are basically two possible reactions. The first would be one that says, well, it is too bad the filmmaker cannot pay, but at least we know that the license is being priced fairly, and therefore he is not being deprived of his free speech rights unfairly. The other reaction would be something like: the fact that the license is still out of reach for this filmmaker means that there is something fundamentally wrong with the system, and that we should not allow him to be priced out of the market. Essentially, I wonder whether a move to a market-based evaluation of licensing fees would ultimately be that much better for the small players and individuals out there.

If, as I suspect is the case, we would get frequent situations where individuals would still be priced out of using the most popular copyrighted works, and judges are in the business of making individualized determinations about the specific value of a single copyright, I wonder whether we would see a move towards licensee-based pricing. In my opinion, such a system would be fairly problematic because the value to an individual of gaining a license in a successful copyright will almost certainly always be far greater than the proportional value of a large player maintaining control of that copyright.

Conclusion

Of course, we know that judges are already making all kinds of individualized determinations with respect to copyright when it comes to things like fair use, so it might well be the case that a new system would not ultimately change the balance all the much. However, I am skeptical of any compulsory licensing system that might push in the direction of licensee-based pricing, because I think it would reduce the value of copyright too completely. And, as Netanel points out, we are not trying to do away with copyright entirely – copyright still is an important factor in encouraging creation and expression – we are just trying to find the best balance on our way to that goal.

Comments

[Vikas Didwania]

Sarah, you bring up some really interesting points. I wanted to respond to your "Unconsidered Pitfalls" section. You expressed concern that the individual creator--the little guy--might still be priced out of the market if we lower copyright prices to competitive instead of supracompetitive prices (assuming that Netanel is right about prices currently being supracompetitive, as he defines it).

But doesn't the individual have access to capital markets? I noted this in my post last week, but let's say John wants a license to incorporate part of The Simpsons into the video he is creating. Additionally, John is very poor and could barely afford the video camera and computer. He has no money for licenses. He could be priced out, or he could go to Sally and tell her he's making this great video and if she chips in some cash for the license, she can have a portion of the future profits from his creative video. The nice thing about this scenario is that it is "efficient" in the sense that the property right to the copyright is only transferred if it is beneficial. As you note in your last sentence, the values for the copyright differ between Fox and John. But that's precisely what creates the possibility for a trade (for any trade). Fox values it at $X and John at $X + Y, which creates a bargaining range allowing for a transfer that benefits both parties (and society in general).

Of course, there are several problems. Our best-case scenario is where the work John is creating will have fantastic market value. If his video will be worth $20,000, then Sally will be willing to kick in $5k for the license. She can have a 50% stake and still make $5k profit, while John makes $10k pure profit. The numbers might shake out a little differently because of the risks that Sally is facing, but I think that's the general idea. The problem is that maybe the risks are not ascertainable in copyright markets, thus the risk premium that Netanel notes. In that case, Sally will be completely unwilling to invest (if she really can't assess risk at all) or demand very high returns (to compensate for very high risk). That way, if John's video is only expected to make $6000, even if it would be beneficial to produce it, Sally may be unwilling to invest due to risk. But I'm not sure how much of a concern that is. Maybe risks and risk premia are fairly well understood, especially if Netanel wants to discount them in assessing actual competitive pricing. Secondly, maybe it is a good thing that we are not investing in such really risky projects. Maybe we want to invest in projects that have a better balance of risks and returns. Not sure.

Another major concern is one of transaction costs. So let’s say Sally invests the entire $5k and knows the project will yield a total value of $6k. She has a 50% stake and will get $500 out of it. Decent enough profit. But if her transaction costs are greater than $500, she still will not invest, even though we as a society would like her to. That is a concern, but I’m not sure how large transaction costs will be. If we follow Netanel’s plan, the price of the license will be pre-determined, so the major transaction cost of bargaining to a mutually agreeable price will no longer exist.

I was thinking about how even if John’s project is worth only $3000, we would want him to still invest because that’s $3k of pure “profit” to society—increase in social welfare. That’s because in some sense there are infinite licenses, meaning there is no opportunity cost to Fox giving it out to another licensee. But there is the cost—to Fox and to society—of incentives to innovate. If the competitive price of $5k is the best balance for incentives to innovate and providing access to society, then effectively reducing the price to $3k would be detrimental. Essentially, there are costs to Fox of each additional license.

That brings me to my final point. There may be non-monetary benefits that would compel us as a society to want the transfer to occur but would prevent such a transfer from actually occurring. So the competitive license for Gone with the Wind may have been $5k, but the market value of The Wind Done Gone may be only $500. Maybe we still want publication, though, because of the non-monetary, social benefits inherent in the novel’s social criticisms. But it wouldn’t happen if Randall can’t afford the license herself and take the hit for that $4500 loss. I’m not sure what to say about this—a little confounded. To some extent, for the novel to have social effect, people would have had to read it (or see it, etc.). That should drive up demand and market value. Plus I’m not exactly sure why people wouldn’t incorporate this social value of the work into the market value. But I get a sense that they wouldn’t, maybe because we are not very good at internally valuing such social criticisms or the value to us of democracy, civil rights, etc.

Sorry for the long post! Hope it made at least some sense.

[Sarah Cottrell]

You bring up some really good points. First, I want to clarify that I am not personally that concerned about the little guy getting priced out of the market, but I do think Netanel is, and I question whether "competitive" pricing as he describes it would make a significant difference on this front. After all, individuals currently have access to capital markets, and I question whether the primary difficulty in raising capital as a starving artist is copyright uncertainty and transaction costs, as opposed to a whole host of other issues and concerns that investors have. Certainly copyright concern might make or break some endeavors, but on the whole I wonder if investor uncertainty ultimately hinges on many other things and copyright issues account for a relatively small percentage of failed capital campaigns.

I think part of my skepticism is based on my concern that valuing copyright licenses is difficult, and I do not think that courts are particularly well-suited to the endeavor. I think copyright can only go so far in encouraging the arts and innovation. At some point, private enterprise and individual contribution has to kick in because as you note, there will be points at which even the competitive pricing of a license will not encourage extremely valuable social criticism or artistic expression. In my opinion, private actors are best positioned to deal with these issues, because if we rely purely on a legal valuation regime there will always be individuals with socially valuable products priced out of the market.

I'm not sure if I have fully addressed all the points that you raised, so let me know if there are things that I have overlooked.

[Vikas Didwania]

You responded to most of my concerns and in such a short, eloquent manner. Thank you. I agree with most of what you said. I do think private valuation is likely to be cheaper, easier, and more correct than any judicially- or agency-imposed valuation. Courts do value copyrights and patents in infringement suits, so it's not impossible, but these tend to be costly endeavors. And I remain unconvinced by Netanel's valuation method of average cost * risk premium. Many governments have tried to figure out what the return on some investment SHOULD be. I dare say all have failed.

It's also unclear to me why we should favor some average industry return (which is what I think he is essentialy arguing) as opposed to the market price, which includes this average return with specifics on supply / demand, cost, etc. The notion that "supracompetitive" pricing creates artificial scarcity is a little ludicrous. I mean, me not selling my plot of land is creating artificial scarcity. There are, after all, no other pieces of land just like it by definition! Even if I don't want to sell it to you for $100 million, it doesn't seem obvious to me that the buyer should be able to compel me to sell for social benefit. But after Kelo, that's another story. Anyway, I'm rambling.

[Sarah Cottrell]

Your final point about the ridiculousness of the artificial scarcity argument is one of the primary reasons that I take issue with Netanel's valuation scheme and the idea of compulsory licensing, namely that I am more inclined to treat copyright as a traditional property right than Netanel is. On a semi-related note, I think Kelo is absurd, and I do not think that we should be able to compel copyright owners to sell licenses anymore than I think we should be able to compel property owners to sell in the service of some generic social benefit. However, the law is not really on my side here, at least when it comes to plots of land.

Still, I have grave doubts about any copyright system that is premised on the idea that anyone who has something to say should be able to say it. I know Netanel says that he does not want to go that far, but I think that any system of compulsory licensing is ultimately a system of forced dealing in which copyright has little meaning. The only thing I mistrust more than courts valuing markets is courts making definitive judgments about what is and is not a socially beneficial use of copyright for purposes of valuation.