Tech Policy Seminar

Someone needs to take a bong hit and chill out.

Now that we're 2/3s of the way through Netanel's book, I'm tempted to offer some ideas for resolving the problems I see with the current Copyright regime vis-à-vis Free Speech.  Since we still haven't heard Netanel's solutions though, that might be a bit premature, so I'll focus instead on some of the issues Netanel hasn't.  I'd like to note though that I don't agree with Netanel on a lot.  In particular, I don't agree with the general way he's framed the issue in "the sky is falling" terms, and the way he uses positive examples of "Fair Use" success such as The Wind Done Gone as negatives at times.  Maybe this is just a rhetorical tool for him since the book seems to be more of an advocacy piece than scholarship (then again, maybe there's really no difference?). 

You're probably wondering what the deal is with the title of this post.  It's taken/copied/stolen/fairly-used from this post (via BoingBoing), but it could also be the title of Netanel's book. Carrie Brownstein has a blog over at NPR.org, and she's started posting streaming "mixes" of music. A few entire songs are posted in non-downloadable format, and Brownstein seeks permission from the record labels before posting (since posting the entire song probably doesn't count as fair use).  She hasn't run into any issues until she requested permission to post a Grateful Dead song.  She was told that she might be able to use the song if NPR did a piece on All Things Considered about the Grateful Dead tied to a piece on NPR.org.  It's not clear to me Brownstein has any say at all over what happens at All Things Considered.  Needless to say, the Dead didn't make the mix. 

Now, at first glance, this seems a lot like Jon Else's "Simpsons" scenario.  Most of the labels agreeing to Brownstein's post probably reasoned that they were gaining more from the transaction (free publicity, maybe someone will buy the song / CD) than not allowing the post.  The Grateful Dead's label was apparently only willing to allow the post with yet greater publicity.  As Brownstein notes, this doesn't make sense.  The posting would presumably confer only a benefit on the Grateful Dead's label… yet the label refused.  What's going on here?  One way to look at it is that the Grateful Dead, being more popular, would only gain a marginal benefit from the transaction relative to the other bands.  Perhaps the Greatful Dead are better off creating scarcity in public displays of the work so that they can extract a higher premium (ala a feature on All Things Considered) when they do get played.   Or, perhaps this is the "winner take all" scenario Max describes at work.  Or maybe, as Netanel suggests, it's somehow the abuse of market power in a particularly popular work.  I honestly don't know which line to buy, so I'm guessing it's a little bit from column A), B) and C).  Also, I wonder to what extent statutory damages play a role in enabling the extraction of supra-competitive rents rather then the winner-take-all / cross subsidization scenario. 

The Role of Damages

In all the discussion of Copyright economics, I was surprised that a discussion of damages didn't play a more dominant role.  I haven't take Copyright yet, and I imagine Prof. Picker knows a lot about this, but I really wonder to what extent the threat of statutory damages warp licensing agreements.   Damages are supposed to ideally make the infringing party no better off, and the infringed party no worse off.  But the Copyright Act offers Statutory Damages between $750 - $30,000 per infringing copy (up to $150,000 if willfully). 

I imagine the threat of such damages are what primarily lead to the "clearance culture" that forced Jon Else to scrap the "Simpsons".  Jon Else's use was probably most clearly Fair Use, but errors and omissions insurance required that he scrap it.  Presumably someone at the insurance company has conducted a risk analysis and decided that even in a case with such a clear fair use, the threat of damages in an unlikely finding of infringement is so great as to not warrant the risk.

This likely wouldn't be the result under a regime that allowed damages that were more compensatory / ideal in nature.  Without the threat of statutory damages, it's likely that error and omissions insurance wouldn't be so averse to letting fair use fly.  Similarly, Fox might be more willing to license the Simpsons at a lower rate, knowing that they have no great windfall if the user goes ahead and infringes. 

Yet, as I bash Statutory Damages, I can't deny they play an important role in creating disincentives for wholesale pirates.  Piracy can often be hard to detect, so damages need to be higher in order to deter.  I think both forms of damages can be reconciled in a regime that imposes statutory damages on wholesale market-stealing pirates, while offering more economically sound damages in cases like Jon Else (where detection isn't so much a problem).

Fair Use Instead of Licensing

As I said before, I think Jon Else's use was a fair use, and under current law you don't need any license for fair use.  However, per our discussion last week there seems to be a willingness to do away with fair use under the presumption that licensing and the price system can account for fair uses.  After class, Prof. Picker showed how that might not always be true given the external "social value" that can often accompany fair uses.  I think the damages issue might also warp licensing in cases of "fair use". 

I'd like to make another argument in defense of no-license fair use.  The Copyright system is created by government to foster creativity, expression, reward authors, prevent free riding, etc.   Fair Use is likewise created by government to promote other social goods: freedom of expression™, criticism, education, etc.   While I lack any empirical data, I can't help but think that most fair uses of works deal with very low-valued uses, the licensing of which involves relatively high transaction costs, even in our computerized era.  Fair Use eliminates those costs, and I guess indirectly subsidizes Fair Uses.  I see nothing wrong with this, the government also subsidizes Copyright on the other side with criminal enforcement and the Copyright Office.

Has Copyright Law Become Un-American?

This is a slightly random sidebar, but many of the "anti-speech" changes to Copyright that have taken place since the 70's have been made to more closely comply with European notions of Copyright embodied in the Berne convention.  These changes have seen the extension of copyright terms, the end of formalities and renewal requirements, and even the limited introduction of moral rights in the united states (via VARA). 

Although Netanel mentions in Chapter 4 of technical content protection mechanisms (or DRMs) that greatly extend the copyright holder’s rights beyond the rights given by the Copyright Act, I was slightly disappointed with his subsequent over-emphasis on DMCA because I believe that the technological developments that are being spearheaded by industry consortiums has a potential of imposing even greater burdens on free speech than the burdens noted in Chapter 6. Of course this point is not a new one and has been brought up by various commentators but I wish Netanel had spent a little more space in his book discussing this point and addressing this problem in his subsequent chapters. 

The problems of DRMs have been extensively discussed by other commentators and I don’t think I have much to contribute to that discussion.  Netanel does note the problem of DRMs by stating that “given those technological controls, it will not be possible to cut and past images and sounds from culturally salient expression to create artistic collage, video mix, machinima, political commentary, fan fiction, or even grade school research projects.” He, however, quickly proceed into discussing DMCA and his analysis goes as follows: (1) if there are technical restrictions, you could break the restrictions, (2) but DMCA prohibits even legitimate hacking for legitimate situations, (3) therefore “most people will be unable to obtain the tools they need to circumvent technological protection measures in order to engage in fair use or other noninfringing copying.”  My point is that, it is increasing likely that people will not be even able to progress beyond the first stage, i.e., the public will simply be unable to bypass the technical restrictions and consequently the public’s fair-use rights may be severely eroded by DRM systems. 

Some industry observers somewhat flippantly dismiss the this problem by claiming that the industry can not create a perfect DRM system and arguing that all technological restrictions will eventually be defeated.  It is true that historically hackers have been winning the battle against the industry. Most DRM systems have been broken, some almost immediately after the system had been introduced, and some almost with trivial effort by the hackers. I do not believe that this trend will continue on in the future.  First, companies have become far more sophisticated in designing DRMs and have learned from previous mistakes. (for example, DTCP/IP (Digital Transmission Content Protection over Internet Protocol) specification even has a provision on number of transmission “hops” that a media content may go through, which means if such specification is adopted, sharing content between computers or devices within a single home may be prohibited) Second, as consumer electronics gets more powerful technological, it will be easier to implement more sophisticated systems in them (for example, some of the televisions that are being sold right now probably have more computation power than personal computers that we used couple years ago).  Finally, there is much greater pressure exerted to the consumer electronics companies by the media industry to develop better DRM system.  Previously, media industry didn’t care too much about what consumer electronics companies did.  And for the most part, consumer electronics companies manufactured products that made it easy to copy content because that is what consumers wanted. This is not the case anymore. Media companies have become more active participants in industry consortiums and will kill any standards that they believe don’t provide that sufficient protection.  Also, consumer electronics companies are liable to large multi-million dollar fines if their device is found to have a defect that allows a hacker to bypass the DRM system, which gives tremendous incentive for the consumer electronics companies to lock down their products as much as possible. 

This problem is compounded by the emergence of industry consortiums.  The public will not be able to opt out of the system because the all consumer electronics will include (onerous) restrictions.  Therefore the market will fail to put any limitations on the restrictions.  For example, HDMI, which is rapidly becoming a dominant standard in interfacing digital media devices, was developed primarily to plug in the analog hole, where a person is able to duplicate a digital content by playing the content over an analog channel, by passing any DRM mechanism that may be present in the digital player. [Think of copying a DVD movie by connecting the DVD player to a VHS player, or connecting an iPod back to a recording device through a regular audio player.]  Other examples include Digital Flag in DTVs, BluRay/DVD, etc.  [Of course there are counter-examples in DRM-free music].  The problems noted by Netanel, such as barrier to entry, problems of vertical integration, becomes much more problematic.  I think in this light, Netanel’s antitrust analysis gets more bite.  Industry consortiums have been discussed by commentators and potential antitrust problem arising out of them.  Some commentators have focused on issue of patents arising out of consortium but I think the analysis from patents can be easily transferred to copyright. 

So what happens to Netanel’s argument for compulsory licensing?  I don’t think compulsory licensing will solve this problem is any way.  Even if I can license something from you, it will be meaningless unless I have the means of using that license.  I think a preferable way would be to create a clear statutory right to fair use and require that any digital system uphold those rights. 

I think a more interesting question is of the similarities and dissimilarities between copyright and patents.  While both are intellectual property there are substantial differences in the regulatory approaches.  At the same time, there are many areas where each could borrow from each other, such as maintenance fees (I think someone mentioned a similar idea in the previous class), compulsory licensing and reasonable royalties in the patent field.  I also find it interesting that the Supreme Court has somewhat moved away from strong property rights in patents in eBay while moving towards stronger property rights in copyright in Eldred (kind of, I know that the holding in both cases is not directly on point but I am talking more general treatment by the courts).

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.

 

Compulsory licensing is not the answer

Compulsory licensing of copyrighted works seems like a great middle ground between allowing authors to receive compensation for use of their works and granting the maximum amount of access to copyrighted works. In Chapter 6 of his book, Netanel outlines one proposal for compulsory licensing, including a scheme to reach a fair competitive price for licenses, while still accounting for the risk that studios and other authors take when investing time and money into creating a work. Though compulsory licensing is often touted as a more efficient and fairer alternative to private negotiation, it is unclear if such a system would really be either more efficient or fairer.

Efficiency

As Sarah points out in her post, there are several questions surrounding Netanel’s proposed compulsory licensing scheme. Before reaching questions of administrability or practicability, however, it is worth considering the more baseline question of whether compulsory licensing will be a more efficient or cheaper alternative to individual private negotiations.

Without compulsory licensing, as Netanel points out, people who want to use a copyrighted work have to negotiate individuals with the copyright holder. In some cases, multiple parties might hold copyrights to various parts of the work, making this process arduous, time-consuming, and potentially costly. A system that allowed for parties to avoid this process could be helpful it was faster and cheaper.

The alternative proposal Netanel mentions in his book, however, would require people interested in a license to litigate their claim in order to obtain the compulsory license. Litigation, as we know, is rarely fast or cheap. Dan’s anecdote from his professor illustrates this point well. Even with modifications to the copyright system, it is likely that any copyright litigation would involve months of fact-finding, expert debate and wrangling over profits and market power. Sarah’s post explains some of the specific problems that might arise in a typical case litigated under Netanel’s proposal. Is market power measured with respect to a parent company and all its subsidiaries? Are profits measured with respect to a parent company and all its subsidiaries? What about determining risk? Even if standards for these questions were developed through litigation over time, the questions would be at issue in each and every case because copyright cases are so fact-specific. While the ultimate judicial determination might be easy to abide by, getting to that determination is likely to be extremely costly and time-intensive.

Moreover, even if litigation was just as fast as individual negotiation, it is likely that some parties might attempt to privately negotiate at first anyway. Litigation is often uncertain, and parties seeking the use of copyrighted works might decide that it makes sense to attempt a private negotiation before resorting to a judicial remedy. Then, if private negotiation fails, the party might turn to the courts for a mandated license. It is not clear that litigation would result in an affordable price for the licensee (or a price that was acceptable to the licensor), however. If the goal of compulsory licenses is to allow greater use of copyrighted works, but a judge decides the fair or competitive price is at a level that is still too high for the potential licensee to meet, then the compulsory license system is not much better than the private negotiation system. Of course, we might think that having a judge decide the competitive price is “fairer”, and that therefore potential licensees will feel better about not being able to obtain a license, but this does not decide the compulsory license question.

Further, it is questionable as to whether a judge-mandated price for a license would be more efficient than a price negotiated by the parties. Individual parties to a negotiation will probably know the market for their works better than a judge will. Judges can hear testimony on industry operations, but will not be able to understand them as well as the parties can. Additionally, in cases like that of Jon Else versus Fox, Fox obviously will have the money advantage during litigation. This money advantage may translate into one-sided litigation, in which judgments will not be any different than outcomes in private negotiation.

Another related problem is the precedential effect of judicial decisions. Would a decision in one case influence other cases involving repeat players or similar players? How often would judges deviate from previous decisions? Prices and markets change as time goes on, so if judges stuck to previously decided license fees, it could result in problems. Would judges take into account the license seeker’s type of work? That is, once a judge decides that the competitive price for Else using The Simpsons in his documentary is X, would the same price be applied to a director wanting to use a portion of The Simpsons in a more commercial movie or a television show or a book or a song? These markets are very different, but it is possible that through a compulsory license system, the price would be set the same for each market, though it would not have been through private negotiation. Moreover, the fact that the first case might have important precedential value means studios or other conglomerates defending against a license seeker would have incentives to throw as much money at that case as possible in order to obtain a favorable judgment. This could deter smaller license seekers, who would rather wait for someone else to try the case and see the results instead of litigating themselves.

Fairness

One of the benefits of a compulsory license system that is often touted is that it will be fairer. That is, because a judge sets the license price, parties can be confident that the copyright holder is not exploiting market power to censor speech. As discussed above, though, there are questions as to whether the license price decided by a judge would be accurate. Indeed, as Sarah mentions, it is hard to know what a fair price is for licensing The Simpsons. Most would agree that $10,000 is probably too high for Else’s proposed use, but that does not mean it is clear what a fair price is. A lower price, such as $1000 might seem fairer, but that does not necessarily mean Else could afford it or would pay it.

Another consideration that often gets dismissed in these discussions is fairness to the copyright holders. Although we usually dismiss moral rights concerns—because, after all, if the author is compensated for the use of his work, then it must be fair—Netanel lists a few examples in his book of artists that refuse to license their work for any amount of money. John Densmore refused a $15 million offer to license one of his songs for a commercial. (p. 48). Most would agree that $15 million is probably much more than a competitive price for one song, but clearly, for some authors, compulsory licensing will never be able to compensate them for their work. Perhaps this is not a large concern because we do not think that authors should ever be able to prevent certain speech by refusing to license. But, certainly there are some situations in which would not think it is fair to force an author to license his or her product—politicians wanting to use a musician’s song as a campaign theme song, for example. Netanel mentions that people probably would not take this to mean that the musician is endorsing the politician, particularly if we had extensive compulsory licensing, but I am not so sure. The larger point here is that maybe the musician should be able to make sure that his or her work is not used to support people or causes he or she disagrees with. The compulsory license system might seem fairer because it involves third parties making pricing decisions, but the machinations of such a system are like to result in decisions that are not fair to the copyright holders or the license seekers.

The Dismal Copyright Paradox

In Chapter 6, Netanel goes through an economic explanation of why copyright holders’ behavior causes speech-stifling effects. He starts by explaining that copyright holders don’t appear to have a direct censorial motive but demand licensing fees that make it prohibitively expensive for the would-be speaker to obtain a license. Netanel concludes that prohibitive licensing fees are often properly understood as an “intolerable speech burden.” He supports this conclusion by exploring a copyright holder’s market power. He states that a copyright holder profits from its market power by charging supracompetitive prices. This behavior, allowed by copyright law, creates an artificial scarcity in existing expression that results in the deadweight loss characteristic of monopolies. He further notes that a copyright holder cannot price licenses at marginal cost, because then it would never recover its fixed costs. He then discusses factors that allow supracompetitive licensing fees such as weak firm competition and a dearth of substitutes for the copyrighted work.

My first reaction at the end of this discussion was, what about discriminatory pricing? Netanel talks about supracompetitive pricing as if it is the most profitable pricing structure for firms, but in fact, discriminatory pricing brings a firm even more profit, as it allows the firm to extract all of the surplus from the transactions. Under discriminatory pricing, a firm charges different consumers different prices for the good, depending on their individual willingness to pay. The firm benefits because it is able to charge higher prices to consumers with a high willingness to pay without losing the consumers with a lower willingess to pay who would not buy the good at that higher price. With supracompetitive pricing, a firm may get a larger overall profit than with marginal cost pricing, but it loses the consumers who are willing to pay more than the marginal cost of the good but not the supracompetitive price. These lost purchases make up the deadweight loss. Discriminatory pricing is not economically inefficient like monopoly pricing because there is no deadweight loss. The consumers with the lower willingess to pay are also accommodated and able to buy the good. People may have distributive issues with discriminatory pricing, believing that it is “bad” that the producers get to reap the entire surplus, but there is no efficiency problem. Discriminatory pricing would avoid the “intolerable speech burden” Netanel is worried about, because people like Else would get their license at the price they were willing to pay, as long as it was above marginal cost, which assumedly it would be, since licenses have such a low marginal cost.

People who are not familiar with the idea of discriminatory pricing may be asking why all producers don’t price discriminate if it allows for the largest profit. The reason is, most producers do not have a mechanism to sort consumers by their willingness to pay, and therefore must charge a single price. Usually, only the consumer knows his willingness to pay. Some markets have consumer purchasing patterns that allow sellers to roughly discern consumers willingness to pay. A commonly cited example is air travel. Many leisure travelers have the flexibility to plan their trips in advance. In contrast, business travelers often have to purchase their tickets near to the date of travel. Therefore, airlines price discriminate between the two groups by charging higher prices the closer the purchasing date is to the date of the flight. Getting back to copyright, it seems like large copyright owners like Fox have the ability to charge different prices to different would be licensees based on their willingness to pay. Each licensee must approach Fox about licensing the work. Fox can ask the licensee for what purpose it wants to license the copyrighted work and do a quick background check on the licensee. In Else’s case, upon hearing that Else was going to use the Simpson’s clip for a documentary with a small budget and limited distribution, why didn’t Fox charge $500, or something else it thought Else could pay? Then Else would have paid for the license to the clip, and Fox would have gotten that profit. When a producer of a projected blockbuster with a large budget, funded by a major studio approached Fox to license a clip from The Simpsons, Fox is still free to charge the studio $10,000. Sure, basic questions such as (1) use of the license in a new work (2) budget of the new work and (3) scope of distribution of the new work are not going to suss out perfectly each would-be licensee’s ability to pay, but they seem to serve as fairly effective proxies. Additionally, such simple questions do not appear to create transaction costs that make them impossible as a price discrimination mechanism. After all, Fox already had to communicate individually with Else.

So why didn’t Fox price discriminate and allow Else to pay a lower price for the license, instead of maintaining that it always charges $10,000 for such a use and would not negotiate. Netanel claims that he didn’t believe that copyright holders like Fox have a speech censorial motive. The Else case does not appear similar to the Wind Done Gone situation where the copyright holder objected to the use of the copyrighted material, believing it distorted the message of the work, or lowered its value. Nor does it have face transaction problems inherent in the music industry where licensing is centralized under a middleman like ASCAP who does not want to individually negotiate a price for each work, perhaps because of the sheer number of licenses it works with. Netanel does not describe a copyright law that mandates that all copyright licenses be the same price, and I am not aware of one. Finally, I doubt Fox was releasing a work that would compete with a documentary as esoteric as one covering the behind the scenes action in operas. Therefore, it is unlikely it was charging a prohibitively high licensing fee to stifle competition.

Perhaps I’m wrong, and the transaction costs of asking would-be licensees questions are too high to make discriminatory pricing worth it. Or, perhaps Fox has no way to verify these claims, or put them in as important representations in the licensing contract, so the licensee cannot lie about them. In that case, those basic questions would not serve as a mechanism allowing discriminatory pricing. However, it is possible that the licensing situation is more complex than Netanel presents it using basic economic explanations. Not only are there the unconsidered pitfalls of using the economic analysis as justification for a compulsory licensing system based on the copyrighted works’ “fair market value,” as Sarah describes in her post, it’s not even clear that the economic analysis behind this potential solution is fully correct in the first place.

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.

Who you gonna call

Muddy Waters and muddy waters

 

 Given our interesting discussion about the value of appropriation last week, especially as it relates to parody and fair use, the Creative Appropriation section (p 58–66) of Chapter Four seems like a good starting point. I’m completely on board with Netanel that 1) creative appropriation is a valuable (and intrinsic?) part of artistic expression (see Kathy’s post last week for some good modern art examples); and 2) that the current legal tests are woefully inadequate, focusing entirely on the appropriation itself rather than the amount of alteration or value added by the subsequent user. I’m more interested in point 2), but point 1) is well-illustrated by musical evolution over time (see the section title). Even if current popular music sometimes seems like a race to the bottom, there is no doubting that current musical genres piggyback off of older forms.

 

For point 2), I’ll begin with an anecdote. One of my favorite philosophy professors in college was, in his past life, an entertainment lawyer in Los Angeles--“babysitter to the stars,” as he put it. His very first case as an associate was a high profile one: defending Roy Parker Jr’s “Ghostbusters” theme song against an infringement suit by Huey Lewis for the similarity to his song “I Want a New Drug.” To be fair, there was a good case there, as the following clips indicate:

 

 

In addition, the producers of Ghostbusters had contacted Huey Lewis prior to hiring Parker, so there were not prohibitive transaction costs for licensing in that case. But what was striking was the professor’s story of how they prepared for litigation (though they eventually settled out of court). They spent several weeks bringing in expert “musicologists” (as well as Stevie Wonder!) to break down the two songs note by note and point out all the differences. They also basically “focus tested” the songs by playing them for other associates in the office, family members, etc. I’m sure that led them to settle, given the obvious similarities, but apparently this was standard operating procedure for all infringement cases of this type. He also worked on hip hop cases where sampling was an issue, and he talked about how they would measure the sample length to the nearest tenth of a second, because apparently that was legally relevant. His overall point in telling these stories, and my point in relating them, is that the current test is a theater of the absurd in practice, and entirely divorced from protecting creation incentives.

 

Some amount of the above nonsense is inevitable in high-stakes litigation, but courts could help by expanding fair use. My own biases about the value of appropriation probably align with Netanel’s, but looking at market impact more concretely instead of invoking “the bare possibility of licensing in potential markets” is a start. A more controversial proposal is to put the burden on plaintiffs to show that the allegedly infringing work is not fair use. As an affirmative defense, fair use does not do enough to protect against chilling of speech, since it is relatively costless for copyright holders to send cease and desist letters or take other initial steps to prevent infringement (see 113 for some examples), and many appropriators don’t have the resources or inclination for protracted litigation. An obvious problem with this approach is that the alleged infringer is in a much better position to argue about the fair use value of her work than the original copyright holder. This approach would thus increase information costs for copyright holders seeking to shut down infringing works. As an empirical matter, it is hard to know if these increased costs are outweighed by additional speech benefits. And as noted last time, the actual value of “more speech” in itself is unclear.    

 

Copyright as Censorship

 

I’m a little less on board with Netanel’s discussion in Chapter 6 of copyright as a tool to silence speech. Though I understand his point, the problem, as others noted last week, is his lack of a coherent theory about free speech and First Amendment guarantees. But he does make an important point about the power of risk-aversion to give copyright holders’ threats of legal action incredible “stickiness” (also note the misaligned incentives of intermediaries like ISPs with their consumers). The point about documentary filmmakers editing under the supervision of insurance carriers is a funny image, but somewhat pathetic too.

 

Of course, it is much easier to say there is a problem with the current system than it is to present a workable fix. Hopefully the final few chapters of the book will present some interesting suggestions. For right now, however, I’m finding myself more aligned with Nathan’s view that changing technological circumstances and pressures will force copyright into a “constitutional moment.” As I mentioned in class, perhaps our concern should be about making sure that when such a moment does arrive, the discussion is not dominated by the current copyright holders. 

Free Speech vs Consumer Welfare

The middle part of Netanel’s book dives right in to the economics of copyright law and how they relate to the “marketplace of ideas”. Overall, Professor Netanel’ does an adequate job explaining how and why the copyright system ensures that copyright owners are compensated for their creative efforts. In his analysis, however, Natanel blurs the line between copyright law and antitrust law. Two features in particular stood out to me: his arguments for a type of pseudo-essential facilities doctrine and his attack on vertical integration in the media markets.

New Copyright Law or Extending the Essential Facilities Doctrine?

In Chapter 6, Netanel embarks on the economic analysis of copyright law and how its burdens on free speech are distributed. In doing so, he draws from the language of antitrust, explaining how copyrights can be used to create an “artificial scarcity” that enables its owners to charge supracompetitive licensing fees (p 123). Netanel’s provides a fairly solid analysis of the zero-marginal cost dilemma posed by markets for intellectual property (p 125). He acknowledges that marginal cost pricing schemes, while theoretically eliminating the deadweight loss, would actually prevent some works from ever being created in the first place because their creators could never recover their high first-copy costs. (p 125). Moreover, Netanel does an admirable job explaining how the inherent risks that studios, production companies and record labels face in creating new content may require even high licensing fees for commercial successes to offset the financial losses of failures (p 126). This analysis touches on the point that Mike made last week about how we may need to take into account the special circumstances of the economics of the film industry before revamping the entire system in favor of weakening copyright.

Where things get interesting is when Netanel purportedly disavows that he is proceeding under the rubric of an antitrust analysis (130). He claims that his arguments are grounded in his concern for speech and that in certain instances, we should be less tolerant over a particular copyright holder’s power over price than we would under a traditional antitrust rubric (130). Proceeding along these lines, Netanel makes his case that for certain iconic works such as the Simpsons and Gone with the Wind, there are insufficient substitutes for individual users to chose from in creating their own content for which these popular works are an essential component (131). Netanel points out that such works have the widest audience and therefore are the most desirable for speakers wishing to build upon “in communicating their own message or artistic sensitivity” (p 131).

Despite Natanel’s assurances to the contrary, his assertion does bear striking resemblance to a key concept of antitrust law: the essential facilities doctrine. In a variety of network industries, ranging from railroads to telecom to operating systems, new entrants often request access to key elements of incumbents’ network. The arguments used to justify these access requirements are normally based on the notion that duplicating the “essential facility” would be impossible, wasteful and/or prohibitively expensive. Natanel’s assertion that there are some cultural icons, such as the Simpsons, that can command such a wide audience as to make them essential for some forms of expression raises similar arguments.

The question is whether courts and Congress can easily apply such a criterion in determining what a reasonable licensing fee is. The essential facilities doctrine has not been a model of clarity for the antitrust bar. Justice Scalia’s opinion in Trinko certainly underscores the fact that the Supreme Court has never explicitly endorsed this approach. This is understandable, given that both American and European courts have spent considerable efforts to precisely define the circumstances under which a particular facility is “essential”. Natanel’s proposal raises similar questions. How exactly does one determine that a particular movie, book or TV show has reached “cultural icon” status? Are courts to look at total number of viewers of the program or total number of copies of the book sold? These are difficult questions and Natanel seems to assume that we can readily discern when the standard has been met.

Copyright and Vertical Integration

A related issue to the essential facilities argument deals with the vertical integration of distribution channels with content product. Natanel argues that this integration presents a significant barrier to entry (p 133). It is undeniable that firms who own the copyright are at a distinct advantage to their downstream rivals in the distribution market. Natanel point to conglomerates’ superior ability to bundle together large numbers of works in a single genre and deliver them via their own distribution networks (p 148). Natanel levies some fairly sharp criticism at what he sees as copyright owners’ repeated attempts to gain control of new distribution channels as they emerge (p 149). Citing examples ranging from the sheet music case to the FCC Broadcast Flag Order, he decries what he sees as excessive lobbying by copyright holder to ensure that they retain control over new forms of distributing content.

Yet Natanel fails to acknowledge that bundling and vertical integration by content owners can have significant consumer benefits as well. Consumers may enjoy the ability to receive a large variety of content in a single package, provided in a convenient format by the copyright holder. Vertical integration into distribution channels allows copyright holders may allow copyright holders to provide more options to customers as to how they receive their content. ABC can broadcast episodes of Lost at its regular time slot and then later provide the content online for those individuals who missed the episode. Natanel overlooks the fact that consumers still benefit from this arrangement even though ABC is controlling two different methods of distribution.

Furthermore, Natanel seems fairly dismissive of the media companies’ desire to develop alternative distribution channels to Google (p 150). He claims that while their desire to avoid being “beholden to a potential new media behemoth” (p 150) is perfectly understandable, he does not agree with their aggressive use of their copyrights to do it. However, given Google’s dominance in this area, one is hard pressed to argue that this is the class case of the big companies picking on the little guy. Natanel seems to forget that a monopsony in the online distribution of content could raise significant threats to consumer welfare just as easily as aggressive use of copyright to foster the development of rival networks.

He does pull back a bit by suggesting that a system of compulsory licenses may provide some relief to this dilemma (p 151). If Congress were to step in and establish such a system, a good deal of the concern regarding the use of copyright as censorship may disappear. Furthermore, compulsory licenses that provided a reasonable rate of return would allow copyright holders to recoup the value of their content without triggering as much of a concern about stifling downstream competition. The setting of the licensing fees would probably not raise nearly as much trouble as the 1996 Telecom Act’s UNE pricing. Distributors such as Youtube, which is often the location of choice for fan faction and other independently-created works that build off of the originals, will not always completely usurp the market for the original works. In certain circumstances, the demand for the originals may actually increase as more people are able to contribute to the development of fan fiction and mashups.

Overall, Natanel’s analysis in this section provides a good overview of the economics behind the paradox of pricing zero marginal cost nonrivalrous goods. However, in his rush to assert the necessity of weakening what he sees as a bloated copyright system that stifles competition in the marketplace of ideas, he fails to adequately address the possible economic counterarguments that one might levy against this wholesale revamping of the system.

Incentives for original works and derivative works – what’s the right balance?

Netanel argues fairly convincingly using the text of the Constitution that the main purpose of copyright is to incentivize the creation of works of authorship. Assuming that this argument is true, then we need to look at what effects we think changing copyright laws will have on creation. One of Netanel’s emphases seems to be increasing the ability (and lowering the costs) of secondary authors to build on the work of others, whether through some compulsory licensing regime, allowing it for free, or some other mechanism. (I’ll call these secondary works “follow-on” works, which includes the derivative works included within the original author’s exclusive rights protected by the current copyright regime, and also works that aren’t included in the exclusive rights such as parody). Netanel’s goal leads to a few questions. Do we think the incentives for creation of original works will be significantly undermined by diminishing the derivative works right? How many more follow-on works will we see, and how much should we value these follow-on works?

To answer this question, I think we can apply one of the economic arguments from the Eldridge case that was touched on in class and in the posts. Briefly stated, authors don’t expect their works to have much value long into the future. Most works have a fairly short shelf life, and even if they do have value into the future, the author would discount that value because of all that time-value of money stuff (in essence, the value of a dollar to me today that I would receive 100 years into the future is close to zero).

So let’s modify that argument a little to the idea of follow-on works. Do we think that authors create works with the intent to license them for derivative use? It depends. As we discussed in class, big movie studios might. George Lucas probably has marketing opportunities in mind when he produces Star Wars sequels. Disney does when it makes its latest animated feature. But do we think that as a whole, authors do? Probably not. Just as most authors don’t expect their works to have commercial value long into the future (or at least, shouldn’t expect them to), most authors probably don’t expect their works to have much value for licensing for derivative works. They probably expect to capture most of their value through direct sale and licensing of the underlying works. A garage band hoping to strike it big might think that it will make money from selling CDs, or perhaps selling T-shirts and stickers (to which I think they would have exclusive rights due to rights of publicity and trademark, not copyright). (Incidentally, I understand that many of the popular bands make most of their money from concert tours, not music sales). Do they expect that someone will want to license their song in a documentary or in a YouTube video parodying President Bush? Probably not.

It seems that the general trend in copyright law is that content creators push for as many rights as they can, saying “whatever you can do with a work, we want the exclusive right to that.” Owners argue that they need these rights to incentivize creation, arguing that some creation won’t occur if these rights are denied. At some point, restricting copyright (or its enforcement) will definitely affect creation. If everyone keeps downloading songs illegally, record companies will probably sign fewer artists. As discussed in class, big movie studios probably spend a lot on a movie like Iron Man with the expectation that they will be able to make sequels, and if someone else make can make a sequel, maybe they only spend $50 million instead of $180 million. Or they decide not to make the movie. Without expressing an opinion on the movie, it seems like losing a movie that a lot of people would want to see is a bad thing.

But that is only half of the story. What about the follow-on creators? Do we always want to privilege original authors over subsequent authors? We do need some original creation to have follow-on creation. But maybe we’re okay with fewer “original” works if we get tons of follow-on works through a weaker derivative works right (building upon the original works that are still created even with the weaker derivative works rights). Let’s say that an author with really strong derivative work rights will create 10 works and license his works to third parties resulting in 10 other works, and then another 10 works will be created by third parties under claims of fair use. Now let’s suppose with really weak derivative works rights, the author will create 8 works and license 3 works (for example, a TV version of a book), but then another 100 unlicensed works will be created by third parties. This could be a pretty good tradeoff. Sure, some of these follow-on works may have little redeeming value. But in the aggregate, if there are a lot of follow-on works have at least a little value, society could benefit a lot. Netanel talks a lot about how licenses that are too expensive or too costly in terms of time and effort can keep follow-on creators from creating a follow-on work (though some follow-on authors will still be willing to bear these costs). If this is so, we miss out on some of these aggregate benefits. How much are these potential benefits? I have no idea, but I imagine that the Internet has greatly expanded the potential gains.

Overall, I think Netanel’s message that we want more creation by lots of different people is sound (echoing Judge Hand, see p.104). As he explains, copyright has greatly expanded from a relatively limited right, both short in duration and narrow in scope. I agree with extending copyright to new forms of media, as we still want to incentivize creation of not just books but also songs, movies, and whatever else comes out in the future. But what counts as infringement seems a bit too broad to me. Even though I don’t know that a jury would find that West Side Story infringed Romeo and Juliet under today’s laws (or that Shakespeare infringed someone else), I still have to worry about the effects on derivative works if I think there’s a chance. If there’s a chance of an adverse jury verdict, Laurents, Bernstein, and Sondheim could decide that their idea is just so good that they’re willing to pay to get a license from Shakespeare. But Broadway being a risky business, they may just move on to some other idea, and the Romeo and Juliet adaption gets canned. Or Shakespeare may decide that he doesn't like the idea of Romeo and Juliet being associated with gang members singing and dancing, so he refuses to grant a license or sets some ridiculously high price for a license. If creators of original works have really strong derivative works rights, there may be a lot of would-be West Side Story-type works out there that never see the light of day.