Abandoning Exclusivity and Getting Paid Instead
Abandoning Exclusivity and Getting Paid Instead
Abstract and Keywords
A central element in copyright ideology is exclusivity. Copyright owners are said to be granted “exclusive rights,” the essence of which is the ability to exclude, to be able to say no to anyone who wants to use your work; the ability to attempt to command any price you want; the ability to impose any conditions you wish on the use of your work; and in many countries, the ability to withdraw the work from circulation. This chapter argues that copyright owners should shift their focus from exclusivity to a right of remuneration. It identifies four principal ways to get paid: rely on one-to-one negotiations by exercising an exclusive right; mandatory statutory licenses for particular works and uses; levies on recording media; and collective licensing.
The central element in copyright ideology is exclusivity. Copyright owners are said to be granted “exclusive rights,”1 the essence of which is the ability to exclude, to be able to say no to anyone who wants to use your work, the ability to say no for a good reason, for a bad reason, or for no reason; the ability to attempt to command any price you want; the ability to impose any conditions you wish on the use of your work; and in many countries, the ability to withdraw the work from circulation.2
When people refer to copyright as a property right, this is what they mean3: It’s mine and I can do what I want with it. The characterization of property as the exclusive dominion of its owner may be traced back to the single most quoted remark in Anglo-American law about property, that of Sir William Blackstone in his “Chronicles on the Laws of England,” published in four volumes between 1765 and 1769. Blackstone remarked: “There is nothing which so generally strikes the imagination, and (p.178) engages the affections of mankind, as the right of property.… That sole and despotic dominion which one man claims and exercises over the external things of the world in total exclusion of the right of any other individual in the universe.”
Regrettably, much of copyright ideology is still mired in that time period, as if technological and market conditions have remained unchanged in the intervening 235 years, as if rhetorical views expressed about English landed estates at a time when England passed the first stamp tax against the American colonies can resolve the question of whether an Internet video hosting service should be liable for making Danger Mouse’s Grey Album mash-up of the Beatles White Album and Jay-Z’s Black Album available for viewing.
Leaving aside the absurdity of resolving such questions by reference to Blackstone, no form of property has ever been exclusive in the “sole and despotic” sense, even in Blackstone’s time. Private property rights do provide an important underpinning for the successful functioning of capitalism. Private property rights constrain the power of the State; they provide an incentive to work and take risks. But private property rights are not and have never been absolute: their reach depends on the specific circumstances—the nature of the property, the presence or absence of what economists call externalities (a cost or a benefit that is not captured in prices),4 and the character of the market in which the property is traded. If I own my car, I will be protected in that ownership against theft, but the State can still tell me what speeds to drive, to wear a seatbelt, to have insurance, and to register the car with the motor vehicle department and pay fees for that registration. I may own my house, but I still have to pay real estate taxes, grant easements, and be restrained from polluting my neighbors’ property. The creator of a copyrighted work is given certain statutory rights, but those rights are similarly (p.179) limited in order to further the public interest, including precluding the exercise of those rights in ways that impede the advance of knowledge, creativity, and innovation.
At their inception, Anglo-American copyright statutes were sketched skeletally by legislatures; legislatures left common law judges to fill in the many substantive details. In filling in those details, common law judges were guided by their perception of the purposes of copyright law: to further knowledge and to have authors paid for rights deemed to be within their legitimate market. The concept of a legitimate market has changed over time, and rightly so as economic conditions change.
Regrettably, currently both authors and the public are ill served by our current laws: authors go unpaid for many legally compensable uses, while many uses that should not be compensated for are the subject of claims by copyright owners. What are the reasons for this unhappy state of affairs?
In the case of uncompensated uses where income should flow to authors, there are two reasons why things have broken down. The first reason is the sheer volume of unauthorized activity made possible by digital formats. There is no effective way to control most of this activity, so the solution is to figure out how to compensate for it. Doing so entails giving up the ideology of copyright = control = money. The new equation must be simply copyright = compensation.5 The RIAA’s lawsuits against 30,000 individuals ended in failure, with failure defined by the lack of new monies being put in artists’ pockets, by the lack of a decrease in unauthorized file sharing, and by the terrible public relations black eye RIAA, the record labels, and copyright law in general got from the controversial campaign. As discussed above,6 copyright owners can compete with “free.” Insisting on control, insisting on the ability to always say no, insisting that “it’s my property and everyone who uses my work without my permission is a (p.180) thief,” may make one feel self-righteous, but it won’t pay the bills. A right of remuneration, not the ability to say no to things you can’t control anyway, must be the new focus.
There are four principal ways to get paid: (1) rely on one-to-one negotiations by exercising an exclusive right; (2) mandatory statutory licenses for particular works and uses, (3) levies on recording media; and (4) collective licensing. With statutory licenses, the legislature determines that copyright owners have a right to get paid but do not have the ability to block uses. The amount of the license is usually set out in the statute the first time and then adjusted at future, periodical dates by some form of governmental body. The money is paid directly to the copyright owner. The oldest of such licenses is the mechanical compulsory license in the United States, established in 1909. Under this license, once the copyright owner of a non-dramatic musical work authorizes a recording of his or her composition, anyone else can make another recording of that composition (a “cover version”) upon paying a prescribed fee.
With levies, the government sets rates on recording media: in the old days, tapes or computer discs, as well as printers and photocopiers; now: USB flash drives, iPods, Mp3 players, and mobile phones. Different media are covered or exempt from levies in different countries; their rates vary wildly among countries, and even with common markets, such as the European Union. Hewlett Packard has stated it pays €12 for printers in Germany, but €178.84 in Belgium. According to a study by the Free University of Brussels, it costs the IT hardware industry €1.88 billion annually in administrative costs to comply with the different levy schemes. Even if the actual amount spent is a quarter of that amount, the amount wasted due to an unharmonized regime is quite significant. The European Commission recently gave up a 16-year effort to harmonize its laws on levies and punted to a mediator. There is (p.181) no lack of studies on the economics of levies.7 The problem is not a lack of data but a lack of political will. Turning the issue over to a mediator may help discussions, but since the mediator, no matter how skilled, lacks the ability to impose a final solution, the can is kicked down the road: the warring parties know they can always argue their case again before sympathetic national legislators who desire, understandably, to protect domestic industries, e.g., in Finland, Nokia. As an important source of income and clarity for device makers, a solution to the levy problem is critical.
With collective licensing, copyright owners pool their copyrights together with a private organization, which then licenses use of the entire repertoire to others, takes an administrative cut of license fees received, and pays the amount left over to the copyright owners.8 There are numerous benefits to this, especially reducing transaction costs and enabling copyright owners to receive income for many small uses that would otherwise be economically impossible to negotiate one-to-one. Licensees can have available a vast repertoire without the high costs of clearing individual uses, as well as, usually, protection in the form of a government appeal over license fees. But there are also significant downsides: collecting societies can become monopolies and can block any innovation that is seen to threaten the interests of the society’s managers, who may enjoy healthy salaries and benefits. Collecting societies can exercise disproportionate leverage against smaller licensees; they can be administratively inefficient and sometimes even corrupt; they can favor national right holders over foreign ones; they can retain royalties for a long time in order to “float” interest payments;9 and they can make very bad investments.10 For example, control over the Italian collecting society, Società Italiana degli Autori ed Editori (SIAE), was taken over by the Italian government in 1999 for four years after it reported losses of US $53 million (at 1999 exchange rates) even though collections were (p.182) up. In 2008, SIAE was reported to have lost US $52.3 million in investments in Lehman Brothers, when the latter went bankrupt.11
By the time this book is set in print, the European Union will have submitted proposals for reform of the societies. Hopefully, those proposals will be bold ones, and will take the form of enabling legislation mandating efficient licensing. Here are a few of my proposals: First, the number and duties of societies must be dramatically reduced per country, with no more than one per right, per type of work, and preferably with one per type of work: e.g., for music, one society that can license the performance right, the making available right, neighboring rights, and all mechanical rights, including downloads. The current regime, which continues a multiplicity of rights, each licensed by a different organization, does not reflect the way current markets and technologies work. For example, it does little good to have licensing solutions only for musical compositions. To be effective, licensing must include sound recordings and, importantly, information that can track a particular composition to a particular sound recording.
I also recommend the following: There should be worldwide exhaustion of digital rights once a work has been licensed in one country. National or regional exhaustion is a relic of the analog world. Societies should be required to maintain free, publicly accessible online databases of which works they claim the right to administer, as well as contact information for the rights holders sufficient to permit users to contact the rights holders directly. There should be legally required fixed time periods to distribute monies, especially for foreign rights holders. If foreign money is not distributed within the requisite time period, the foreign rights holder or the home society of the rights holders may bring suit and are entitled to attorney’s fees and penalties.
(p.183) Collecting societies should be required to use ISO-standard rights management systems, in order to lower the administrative costs of obtaining information about rights held and payments due. Identification numbers for works, performers, and recordings must be standard and uniformly used. It is highly ironic that as a result of the 1996 WIPO Copyright and Phonograms treaties, countries have made it a crime to delete copyright management information, while not requiring that the information be standardized and actually used by rights holders. The compensation for the executives of the societies should be publicly posted annually, and their term of office should be limited to four years. Governance of the societies should be representative of those whose rights are being administered.
One-to-one negotiations will always be necessary for situations where we want copyright owners to control the individual use of their work, such as licensing the use of a novel or musical composition in a movie for “grand rights” (theater), or for use in advertisements. Statutory licensing is appropriate where we do not want users to bargain over the licensee fee (usually because the transaction costs are high relative to the license fee) but we do want them to pay. Collective administration is appropriate where, due to large transaction costs and the potential inequality of bargaining leverage by individual copyright owners, we want users to have to negotiate fees.
The usual theoretical model today remains the exclusive rights. This model is becoming less useful given the large-scale, global nature of the Internet. But as much attention as unauthorized uses on the Internet receive, the largest problems facing authors today are not unauthorized uses but the obstacles put in the way of buyers willing to pay for access to or copies of the work. These obstacles have caused a huge loss of income for composers, performers, and photographers (given the sheer volume of works they create). For (p.184) these creators, the costs of enforcing rights are substantial, and involve search costs for identifying infringers, enforcement costs for suing infringers, transaction costs for negotiating licenses with users, and collection costs for obtaining payment from licensees. Innovative services that wish to offer the public authorized, paid access, or copies have been impeded or shut down by licensing difficulties. Prospective licensees must negotiate directly with numerous groups or companies that frequently have competing claims, and they must negotiate anew in each country.
The best illustration of this is the music industry, which we can think of as a potentially very profitable restaurant owned by an extended family that is always feuding, and has from time immemorial. They are loudly arguing out on the sidewalk in front of the restaurant. Inside the restaurant are customers lined up, all of whom love the food and have wallets full of money, ready to pay. The owners are, however, outside fighting about who gets paid: how much and for which meals. As a result of their fighting, the customers eventually leave, and everyone starves, including the chefs, the waiters, and those who grew the food and supplied it to the restaurant. The owners then blame the customers for the owners’ terrible fate. The music industry family is fatally dysfunctional; policymakers have to step in and lead. Leading means making decisions that some people or even many people don’t like, but which are necessary for the good of all. You can’t consider yourself a leader if you don’t lead in this most basic of meanings.
Here is a technical explanation of why the music industry faces these problems. Copyright consists of a bundle of different rights, including a right to authorize the reproduction of copies of the work, the right to publicly distribute copies of the work, the right to publicly perform the work, and more recently, the making available right (really a combination of the distribution and public performance rights). These rights can be, and usually are, separately (p.185) assigned. This means there are multiple different owners of rights in the same piece of music. A composer can assign the right to make and distribute copies of the work to a music publisher; the music publisher then licenses the right to make and distribute recorded versions of the composition to a record company. The composer can assign the right to authorize public performances of the composition to a performing rights society, in the United States, ASCAP, or BMI.12 There may also be a public performance right for the sound recording, and in many countries, there are collecting societies that license more than one right. The administration of all these rights entails separate administrative fees—which come out of authors’ and performers’ royalties; the payout rates to authors and performers varies depending upon the right that is licensed.
In order to have a music service offered to the public, all possible rights holders must sign off. It does no good to get the right to stream performances of sound recordings unless you have the right to also stream the underlying musical composition. Unless you get both rights, you can’t offer the service. Given that you want to offer as wide a service as possible, you have to obtain licenses from everyone. If a single important licensor says no, you’re sunk.
But it is even worse than that. There are disputes within the music industry about whether a stream requires both a public performance license as well as a reproduction and distribution license, and whether a download requires both a reproduction and distribution license as well as a public performance license.13 There are music publishers who demand a separate license for uploading your own CD to a locker service and for then listening to it. Multiple claims are thus often made for the same conduct, with one group claiming the conduct constitutes a public performance and another group claiming the conduct constitutes a reproduction, and both demanding payment.
(p.186) Those who wish to offer music services—like the restaurant customers—are happy to pay, but they should not pay multiple times to different groups for the same conduct.14 As the U.S. Copyright Office observed, “licensors have rarely turned down the opportunity in the digital age to seek royalties, even when the basis for their requests is weak at best. Online music companies rightly complain that they need certainty over what rights are implicated and what royalties are payable so that they can operate without fear of being sued for copyright infringement.”15 Greed is not good, as Michael Douglas’s character Gordon Gekko once argued in the movie Wall Street. Obstructionists in the music industry would do well to follow the advice of another movie character: actor Alec Baldwin’s character’s Blake in David Mamet’s 1992 film Glengarry Glen Ross. Sent in by corporate headquarters to motivate real estate salesmen, he harangues them about going after prospective buyers: “They’re sitting out there waiting to give you their money. Are you gonna take it?” To date, the answer has been “no.”
The problem is international: many tens of millions of dollars are left on the table in Europe alone because of the inability to get pan-European licenses. Instead, licensees have to negotiate on a country-by-country basis with national collecting societies, music publishers, and record labels (to name only the top three groups), to say nothing of countries where there are no collecting societies. Authors lose because deals aren’t done; the public loses because there is a dearth of authorized, complete services; copyright law as a system loses for both these reasons. The European Commission has observed:
Consumers expect, rightly, that they can access content online at least as effectively as in the offline world. Europe lacks a unified market in the content sector. For instance, to set-up a pan-European service an online music store would have to negotiate with numerous rights management (p.187) societies based in 27 countries. Consumers can buy CDs in every shop but are often unable to buy music from online platforms across the EU because rights are licensed on a national basis.16
It is impossible to overstate how severe the rights clearance problem is.17 Here is one example, from just one country, the United Kingdom. Figure 7.1 explains from whom potential licensees must clear rights.
(p.188) Now multiply this times almost 200 countries and you can see why there is no worldwide music service and will never be unless rights holders cooperate first with a global rights registry, and then a way is developed for global licensing. Global licensing can only be accomplished by legislative and treaty action. Time spent on this effort and on resolving fundamental questions about the nature of rights that need to be cleared, rather than suing consumers or online services, will reap authors vastly greater amounts of money in both the short and long term.
In order to accomplish this, policymakers must make bold political decisions to radically break with the past. There is reason to be skeptical that this will occur. Twenty-four years after the creation of a single European market, a service wishing to offer a lawful, one-stop paying music service cannot do so. The European Commission’s May 2010 “Digital Agenda” document makes the usual noises about the need for pan-European licensing and the need to improve collective rights management. In the usual grand rhetoric, such improvements will, it is said, “stimulate creativity and help the content producers and broadcasters, to the benefit of European citizens.”18 Yet, the Commission proposes to prevent these goals from ever being accomplished by adding, “such solutions should preserve the contractual freedom of right holders. Right holders would not be obliged to license for all European territories, but would remain free to restrict their licenses to certain territories and to contractually set the level of license fees.”19 This statement is precisely why we are in the mess we are in: The problems and solutions are well-known, but a failure of political will to disturb the powerful interests that maintain the very business models causing the problems renders meaningful progress impossible.
Rights registries, in which there are easily accessible, transparent repositories of information about who owns what, where, and for how long, are critical to such progress.
(1.) See, e.g., 17 U.S.C. §106.
(2.) I use the term European here as shorthand to refer more broadly to civil law countries that have droit moral.
(3.) The exception being that droit moral is based more on the author’s personal connection with the work, and not a property right.
In economics, an externality (or transaction spillover) is a cost or benefit, not transmitted through prices, incurred by a party who did not agree to the action causing the cost or benefit. A benefit in this case is called a positive externality or external benefit, while a cost is called a negative externality or external cost.
In these cases in a competitive market, prices do not reflect the full costs or benefits of producing or consuming a product or service, producers and consumers may either (p.302) not bear all of the costs or not reap all of the benefits of the economic activity, and too much or too little of the good will be produced or consumed in terms of overall costs and benefits to society. For example, manufacturing that causes air pollution imposes costs on the whole society, while fire-proofing a home improves the fire safety of neighbors. If there exist external costs such as pollution, the good will be overproduced by a competitive market, as the producer does not take into account the external costs when producing the good. If there are external benefits, such as in areas of education or public safety, too little of the good would be produced by private markets as producers and buyers do not take into account the external benefits to others.
(7.) See, e.g., José Luis Ferreira, Compensation for private copying: an economic analysis of alternative models (May 2011, Enter 2.0); Martin Kretschmer, Comparative study of copyright levies in Europe (April 2011, ESRC fellowship project at IPO); Patrick Legros and Victor Ginsburgh, The Economics of Copyright Levies on Hardware, Encore Discussion Paper 2011/34; Oxera Consulting, Ltd., Is there a case for copyright levies: An Economic Impact Analysis (April 2011); Economic analysis of private copy remuneration (EconLaw 2007).
(8.) A classic article on the subject is by Stan Besen, Sheila Kirby, and Steven Salop, An Economic Analysis of Copyright Collectives, 78 Virginia Law Review 383 (1992).
(9.) Collecting societies are hardly alone in doing this. Wall Street is notorious for such skimming.
(10.) There is a rich literature on the problems and potentials of collective licensing. See Collective Management of Copyright and Related Rights (Daniel Gervais editor, 2d edition, 2010 Kluwer); Teese Foged, Licensing Schemes in an On-Demand World, 32 European Intellectual Property Review 20 (2010); Christian Handke, Economics of Copyright Collecting Societies, 38 International Review of Intellectual Property and Competition Law 937 (2007); Pavel Tuma, (p.303) Pitfalls and Challenges of the EC Directive on the Collective Management of Copyright and Related Rights, 28 European Intellectual Property Review 220 (2006); Yuan Zeqing, A New Impetus for Chinese Copyright Protection: The Regulations on Collective Administration of Copyright, 28 European Intellectual Property Review 241 (2006); Peter Gyertyanfy, Why is a European Directive on Collective Management Necessary? A Perspective from a New Member State of the EU, 53 Journal of the Copyright Society of the U.S.A. 71 (Fall 2005–Winter 2006); Ariel Katz, The Potential Demise of Another Natural Monopoly: Rethinking the Collective Administration of Performing Rights, 1 Journal of Competition Law & Economics 541 (2005); Martin Kretschmer, The Aims of European Competition Policy Towards Copyright Collecting Societies, Paper for Society for Economic Research on Copyright Issues SERCIAC 2005 Montreal, 7–8 July 2005; Antonio Capobianco, Licensing of Music Rights: Media Convergence, Technological Developments and EC Competition Law, 26 European Intellectual Property Review 113 (2004); Martin Kretschmer, The Failure of Property Rules in Collective Administration of Rights: Rethinking Copyright Societies as Regulatory Instruments,  European Intellectual Property Review 127; Adolf Dietz, Legal Regulation of Collective Management of Copyright (Collecting Societies Law) in Western and Eastern Europe, 49 Journal of the Copyright Society of the U.S.A. 897 (2002); Herman Jehoram, The Future of Collecting Societies, 23 European Intellectual Property Review 134 (2001); Martin Schippan, Purchase and Licensing of Digital Rights: The Verdi Project and the Clearing of Multimedia Rights in Europe, 22 European Intellectual Property Review 24 (2000); Irini Stamatoudi, The European Court’s Love-Hate Relationship with Collecting Societies, 19 European Intellectual Property Review 289 (1997); Hamish Porter, European Union Competition Policy: Should the Role of Collecting Societies be Legitimised?, 18 European Intellectual Property Review 672 (1996).
(11.) See http://books.google.com/books?id=OLyclzAaC-4C&pg=PT12&lpg=PT12&dq=SIAE+Italian+collecting+society+Lehman+brothers&source=bl&ots=qPmpWPdPwV&sig=Idmz5WRQ_9-Gb3CC-2F2oJT-OMU&hl=en&ei=32TlTb3HL4bk0QGg66WzBw&sa=X&oi=book_result&ct=result&resnum=1&sqi=2&ved=0CB0Q6AEwAA#v=onepage&q=SIAE%20Italian%20collecting%20society%20Lehman%20brothers&f=false.
(13.) See United States v. ASCAP, 2010 WL 374292 (2d Cir. September 28, 2010) (rejecting the argument).
(14.) See Statement of Marybeth Peters, The Register of Copyrights Before the Subcommittee on Courts, the Internet, and Intellectual Property of the House Committee of the Judiciary, 110th Congress, 1st Session, March 22, 2007, Hearing on Reforming Section 115 of the Copyright Act for the Digital Age, at pages 6, 7:
The Copyright Office noted this in testimony before Congress in 2007: “One of the major frustrations facing online music services today, and what I believe to be the most important policy issue that Congress must address, is the lack of clarity regarding which licenses are required for the transmission of music.… But why is this important? If both the mechanical and the performance rights are implicated and the money goes to the same copyright holders, why not make a single payment to one agent for the digital transmission of the work? The answer is that the current music licensing structure does not allow for that option.”
(16.) “A Digital Agenda for Europe,” European Commission, May 19, 2010, Brussels, COM(2010) 245, Section 2.1.1.
(17.) For examples in the United States, see the testimony in Section 115 of the Copyright Act: In Need of an Update?: Hearing Before the Subcommittee on Courts, the Internet and Intellectual Property of the Committee on the Judiciary, U.S. House of Representatives, 108th Cong. (2004); Internet Streaming of Radio Broadcasts: Balancing the Interests of Sound Recording Copyright Owners with Those of Broadcasters, Hearing Before the Subcommittee on Courts, the Internet and Intellectual Property of the Committee on the Judiciary, U.S. House of Representatives, 108th Cong. 2004.