– now is the time to reform copyright for the digital era

The tide is turning

Lessons learned from the past 3

Why reform? 6

Those against reform 7

So what’s next? 9

References 11

Index

2 the tide is turning

Lessons learned from the past

Copyright is possibly one of the most controversial policy topics to have been talked about, lobbied and contested by various stakeholders for a very long time. Some would say that the controversy already started at the very beginning of the birth of the world’s first copyright statute and it has never stopped since. Skeptics on both sides of the debate would say that not much has really changed since the genesis of the controversy, as the debate has always come down to two things. The first is the tension between insiders benefiting from the prevailing copyright regime pushing back outsiders – in other words, the innovators who are barred from benefitting from the established status quo and are therefore demanding a change.1

“i’m scared, and so is my industry. Changing technology today is threatening to destroy the value of our copyrights and the vitality of the music industry. Our nemesis is home taping.”2

The second part of the debate concerns the icons of copyright. These include the creators and the forgotten masses, such as the users3, typically being taken advantage of, squeezed in and marginalized in the copyright revision process when insiders push back on new innovations by simultaneously expanding their control in the new domain that embodies the innovation.

Younison – Artists, stand up for your rights: “Except for the exploitation of online music [read digital] – which for the moment represents about 5 percent of the total amount of revenue for collecting societies (and for authors) throughout the EU – the [new] directive [Collective Rights Management Directive] ignores all our demands and ensures that in the digital era, the archaic and opaque redistributions systems are institutionalized”4

Of course outsiders, today also labeled as “pirates,”

have changed over time and have turned into insiders

such as: the self-playing piano, FM radio, the recording music industry – including gramophones and cassette tapes – cable-TV providers and video cassette recorders. Today, hardly anyone would call these industries or technologies pirates.5

In this very brief historical perspective, we can be sure of at least two things. > First, new technologies and innovations have been

a key industry growth engine for the creative sector, as they have resulted in increased market reach and consumption opportunities, and introduced new types of creative products that all contribute to increased consumer spending.6

> Second, the tension between insiders and outsiders has never been – as is typically portrayed by insiders – about an apocalyptic industry collapse, loss of creativity or about intrinsic pirate qualities of new generations of consumers that must be controlled at all costs.7 In fact, the tension has ultimately been about managing firm level risks associated with shifts in the value chain and necessary transformation of business models brought about by the introduction of new technology and innovation.8

“I’m scared, and so is my industry. Changing technology today is threatening to destroy the value of our copyrights and the vitality of the music industry. Our nemesis is home taping.”

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“…economists have long had concerns that copyright has a moral hazard effect on incumbent firms, including those in the creative industries, by encouraging them to rely on enforcement of the law rather than adopt new technologies and business models to deal with new technologies.”9

This problem of the “moral hazard,” in other words, insiders resisting innovations, was already observed and

acknowledged by niccolò Machiavelli in 1532, who in his book The Prince stated:

“...there is nothing more difficult to execute, nor more dubious of success, nor more dangerous to administer than to introduce a new system of things, for he who introduces it has all those who profit from the old system as his enemies.”10

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“now the tide is turning. For many politicians, property rights for media moguls are taking second place to attempts to boost growth by making life easier for technology companies.”

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Over the last two decades, there has been very significant pressure to strengthen copyright laws in the digital environment by providing cheaper enforcement mechanisms and more severe penalties for infringement. however, this enforcement-only-focused approach failed to recognize or to adequately distinguish that file-sharing is a symptom of a problem. Instead, the root cause of the problem is the inadequate availability [supply] of lawful, timely, affordable, and wide-ranging choices of digital-content offerings, which is fundamentally a market-supply failure.11

“now the tide is turning. For many politicians, property rights for media moguls are taking second place to attempts to boost growth by making life easier for technology companies.”12 At first glance, the quote from The Economist above seems quite controversial, but is it? What it really says is:

> Insiders’ interest in protecting the prevailing system and relying on more enforcement to protect the status quo is no longer the no.1 priority. Put simply, the enforcement-only-focused approach is out of fashion and even more politically toxic (for example, think ACTA, SOPA/PIPA).

> The no.1 priority now is to boost growth by making it easier for outsiders, such as innovators, to do what new technology has always done best for all industries, including the creative industry – namely, inject growth.

This new focus on growth and not on a singular stakeholder interest is the big change in the latest copyright-reform debate. This newly gained focus is especially well captured in the hargreaves Report from 2011, which states: “When the (UK) prime minister (David Cameron) commissioned this review in november 2010, he did so in terms which some considered provocative. The review was needed,

Why reform?

the PM said, because of the risk that the current intellectual property framework might not be sufficiently well designed to promote innovation and growth in the UK economy. In the five months we have had to compile the review, we have sought never to lose sight of David Cameron’s “exam question.” Could it be true that laws designed more than three centuries ago with the express purpose of creating economic incentives for innovation by protecting creators’ rights are today obstructing innovation and economic growth? The short answer is: yes.”13

More broadly, there is a growing acceptance among policy makers that a digital copyright reform is a necessity, not an option.14 The socioeconomic benefits associated with increased digitization of industries, including creative sectors such as economic growth, increased competitiveness and job creation, are too great to forgo. In addition, in the current economic climate, the absence of growth also comes with social and political imperatives.

“The cost of non-digital Europe is significant: according to a recent study, the eu could gain 4 percent gdP by stimulating the fast development of the digital single market by 2020. This corresponds to a gain of almost EUR 500 billion and means that the digital single market alone could have an impact similar to the 1992 internal market program.”15

“According to a recent study, the EU could gain 4 percent gDP by stimulating the fast development of the digital single market by 2020.”

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Those against reform

Those who resist changing the status quo and, consequently, digital upgrades of copyright to facilitate the adoption of new technologies and business innovations tend to resort to the following arguments:

> the threat to creativity > the exploitation of creators > that digitization goes against culture.

Arguments related to technological advancements that threaten creativity have a long history. The advent of the music recording industry threat in 1906 is a good example.

“…. gramophones (today’s CD and DVD players), self-playing pianos and talking machines. The technologies threaten to negate the value of sheet music and the future of creativity; Composer John Phillip Sousa to the US Congress: “…these machines are going to ruin the artistic development of music…the vocal chord will be eliminated by process of evolution, as was the tail of a man when he came from the ape…”16

The risk of new technology unfairly exploiting creators is constructed around creators’ right to fair remuneration. Insiders’ call for this argument fails to recognize the simple fact that most commercial arrangements today regulate creators’ rewards contractually. That is, the relation between creators and the economic rights holders (whose business it is to commercially maximize the creative endeavor) is regulated in a contract or an employment agreement and not by copyright – the latter establishes creators’ right to be remunerated, but the actual remuneration is negotiated outside the copyright statute.17

“Copyright law only stipulates the copyright standard and the rights that protect authors. But authors almost

always have to contract with an intermediary or distributor in order to market their work, and it is the terms of the contract between them that determine the eventual financial reward to the author... Research on artists’ total earnings including royalties shows that only a small minority earns an amount comparable to national earnings in other occupations and only “superstars” make huge amounts. Copyright produces limited economic rewards to the “ordinary” professional creator.”18

“Copyright should be owned by creators not corporations… It would be good to have music-business people rather than financiers owning and running music companies again. It would be even better to have artists owning their work and entering into partner relationships with service-providing major and independent record companies with all the finance and expertise an artist needs to develop their own business.”19

This is not to say that creativity should not be remunerated – on the contrary, it absolutely must. But contrary to insiders’ depiction of the remuneration issue, academic research shows that rewarding creators is much more a contractual arrangement issue than a copyright issue. In addition, a digital-copyright reform is not at all about weakening creators’ rights – in other words, weakening the copyright standard – and it has even less to do with contractual or employment arrangements.

Digitization is against culture. The claim that digitization is a zero sum game is a construction.20 One cannot simply conclude that digitization of creative sectors is decreasing creators’ incomes, industry revenues or destroys jobs. In a longitudinal study analyzing the impact of digitization on the norwegian music industry between 1999 and 2009, the report authors concluded that:21

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> total annual industry revenues grew from nOK 1.4 billion (EUR 190 million) to nOK 1.9 billion (EUR 255 million), which is a rise of 36 percent

> the number of artists increased by 28 percent > per-capita inflation-adjusted annual artist income

had increased by 66 percent.

We can see that the impact of digitization has not only delivered industry growth but also resulted in job

creation (28 percent more artists) and increased artists’ incomes (up 66 percent). We can also identify strong positive effects of digitization for other companies outside the music industry, such as The Economist22, hulu23 and Amazon24 . however, it should be said that digitization is not a one-way street that is either positive or negative. It is rather about how companies deal with digital transformation. Finally, on a more general note, an OECD review of the impact of technology on jobs found that:

“… technological progress has been accompanied not only by higher output and productivity but also by higher overall employment.”25

Each of the arguments above has been around for decades, some of them for a century. Old habits are truly hard to break. But, as indicated above, the tide has finally turned and the time has come to learn from the past – to avoid making the same mistakes all over again and escaping manufactured facts. The time is ripe for more facts-based copyright reforms.

66%”

“Per-capita inflation-adjusted annualartist income had increased by

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A vital link exists between copyright and the degree of availability of lawful digital content.26 The degree to which copyright exhibits the capacity to stimulate the availability of legal (licensed and exempt) digital-content services is important for many reasons.

> Displacing illegal access with legal digital services presupposes the availability of a legal digital alternative. In addition, the growth of legal services drives revenues, profits and job creation.

> Consumer benefits from digital services, such as time, place, device shifting and personalization are in high demand and valued by a continuously growing number of consumers.27

> Conventional distribution methods in creative industries are increasingly falling behind average business norms and consumer expectations in a number of customer dimensions: › timeliness, due to windowing › availability, 24/7: think physical distribution, such

as the cinema › mass-personalization: appointment-based

viewing, such as linear TV and fixed dates/times, and

› limits of physical point of service delivery: number of points, location of points and physical limitations (screens, seats, shelf space) such as physical locations of DVD stores and cinemas, resulting in limited consumption opportunities, exclusion and higher consumer transaction costs.

> Public-interest synergistic effect (see figure 1): the availability of lawful digital-content services incentivizes a vast share of the consumer market to adopt higher broadband speed services28 on which other essential digital public services (e-work, e-education, e-health and e-government) can be delivered at low or no incremental distribution cost. In other words, this catalytic effect of the availability of

So what’s next?

lawful digital content on the increased uptake of digital public services constitutes a new fundamental consideration that puts copyright’s ability to stimulate digital transformation29 into a new perspective.

Figure 1: Factors influencing the economic impact of digitizations Source: Copenhagen Economics Stockholm, January 2012

Share of digital revenues of totalsector revenues 2001 – Europe

5%

0% 0% 1% 2%

15%

25%

20%

15%

10%

40%

35%

30%

50%

45%

Cinema Subscription TV Commercial TV Home video

Economic impact

Digital infrastructurePenetration, coverage, bandwidth

Digital content & servicesharmonization, large markets, innovation

Use of digital servicese-government, e-commerce, ERP, e-health, e-learning

Digital readinesse-skills, e-awareness, ICT equipment

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The degree of availability of lawful digital content services is also a measure of the degree of the digital transformation of creative sectors. An evidence-based approach to measure the degree of digital transition in creative industries – and therefore the prevailing copyright regime’s capacity to stimulate digitization – is to relate the share of digital revenues to total (digital and non-digital) revenues, thereby avoiding the pitfalls of blunt measures such as merely counting30 the number of digital services. Regrettably, as shown in Figure 2, we can only conclude that the digital transformation of creative sectors in Europe is underdeveloped, and this disturbing situation should be one of the key considerations to be taken into account in future digital copyright reforms.

Recognizing the underdeveloped digital state of European creative sectors, the obvious question is what policy outcomes should a digital copyright reform deliver? In other words, what’s next? Ericsson has identified some key copyright regime31-related barriers32 hindering the digital transformation, in other words, the key root causes of the market-supply failure of lawful digital content. These are:

1. the deliberate limited availability of lawful digital content – in other words, windowing33

2. the high degree of technology specificity of copyright, licensing and exceptions34

3. unreasonable transaction costs (licensing effort, the inefficiency of the levies system) that make digital content offerings to consumers unnecessarily expensive.35

there is no doubt about the importance of the copyright law and the incentives it creates for certain market behavior, and therefore the licensing conducts. The three types of barriers mentioned above are the key determinants of prevailing market behavior

and licensing conduct, and they therefore dictate the pace of transformation in the lawful digital creative market. Removing or mitigating these barriers in prevailing copyright regimes is the defining basis for any progressive digital copyright reform.

Bring on the digital transformation!

Figure 2: Digital creative transition in Europe 2011 Source: PWC global entertainment outlook 2011-2015

Share of digital revenues of totalsector revenues 2001 – Europe

5%

0% 0% 1% 2%

15%

25%

20%

15%

10%

40%

35%

30%

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Cinema Subscription TV Commercial TV Home video

Economic impact

Digital infrastructurePenetration, coverage, bandwidth

Digital content & servicesharmonization, large markets, innovation

Use of digital servicese-government, e-commerce, ERP, e-health, e-learning

Digital readinesse-skills, e-awareness, ICT equipment

“There is no doubt about the importance of the copyright law and the incentives it creates for certain market behavior, and therefore the licensing conducts.”

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1. Jessica Litman, Digital Copyright, 2006 and Tim Wu “Copyright’s Communication Policy” 1043 Mich. L. Rev.278, 313 (2004).

2. Stanley M. gortikov, President of the Recording Industry Association of America (RIAA), explained in hearings before a house Committee on April 14, 1982.

3. European Consumers’ Organization, BEUC IPR Strategy: http://www. copyright4creativity.eu/foswiki/pub/Public/Resources/BEUC_IPR_Strategy.pdf and http://theartistnetwork.ws/why-artists-are-angered-by-eu- copyright-directive/

4. http://www.younison.eu/news/read/44

5. Jessica Litman, Digital Copyright, 2006 and Tim Wu “Copyright’s Communication Policy” 1043 Mich. L. Rev.278, 313 (2004).

6. The Internet and the Mass Media, Kung, Picard, Towse, 2008.

7. Vaidhyanathan, 2001, 2004 quoted in Currah, Andrew (2007) “hollywood, the Internet and the World: A geography of Disruptive Innovation,” Industry & Innovation, 14: 4, 359-384

8. Ruth Towse, “What we know, what we don’t know and what policy makers would like us to know about the economics of copyright”, Review of Economic Research on Copyright Issues, 2011, vol. 8(2), pp.101-120 and harvard Business Review File-Sharing and Copyright, Felix Oberholzer-gee and Koleman Strumpf, May 2009.

9. Ruth Towse, “What we know, what we don’t know and what policy makers would like us to know about the economics of copyright”, Review of Economic Research on Copyright Issues, 2011, vol. 8(2), pp.108-9.

10. niccolò Machiavelli, The Prince, new York, Dover Publication, 1992.

11. Jakarta globe, The Smart Way to Fight Content Piracy, January 6, 2012. Ericsson ConsumerLab, TV and Video Changing the game, 2012. Ericsson, Copyright enforcement in the networked Society, 2011.

12. The Economist: “Letting the baby dance, new copyright rules for the digital age,” Sep 1, 2012.

13. Digital Opportunity, A Review of Intellectual Property and growth, independent report by Professor Ian hargreaves, May 2011.

14. Commission agrees way forward for modernizing copyright in the digital economy: http://europa.eu/rapid/press-release_MEMO-12-950_en.htm

15. MMonti report, a new Strategy for the Single Market, p. 44, May 2010.

16. Arguments before the US Commission on Patents of the S & h.R, Conjointly on the Bills S 6330 and h.R. 19, 853 to Amend and Consolidate the Acts Respecting Copyright 1906.

17. Recognizing that some countries, especially in Europe and contrarily to the US, do not allow the bulk transfer of all of the economic rights to a pro-ducer, thus guaranteeing that the author will have access to an independent cash flow usually managed by a collective rights-management organization.

18. Ruth Towse, “What we know, what we don’t know and what policy makers would like us to know about the economics of copyright”, Review of Economic Research on Copyright Issues, 2011, vol. 8(2), pp.101-120

19. http://thefac.org/fac-statement-copyrights-should-be-owned-by-creators-rather-than-corporations/

20. Vaidhyanathan, 2001, 2004 quoted in Currah, Andrew (2007) “hollywood, the Internet and the World: A geography of Disruptive Innovation,” Industry & Innovation, 14: 4, 359-384. Please note also that the displacement effect of piracy is a symptom of the supply failure of lawful digital content and as such is not to be confused with digitization effect. See also Jakarta globe, The Smart Way to Fight Content Piracy, January 6, 2012. Ericsson Consum-erLab, TV and Video Changing the game, 2012. Ericsson, Copyright enforcement in the networked Society, 2011.

21. The norwegian Music Industry in Age of Digitalization, Bjerke & Sorbro, BI norwegian School of Management, Oslo 2010. golden times for record companies. It’s raining money over record companies again. Sales contin-ued to grow substantially over last year, and the increase is the new digital services. http://www.svd.se/naringsliv/nyheter/sverige/gyllene-tider-for-skivbolagen_7837552.svd

22. See also Economist Presentation: http://www.slideshare.net/emmaturner/lean-back-media-the-shock-of-the-old.

23. hulu: 2012 Revenue Up 65 Percent: http://techcrunch.com/2012/12/17/ hulu-2012-revenue-up-65-percent-to-695m-3m-paying-customers- 430-content-partners/

24. Amazon, Annual Meeting June 2011, http://phx.corporate-ir.net/phoenix.zhtml?c=97664&p=irol-presentations

25. The OECD Jobs Study; Facts Analysis, Strategies 1994.

26. In this context, digital refers to a number of attributes, such as online, on-demand, the portability of content across borders, personalization, device/time/place, and shifting.

27. See Ericsson Consumerlab: TV & Video – Changing the game: http://www.ericsson.com/news/121024-tv-video-changing-the-game_244159017_c?categoryFilter=reports_1270673222_c&tagsFilter=ConsumerLab

28. For more information, see: http://www.epc.eu/dsm/ and new Zealand’s Commerce Commission Demand Study: http://www.comcom.govt.nz/media-releases/detail/2012/commerce-commission-releases-final-issue-paper-on-high-speed-broadband-demand-side-study/

29. More information on the economic impact of digitization, see: The Econo-mist – growth through digitization requires more than faster broadband connections: http://www.economist.com/node/21556221 and Booz&Co; http://www.booz.com/global/home/what_we_think/digitization For more information about digital transformation, see: MIT Centre for Digital Busi-ness: http://digital.mit.edu/index.html and Cap gemini Digital Transforma-tion Conversations: http://digitaltransformationconversations.com/tag/mit%E2%80%99s-center-for-digital-business/

30. A mere count of digital services does not recognize important factors to assess the level of success of a digital service. These factors include: timely availability, the range and depth of titles available, business models (subscription, transaction or advertising), the ability to time/format/device shift content, payment methods (credit card, prepaid), ease of use and affordable price points. Please note that a revenue-based approach is less appropriate for public-TV-service providers whose revenues are based on

REFERENCES

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licenses or state-budget contributions; comparing the number of hours of digital programming with the total hours of programming would be more appropriate in this case.

31. The term copyright regime refers to: copyright law, the licensing practice, the balancing of exclusive rights, in other words, exceptions and the induced business conduct of economic rights holders.

32. Other non-copyright-specific barriers also limit digital transformation and must be addressed by other reforms/initiatives. These barriers include: dif-ferentiated VAT regimes discriminating digital versus physical formats; film state aid rules discriminating digital distribution; audiovisual and broadcast regulation; and windowing laws, such as those in France and Portugal. For content-access barriers, see World Intellectual Property Organization, Twen-tieth Session, geneva, June 21-24, 2011: http://www.wipo.int/edocs/mdocs/copyright/en/sccr_20/sccr_20_2_rev.pdf See also Intellectual Property and Innovation: A Framework for 21st Century growth and Jobs: http://www.lisboncouncil.net/publication/publication/84-intellectual-property-and- innovation-a-framework-for-21st-century-growth-and-jobs-.html

33. See for example: http://www.guardian.co.uk/film/2010/feb/17/european-cinemas-boycott-alice-in-wonderland; http://www.guardian.co.uk/technol-ogy/2011/nov/22/movie-fans-piracy-online; and: http://blogg.kritiker.se/sa-bra-utbud-har-netflix-och-viaplay-svart-pa-vitt/ See also Wired Magazine: http://www.wired.com/threatlevel/2013/01/block-buster-movie-piracy/?cid=5253254 Ericsson is not advocating that a creator should not be able to freely exercise their right to, exhaust their right to, nor advocating that there must be a condition for the creator to create competi-tion in their own exclusive right. however, once a creator has made the free choice to exhaust their right, competition concerns may arise when a licens-ing arrangement harms competition among entities that would have been actual or likely potential competitors in a relevant market in the absence of the license. A restraint in a licensing arrangement may harm competition, for example, if it facilitates market division or price-fixing. In addition, license restrictions with respect to one market may harm competition in another market by anticompetitive foreclosing access to the digital/online versus physical (cinema) market.

34. For example: “...the first sale principle of the original of a work or copies thereof by the right-holder or with his consent in the community, exhausts the right to control the release in the community of a work incorporated in a tangible tool.” This wording limits the principle of exhaustion to tangible goods only, excluding online services and intangible goods that incorpo-rate digital content. It is paradoxical, however, that in a legislative measure devoted to the online context, the only purpose of market integration was confined to the offline context.” EU Study, Legal Analysis of a Single Market for the Information Society, page 137. Draft Report, October 2009. For more general information about a technology-specific approach in a converg-ing environment, see The Recasting of Copyright & Related Rights for the Knowledge Economy, IVIR 2006.

35. See for example: Economic Impact of Copyright for Cable Operators in Europe, identifying high transaction costs resulting from the necessary negotiation of copyrights for various content formats (for example, analog, digital, pay, on-demand) with numerous parties, available at: http://www.cableeurope.eu/uploads/2006%2005%2009%20Solon%20Study%20Final.pdf

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