As noted in our two preceding posts about the introduction of the “ancillary right” in Spain (here and here), Google announced it would discontinue operation of the Google News product in Spain, starting tomorrow, December 16.  (Wired UK cites a potential fine of up to €600,000 (~$746,000) for non-compliance after the January 1 deadline.)  In a statement, the Spanish Government shrugged off the company’s response to the “so-called Google tax” as a “business decision.”

Google’s decision surprised no one save perhaps the Spanish news publishers’ association (AEDE).  Responding to the announcement, the AEDE released a statement last week arguing that Google had a dominant position in the news market, and demanded that it not be permitted to exit the market.  Note that the data doesn’t seem to bear this assertion out; relying on data from Similarweb.com, it appears Google.news.es ranks 226th in Spain, miles behind Elpais.com at 16th, and elmundo.es at 18th.  If one limits the data strictly to news media, Google News Spain is still bringing up the rear (at 26th) behind yahoo.com (1st), elpais.com (3rd), msn.com (4th) elmundo.es (5th), and abc.es (7th).

In any event, the association’s about-face epitomizes its love-hate relationship with news search and aggregation: its members love the free traffic that they drive to publishers’ ads, but hate that news search providers and aggregators don’t pay for that privilege.

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As Jakob explained yesterday, the recently enacted “ancillary right” law in Spain is prompting Google News to fold up shop there; it will cease displaying Spanish publications and Google News Spain will exit the market on December 16.

(For background on the ancillary right, see our “explainer” post here.)

The ancillary right fad is but one of several protectionist measures recently launched in European states that extract rents from or restrict market access to technology companies — companies which are often U.S.-based.  (Another example is the misguided “right to be forgotten.”)  This particular Spanish law, set to go into effect in 2015, has been criticized as “ill-conceived” and even “mercantilist.”

While any protectionism should be a cause for concern, this particular instance of heavy-handed regulation merits attention because it so conspicuously violates existing international trade law.  By adopting the ancillary right levy, Spain has broken with clearly established law and the international community.

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Today we learnt that Google will shut down its ‘Google News’ service this year in Spain. This is just one consequence of the introduction in Spain of an ancillary copyright levy (known as the ‘AEDE levy’) affecting online services (apps and websites).

In a nutshell, if an online service uses short snippets to link to content which is deemed ‘news’, or enables internet users to do so, payment to the Spanish news publishers’ collecting society is mandatory. And by “news”, the law targets not just articles from major newspapers, but pretty much any blog or website that provides “information”, “entertainment” or content relevant to “public opinion” (see Art. 32.2 of the final text here).

There is no escape — even if a publisher does not want to be compensated when online services redirect substantial volumes of traffic to his site, even if they want to be included in the service, and even if their content is made available under a Creative Commons license, the law still obliges the publisher to charge.

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Next year marks the 6th triennial rulemaking under Section 1201 of the Digital Millennium Copyright Act (DMCA), a recurring regulatory process which determines to what extent consumers can use content and devices that they own. While the first sale doctrine limits downstream control of protected works, Congress permits content owners to implement use restrictions in the form of “technological protection measures” (TPMs). Every three years the Copyright Office and multiple stakeholders engage in a year-long process to convince the Librarian of Congress to grant or deny exemptions to prohibitions against circumventing TPMs used on certain classes of protected works. The Office will not only continue to implement new administrative procedures next year, but will also address multiple proposed class exemptions that are in front of the Office for the first time.

Jonathan Band provides an excellent summary of the legal history leading to the enactment of this section, but in short Section 1201 bans (1) the circumvention of TPMs, and (2) the manufacturing and “traffic[king]” of circumvention tools. To provide balance, the DMCA allows the Copyright Office to review and grant proposed exemptions to the former. The Office requests public petitions for class exemptions and reviews all petitions de novo, placing the burden on the petitioning party to show by a preponderance of the evidence that harm alleged by the anti-circumvention ban to the proposed class is more likely to occur than not. After a notice and comment period following the petitions, the Office holds public hearings. The Office, in consultation with the National Telecommunications & Information Administration (NTIA), then makes recommendations to the Librarian of Congress, who will subsequently adopt the recommendations. This entire process must be done every three years for all exemptions to the anti-circumvention bans, regardless of whether the Office granted them in the past.

The process has been criticized as an outdated and somewhat ineffective requirement to permit otherwise lawful, fair uses of technology (one recent critic going as far as calling it quite literally lethal to the public). While there are beneficial uses to TPMs, and they can be utilized to effectively balance the concerns of copyright owners and innovators, some contend that the triennial ritual has come up short in effectively realizing this goal.

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On Monday, the New York Times reported about Amazon “disrupting” itself, not referring to Clay Christensen or his disruptive innovation theory by name, but using it in that sense.  (Coincidentally, VC Marc Andreessen had a 17-part tweetstorm on the disruption concept and its misconceptions yesterday, which DisCo has covered before.)  One aspect of this theory is that companies may have to radically shift directions when faced with competition from disruptive entrants — or cannibalize their own existing revenue stream when they realize that a disruptive innovation is what consumers will want and need, not an incremental innovation on their existing product.  As DisCo has explained, Christensen’s work notes that executives at dominant companies are often hesitant to change business models to adopt lower profit margins:

One of the reasons why successful incumbents are so vulnerable to disruptive technologies — as Clayton Christensen pointed out in his seminal work — is that they have a hard time adopting a lower margin business model that would mean sacrificing their current hefty profit margins.  This initial hesitance is often their death, as they are quickly forced out by new, more efficient competitors.

The New York Times discusses how, although Amazon’s revenues went down this quarter, it’s because they are in the process of shifting from a focus on physical books to digital media consumption, including television, movies, and music.  Apple similarly disrupted itself when it released the iPhone, which made the iPod irrelevant, and shifted its focus from personal computers to consumer devices.  Companies like Autodesk have also disrupted themselves with apps.  Many other technology companies face these challenges, as Vivek Wadhwa wrote in a great Washington Post piece earlier this year about the technology industry and disruption, and challenges in leadership.

Self-disruption is likely to occur even more now that technology companies provide so much more than just technology products and services, and compete in industries like entertainment, media, and communication.

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News media [1, 2, 3, 4] and previous DisCo posts [1, 2, 3, 4] have reported on several European countries’ efforts to create a so-called “ancillary right” in newspaper text and headlines.  This right would limit the ability to quote from or link to online news without paying a fee.  These proposals tend to be geared toward providing an additional revenue stream for news publishers, and in effect prevent search engines and online news aggregators from displaying excerpts from articles without a license.  This post aims to answer some of the common questions about ancillary rights.

What are ancillary rights?

The term “ancillary rights” is sometimes used to describe exclusive rights that provide copyright-like protection and remedies to something that is conventionally viewed to be outside the scope of copyright.  Lawyers sometimes refer to similar concepts using terms like “neighboring rights” or “paracopyright.”  Sort of like copyright, but not really; ancillary rights in news headlines would exist outside of (and perhaps even in violation of) the established international copyright system.

These proposals have also been described more prosaically, for example as a “snippet tax” or “snippet subsidy.”  It is also sometimes called the “Google tax” since the search company is one of the intended targets, but these proposals would affect many companies beyond Google, potentially including search, social media companies, and blogs.  The ancillary right law enacted in Germany is referred to in Germany as the Leistungsschutzrecht.

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Sit down before you read this: Internet companies pay more corporation tax than the European average, in some cases many times more.

According to the European Commission the average ‘effective’ corporate tax rate in the European Union and EFTA is 12.9%; in 2012 Amazon had a whopping 78% in corporation tax on its global profits. In that same year Yahoo had 37% and Google 19.4%.

It is important to note that corporation tax is paid on profits and not on revenues. In 2012 for example, the Commission says Amazon had global revenues of USD 61 billion, but profits of only USD 544 million. The difference comes from being a low margin business and from investments. If you don’t make much profit, you don’t pay much tax.

The Lux Leaks files list 340 companies who have received ‘comfort letters’ from the Luxembourg tax authorities. Of these, 32 are categorised as ‘Tech’, meaning more than 90% are not tech. Other sectors include: energy, finance, food, health, manufacturing, media, retail and travel. There is also a broad geographical spread with prominent European names including Ikea, Burberry, Vodafone, Volkswagen, GlaxoSmithKline and the Guardian Media Group.

The files have one clear message: companies from all sectors and all regions of the world have been using tax optimisation techniques.

A review of the tax incentives for the knowledge economy will need to address the whole knowledge economy and not just the digital sector. This is the conclusion the European Commission has arrived at.

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Yesterday Billboard reported on research by Pandora finding that music played on the service experienced increased sales.  The study found that, on average, sales increased between 2.31% and 2.66% for music played on the Pandora service.  The effect apparently grows with more spins.  That is, the more frequently a song was played, the likelier listeners were to purchase the track or album.  This data doesn’t even reveal all of the promotional value of the service: to what extent does it lead to concert and merchandise sales, for example?  The takeaway, however, is that digital radio play drives sales, in a quantifiable way, which artists can now analyze at an increasingly granular level.

The findings are consistent with observations made in music producer Steve Albini’s recent, colorful keynote at the Melbourne, Australia “Face the Music” conference.  Albini said:

“It’s no longer necessary to pay people to pay other people to play your records on the radio, only to have those people lie about doing so. It’s no longer necessary to spend money to let people hear your band.”

Albini also lauded that the Internet facilitates a “direct relationship” between fans and artists that “skips all the intermediary steps.” Nevertheless, while artists can now reach audiences directly, existing contractual arrangements and the legacy of industry structure limits the extent to which artists can be compensated by audiences directly.  Thus, as DisCo has noted before, while music services drive sales and pay out the vast majority of their revenues as royalties, those royalties are far more often paid to intermediary rights-holders, and the majority of the revenues don’t reach the artist.

Transparency problems aside, the fact that digital services represent the future of the music industry is increasingly hard to ignore.  Yesterday’s N.Y. Times reported a Sony Music estimate that in four years, streaming and subscriptions would constitute 60% of the music industry’s digital revenue, up from 18% now.  Sony executive Kevin Kelleher claimed to be “very encouraged with the paid streaming model”, while questioning the value of ad-supported models.

Yet digital services are rising to such prominence in the marketplace that, at least in Europe, Spotify appears to have overtaken iTunes in generating royalties for artists.  Given this data, combined with continued growth in legal digital music consumption (music listeners streamed more than 118 billion tracks in 2013), it is hard to understand commentators still suggesting people won’t pay for music.  YouTube, of course, is just launching its Music Key product, betting exactly the opposite.  Nevertheless, like Pandora and Spotify, Music Key keeps with the conventional wisdom that “having a free tier [i.e., ad-supported] as a springboard to get people to pay is key to winning members.”

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In discussions of Taylor Swift pulling her music from Spotify because the service wouldn’t make the music available solely to paying subscribers, which pays higher royalty rates, and Aloe Blacc’s Wired op-ed calling for higher royalties for songwriters from streaming services (but see: Spirit Animal frontman Steve Cooper’s thoughtful piece in Business Insider on “why Spotify is not the enemy”), there are a few important economic realities being ignored.

Spotify currently pays about 70% of its revenue to rightsholders.  That typically goes to middlemen — publishers for the musical work copyright, who then pay a portion to the songwriters, and record labels for the sound recording copyright, who then pay a portion to the musicians.

VC David Pakman (who testified in November 2012 before the House Judiciary IP Subcommittee about why the current music licensing scheme deters VC investment in new music services) recently analyzed data from middlemen in a few industries and found that many legacy middlemen are not earning the large share they take from creators in the digital age.  Record labels, for example, contributed a lot more value when they coordinated and financed studio time (which can now be done with a basic computer and Internet connection, and possibly a Kickstarter campaign), manufacturing records and CDs and got them to retailers (which is no longer the primary way of selling music), and marketing (which can be done online with free services).  Now, in the digital age, many of these services are no longer needed or performed.

In remarks last week at the Web Summit Conference in Dublin, Bono explained that rather than fighting against streaming, artists should be fighting for transparency:

Spotify is giving up 70% of all their revenues to rights owners.  But it’s just that people don’t know where the money is going because the record labels haven’t been transparent.

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The Internet has brought change to our society, just like previous technological advances such as the printing press, canals, cars, or mobile phones. Every advance engenders a debate about the appropriate policy and regulatory response. Sometimes actors affected by the changes around them call for a regulatory response to preserve that status quo or slow change.

In recent months, we’ve heard two arguments in European circles about Internet companies: the first is that Internet companies are not regulated; the second is a concept called “platform neutrality.”

Let me explain why both of these concepts are wrong.

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