Competition, Regulation, and Market-Based Prices in Copyright Rate Setting

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When it comes to the nexus between competition and regulation, competition is all too often cursed with fair-weather friends.  For today’s example, we’ll take a trip down the copyright regulation rabbit hole.

It begins with a Copyright Royalty Board (CRB) proceeding for setting webcaster rates under a statutory license in Section 114 of the Copyright Act.  The process, called “Web IV” because it is the fourth such proceeding under this section of the Copyright Act,[1] was announced late last year and should conclude by the end of 2015.  By mid-December, non-interactive webcasters like Pandora and iHeartMedia will know how much they must pay to stream (or “publicly perform”) recorded music to listeners from 2016-2020.[2]

These statutory license rates, part of a complex multi-tiered system that, as we’ve noted in the past, legally requires discrimination against new technologies, are set for 5-year periods and are paid to an entity called SoundExchange.  SoundExchange is designated to collect royalties under the statutory license for certain uses of sound recordings, including Internet radio play of music.

(Perhaps you’re thinking, “wait, I thought radio stations didn’t pay royalties to play records on the air?”  You would be right: traditional terrestrial radio does not pay royalties for playing sound recordings – which has historically been defended with the argument that radio play provides valuable promotion for sound recording owners.  But in another example of copyright law discriminating against new entrants, while conventional terrestrial radio is not compelled to pay for the public performance of sound recordings, Internet radio must pay to do the same, under Section 106(6) of the Copyright Act.)

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Is the Justice Department taking a stand against music licensing gridlock?

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Yesterday Billboard wrote that the Department of Justice was reportedly taking a position against a major source of gridlock in music licensing: so-called “fractional licensing.”

As readers of DisCo may recall, the Department of Justice has been investigating alleged anticompetitive activities by the nation’s performance rights organizations (PROs).  Two of the major PROs, ASCAP and BMI, are already governed by long-standing consent decrees originating from previous antitrust cases.  In the course of efforts to update those consent decrees, DOJ has reportedly said that it will look disfavorably on contractual terms that gridlock musical compositions.

This is a crucial development, because gridlock is one of the greatest impediments to more viable options for music delivery, and, one federal judge has already found, has been used anticompetitively in an effort to extract supra-competitive prices.MORE »

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Quote of the Day: The Apple eBooks Decision, On Windowing

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Today a federal court of appeals in New York upheld an antitrust judgment against Apple, affirming a trial court’s finding that the technology company had coordinated a price-fixing scheme among five major publishers when launching its ebook store in 2010.  DisCo has covered the antitrust aspects of the ebook case before [1], [2], but there is a non-antitrust thread in the opinion, regarding windowing, that deserves attention.

As I noted in a previous post, windowing is a content distribution strategy of releasing the same content in different formats and venues at different times. By delaying consumer access to digital content as long as possible, rights holders aim to maximize returns from more traditional distribution outlets.  My previous post explored windowing in the motion picture industry, but windowing is practiced in the ebook market as well, with publishers holding back the digital distribution of their catalogue in the hopes that consumers would purchase hardcovers.  One of the problems with this windowing business model is that it induces copyright infringement.

Today’s decision by the appeals court notes that publishing executives knew this quite well, but couldn’t bring themselves to break the practice.

Ultimately, however, the publishers viewed even this [windowing] strategy to save their business model as self‐destructive. Employees inside the publishing companies noted that windowing encouraged piracy, punished ebook consumers, and harmed long‐term sales. One author wrote to [a publishing executive] in December 2009 that the “old model has to change” and that it would be better to “embrace e‐books,” publish them at the same time as the hardcovers, “and pray to God they both sell like crazy.”

(emphasis mine)

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Supreme Court Declines to Hear Oracle v. Google Case Over Java Copyrights

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This morning the Supreme Court issued an order indicating that it was declining to hear an appeal of the copyright case between Oracle and Google.  The appeal concerned the copyrightability of “application programming interfaces” (APIs).  Oracle launched the suit against Google shortly after acquiring Sun, which held copyrights and patents on the Java computer language, in 2010.  It claimed that Android infringed Java copyrights because Android replicated elements of the Java API in the Android API.  (Oracle’s suit also advanced patent claims, which came up remarkably short.)

The trial court sided with Google, but the U.S. Court of Appeals for the Federal Circuit disagreed, in a May 2014 ruling discussed previously here, here, and here.  Google appealed to the Supreme Court, arguing that the appellate court had incorrectly held that the system and methods of the Java API could be protected under U.S. copyright law.  The U.S. Copyright Act withholds protection from any idea, procedure, process, system, or method of operation. Processes, systems, and methods are usually the domain of patent law, not copyright; courts have long noted the lack of copyright protection for interface specifications encourages interoperability across software environments.

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The Public Costs of Private Distribution Strategies: Content Release Windows as Negative Externalities

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In a Bloomberg Businessweek interview last month, Megaupload founder Kim Dotcom talked extensively about copyright and business models.  Dotcom, who has been criminally charged in the United States in relation to copyright infringement, was asked by the interviewer if he “believed in copyright.”  Dotcom replied that he did, but argued that he did not believe in “copyright extremism” – a term he used to describe extended delays in content distribution, which often result in content reaching foreign markets months after it is released in the United States.

According to Dotcom, the solution to such “extremism” is a worldwide studio-run streaming platform rather than, as the Washington Post’s Brian Fung described it, “letting Netflix play the middleman.”  Essentially, “extremism” is another way of saying that piracy is more a business model problem than a policy problem.  Expensive and controversial copyright enforcement would be more efficiently supplanted with different business practices.

But this raises an obvious question: if there is a better way of doing things, why aren’t things done that way?  The answer is that different stakeholders bear the costs of different solutions.  Moving to worldwide online distribution entails risks borne mostly by industry stakeholders, who would be abandoning a time-honored content distribution strategy referred to as “windowing” or “release windows.”  On the other hand, the risks of the current windowing model are known, and the costs of this model fall at least in part on taxpayers.

Example of Release Windows

(click to enlarge)

What Are Content Release Windows?

The traditional approach to distribution of film and some other content involves selective release through different and often exclusive channels, in different markets, for different times.  This means content may only be available through a particular channel for a period of time.  This period is dictated by the license, and it may occasionally be mandated by law.  As a result, the availability of a given piece of digital content often appears to consumers to change arbitrarily.

The most sacrosanct window has always been that of initial theatrical exhibition.  This is the time frame during which newly released films are exhibited in traditional movie theaters.  Over time, the length and nature of this window has changed, and it has generally become shorter.  As data from the theater owners’ trade association shows, the theatrical exhibition window has contracted over the last decade, but it still stands at roughly 120 days in the United States, and can be far longer in other markets.

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Royalties Ruling Reflects Anti-Innovation Bias

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As the national press noted two weeks ago, Judge Louis Stanton in the Southern District of New York sided with BMI in a dispute with Pandora over royalty rates for public performance of musical compositions administered by BMI.  That ruling was finally unsealed yesterday, and it reflects another example of copyright law penalizing new technology.

The upshot of yesterday’s decision [PDF here] is this: while radio broadcasters everywhere pay 1.7% of their gross revenues in public performance royalties for musical compositions, Pandora should pay 2.5% of its gross revenue to BMI.

As I have noted in previous posts, Internet radio broadly gets a bad deal in the copyright regulatory framework.  The fact is that the current copyright system tends to discriminate against newer forms of technology, and in favor of existing technologies.  This isn’t a recipe for promoting progress.

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Appellate Court Rejects Attempted Copyright ‘Immigration’ Claim in Garcia v. Google

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Today a federal appeals court in California rejected an effort to use copyright to suppress the distribution of a controversial film online, echoing sentiments I previously expressed in two posts on what I called “IP immigration” [1] [2].  Others have discussed the case at length today [1] [2] [3] [4].  In short, the Ninth Circuit court of appeals rejected a copyright infringement claim by the plaintiff Cindy Garcia, who had been deceived into appearing in a short film titled “Innocence of Muslims,” which made insulting and inflammatory statements about Islam.  When the film was posted to YouTube and translated into Arabic, it resulted in threats to the plaintiff Garcia.

The court’s opinion today recognized that the plaintiff could not and did not have a copyright in her five-second, otherwise-unfixed performance.  As the court put it, the activities surrounding Garcia’s unwitting participation in the film may leave her “with a legitimate and serious beef, though not one that can be vindicated under the rubric of copyright.”  (A separate opinion released today observed that compelling YouTube to take down the video based on threats was a prior restraint of speech prohibited by the First Amendment.)

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Why U.S. Trade Promotion Authority Should Promote Balanced Copyright

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As a fight over the trade promotion authority (TPA) bill “engulfs the capitol,” debate has arisen over whether Congress should identify obtaining balanced copyright language as a U.S. trade priority. Both the Internet Association and the Computer & Communications Industry Association (where I work) criticized the bill’s failure to acknowledge the importance of promoting balanced copyright among U.S. trading partners, since the absence of these protections limits growth opportunities abroad. The Consumer Electronics Association, while applauding the legislation, expressed a similar view, observing that “[f]uture trade agreements should include not only include strong intellectual property protection and enforcement, but also robust and flexible limitation provisions.”

In response to the concerns voiced by the Internet sector, Geoffrey Manne appears to disagree, writing for Truth on the Market that “mandated ‘fair use’ language has no place in trade promotion authority.” (It is important to recognize that these statements do not call on Congress to “mandate fair use” in TPA. The question is whether Congress should direct the U.S. Trade Representative to promote balanced copyright in foreign markets that U.S. Internet companies are entering.)

This issue is important because of the high stakes. Manne is right in saying that trade promotion authority is important, but this glosses over how controversial it can be. As former Deputy USTR Miriam Sapiro wrote at Brookings this week, “the stakes as well as the hurdles for getting trade promotion authority from Congress are high. Critics of trade agreements have been well organized and mobilized.” Trade needs every friend it can get right now, which is why it would be a grave mistake to throw Internet concerns under the bus. This is particularly the case given that the Obama Administration’s last trade effort, ACTA, foundered several years ago due to the perception that the agreement was anti-Internet.

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Giganews Wins $5.6M Against Perfect 10 Over Copyright Misadventure

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Yesterday Austin-based Usenet provider Giganews was awarded more than $5.6 million in attorney’s fees and costs by a federal court in California, relating to its lengthy battle to exonerate itself of spurious infringement allegations from serial copyright litigant Perfect 10.  The court awarded fees in order to “discourage serial litigants from bringing unmeritorious suits and then unnecessarily driving up litigation costs in order to drive a settlement.”  (A statement by Giganews and link to the order are here.)

Represented by “high stakes” IP litigator Andrew Bridges of Fenwick & West, Giganews has been slugging it out with adult content purveyor Perfect 10 since 2011.

Perfect 10 is likely no stranger to copyright nerds; its litigation campaigns against a who’s-who of Internet properties in the previous decade yielded few victories for the company, but did lead to important precedents on intermediary liability and fair use, including search engines’ use of thumbnails.  (Some of these cases comprise the so-called Perfect 10 “trilogy”; including Perfect 10 v. Google, Inc., Perfect 10 v. Amazon.com, Perfect 10 v. VISA, Perfect 10 v. CCBill LLC.)MORE »

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Research Shows Impact of Legal and Regulatory Ambiguity on Investment

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An expert panel convened on Capitol Hill this morning, discussing new research on the detrimental effect that regulatory uncertainty has on Internet investment (as well as additional copyright law and policy challenges, which we live tweeted on @DisCo_Project).

The new research quantifies the impact of Internet regulations, including intermediary liability limitations, by showing their effect on early-stage investment.  A new report by Fifth Era and Engine finds that legal uncertainties for digital content intermediaries discourage early-stage investment around the world, reinforcing findings from a 2011 report that found early-stage investors in the United States were considerably less likely to invest in new online services exposed to legal risks.

In a similar vein, another 2011 paper found that changes in copyright policy changes could spur demonstrable investment in new online services.  Comparing investment in online services in the U.S. and Europe in the wake of the 2008 Cablevision case — a federal appellate court ruling widely heralded as giving additional legal certainty to online platforms — researchers found that U.S. investment increased considerably.  In contrast, a follow-up study by the same authors explored the impact of judicial decisions in Europe that increased legal exposure for online platforms, and found decreased investment when applying the same methods.

The Fifth Era report reinforces this conclusion, providing further evidence that additional risk and uncertainty in the online environment decreases investment.  This conclusion is not entirely surprising — but the authors’ specific findings provide impressive data on how severely risk can stifle early-stage investment.

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