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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The White House Chimes In On Occupational Licensing

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Consumers may reasonably expect that their doctors and teachers are appropriately licensed. But do they expect the same for their florists? Apparently that is the case in Louisiana, which requires budding flower shop owners to pay $125 in fees and pass a written exam before obtaining a license. This is just one example of the huge growth in occupational licensing since the 1950’s. Now, more than one-quarter of U.S. workers require some government licensing to do their jobs.

Assessing the consequences of this growth in occupational licensing on the economy is the purpose of a recent White House report. The report notes that licensing is valuable in certain fields to protect public health and maintain service quality, but overly burdensome licensing (and its inconsistent regulation across states) can hinder economic growth and innovation. Workers face tougher barriers to earning higher wage jobs or moving across states to best utilize their skills. The requirements they need to meet to be licensed may not even be germane to their occupation.

Entrepreneurs and consumers also suffer from the consequences of inefficient licensing.  Entrepreneurs are hindered in developing solutions—for example, websites offering legal services may be illegal if they are seen to offer “legal advice” instead of “legal information”.   Immigrants who may want to set up their own businesses in services like nail care may be prohibited from doing so by state regulations mandating certain levels of general education. Consumers, on the other hand, almost always pay higher prices to use services requiring strict licensing requirements. The report cites quantitative studies showing that more restrictive state-level licensing of nurse practitioners raised the price of certain medical exams by 3 to 16 percent.MORE »

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Quote of the Day: ‘There’s Nothing On’ Edition

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According to media analyst Rich Greenfield, Cablevision CEO Jim Dolan apparently stated on an earnings call today that he is not threatened by the rise of over-the-top (OTT) video because:

“There is not enough content on the Internet to interest a mainstream audience”

DisCo, of course, has disagreed.  We’ve covered the launch of OTT services from major brands like HBO and CBS, and the rising media consensus that OTT isn’t going anywhere.

But it’s not just about studio-produced video content being made available via the Internet.  Competition for people’s attention involves more than streaming television and movies.  The sky is rising, with more content being created and consumed than ever before.  There are blogs and podcasts and playlists and vines and online communities, which all provide endless ways to stay entertained and informed, and most cost far less than a cable subscription, if they cost anything at all.  By empowering more people to be involved in the creative process, it’s pretty clear that the Internet is a disruptive threat to traditional cable TV and middlemen in general.  And with cord-cutting on the rise, it’s apparent that more people view content available on the Internet as a legitimate replacement for the cable bundle.  As one cable industry analyst noted: “It’s too soon to panic. But it’s not too soon to be genuinely worried.”

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Finger on the Trigger: The FCC Needs to Get Spectrum Auction Rules Right

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The FCC is set to vote on the final rules for the upcoming 600 MHz incentive spectrum auction tomorrow, in accordance with the goals of the National Broadband Plan that were reiterated by Congress. Chairman Wheeler and the rest of the FCC’s commissioners are about to take a very important step to free up valuable low-band spectrum, a necessary input for the provision of wireless broadband coverage.  As the FCC has repeatedly said, this auction is a “once-in-a-generation” opportunity to feed the fast-growing demand for high-quality spectrum.

Given that these auctions are rare, the 600 MHz incentive auction presents the FCC with a unique opportunity to foster competition and innovation in wireless markets.  As the FCC’s decision to block the T-Mobile-AT&T merger and the FCC’s most recent “Mobile Wireless Competition Report” illustrate, the mobile broadband marketplace faces key competitive challenges.  The two biggest network providers, AT&T and Verizon, command nearly 70% of the industry profits and control nearly three-fourths of the high-quality, low-band spectrum.  To his credit, the FCC Chairman acknowledges these issues.  In a 2014 blog post on the 600 Mhz spectrum auction, Chairman Wheeler stated:

Today, however, two national carriers control the vast majority of that low-band spectrum.  This disparity makes it difficult for rural consumers to have access to the competition and choice that would be available if more wireless competitors also had access to low-band spectrum.  It also creates challenges for consumers in urban environments who sometimes have difficulty using their mobile phones at home or in their offices.

This is why the Commission has proposed creating a 30 MHz block of “reserve spectrum”, eligible only to non-dominant carriers.  According to the Chairman, the point of the reserve is to prevent the dominant carriers from sweeping the auction and to maintain a “vibrant and competitive” auction.MORE »

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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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An Uber Victory For Consumers

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New York City officials on Wednesday abruptly abandoned plans to rein in Uber, dropping a fiercely contested proposal to cap the company’s growth in its largest market. That’s a good result, because as Mitchell Moss, director of the Rudin Center for Transportation Policy at NYU, commented, it signals “that the days of taxi industry cartels are over.”

Yet the even better lesson is that competition, if left unregulated — without political or regulatory barriers protecting incumbents — can work quickly to correct market failures. The problem in New York for decades has ben a shortage of taxi availability on rainy days and during rush times.  Here:

Consumers have become too attached to apps like Uber’s that now make ordering a car as easy as two clicks on a smartphone. That base of users has now in many cities proven more powerful than the company’s not insignificant opposition, from traditional taxi providers and labor critics.

Uber triumphs as New York City officials abandon plans to limit transportation company | WashPost

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The Disruptive Benefits of Zenefits (and Lemonade Stands)

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You may not have heard of cloud-based business HR and insurance provider Zenefits, but the folks at industry giant Automatic Data Processing Inc. (ADP) certainly have. ADP recently shut off Zenefits’ access to client information needed to run payroll, charging that the startup was gleaning this information in an unauthorized manner and posed a security risk. Zenefits countered with a blog post claiming that ADP was actually shutting off access because it had developed a competing service to Zenefits. ADP took issue with that accusation and then filed a lawsuit against both Zenefits and its CEO Parker Conrad.

The Zenefits story is fascinating, both ADP’s snarky legal reply and the unusual circumstance of a disruptive entrant challenging a de facto monopolist (or duopolist). The two largest U.S. payroll processors — ADP and Paychex — combine for some 40% of the payroll market, which indicates that their share of outsourced payroll services is probably far higher. Analysts have also noted that both firms share lock-in advantages, raising entry barriers, and enjoy what one market observer terms a “rational duopoly,” with ADP focusing on larger businesses and Paychex targeting smaller concerns. The firms are able to lock customers into long-term deals and “consistently raise prices.” And both companies have strong brand identities that help them against upstart, unproven competitors.

As a competition matter, of course, a 40% share does not qualify as monopoly power for antitrust purposes. On the other hand, when a dominant firm uses the legal process as a tool to intimidate or retard the growth of new, upstart rivals, it faces some serious antitrust risks. So while the details remain to be disclosed, the glimpse inside the dynamics of payroll processing provided by ADP’s libel litigation suggests something possibly untoward.

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The Disturbing State of Uber In California and France

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You’ve probably read news reports of two current developments that are directly threatening the continued viability of Uber’s ride-sharing service — California’s ruling that Uber drivers are “employees” of the company, and France’s decision to indict two of Uber’s top French executives on criminal charges of “enabling illegal taxi services” that could bring fines and jail time. The company called the latter “[t]otally unheard of,” and a “piece of pure calumny,” and is appealing the former.

Taxi Drivers Protest Uber. Image Credit/License: Gyrostat (Wikimedia, CC-BY-SA 4.0)

Taxi Drivers Protest Uber. Image Credit/License: Gyrostat (Wikimedia, CC-BY-SA 4.0)

These represent just the latest conflict between the sharing economy and legacy regulations, issues we have explored several times at Project DisCo. Uber, which is in talks to raise more investments at a whopping $50 billion valuation, has rapidly upended entrenched taxi and transportation industries with its model of letting people hail rides via their smartphones. Airbnb has done the same thing to hotels and motels, with similar blowback from local regulators, as in New York City. Tesla’s direct automobile sales model has been opposed at the state level by auto dealers.

All of these examples share the common thread of treating innovative new services as if they were clones of traditional industries with which they compete, and thus subject to the same legal restrictions. But they are not. There’s no public policy or legal difference between asking a friend to drive you to the airport and hailing an Uber driver with the company’s smartphone app; both perform exactly the same function, and neither involves holding the driver or company out as offering “common carriage” transportation to the general public. The fact that modern technology allows on-demand ride-sharing to be organized at scale is precisely why Uber’s service is different from taxi rides. Cabs can cruise the streets, wait at hotels and airports for fares and, in many locales — like Washington’s Dulles Airport — enjoy a franchise monopoly. Uber drivers have none of those benefits, especially the municipal-sanctioned protection from new entry.

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The Digital Single Market and A Duty of Care: Preserving the Transatlantic Legal Foundation of a Thriving Internet

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As part of the Digital Single Market (DSM) communication, the European Commission has discussed the possibility of imposing a “duty of care” on Internet intermediaries, which would require Internet platforms to take a more active role in policing user content.  Forcing Internet intermediaries to monitor and remove their users’ communications is ill-advised from both an economic and human rights standpoint.

The rapid growth of the Internet was not merely the function of technological innovation.  This fundamental restructuring of commerce and communications would not have been possible but for substantive legal reforms that adapted legacy legal concepts to comport with the realities of a hyper-connected Internet age.  Arguably the most important legal and legislative development of the Internet era was the concept of intermediary liability limitations for Internet service providers.  Or, stated in a less legalistic way, the policy choice that Internet services should not bear blame for bad people saying or doing bad things on the Internet.  Given the size and scope of the Internet and the volume of online communications, it is safe to say that Facebook, Twitter, Google, Yelp, YouTube, Allegro, and Dailymotion would not exist today if the law evolved to hold websites and Internet services liable for the actions of their users. Further, imagine operating a telecommunications network with the sum of all this information passing through without being shielded from responsibility for the actions of all of your users.  What venture capitalist in her right mind would invest in a platform that was exposed to liability for billions of websites beyond its control or trillions of posts composed by third parties?  What would Internet business models look like if companies had to pre-screen all user communications before they went live?

Recent developments in Europe, including the Delfi ruling and the DSM “duty of care” proposal, suggest that Internet services may soon be asked to take a more active role in filtering user content. Yet even with advanced filtering tools, unlawful speech is almost always context dependent.  Libel and defamation would not be obvious to a filter.  Even more complex is when lawful speech is used unlawfully, as in the case of copyright and trademark infringement.  Given that rules about these various types of speech are often the product of complex legal cases, even human review of every online communication would not completely shield an Internet company from liability, given that different people can come to different conclusions about whether speech is “harmful.” Not to mention that standards for what is permissible speech vary widely from country to country.

Besides the commercial impact, the implications for free speech would also be disastrous. Protections from intermediary liability enable platforms to give people around the world a simple way to express themselves and to share what they love with the world, and to challenge the restrictions of oppressive governments. One study found that when online platforms are regulated on the basis of content submitted by their users, they remove large amounts of controversial but legal content for fear of facing penalties. The UN’s Joint Declaration on Freedom of Expression on the Internet recognizes the success of laws such as the CDA, DMCA, and the E-Commerce Directive, stating that “intermediaries should not be required to monitor user-generated content and should not be subject to extrajudicial content takedown rules which fail to provide sufficient protection for freedom of expression.”

Even if pre-screening and filtering at scale were feasible, the value of each individual communication — whether it takes the form of a website, a tweet, a Facebook post or a YouTube video — is negligible, where the potential legal exposure is huge; the potential damages for copyright law can reach $150,000 per work infringed.  So, in a world where Internet companies were liable for the communications of their users, a rational company would be incentivized to aggressively censor content, leading to significant blocking of ostensibly legal speech as the costs of under blocking are significantly more than the costs of over blocking.MORE »

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The Layered Playing Field

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Recently Politico reported on Deutsche Telekom CEO Timotheus Hottges calling for “free competition” while reporting the company’s strong financial results, reliable dividend and strong free cash flow. But “free competition” in what? Mobile telephony?

Deutsche Telekom (DT) spokesman Philipp Blank clarified that “What we want are open platforms and inter-operability” apparently a reference to messaging applications such as WhatsApp, Apple’s FaceTime, Skype and Viber. DT wants such apps to be made interoperable with SMS. These demands have also been made by Telefonica and coincide with the European Commission’s recent release of the Digital Single Market strategy. Both companies want the European Union to bring about a ‘level playing field’.

Is this a good idea?

Rather than think about a level playing field, something the firms above have called for, a better way to approach this debate would be to think about a layered playing field.

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