Copyhype

With rogue sites legislation moving through Congress, there have been some suggestions that, even if the bills were changed to address the (largely unfounded) criticisms of them, the PROTECT IP Act or Stop Online Piracy Act are simply not worth it. Some say that online piracy is not an enforcement issue but a business model issue, or that enforcement just doesn’t work.

The case for the need for such legislation has been made by many others. Judiciary Committee Chairman Lamar Smith noted the harm that rogue sites cause by profiting off the work of others in a statement issued for the Stop Online Piracy Act hearings earlier this month. Smith also pointed out how the DMCA is ineffective against the types of sites targetted by the bill.

I’ve examined the specific provisions in both the House and Senate bills previously, and they are very much likely to change as they move through Congress — Smith says he hopes to markup SOPA by the end of the year. But broadly speaking, is more effective enforcement necessary to protect the incentive for the creation of expressive works?

I think the answer to that is yes. I don’t think online piracy is solely an enforcement issue — just as it’s not solely a business model issue, or a technology issue. It’s all of these and more. There are a range of reasons why consumers pirate, a range of obstacles to building successful digital business models. It defies common sense to completely remove an entire approach from the table.

Ensuring a climate that doesn’t create incentives for pirate services

Harvard law professor Joseph William Singer sums this up eloquently in his recent paper, Subprime: Why a Free and Democratic Society Needs Laws. Singer talks specifically about the subprime mortgage crisis, but from a broader perspective, one that is just as relevant to the market for creativity:

The truth is that markets function because we have the rule of law, and liberty is possible only if we have a robust regulatory state. Markets are defined by a legal framework that sets minimum standards for social and economic relationships. And because we live in a free and democratic society (or aspire to do so), our regulations must be compatible with the norms, ideals, and values that democracies represent.

The exclusive, limited rights of copyright provide the minimum standards for the social and economic relationships at the heart of the market for expressive works. Free Ride author Robert Levine sums it up succinctly when he says “an information economy needs a functioning market for information. Traditionally, that market was created by copyright, but those laws haven’t been enforced effectively online.” Or, as Singer puts it, “Markets are enabled by law; without law, one cannot have a market.”

Any business relies on some level of legal framework — through enforcement of private property rights or contractual obligations. Businesses that rely on intellectual property are even more reliant on legal protection because of the intangible nature of their work. Enforcement of this legal protection remains a vital component of ensuring a functioning market for creative works.

Current law is insufficient to provide this protection online. Economists Olivier Bomsel and Heritiana Ranaivoson explain that

As a consequence, incentives arise all along the vertical chain to let the consumer free ride on copyright. Innovation signals can be then distorted in the sense that copyright infringement may drive industrial research and development, with the consequence of increasing more and more copyright enforcement costs. In other words, as long as the consumer can free-ride on copyright at nearly no cost, the whole copyright institution and the growing benefits it can bring to creative industries are threatened by the powerful incentives given to new infringing means. ¹Olivier Bomsel and Heritiana Ranaivoson, Decreasing Copyright Enforcement Costs: The Scope of a Graduated Response, 6 Review of Economic Research on Copyright Issues 13, 24 (2009).

Though Bomsel and Ranaivoson were talking specifically about efforts against end users, the same holds true for online intermediaries. Without effective protection of copyright, intermediaries have every incentive to misappropriate other people’s work as part of their business model. This forestalls the development of legitimate business models — ones that give consumers what they want while also ensuring that the type of high-quality content they want can continue to be produced in the future. And it shows why the solution to online piracy cannot be an either/or choice between better enforcement and better business models: just as enforcement alone won’t lead to increased revenues if there are no legal alternatives for consumers, legal alternatives for consumers have difficulty developing without proper enforcement against infringement.

The Evidence

Album sales reversed their downward trend for the first time in years in 2003 and 2004, after the major record labels began end user litigation. ²Kristina Groennings, An Analysis of the Recording Industry’s Litigation Strategy Against Direct Infringers, 7 Vanderbilt Journal of Entertainment Law & Practice 389 (2005), in response to RIAA litigation, “album sales increased for the first time in several years by 4.7 percent in the last quarter of 2003. In January 2004, sales showed a 10.4 percent increase since January of the previous year”; David Blackburn, On-line Piracy and Recorded Music Sales, Harvard University working paper (2004), “lawsuits brought by the RIAA have resulted in an increase in album sales of approximately 2.9% during the 23 week period after the lawsuit strategy was publicly announced. Furthermore, if files available on-line were reduced across the board by 30%, industry sales would have been approximately 10% higher in 2003”. More recently, we’ve seen music sales rise following Limewire’s demise. According to Nielsen, after Limewire was shut down by a federal court, “The spike in sales was immediate, noticeable and lasting.”

These effects are likely short term due to the one-off nature of litigation. More lasting effect must come from improved enforcement through legislation.

The March 2009 Final report by Oxford Economics on Economic impact of legislative reform to reduce audio-visual piracy surveyed evidence of the positive effect of enforcement. It noted the following research:

• Short term indications from recent UK research (Entertainment Media Research 2008) of 520 users who obtained unauthorised content digitally indicated 70% would stop their activities if they received an email or call from an ISP.

• Likewise BERR (2009b) refers to international evidence that two thirds of copyright infringers change their behaviour after receiving notification that their conduct is unlawful.

• Waterman et. al.’s (2007) review of the history of film piracy notes how the MPAA tackled the earlier problem of VHS piracy. This involved the introduction of harsher penalties against commercial piracy in 1982, which were further strengthened with the Digital Millennium Copyright Act (DMCA) in 1998. US states simultaneously began to increase penalties. The MPAA also brought prosecutions and raids against video retailers involved in the 16 manufacture and distribution of counterfeit videos. The authors report that losses from US video piracy fell from some 10-15% of legitimate video release revenues to studios in 1987 to roughly 7% of all legitimate video revenues in 2005. While they note the role of changing retail practices and technology, the authors clearly point to enforcement of legislation as an effective deterrent.

• A more sceptical assessment of historical copyright theft – Alexander’s (2007) analysis of legal attempts to confront illegal sheet music in the early 20th century – also acknowledges that the introduction of specific legal measures (the Musical Copyright Act 1906) played an important role in curbing this form of IP theft. She also pointed to the negative relationship between crime rates and the likelihood of conviction. Alexander reviewed these issues in the context of the Gowers Review and the question of whether history could throw any light on the effectiveness of criminal sanctions.

• Walls (2008) conducts a 26 nation cross-country quantitative analysis of film theft in which the cost of enforcing legal contracts (to prevent film theft) is a statistically significant dependent variable. That is, the greater the obstacles to legal methods such as enforcement, the higher the rate of piracy. Likewise, Proserpio et al’s (2005) 64 country study finds a higher degree of likely enforcement of international IP agreements is statistically related to lower movie piracy levels. Andres’ (2006) survey of software piracy in 23 European counties over three time periods (1994,1997 and 2000) finds a statistically significant negative relationship between software piracy and an index of copyright software protection (based on data from national copyright laws as well as civil and criminal codes and international data). Thus, countries with stronger antipiracy legal provisions tend to have lower software piracy levels.

• Finally, on a theoretical level, Harbaugh and Khemka (2001) point to the fact that broader based copyright enforcement (i.e. which captures a wider range of copyright theft rather than just “high value” types such as government and business) can ultimately lead to both lower consumer prices and higher industry profits. So there are social welfare benefits from enforcement. They also argue that private enforcement by copyright holders will tend to be “insufficiently extensive”. This suggests there is a need for government intervention through explicit copyright protection measures and that such measures should be broad in their scope.

The report itself concluded that changes to UK copyright law — including “Anti-camcording legislation”;ƒ “Regulation of car boot sales and occasional markets”; “Effective codes of practice with ISPs, underpinned by legislation”; “Implementation of additional damages regime”; andƒ an “Ongoing copyright awareness campaign” — would result in a direct increase of  revenues in the film and television industries of £268 million.

The Oxford Economics report noted broader results of implementing new antipiracy legislation: “Improvement of the theatre-going experience”, “Higher spending/employment on sets”, “Improved visual effects (UK)”, “Increased production of films”, “Improved employment opportunities for UK actors”, and “Better range/quality of legal online products”.

It also noted some negative effects of not improving the laws: “Loss of first release rights/prestige”, “Camcording in small cinemas and community effects”, and “Exodus of artistic talent”.

For creativity and culture to thrive in the online environment, a host of factors need to work in conjunction: effective enforcement, improved legal business models, more efficient licensing, increased awareness of copyright issues. None of these on their own represent a “silver bullet”, but each is a necessary component.