The New Perverted Reverse Value Theory of Copyright

Candidates for a unified theory justifying copyright in all its manifestations include the value of the copyright owner’s efforts in creating the work. This value can take a natural rights form – the value of genius – but it can also take the more mundane Lockean agricultural form – copyright owners are the sowers of their intellectual labor.

The value theory of copyright rightfully has considerable appeal. One can even correlate the value theory to fundamental concepts of copyright like originality: where the copyrighted owner has added expression, that expression is protectible; when expression hasn’t been added, there is no protection. The correlation breaks down in areas like ideas, which while perhaps the most innovative and valuable part of a given work will nevertheless remain unprotected; the value theory has to rely on other theories to explain the exclusion of protection for ideas. And the pure value of labor also leads to protection for sweat of the brow. The value theory is both over- and underinclusive and therefore cannot play the role of a unified theory.

There is also a reverse value theory, one that has been invoked sketchily in the past, but has now been officially launched on a grand scale in the UK. The reverse theory is the subject of this post. In the past, courts have on occasion found infringement based merely on the fact of copying: if defendant went to the trouble to copy something from plaintiff, then the copied material had value to defendant, and defendant should lay claim to recovering the lost value. This was approach represented a negation of the originality requirement and of the requirement that what is taken be a substantial amount of expression; but for those judges who preferred moral simplicity to substantive law, the copied=value=infringement approach proved irresistible. Note that the value spoken of was the value to defendant, not plaintiff. The portion taken could have been quite insignificant to plaintiff’s work, another reason the approach conflicted with general principles of copyright law, which bases infringement on the importance of the portion taken to plaintiff’s, not defendant’s work.

The new reverse value approach does to consumers what the infringement approach did to defendants, and then some. On January 8th of this year, the British UKIPO launched a consultation process as a follow-up to the December 6, 2006 Gowers report. One of the recommendations in the report (see page 2, paragraph 6) was this:

It is proposed to create a new exception that would allow consumers to make a copy of a work that they legally own, so that they can make it accessible in another format for playback on a device in their lawful possession. The exception would apply to personal or private use. The owner would not be permitted to share it more widely (for example in a file sharing system or on the internet). Multiple copying would not be allowed.

The proposed exception is very narrow. The consumer would have to own a legal copy. The format (and perhaps space)-shifting would have to a one-off and for personal use, and the copy would have to made for a device the consumer legally possesses. There are certainly more liberal approaches to format-shifting one could propose, but as approaches go, if personal use means anything it has to fall within this modest proposal.

Comments on this process of the consultation closed last Tuesday. One of those submitting comments was the Music Business Group (MBG), a coalition of UK music publishers, record labels, and licensing organizations. Here is the link. The MBG takes a negative view of the proposed exception, that is unless its members get a license fee. But how to justify such a license fee for consumers making a single copy from a lawfully owned copy on to a lawfully possessed device for personal use? Here is the MBG’s introductory bulletin points on this effort:

 Unquestionably, there is value produced by the ability to format shift for both consumers and commercial enterprises which directly arises from the transferability of music
 It is imperative that creators and performers should benefit from this value; ultimately it is their creativity which underpins the entire value chain
The only solution which achieves this goal is a flexible and market-led approach based upon a business-to-business relationship.
(page 3).

At this point, some readers might be confused: what is the value produced by consumers? Aren’t those who use copyrighted works without permission or payment usually described as parasites, pirates, or thieves, and hardly as value-creators? And haven’t we been told for years that it is consumers, especially via P2P file sharing, that is the cause of the record industry’s decline?

Behind the MBG’s new approach is a plan to pervert language in order to achieve an otherwise politically unacceptable result. The plan began in the summer of 2007, with what was called the Value Recognition Strategy (referred to in MBG’s submission to the UKIPO). The strategy was prepared by Capgemini consultants (no surprise there: copyright, like political campaigns, is now the province of focus group generated slogans and messaging), and is designed to examine the “value gap,” which is defined as the amount of decline in UK record sales since 2004. A private study conducted by Capgemini for copyright owners, and discussed here at the UK Register website is said to have revealed that “format changes and price pressure from discounted CDs on sale in supermarkets, are most to blame for this ‘value gap.” Format changes here refers to the unbundling of albums into per song sales, and not to the format shifting proposed in the UKIPO exception, although as we shall see the two are very much related in the MBG’s view. The article in the Register states:

Capgemini calculates that of £480m lost to the industry since 2004, £368m was the result of format changes: principally the unbundling of the CD into an "a la carte" selection of digital songs. Of the remainder, 18 per cent was lost to piracy. And that suggests that simply going after illegal downloaders won't save the British music business.

So what is the Value Recognition Strategy, then? To go after iTunes as the Register article notes, but that means not shutting it down – since the site is licensed -- but instead getting a cut of the revenue iTunes generates. There have been efforts to do this in the past, under the same value approach. For example, there have been efforts to obtain a cut of the profits from the sale of iPods. One head of a U.S. music company was quoted as saying with respect to this effort, “We felt that any business that’s built on the bedrock of music we should share in.”

This statement is indicative of why the corporate music industry is on its death bed: after the industry insisted in preserving a business model that consumers didn’t want (album sales), it fought the business model consumers do want (per song downloads) resulting in a flight to unauthorized services that gave consumers what they wanted (P2P), and then when someone else came along and saved the industry from itself by creating an authorized way to get consumers to pay (iTunes), the industry now insists that it is being ripped off, that it is being deprived of “value” that belongs to it.

Apple’s iTunes business was built from scratch by a technology company, not by an entertainment company, not a consumer electronics company (or a hybrid like Sony), and not by a traditional retailer – indeed, it bears noting that the traditional record store chains in the United States – based on the sale of albums -- are out of business, and the few foreign ones (e.g., Virgin) that remain, remain because they sell video DVDs and clothing. In February 2008, a mere five years after the launch of iTunes, Apple has become the word’s largest source of music purchases (surpassing Wal-Mart), and it did so by sinking its own money and creativity into hardware and software, none of which any copyright owner contributed to, and by developing a business model that copyright owners had fought tooth-and-nail. Nor apparently is it enough for copyright owners that they reportedly get 70% of all iTunes sales with no development costs, no overhead costs, no server costs, and without bearing any of the expenses of Apple’s technical work. Even more: on the record labels’ side of production, the 70% of iTunes revenue they are receiving is made off of a product that requires no packaging, warehousing, shipping or other associated costs.

So, back to the value recognition strategy and the MBG’s submission to the UKIPO. That submission is the public face of what has previously been private, and it is not a pretty sight: faced with its own consultant’s conclusion that only 18% of the songs on iPods and other such devices are “pirated,” the industry wants to save it self from its own failures by getting a second license fee; recall that the UKIPO’s proposal was limited to making one copy from a lawfully owned copy for personal use. The industry got paid once for sale of the lawful copy and now wants a second bite at the same apple (pun intended). And why? Why because the market for iTunes and the ability to transfer DRM-free copies demonstrates that consumers “value” getting what they want; because they “value” getting what they want, that value belongs to the music industry.

What am I talking about, you may ask? The MBG states on page 13, paragraph 20, “Consumers enjoy and value the transferability of music.” Note the word value here. But what does the word mean? The MBG submission explains on the next two pages, paragraphs 28-30:

28. Another way of approaching the question is to ask how much less value would consumers attach to devices – MP3 players, computer hard drives, CD and DVD burners – if music were not transferable?
29. In 2003 Sony introduced digital music versions of its Walkman player, called the “Network” Walkman. Sony’s players were initially compatible only with Sony’s proprietary music format. In order to move tracks from CD to the Sony ATRAC3 players, customers were forced to use specific Sony software.
30. Purchasers of Sony Network Walkman players were not easily able to play podcasts, tracks copied from friends’ hard drives, tracks downloaded from filesharing networks and so on. Eventually, in August 2007, Sony responded to the business failure and announced that future players would support the more common Windows Media and MP3 formats as well as AAC which is used in the iTunes store and jukebox. “By going open-standard, Sony will increase customer choice and make its audio players more versatile,” said [a Sony representative]. “We did something perfectly simple. We listened to what our customers want.”

Of course, it took Sony four years to listen to what it customers wanted, a period of time in which iTunes was developed and came to dominate the field. But the conclusion the MBG draws from this experience is not what you would think: Sony’s failure to listen its customers shows that customers valued something different than what Sony valued, and therefore, as a direct result of Sony listening to its customers, Sony’s customers now possess value that Sony should recapture.

I am not exaggerating, which is why I quoted all of paragraphs 28-30. Most people, and hopefully government policy makers, would think the existing situation is a win-win: Sony sells more machines and Sony music, and consumers get what they want. But that is not how the MBG sees things. They see the Sony experience as an example of what is wrong with the music industry: now that consumers have what they want, through lawful sales from Sony, Sony is losing value to its customers. This “imbalance” as MBG describes it can only be corrected through a new levy on customers for having the audacity of forcing Sony to give them what they want.

In short, the “value” the MBG is demanding that the UK government recognize through the imposition of a new levy is the market place value that Sony willingly gave to its customers, and which it trumpeted as an example of listening to those customers. From customers’ perspective, this is surely an unusual way to lose through winning. The new levy approach, the MBG concludes “provides a future proof, yet easy to manage system that is responsive to market realities … .” (page 17, paragraph 42).

The imposition of a levy for the making of one personal copy of a lawfully purchased work for format-shifting is not even remotely a market reality, much less responsive to one. Instead, the MBG’s proposal seeks to create an obligation that doesn’t and should never exist: even counter-reformation opponents of limitations and exceptions have to acknowledge that in the drafting of Article 9(2) of the Berne Convention in 1967, private use exceptions were common in national laws. The MBG’s proposed levy is to create value for copyright owners where none exists: in the past, the industry made money by reselling consumers the same product over and over again: 78s to 45s; 45s to tape; tape to CD, and most importantly all of them in album format, a proven bad value to consumers. The incredible amounts of ink spilled about and suits filed over the Mp3 format have little to do its with digital format, and everything to do with breaking down the single business model that has sustained the music industry for many decades, album sales. It is the decline in album sales that the industry’s own Value Recognition Strategy acknowledges is responsible the principal decline in the industry’s income, not file sharing and certainly not format shifting.

What this means to me is not that consumers have captured value that belongs to the industry, but rather that consumers have long been deprived of the value of their money, and are finally beginning to get something close to the true value of the product being sold. It is that market reality that scares the you-know-what out of the MBG, and that forced it to turn to a consultant to come up with a theory to sell to government policy makers as an example of the sky is falling from yet another effort to blame consumers for the industry’s own shortcomings. The proposed solution by MBG is an attempt to obtain a government-mandated subsidy by consumers of an industry that is finally being forced to give consumers what they want. There is no value for policy makers in mandating such an undeserved subsidy. And, as a policy matter, the theory on which it is based, namely that every unauthorized use by consumers is the misappropriation of value properly owned by copyright owners, has no limit; it applies to book reviews, news stories, quotations, parodies, the first sale doctrine, and a limitless term of protection (note the connection between the value theory and the concurrent effort at term extension for sound recordings in the UK and Europe). Even Blackstone’s view of property as the sole, despotic dominion of the owner never reached this far.

Hopefully the UKIPO will reject the proposed levy and the theory out of hand. Rejection would be a valuable lesson.