Monday, April 14, 2008

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.

11 comments:

Seth Greenstein said...

Excellent post, as always, Bill. The "value" theory continues the debate whether personal copying is a fair use. Having matured through reel-to-reel, compact cassette, DAT, CD-R and now MP3, that grudge match now has reached middle age, but has acquired little new wisdom over its years.

The recording industry began its most vibrant period selling singles, followed by albums (if enough good singles merited their purchase in a higher fidelity long form). When singles were phased out as too expensive or impractical, consumers were stuck with purchasing entire CDs for one song. For a time, that equated to annually-increasing profits, particularly as consumers replenished their aging vinyl catalog. But, as CD prices rivaled DVD prices, and video games gained popularity, the true value proposition of music became clear to consumers. Music is the background for other activity; motion pictures are immersive, but may be watched only a few times; video games ultimately cost less per hour of enjoyment than any other medium.

Now 99 cents again reigns as an acceptable price per song, and consumers can decide for themselves whether an artist's artistic vision is better consumed per track or as an entire oeuvre. The music industry faces the reality that it has lost control over how music must be consumed, and the consumer once again determines what value means.

And that brings us full circle to the fair use debate. Just as many consumers might not have bought a CD without the ability to format and place-shift a tape to use in the car or Walkman, the recording industry will find consumers unwilling to spend even the 99 cents without the ability to place and format shift from their computers to their MP3 players to recordable discs. Most certainly, it would be the rare consumer willing to pay for each copy. That certainly has been proved by consumer rejection of single-or-no-copy DRM restrictions. So, that's the reality of value for the music industry: absent portability, music may not be worth paying 99 cents. The consumer has decided what "fair" use is, regardless of whether the copyright owner explicitly or implicitly authorizes it, or the copyright law declares it noninfringing.

William Patry said...

Thanks for your very thoughtful comments, Seth. For further reading on the issues raised in the post, Fred von Lohmann pointed out to me Mark Lemley's papers on free riding and "spillovers" in which he notes that they produce positive externalities that cannot otherwise be achieved. See here:
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=898881
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=582602


And, also Fred himself has a forthcoming article in Berkley Tech Law Journal that attempts to explain why letting Apple "get away" with not paying over a portion of the value of iPods is not only good for society, but actually good for copyright owners in the long term. Please contact Fred for a copy; Fred's stuff is always worth reading.

joshua wattles said...

The way to deal with personal use of music as a business opportunity is to sell it as many times as possible in as many formats as possible and through as many outlets as possible. The music industry is coming to this. I worry that the distraction of personal use levy proposals whether in Britain or in the United States avoids the business challenges and their hard work and interposes a consultant-inspired (or trade organization inspired) quick fix - - or the perception of a quick fix. Almost every time a compulsory levy is imposed, and particularly at the early stages of a market transition, the result is to slow down business. There are exceptions. The cable compulsory license seemingly enabled the cable industry to grow faster and opened up huge revenue opportunities for copyright owners with pay television services grafted onto basic cable penetration levels. Obviously the “free license” of the ISP safe harbor has permitted faster development than might otherwise have occurred and, if you can keep the faith through the massive disruption, in the longer run enables important markets for copyright owners. So in evaluating a proposed levy, a measure among others might be the degree to which it enables future markets rather than the amount that gets paid into an outstretched hand. The leading minds conducting that evaluation should be the sales and marketing executives. It is their job to know what the customers want and how to convert that need into the most money. It certainly should not be a calculus performed by academics, lawyers and consultants. That being said, maybe I should write an article about it.

William Patry said...

Hi Josh, it would be great for you to write an article. If you want to do something different and shorter, I am happy to turn the blog over to you for a guest blog appearance.

Some might disagree that personal use should solely be viewed as a business opportunity.

MarcW said...

I add my thanks for another excellent article.

It is interesting to compare and contrast the notion of ownership and shifting of music files with the notion of ownership and reproduction of photographs. As you discussed recently, while the law is quite clear and to copyright lawyers there is no uncertainty, thirty years after the last major copyright reform it is still an everyday occurance for consumers to not understand that most of the time when they buy professionally-produced photographs, they have bought that print, and they do not have the right to make copies, enlargements, or derivative works involving the photographs without permission from the photographer.

In both cases, the consumer's thought process is very simple: "I bought it, it's mine, and I can make any reasonable use of it which I want to make." If I download a song from iTunes, I should not have to pay for it again if I burn a CD of it in a format which my car's audio system can read. Well and good. Why, then, should I have to pay the photographer for another 8x10 print of a photo for my office when I can scan my legitimately purchased 8x10 print which I keep in my living room and print it on my own printer?

Being a photographer myself, I admit to some inherent bias. I could probably make an argument for distinction, but in reality, the average consumer is going to see it just that way. The "reverse value" argument applies, so far as I understand it, exactly the same to both situations. If you have any thoughts on the matter, I would be very interested to hear them.

M

Michael said...

Hi Bill,

The MBG’s argument strikes me as being counterintuitive. If we accept that a market clearing price is found when consumers’ revealed preferences are satisfied, then it is not to the point to assert that the question of “value” to a consumers is tested by asking “[h]ow much less value would consumers attach to devices …if music were not transferable?”

I take your analysis of the proposition to mean that it not for the consumer to defend their market preferences (ie demand); on the contrary it is for suppliers to respond to meet these revealed preferences. This is precisely what Apple has done: it has found a market clearing price for music at 99c. But, of course, the inconvenient truth (to pinch a presently popular phrase) about the statutory monopoly which is copyright law has the obvious side-effects, not least of which is to skew the perspective of those for whom the die of copyright law is presently loaded – hence the tortured logic of the MBG submission (and, for that matter the tortured logic you have previously pointed to in respect of the RIAA’s convoluted inability to provide a clear answer to what, in its view, personal use actually means).

History is written by the victors. As Seth astutely obverse, “[t]he music industry faces the reality that it has lost control over how music must be consumed, and the consumer once again determines what value means.” Very true. With respect, the time has now long past that the music industry (the distorting effects of statutory monopolies not withstanding) might enjoy the rhetorical high ground from which to lecture and hector the market; in this regard Jessica Litman’s splendid commentary in Sharing and Stealing does this exposition of the argument a great service.

The MGB submission talks of ‘value’ as if consumers are but mere beneficiaries. Lest the supplier of goods to a market need reminding (eg the music industry), the ‘value’ of a product or service is a function of consumers’ revealed preferences in the market. Thus, in my view, it is an inconsistency of rhetoric to maintain an argument which postulates, as Pars 28 and 29 seem to do, that because we - the music industry – has ‘responded’ to a market which is tell us that our present offering is not capable of clearing the market, that this means we actually deserve to be rewarded to the windfall again of that response. It is as if the argument says we deserve to cream off this additional consumer surplus because, in effect, it is just the natural order of things (se Breyer, Uneasy case for Copyright (1970)). I don’t think so.

I am in Australia where we have recently enacted a new exception for the purposes of personal copying. They are pretty half-baked statutory amendments and do not deal with the real issues – the ubiquitous, always-on ‘value’ proposition consumers now attach to content in the digital age. It is to be seen, I suppose, if the UK (which, like us here in Oz) does not enjoy the bulwark of First Amendment speech protections will find an opportunity in this present reform round to inject a much needed does of progressive thinking into copyright law, rather than see it remain stultified and mired in obfuscating arguments about ‘value’ – arguments which for most consumers moved on some years ago. I am sorry if I have to be to be the one to break to the music industry but, as iTunes clearly shows, ‘value’ is simply what consumers say it is.

Regards,

Michael

twitcher said...

It is worth noting that MBG are pushing against a closing door here. UKIPO's consultation document, para 108 states:

We do not consider that levies are a good option for the UK.

Given that, I feel the chances of success for MBG's submission are somewhat slim.

Anonymous said...

"it is still an everyday occurance for consumers to not understand that most of the time when they buy professionally-produced photographs, they have bought that print, and they do not have the right to make copies, enlargements, or derivative works involving the photographs without permission from the photographer."

If I were told by a photographer that I didn't have the right to do that, I would demand a refund, on the grounds that I had been defrauded and sold the photo under false pretenses. Heck, if sued for copyright infringement I'd countersue for fraud.

Unless warned that the terms of sale are different, customers have the moral right to assume "I bought it, it's mine, and I can make any reasonable use of it which I want to make." This is ancient principle which is invariable across most of the world and most of time (with allowance for the meaning of "reasonable", but nondestructive personal uses are always reasonable). If the current state of the law disagrees with this, the law is just an ass.

Have you ever tried actually warning the customers that you're selling them very little? Have you observed how many customers just say, "Well, I'll just take the photo myself, in that case, rather than buying one print from you"? I'd bet a large number would say that. Or how many would say "How much for the right to use it in any reasonable manner?" That would probably be *all* of your customers.

MarcW said...

Anonymous:

Unless I actively tell someone a lie about copyright law and its application to photography, it's not fraudulent to assume that they know what the law is. The law itself assumes people know what the law is. ("Ignorance of the law is no excuse, not because it may not be an honest assertion, but because then any man may claim it, and none knows how to answer him.") Interestingly, this ties back to Mr. Patry's post about attempts to copyright state statutes - as one of my professors used to say, "The law is a seamless web." Given that the US Copyright Office has a large and efficient website, anyone who cares to may become reasonably educated about the relevant law.

That being said, I do educate my photography clients about these matters, and I am always up-front about what they can and can't do with any particular image I give them. I do not feel one whit of guilt about protecting my legal rights. If you want the copyrights to my photographs, you can buy or license them. If you are not prepared to pay what such rights are worth, then you may not use them.

Customers do not have any such "moral right" as you imply. The law is more than three decades old in its current form, and every Wal-Mart Photo Counter and Kinko's Copy Shop has signs and policies informing customers that they will not copy professional photographs (among many other things) for this very reason. My comment that consumers are often unaware - or, to be more precise, do not think to apply what they already know to their own personal photographs - was related to comparing photography to other digital media for purposes of discussing reverse value theory. It was not meant in any way to imply that they were correct, either legally or morally.

The law may often be an ass - I would not disagree with such an assertion. But in this case at least, it is quite clear. I urge you to write to your legislative representatives if you feel it should be changed.

M

Francisco de ZavalĂ­a said...

Mr Patry:

For those of us that are not experts in copyright law and tha cannot consult your treaty (Alas, it's not available in Argentina). Could you clarify something for me?
You said:
"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".
Why don't you agree with this reasoning? I ask because in my country this is pretty much the legal point of view.
Anyway I took the liberty of writing a comment of this entry in my blog.
Thanks, Francisco.

William Patry said...

Hi Francisco, the U.S. approach is to find infringement only when there is copying of material deemed expression. That is an objective inquiry, not based on defendant's conduct. For example, our Supreme Court in the Feist white pages telephone directory case said it is not only permissible to take all of the facts from a work, but that doing so is helpful to society; this approach is inconsistent with the "if you copy your are an infringer" approach