Creation and the Internet

Last week saw two interesting developments in the ongoing debate over effects of file-sharing and what to do about it. On Thursday, a federal jury in Minneapolis ordered Jammie Thomas-Rasset to pay $1.92 million to Universal Music Group and other record labels after finding she had downloaded 24 songs illegally. That works out to a staggering $80,000 per song.

thomas-rassetEven Sony BMG’s lead lawyer in the case, Wade Leak, admitted to being “shocked” by the size of the verdict.

On Friday, two Harvard Business School economists, Felix Oberholzer-Gee and Koleman Strumpf, released a working-paper version of a new study (PDF), which found that, pace the media companies, the conclusion that rampant file-sharing and other types of digital piracy will reduce incentives to produce new music and movies ultimately harming the public, has no empirical foundation.

In fact, the data point in precisely the opposite direction. The researchers found that the number of new albums released each year soared from 35,500 in 2000, to nearly 80,000 in 2007 (including 25,000 digital-only albums), despite a decrease in gross revenue from CD sales over that same period. Similarly, the number of feature films produced worldwide each year rose from 3,807 in 2003 to 4,989 in 2007.

The increase in film production held true even in countries where film piracy is rampant, such as South Korea (80 to 124), India (877 to 1164) and China (140 to 402). Feature film production in the U.S. over the same period rose from 450 films in 2003 to 590 in 2007.

What does one development have to do with the other, apart from their coincidental timing?

Oberhalzer-Gee and Strumpf advance a number of provisional theories for why production has not declined even as traditional revenue streams, such as CD sales, have.

One is that other sources of revenue have grown even as CD sales were declining, such as live touring. The researchers note that average concert ticket prices rose more than twice as fast as the consumer price index between between 1999 and 2003. Perhaps, they suggest, the incentive provided by live touring and merchandise sales (“complementary goods”) was enough to offset the loss of CD sales. (The idea is hardly far-fetched. The music industry long accepted the idea that record sales were a highly valuable complementary good derived from radio play–to the point were record companies were willing to engage in various forms of legal and illegal payola to ensure it–and thus there was no need to compensate artists for airplay.)

Another possibility is that artists simply aren’t motivated exclusively by expected financial return, but instead draw other benefits from creating their art. Thus, a loss of revenue from recording might have relatively little impact on their overall motivation. (Note: I am greatly eliding Oberhalzer-Gee and Strumpf’s arguments here. The report is worth reading in full).

Neither theory is likely to be easily accepted by the media companies because they point to the conclusion that increased and expanded copyright protections will have relatively little bearing on the public-goods goal of copyright law and may, in fact, be harmful:

Over the past 200 years, most countries evolved their copyright regimes in one direction only: lawmakers repeatedly strengthened the legal protections of authors and publishers, raising prices for the general public and discouraging consumption. Seen against this backdrop, file sharing is a unique experiment that considerably weakened copyright protections. While file sharing disrupted some traditional business models in the creative industries, foremost in music, in our reading of the evidence there is little to suggest that the new technology has discouraged artistic production. Weaker copyright protection, it seems, has benefited society.

By the same token, huge damage awards such as in the Thomas-Rasset case (or the tens of thousands of small settlements resulting from the RIAA’s campaign of litigation against individual file-sharers), while perhaps deterring some file-sharing in the future, are essentially irrelevant to the public-policy goal of copyright because they’re focused entirely on the end user, whose behavior has little or no empirical connection to the behavior of artists.

At this point, some in the media companies will object that there is more at stake than the motives of creative artists. Unless someone is willing to invest in artistic production by paying artists and providing the means of production, artistic creation won’t happen. Even if weaker copyright protection has not affected artists’ incentive calculus, if it undermines the profitability of investing in artistic production the effect is the same: less production.

Oberhalzer-Gee and Strump advance another idea, however, that offers at least a partial answer to that objection (and which will be familiar to readers of The Media Wonk):

The role of complements makes it necessary to adopt a broad view of markets when considering the impact of file sharing on the creative industries. Unfortunately, the popular press – and a good number of policy experts – often evaluate file sharing looking at a single product market. Analyzing trends in CD sales, for example, they conclude that piracy has wrecked havoc on the music business. This view confuses value creation and value capture. Record companies may find it more difficult to profitably sell CDs, but the broader industry is in a far better position. In fact, it is easy to make an argument that the business has grown considerably.

The decline in music sales – they fell by 15% from 1997 to 2007 – is the focus of much discussion. However, adding in concerts alone shows the industry has grown by 5% over this period. If we also consider the sale of iPods as a revenue stream, the industry is now 66% larger than in 1997… Technological change will often lead to changes in relative prices and shifts in business opportunities. Focusing exclusively on traditional streams of revenue to arrive at a sense of how new technology changes welfare will typically be misleading [empahsis mine].

The main problem confronting artists and publishers, in other words, is not that they lack adequate copyright protection but that they lack effective mechanisms for capturing value as it is created and consumed on digital networks. Legally distributed music, for instance, has had enormous value on the Web. But most of that value has been captured by Apple, by keeping iPods dear and treating the music like a commodity.

Ipod Toilet RollThe problem is not limited to music and movies, moreover. Newspaper publishers face the same basic dilemma as they watch their traditional revenue streams from advertising and subscriptions get eroded in the shift to digital platforms. Meanwhile, aggregators, bloggers and search engines manage to capture value around news content while publishers, by and large, have not.

I would argue, in fact, that the current system of exclusive rights provided by copyright has actually become an impediment to copyright owners seeking to capture value for their content in digital networks, not the solution, because it does not easily lend itself to the sort of mechanisms that might be effective at capturing value on digital platforms.

The collection of exclusive rights spelled out in the Copyright Act, developed over decades, were by and large designed to back-stop licensing schemes in which the licensor paid for access to a scarce resource and then sold that access to the public.

Scarcity, however, is an alien concept on the Web. The challenge on the Web is to maximize the utility of ubiquitous resources by maximizing their use. That’s a very different gestalt from copyright’s traditional focus on exclusivity.

Traditional licensing arrangements based on scarcity simplay have not been very effective at capturing value for content owners online, as the record companies discovered to their chagrin from their dealings with Apple. And beggaring downloaders like Jammie Thomas-Rasset for acting without a license isn’t going to make them any more effective.

What artists and their investors really need is not more exclusive rights, or more enforcement of their current exclusive rights, but a system of rights that support business models premised on capturing value from use, not from scarcity.

Everything else is just fighting over the remains. — TMW