THE ECONOMICS OF COPYRIGHT - THE BASELINE MODEL BEFORE DIGITIZATION

At the outset, it makes sense to briefly restate the main economic rationales behind copyright law. Legally speaking, copyright law grants moral and economic rights to the creator of a work, such as a song or a movie.

Copyright consists of a bundle of exclusive economic rights that enable authors to control, and therefore license the use of, their creations. These economic rights include: rights to reproduce and distribute (e.g., in form of DVDs or books); rights to publicly perform and communicate to the public (e.g., the broadcast of a movie or the performance of a song in a concert); the right of making available the work on digital networks (e.g., downloading and streaming); and the right to control adaptations and translations. Because these rights are independent of each other, each commercial and

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non-commercial use can be licensed or transferred independently. In practice they can be managed directly by the original rights holder, by those to whom a right or rights have been transferred (e.g., producers or publishers), or by collecting societies entrusted to that end (WIPO, 2004). It must be noted that economic rights are subject to certain limitations or exceptions. In fact, certain actions normally restricted by copyright may, in circumstances specified in the law, be done without the authorization of the copyright owner (e.g., reproduction exclusively for private use or short quotations from a protected work).

This legal set-up is grounded in the economics of copyright, which sees this intellectual property right as an instrument to stimulate the production and dissemination of creative works (Landes and Posner, 1989; WIPO, 2003). Economists view creative works as non­excludable goods that can be reproduced at low marginal cost and enjoyed in a ‘non-rival’ way by many consumers. However, if creative works were to be provided at their low marginal costs or copied for free, creators and the associated industries would have no direct incentive to undertake the investments to create such works. In this case, the supply of creative works - in terms of quantity, quality or diversity - could fall below a level that is socially desirable. Indeed, the fixed cost of producing content and the risks associated with financing the production, marketing and distribution of creative works tend to be high in many content sectors.

The establishment of a copyright system is seen as the solution to the market failure scenario described above. As with other intellectual property (IP) rights, however, a trade­off among costs and benefits that merits careful consideration is involved (Table 11.1). The specific provisions of copyright seek to strike a balance between the short-term

Table 11.1 Effects of the copyright system - a conceptual framework

gratification of immediate consumption and the long-term process of providing eco­nomic incentives that reward creativity and foster a dynamic culture (Gurry, 2011).

On the one hand, the creator of a work is rewarded with the grant of exclusive rights for having invested the necessary time and effort in cultural creation (Plant, 1934). As outlined above, besides any moral rights conferred by copyright law, the economic rights grant the creator exclusive control over his or her work for follow-on activities. First, theoretically at least, these rights allow the creator to set the market price at a ‘monopoly’ rather than at a competitive level, and second, they allow the creator to price discrimi­nate with regard to the other market participants according to different levels of access (WIPO, 2003). The exclusive rights conferred by copyright are intended to stimulate the supply of creative works, both directly as authors are incentivized and indirectly as the created works might stimulate follow-on creativity by others.

Importantly, copyrights play a fundamental role in the economic organization of creative activities and the creative industries. Copyrights are a vehicle for transaction and cooperation, as rights can be transferred and bundled. Rarely do consumers enjoy creative works directly from a ‘lone creator’, as is often implied in economic treatises or studies relating to copyright. A musician will often rely on a record company to invest in his or her recording, to market it, to arrange for broadcasts, and so on. He or she will also rely on a collective management organization (CMO) to generate revenues for him or her through collective licensing of his or her music to radio stations and other outlets. Many creative works also require the participation of many creators with potential rights to their performance that need to be negotiated and bundled in one piece of work. A movie, for instance, has a scriptwriter, a director, actors, camera people and the like, who all share in the creation and potentially hold separate rights.

Copyright-based industries are often the rights holders responsible for financing, supporting, distributing and marketing creative works.

When it comes to access by end users, the exclusive rights conferred by copyright law allow the rights holder to control the work, its accessibility, its pricing, its modification, and so forth. It is expected that this will raise the price of the said work, in particular when works can be shared through copying or rentals (Varian, 2005).

In reality, of course, creators or artists cannot set prices while ignoring market forces. The price elasticity of demand, the availability of other competing content products, and other factors rein in the power to control prices, which is more theoretical than real. In addition, it is not the creators themselves who decide on the pricing of their work in most cases, but intermediaries, (e.g., the movie studio, the collective management organiza­tion, etc.) and distributors, (e.g., record shops, supermarkets).¹ It also needs to be noted that in many creative posts, such as computer programmers, journalists, and others, the copyright is never attributed to the actual creator but to his or her employer, when these activities are treated as ‘work for hire’. However, the point about potentially higher prices remains valid. Access to the creative work will certainly not be free and ubiquitous.

When it comes to the impact on follow-on creation, the limitations on accessing, reusing and modifying creative works - all of which can inspire the creation of new works - can, at the same time, potentially have a negative effect on follow-on creation. As compared to patents that offer protection to inventors for 20 years, copyrighted works fall in the public domain much later, and potential follow-on creators - either of original works or adaptations - can be negatively affected (Landes, 2002).

Finally, while the existence of copyright facilitates transactions and collaborations, it can also hinder making works available and impose costs on intermediaries keen to invent new forms of access and new business models.

First, copyright by definition means exclusivity and territoriality depending on the country and its legal regime. Thus, rights holders could refuse to license and make the work accessible to particular actors or transmission channels, or to particular jurisdictions.² In particular, when new entrants would like to make content available in new ways, the refusal to offer or broadcast certain copyright works might disable new forms of accessing content. The daunting process telecom providers experienced in trying to secure the rights to broadcast soccer matches over mobile phones is one example of this kind of refusal. At times, such refusals to license copyrighted content can result from rights holders’ anticompetitive motives (Wunsch-Vincent, 2010a).

Second, the nature of scattered and unregistered rights and their territorial nature can complicate the identification of rights holders and the construction of new business models. Indeed the complexity and costs of the legal processes and the fees involved can be so high as to discourage new market entrants. Small players in particular might face insurmountable obstacles. This became apparent in the online context, with new entrants - no matter how large their size - initially having a hard time securing rights for many territories in a timely manner. As posited in earlier OECD studies (2005, 2008) and documented more recently in KEA and Vrije Universiteit Brussel (2012), licensing music for online music platforms entails dealing with the copyrights granted to a spectrum of people involved in composing, performing, recording and exploiting musical works.

In addition, maintaining a copyright system is not without cost. Similar to other forms of statutory intervention, a copyright system also creates considerable administra­tion, enforcement and transaction costs that lead to a so-called ‘deadweight loss’ (Watt, 2000).⁵ As copyrights are never examined or renewed, no related efforts or fees have to be incurred.⁶ As a result, in contrast to the patent system, the costs at this end are rather low. Still, private parties have to keep records, and transact, negotiate, clear, and enforce rights. Policy-makers must identify the right scope and duration of copyright protections. Courts are necessarily involved in settling disputes, and police, border authorities and others - including private firms on their own or others’ behalf - regularly participate in copyright enforcement.

In light of the above, there is recognition among economists that copyrights alone might not create optimal incentives and economic rewards for creators. Given the multiplicity of rights holders, copyright markets and institutions such as CMOs are needed to create more efficient markets, to mediate between creators, licensors and licensees, and hence to reduce transaction costs related to search, bargaining, and other licensing processes. Such arrangements become ever more important in the digital era (Wunsch-Vincent, 2010a, 2010b).

In order to better understand the impact of copyrights on economic outcomes and social welfare, economists have to disentangle the various above effects on creators and performers, rights holders, the industry, consumers and society at large while taking the parameters of the particular copyright system and possible alternatives into account.⁷ Parameters include the definition of protectable subject matter; the scope of exclusive rights, exceptions and limitations; duration of protection; and the level of enforcement. Other concerns are mechanisms to create copyright markets and exchanges, as well as how these parameters are put into practice or modified by law or behavior in an online context.

Importantly, and to connect to the topic of copyright in the digital age, the outcome of this analysis is largely empirical and not theoretical. The analysis should seek to answer the following questions. Is the current legal and administrative copyright set-up guaranteeing an optimal supply of creative goods, new genres and related innovation and diversity? Is the term of protection long enough to stimulate these policy objectives, particularly compared to the access barriers it might create?

11.3