When it comes to the nexus between competition and regulation, competition is all too often cursed with fair-weather friends. For today’s example, we’ll take a trip down the copyright regulation rabbit hole.

It begins with a Copyright Royalty Board (CRB) proceeding for setting webcaster rates under a statutory license in Section 114 of the Copyright Act. The process, called “Web IV” because it is the fourth such proceeding under this section of the Copyright Act,^[1]was announced late last year and should conclude by the end of 2015. By mid-December, non-interactive webcasters like Pandora and iHeartMedia will know how much they must pay to stream (or “publicly perform”) recorded music to listeners from 2016-2020.^[2]

These statutory license rates, part of a complex multi-tiered system that, as we’ve noted in the past, legally requires discrimination against new technologies, are set for 5-year periods and are paid to an entity called SoundExchange. SoundExchange is designated to collect royalties under the statutory license for certain uses of sound recordings, including Internet radio play of music.

(Perhaps you’re thinking, “wait, I thought radio stations didn’t pay royalties to play records on the air?” You would be right: traditional terrestrial radio does not pay royalties for playing sound recordings ? which has historically been defended with the argument that radio play provides valuable promotion for sound recording owners. But in another example of copyright law discriminating against new entrants, while conventional terrestrial radio is not compelled to pay for the public performance of sound recordings, Internet radio must pay to do the same, under Section 106(6) of the Copyright Act.)

The rate Internet radio services pay is supposed to represent what a “willing buyer” would pay a “willing seller.” During the round of rate setting that governed 2006-2010, however, the CRB announced a fairly punitive “willing buyer/willing seller” rate, which was so high that it exceeded some webcasters’ total revenues. The risk that the Internet radio industry would collapse led Congress to enact the 2008 and 2009 Webcaster Settlement Acts, under which most non-interactive music licensees directly negotiated settlements with SoundExchange for that time period. An important wrinkle to this legislative action, however, was that Congress also directed that these settlements could not be used as benchmarks for future rates ? which includes the current rate setting proceeding.

So, why is this relevant? It matters because in the current Web IV rate setting proceeding, SoundExchange has argued that recent deals struck in the free market by non-interactive webcasters should not be used as the benchmarks for non-interactive rates.

Those deals include an arrangement between Pandora and the collection of indie labels known as Merlin. The terms of that deal were lower than the existing statutory rate, and encouraged Merlin music to be played more (and thereby the music of major labels to be played less). At the time, rights-holders openly criticized Merlin for entering in the deal, noting that it could become a benchmark, and might result in prices coming down. It was a peculiar moment: despite all the cheerleading of moving toward a free market in music licensing of willing buyers and willing sellers, Merlin came under fire for actually being a willing seller at the best price it thought it could get.

SoundExchange previous said it was seeking “rates that reflect a fair market value for recorded music? based heavily on evidence of other deals that exist in the marketplace”. Now, however, it argues that an analogous free-market deal with Merlin should be ignored, because it was in some way influenced and thereby tainted by settlements reached 6-7 years ago.^[3]

This situation illustrates an issue larger than webcaster rate setting: there is cognitive dissonance about what it means to have free-market transactions in lieu of statutory licenses. In parts of the music industry, there is hostility to the statutory licenses. While statutory (or “compulsory”) licenses help overcome the enormous transaction costs of licensing millions of works from millions of rights-holders, they don’t allow rightsholders to say “no” to all uses.^[4] These statutory licenses, it is sometimes argued, are unfaithful to the notion of copyrights being property rights. Such transactions would be better handled in the free market, the argument goes, and so statutory licenses should be repealed.

Nevertheless, the free market enthusiasm disappears when a free-market deal was actually reached outside the statutory license. To the dismay of other licensors, Merlin’s competitive price was *lower* than the statutory rate, and suddenly the free market doesn’t look so hot. Hence, Merlin was criticized and now efforts are being made to expunge Merlin’s deal from the record.

There are numerous transactions cost-related reasons why ? absent better copyright ownership records ? it is impossible to have a completely free market in music licensing at present. Still, insofar as anyone is going to champion competition as an alternative to statutory licenses, that means accepting prices that may be below statutory rates. If “free market” means rates can only be higher than statutory rates, then we don’t have a free market; we have a price floor. Or, stated otherwise: we’re not really talking about “willing buyers and willing sellers” if we’re only going to entertain market-based deals that come in above the statutory rate.

^[1] Officially, “In re Determination of Royalty Rates and Terms for Ephemeral Recording and Digital Performance of Sound Recordings.”

^[2] The CRB only sets rates for “non-interactive digital music services”; interactive services like Spotify, which are “interactive” because users can determine themselves which music is delivered, fall outside the statutory license.

^[3] The rationale for this is that Congress directed in Section 114(f)(5)(C) that Webcaster Settlement Act (WSA) agreements shall not “be admissible as evidence or otherwise taken into account” in a rate settlement proceeding. Because SoundExchange contends the Merlin agreement resembles the 2008-09 settlements, considering the Merlin rate would be “taking into account” a WSA agreement.Instead, SoundExchange contends that the benchmarks for non-interactive rates should be deals between interactive services like Spotify. When all the relevant apples are inadmissible, we’re left referring to oranges.

^[4] In econ-speak, we would say that statutory or compulsory licenses resemble a liability rule more than a property rule.

Reposted from the Disruptive Competition Project

Tomorrow, the House Judiciary’s Subcommittee on Courts, Intellectual Property and the Internet is holding a hearing on the safe harbors of the Digital Millennium Copyright Act, Section 512, as part of a continuing reexamination of U.S. copyright law.  We cover this important framework frequently, because it has been instrumental to the growth of the Internet – by many accounts online safe harbors “saved the Web.”  Now that the DMCA is over 15 years old, a number of pervasive misconceptions have developed about its safe harbors.  Let’s consider some of the top DMCA misconceptions that we’re likely to hear tomorrow.

(1) “No one anticipated there would be so many DMCA takedowns.” (Also, “filter because whack-a-mole.”)

One of the critiques of the DMCA is that because it is used so frequently, it must not be working.  It is strange to argue that a system isn’t working when demand for it is going up, but I hear ‘the Internet must be filtered because whack-a-mole’ so often that if I owned the Whac-A-Mole trademark I’d be worried about it going generic.

It is true that DMCA takedowns are increasing.  This suggests rights-holders see value in the system, and that third-party takedown vendors are enabling more rights-holders to outsource policing their content at lower cost.  When Congress enacted the DMCA, it specifically legislated that online services have no continuing obligation to monitor Internet content, in Section 512(m)(1), acknowledging that there would be continued costs to enforcing rights through the DMCA.  Congress recognized that assigning this responsibility to online service providers ill-equipped to execute it would hamper the growth of online commerce.  It thus forged a compromise, ensuring that rights-holders would need to initiate takedowns, but would receive expeditious, extralegal relief in response to a complaint without the time and expense of going to court.  Some would prefer to unwind the compromise struck in 1998, however, and shift more of the burden of enforcing copyrights to service providers, perhaps through some form of content filtering.

(2) “Anyone can see there’s a lot of copyrighted content on the Internet.”   

It is not possible to ascertain on sight which works are copyrighted and which are not.  U.S. copyright law no longer requires ‘marking.’  More importantly, even for works with identifying information, it is impossible to determine which uses of works are licensed, or otherwise authorized by law.  One might simply assume that every digital file is copyrighted and be right most of the time.  This blog post, every email and selfie, and every cat video receives instant copyright protection.  With copyright’s low threshold of creativity, instantaneously attaching protection, and exceptionally long terms, it is hard for something not to be copyrighted.  But what should one do with the knowledge that every photo and email gets a century-plus of protection?  Obviously, no one wants to censor the famous Oscar “selfie” that went viral just because the copyright is owned by Ellen DeGeneres (or Bradley Cooper, or Samsung, or whomever…).  The fact that something is protected does not mean the rights-holder doesn’t want it online.

Often, when people refer to “copyrighted” content in this context, they actually mean “industrially produced creative works.”  More specifically, when someone says “there’s a lot of copyrighted content online,” what they really mean to say is “there’s a lot of stuff online that seems so professional that we should assume it was made by an industrial content producer, and that we should also assume they don’t want it online.”  Of course, this isn’t a particularly clear line: what metric should a hypothetical army of content reviewers apply in deciding how professional a work should be before it is purged from the Internet?

Even if there were a clear line, rights-holders of industrially produced creative works often approve of works being used online for promotional purposes.  And it isn’t just Oscar selfies.  In the Viacom v. YouTube litigation, it came out that Viacom’s marketing teams were secretly uploading its own works to YouTube, even after the lawsuit began, and its lawyers sued over works that had been uploaded to the site by its own personnel.  

Given billions of indexable pages, the absence of a reliable list (government-maintained or otherwise) of who owns or has licensed what, and the inherently complex contours of copyright’s exclusive rights and exceptions, only rights-holders are positioned to begin the process of enforcing their own rights.

(3)  Infringing content is “illegal.”

It is common to refer to infringing works as “illegal,” but this actually clouds the fact that the Copyright Act regulates actions, not content.  That is, a pirated work itself is not what violates the Copyright Act; the law is violated by the act of reproducing a work without authorization or as permitted by an exception.  In many cases this distinction doesn’t matter.  That doesn’t mean the point is mere semantics, however.  Because two different acts reproducing the same protected work may be alternately permitted and unlawful, depending on who did it and why, it is important to separate the infringement from the content.  For example, a law professor posting to YouTube the copyright announcement on an NFL game for her students to analyze in the classroom would constitute fair use, whereas an individual doing the same without any educational purpose might be labelled an infringer.  There’s nothing illegal about NFL football games (well, usually): it’s the act that matters.  Thus, it is important not to lose this distinction.

(4)  “Services filter for other illegal content; so they can filter for infringement.”

The previous point leads to this logical flaw.  The notion is that because some services attempt to filter wholly unlawful content, such as child pornography, they should also filter for lawful content whose use may be unlawful.  However, filtering any unauthorized Harry Potter for example, might also filter out Harry Potter reviews, book reports, and cultural studies.    Again, lawful content, used unlawfully, is not the same as unlawful content.  One cannot filter when lawfulness is context- and user-dependent, and even if that were possible, it is rarely stated when a use has been authorized.

(5) DMCA compliance is mandatory.

It isn’t.  Service providers may comply with the DMCA in exchange for the promise of liability limitations, and many services within the US and abroad (over 66,000 at last count) do so.  Notwithstanding that DMCA compliance can be a significant expense, particularly for smaller services, it is viewed by many as the cost of market entry: a regulatory obligation undertaken by responsible businesses.

That being said, DMCA compliance is not compulsory, a service can decline to comply with takedown requests — or even ignore them altogether.  As a standard business practice, this is a terribly bad idea, because of the potential exposure to copyright’s notoriously large statutory damages.  At times, however, online services can and do rightly refuse to comply with abusive requests by bad actors.  Attempts to get one’s business competition kicked offline, or to suppress criticism, embarrassing news, or disfavored speech are increasingly common.  (E.g., [1], [2], [3], [4]).  In each case that an online service stands up for users, however, it risks extraordinary liability if a court should later side with a complainant who the service initially concluded was not acting in good faith.

Reposted from the Disruptive Competition Project, DisCo