Music Industry & Alternative Compensations Systems

By Michael A. Einhorn (more articles from this author) 2009-01-18

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Several law professors and institutional critics have sketched a number of "alternative compensations systems" that purportedly solve the problem of compensating copyright owners for takings on P2P networks. In these proposals, users will be permitted to freely download music, movies, and other forms of content through any file-sharing network. Rights owners would be compensated for takings not from direct payments from actual customers, but from the proceeds of a levy assigned to a number of playing devices and services -- burners, disks, portable players, broadband connections, and possibly personal computers themselves. The appropriate rates and royalty structures would be determined by arbitration panels or tribunals administered by the Copyright Office. The idea is imperfectly likened to provisions for levying under the Audio Home Recording Act of 1992 (AHRA) and the Cable Compulsory Licensing Act of 1976.

Specific proposals vary. Neil Netanel of UCLA would allow noncommercial takers to take everything they want except software. Terry Fisher of Harvard confines his domain to music and movies that can be monitored in real time, but allows commercial takings as well. Professing voluntarism, Jessica Litman suggests that content owners be permitted to opt out; she then disqualifies record labels entirely from receiving any compensation and therefore guarantees that they will indeed opt out. Fred von Lohmann of the Electronic Frontier Foundation advances the idea that five dollars a month (the equivalent of eight permanent downloads on iTunes) is fair compensation for granting licensing rights to unlimited downloading on P2P.

These schemes – and others like them – are impractical, inequitable, and overreaching. As a straight legal matter, no proposal has anything to say about foreign takings. Foreign levies represent a political logjam -- Congress evidently cannot levy a fee on foreign computers or ISP subscriptions, the Copyright Office has no ratemaking authority over them, and no foreign government can reasonably be expected to take up the task of putting levies upon its citizens in order to recover "due royalties" for American media companies.

More fundamentally, each proposal lacks basic equity. Despite the false claim of voluntarism, each proposal is a compulsory tax generally placed equally on all users of devices and services regardless of actual use. In fact, computer users who have no interest in downloading popular music would be harmed by a system of taxation that reduces their wealth and which would possibly stifle their purchases and upgrades of new equipment and services. Herein is a crucial difference with AHRA levies that were imposed only on the sale of digital recorders and tapes; these devices had little, if any, use outside of copying.

As an institutional matter, the long-run administration costs for setting and revising license terms through copyright tribunals or arbitration panels are considerable and open-ended. As consumers download increasing amounts of content, copyright administrators will need to reconvene hearings annually just to adjust the levy percentage to keep up with the foregone revenues of the industries. It will be necessary to hire one or more forecasting teams simply to anticipate future demands and revenue requirements. If demand expands rapidly, levies must increase accordingly, or be extended to yet other devices, possibly burdening equipment sales and network expansion.

Finally, the economic problems posed by proper allocation are considerable.
1. The panel would face the daunting task of parsing out a fixed pot of revenues to contending uses. As a first requirement, arbitrators would need to determine the relative worth of each different use. If Netanel’s idea were seriously considered, the panel would need to consider the relative worth of a novel, a full length movie, a recorded song, a music video, a photograph, and a comic strip. Netanel did not begin to suggest a method for doing this.

2. Fisher confines himself only to works that can be represented in minutes of duration. By Fisher’s proposal, two hours of content would be compensated equally; a two hour news documentary and a two hour feature length movie would be compensated with equal amounts. This slapdash arithmetic rule fails to consider relative costs of production and is devoid of any economic meaning.

3. In the foreseeable event that the level of content downloading outgrows the available pot of levy dollars, compensation per individual work would necessary diminish. Content owners in different private sectors would then need to fight continually for aggregate revenues that bear no direct relation to the value of underlying content, or the money and effort used to produce it. The nexus between individual effort and anticipated just deserts is then severed completely by the constraints of a fixed pot of revenues at any moment. As the Internet distribution expands, the resulting uncertain connection between present effort and later reward would weaken or destroy producer incentives to invest resources to produce and bring commercial wares to market.

4. No author offers any credible discussion of producer costs, nor any means of determining whether collected revenues actually true up to adequate compensation for the takings. Fisher suggests that major label cost estimates are irrelevant because internet marketing is about to take over more traditional means of promoting product (sic). Von Lohmann bases his suggested "fair compensation" by ignoring costs and relying instead upon his perception of what consumers would be willing to pay -- five dollars per month.

5. Moreover, each proposal establishes a means of taking for permanent downloads. No proposal considers the need for licensing for alternative services – streaming, and temporary downloads of various durations – which some customers may actually prefer to downloading. Indeed, it is quite possible that all competing subscription services (such as iTunes and Rhapsody) will wither if content is given away on P2P networks. Finally, no author suggests what to do about the content omitted from the particular compensatory arrangement that he or she advocates.

Conclusion

A market-based approach that combines private agencies, government administration, and judicial and legislative oversight should permit matters time to evolve and new information to surface. Market rules designed to meet specific emerging needs of individual players can potentially be open-ended enough to allow modification as more information becomes available. The incrementalist approach is purposely and wisely limited -- restricting considerations, limiting classifications, forsaking measurement, leaving options open, and learning-by-doing. Incrementalists then forsake the spectacular imagined gains from an immediate fix for the prosaic benefits of slow judgment and reversible errors.

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