EUROPEAN MASTER IN LAW AND ECONOMICS

Copyright in the Music Industry

„For whom the bell tolls“

MASTER THESIS

By

Ass. iur. Volker Lehmann

August 2005

CONTENTS

I. Introduction

II. The current dilemma
1. Pirates v. Business
2. Constraints of Copyright and its Enforcement
3. Uncertainty
4. Summing up

III. The Notion of Copyright and its Economic Aspects
1. Basic foundations
2. Economic Rationale of Copyright
3. Major Economic Impacts of Copyright Laws
a. Monopoly Costs of Copyright
aa. Primary Monopoly Costs (DWL)
bb. Secondary Monopoly Costs
b. Transaction Costs
i. Lack of a Central Registry
ii. Long Copyright Terms
c. Résumé

IV. Adjustments of Current Copyright Laws
1. Optimizing Copyright Enforcement
2. Changing the length of copyright
a. Finding the Optimal Copyright term
b. Renewable Copyright Terms
c. Concluding Remarks
3. Changing the Scope of Copyright Laws
a. Alternative Compensation Model
b. Creative Commons or let the artist decide
aa. the licence
bb. the code
cc. The Registry and the Logo
dd. Concluding Remarks
V. Towards a “no rights reserved”
1. Copyright has little – if any – impact on the incentives for creating music
2. Concluding remarks

VI. Current Copyright Developments

VII. Conclusions
1. Short Run
2. Long Run

VIII. Afterword

IX. References

X. Authorship Declaration

XI. Appendix

OMNIS ENIM RES,
QUAE DANDO NON DEFICIT,
DUM HABETUR ET NON DATUR,
NONDUM HABETUR,
QUOMODO HABENDA EST¹.

Aurelius Augustinus (354-430)

I. Introduction
Copyright protection in the media and especially in the music industry is a widely discussed topic since several years. In fact new technologies based on Internet changed the situation for the classic business model of the music labels dramatically. CDs become more and more superfluous with the advent of digital media and thus the traditional business model producing and selling them. The music industry of course makes these new technologies responsible for their decline in sales while others argue that the new technologies moreover offer great opportunities for the industry to expand their markets. However I will not join the discussion whether online file sharing is responsible for the decline in record sales². I rather will show that the new technologies being introduced offer great chances for new ways of producing and distribution of music, no matter the impact it has on the old and outdated business models by selling CDs. In my thesis I try to give some insights into the current dilemma, discuss the most appealing proposals advanced by legal and economic scholars and, finally, provide my own suggestions without neglecting the current political circumstances. Therefore I will give some background information of what is actually going on right now in the markets for music in the second chapter. Then I will shed some light on the basic foundations of copyright, its economic impacts and of course its inefficiencies according the music business. After having analyzed the economic consequences of current copyright laws I will introduce and comment on some recent suggestions to ameliorate the inefficiencies. This will be proposals from single changes of particular parts of copyright to radical abandonment of copyright law at all. In order to ameliorate the dilemma given I will give some suggestions for the short respectively the long run. Unlike the existing literature I will therefore consider current copyright policies in major markets which I will shortly introduce. Furthermore I will argue that copyright might be seen differently in different markets. These are the end-consumer market, the intra-business and the extra-business market as being introduced in the following.

II. The current dilemma
In case the reader has not realized so far: there is a “terrorist war” on the file-sharers going on right now, as Jack Valenti³ martially stated. In the following I will try to explain this disturbing news.

1. Pirates⁴ v. Business
In 1987 the Fraunhofer Society⁵ invented the so-called MP3 audio encoding and compression format. It was created to significantly reduce⁶ the size of space needed for a digital file representing audio while ensuring the quality of the song to the listener. With around 3 MB an average song can be saved on any digital memory device such as hard disks while ensuring an equal quality as the audio source. Assume the common hard disks nowadays come in sizes of 80 GB, one could save up to 27306 songs or 1950 albums⁷ on it. By far more than the average music fan will ever possess in his life. With the invention of the first popular MP3 encoder in 1994 it was able for the then still rather advanced computer user to encode his or his friends’ music CDs into this digital format. So far still a rather non public thus private activity which cost a lot time for the so called “rippers”⁸. However the development of computer speed and capacity made it more and more feasible for the average computer user to rip his or her own audio music. So far no real threats to the music industry, since digital copying was no mass phenomenon and CD sales have still been up. Possessing a MP3 music collection on the PC was simply cool on private parties and for most people practical, since their music collections now needed much less space than in tangible form and have been available via one click on the screen like a modern jukebox.

In 1999 Shawn Fanning, then a student from Boston’s Northeastern University, released Napster; the first popular peer-to-peer file sharing network. This service actually enabled its users to share their digital MP3 music files and thus made music freely available online for those who joined the community. Simply download Napster for free, install, log in and up- respectively download music from / to the Napster community. However in fall 1999 the Recording Industry Association of America (RIAA) filed a law suit against Napster accusing it to facilitate music piracy⁹. Unlike earlier when people already copied CDs on cassettes for instance Napster significantly increased the amount of copies shared by decreasing the transaction costs for users to get the music. The advent of broadband access and increasing computer power aggravated this development in the eyes of the music industry. Consequently the almost logical argument by the RIAA was that these file sharing activities heavily infringe copyrights and threatens the music industry as well as the recording artists, since neither of them gets compensated by these pirates. Since 1999, they claim, the balance was gone and Napster is responsible for around 30% decline in music sales¹⁰. After failing an appeal to the Ninth Circuit Court Napster had to shut down and cease its service¹¹. However this was not the end of file sharing activities via the internet. The Ninth Circuit Court held Napster liable for copyright infringement, because it offered a centralized server system which at least temporarily stored the music on its server. This did in the first place not apply to peer-to-peer networks that are in opposite to Napster decentralized. Such services as Gnutella or BitTorrent who followed the path Napster has already taken provided users all over the world even more easily with freshly encoded music. Finally more and more people connected to these peer-to-peer communities and shared more and more music online¹². On the other side the MPAA as well as the RIAA supported by some musicians such as the band Metallica filed one suit after another and turned their legal guns on users and lately owners of websites providing peer-to-peer services. Most of the claims were approved by the courts or ended in settlements¹³. Recently the Metro- Goldwyn-Meyer Studios Inc. won his appeal in its law suit against Grokster, an online peer-to-peer service¹⁴. The court held that a peer-to-peer service provider might be liable for copyright infringing behaviour of his users if he “promotes its use to infringe copyright, as shown by clear expression or other affirmative steps taken to foster infringement, going beyond mere distribution with knowledge of third-party action, …, regardless of the device’s lawful uses”¹⁵. Thus for now it can be assumed that in the near future avalanches of law suits against other peer-to-peer providers will be filed and the stars of online file sharing might fall. Hence the terrorist war will go on between those who want free access to music and those employing any legal means available to protect their property.

2. Constraints of Copyright and its Enforcement
Beyond the contradicting claims of the two parties involved there are actually legal and technical constraints of copyright and its enforcement.

[...]

1 "For if a thing is not diminished by being shared with others, it is not rightly owned if it is only owned and not shared."

2 There are studies which say that file sharing has is detrimental to the music business, others which say that it is beneficial and those who see no impact of file sharing on the music industry; pro negative impact see Enders Analysis – Europe March 2003 or Forrester Research – Europe January 2003; for no negative impact of file-sharing see CNET.com http://businessweek-cnet.com.com/Study+Falling+CD+sales+cant+be+blamed+on+P2P/2100- 1027_3-5746291.html (OECD study) or a study by Felix Oberholzer and Koleman Strumpf The Effect of File Sharing on Record Sales – An Empirical Analysis 2004 which suggests that file sharing might even boost record sales http://www.unc.edu/~cigar/papers/FileSharing_March2004.pdf.

3 Jack Valenti was the president of the Motion Picture Association America (MPAA) until August 2004. see Lawrence Lessig on FT.com End the war on sharing.

4 Rather so-called pirates; since the early inventions like Eastman`s flexible film or Armstrong`s FM radio technology modern entrepreneurs introducing revolutionary technology which were likely to threaten the traditional market models were always accused of pirating copyrighted goods by the old fashioned business. However should the legislators these days have forbidden these path breaking technologies? Not only fort he sake of the development of our societies they wisely decided to do not so. [see Lawrence Lessig Free Culture Chapter 4].

5 Fraunhofer Institute for Integrated Circuits in Erlangen, Germany; on 14 July 1995 Germany′s Fraunhofer Institute chose to use the .mp3 extension for files holding audio data encoded using the MPEG standard′s Audio Layer 3 specification [http://www.theregister.co.uk/2005/07/14/mp3_tenth_birthday/ last visited 3.8.2005]; on July 14 2005 it mp3 celebrated it 10th anniversary. 6 10:1.

7 80 GB = 81920 MB : 3 MB = 27306 songs = 1950 albums with an average of 14 songs each.

8 “To rip music” = to encode audio into MP3.

9 A&M Records Inc. et al v. Napster Inc., No. 00-16401, U.S. Supreme Court.

10 See for recent numbers the website of the International Federation of the Phonographic Industry http://www.ifpi.org/sitecontent/ antipiracy/piracy_watch_current.html.

11 Supra 8.

12 After the RIAA filed the lawsuit against Napster the file sharing community grew to more than 57 million users in opposite to nearly 200.000 before the law suit - Lawrence Lessig The Future of Ideas 2001 p. 130.

13 The average file-sharer has to pay around $ 4000.

14 MGM Studios Inc. et al v. Grokster Ltd., No. 04-480, U.S. Supreme Court.

15 Syllabus of the case, p. 2, http://www.copyright.gov/docs/mgm/syllabus.pdf (last visited 01.07.2005)