Copyright in the Music Industry

C O N T E N T S

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 EST^[1]

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 sales^[2]. 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 out-dated 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 Valenti^[3] martially stated. In the following I will try to explain this disturbing news.

1. Pirates v. Business

In 1987 the^[4] Fraunhofer Society^[5] invented the so-called MP3 audio encoding and compression format. It was created to significantly reduce^[6] 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 albums^[7] 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 piracy^[9]. 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 sales^[10]. After failing an appeal to the Ninth Circuit Court Napster had to shut down and cease its service^[11]. 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 online^[12]. 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 settlements^[13]. Recently the Metro-Goldwyn-Meyer Studios Inc. won his appeal in its law suit against Grokster, an online peer-to-peer service^[14]. 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. While music labels employ questionable methods in order to protect their copyrighted works, pirates seek for shelter in non-copyright-enforcing countries, since the internet is everywhere but laws face geographical constraints.

Recently one can find signs on CDs which say that any copy is prohibited. By this the media industry tries to establish a contractual clause - additionally to the existing copyright laws - to the purchase of a CD or DVD in order to claim compensation on the grounds of the breach of a contract, if a CD is copied anyway. Normally copyright laws allow several^[16] copies for private use either justified by the doctrine of fair use or the right to make a private copy of a purchased CD^[17]. This practice of course provoked heavy reactions by consumer associations which brought this to court. Among other courts the court of appeal in Paris ruled in favour of the consumer associations that a note on a DVD “copie prohibée” infringes the fundamental right to make a private copy^[18]. By this the court clearly confirmed the legal boundaries of copyright protection. Unlike the industry would like to, copyright holders simply can not determine every single possible use of their works. They have to respect at least fundamental rights of the consumers. Hence this questionable legal practice of music labels is likely to be not successful in the long run.

Furthermore if copyright holders want to enforce their rights globally they face problems in finding legal partners. A lot of jurisdictions especially in former communist countries in Eastern Europe do not respect copyrights as western countries do such as the U.S. or the EU^[19]. For instance Russian prosecutors had decided not to pursue [AllofMP3.com] with legal action because Russian copyright laws only cover physical media such as CDs or DVDs and not digital files such as MP3s although it would have obviously been a copyright infringement under western laws; the Russian server offered and still offers mostly western music for discount prizes to its international customers without having valid licences^[20]. However the claim by the western music industry was rejected which shows that due to the still regional constraints of copyright laws they are useless in terms of enforcement as soon as infringement takes place in not “cooperating” countries with nevertheless world wide impact. The message for “pirates“ is to establish servers in these non-cooperating countries in order to peacefully run their business. The message for copyright holders is to face the reality and give up the dream of a globally enforceable copyright. In worst case all the commercial copyright infringers will sit in non cooperating jurisdictions and thus are out of reach for legal claims.

Besides these legal approaches to control the use of a musical work, there are several technical efforts made in order to keep control over the use of music. So called Digital Rights Management approaches try to secure files by copy-protection tools or watermarks. However these technical attempts become rather soon out-of-date since they are quickly hacked or circumvented by specialized groups^[21]. Thus technical protection in the fast changing world of the internet is a rather useless and hence costly fight like the one of Don Quixote against the windmills. Furthermore technical copy-protection is likely to upset the customers since there are a lot of cases where accordingly manufactured CDs are not playable for instance with older CD players.

To sum up, copyright holders face legal constraints in designing contractual clauses as well in enforcement of their rights as well as a never ending competition in employing technical means to protect their works.

3. Uncertainty

Additionally to the weak points of copyright and its enforcement as said above legal uncertainty in substantive law plays an important role as well. From my own experience with German copyright law I can say that most cases of music down- or uploading are difficult to subsume under the code even for specialists. Before the reform of the German copyright code in 2003 there have been some scholars that said even the process of encoding audio into digital format infringes copyright since it changes the consistence of the original work. Of course this is a rather unreasonable claim and has been clarified lately by stating that private copies on any feasible device are allowed based on fair use^[22]. Then it was discussed whether the service provider infringes copyrights by granting two parties to send MP3 files over their servers. It was argued that the technique of cutting one MP3 file in fragments and partially saving these fragments on the respective servers is an illegal change of the original work and thus infringes copyright. This claim however was as well not approved by any courts and hence belongs to academic legal history. However it shows the bizarre way of trying to approach these evolving challenges due to the new technologies by legal scholars.

Since the reform of the German Copyright Act due to the EU Copyright Directive^[23] in September 2003 it is much more likely for copyright infringers not only to be liable by civil law but under criminal law. These possible legal consequences are of course much more severe than under former copyright law since they allow imprisonment as well. However until now state prosecutors and enforcement authorities did not make use of these laws since they are still not sure in what cases they apply. Instead they prefer applying rather standard criminal or civil laws to the cases^[24].

For users on the other hand the situation is not much clearer. Dozens of forums in the internet try to shed light on the often raised question whether up- or downloading of MP3 files is legal or not. Most of them conclude that uploading is illegal. However when it comes to the many times more raised question of downloading the answers are not able to clarify the current mess. The law says in § 53 section 1 German Copyright Act that copies of a work for private use is allowed as long as the initial work is not an “obviously illegal created sample”. What is meant by obviously ? Is it every MP3 file which does not stem from the official webpage of the artist e.g. his label? How about the music file a friend received by a friend. In general this exchange between friends falls under fair use. However should users now be suspicious about the legal circumstances of files sent by a friend? Quite comprehensible there is uncertainty among users which will in doubt rather deter them from music swapping than the other way round.

Of course there are fields in legal policy^[25] where the law maker prefers to have a certain degree of uncertainty in order to deter people from doing this or that. In copyright law however uncertainty in the scope of fair use is simply no longer fair to the user. Furthermore it raises the transaction costs of implementing and enforcing the laws due to unsuccessful trials by state prosecutors. Trial and error is a rather costly affair which is superfluous with well designed and easy to understand laws.

4. Summing up

The dilemma given above shows that there are due to legal and technical constraints as well as uncertainty many weak points in current copyright policies. Terrorist wars are never efficient since they come along with a huge waste of resources. Should copyright holders instead join the ones they can not beat anyway? In the following I will analyze, whether copyright laws themselves are efficient or not. This might help the copyright holders and policy makers to come to better decisions.

III. The Notion of Copyright and its Economic Aspects

In order to mitigate the dilemma I have to investigate it sources first. Therefore I recall basic theories why we have copyright at all and then analyze the current copyright law regarding the music industry. In other words I will trace the roots of copyright and see, if there are other ways to reach the same goals copyright exists for maybe even better and at lower costs for the society.

1. Basic foundations

The notion of^[26] Copyright is a comparatively rather young one. Its roots trace back to the Statute of Anne in 1709 England. After abolishing the royal printing monopoly, the so called Stationer’s Company, in 1694, the way was cleared for this first copyright law. Various interests had to be considered. Those of the author’s to commercialize their works; those of the former monopolists to exclusively bind the former through their exclusive author’s right and of course those of the crown to participate financially in the trade with printed goods. The initial copyright term was 14 years, once renewable by the author for another 14 years. After the expiration of either the first or the renewed term the work fell into the public domain for everybody’s use^[27].

In the U.S. the basis of copyright is already written down in Art. I, sect. 8, cl. 8 of the Constitution. It says "the Congress shall have power . . . to promote the progress of science and useful arts, by securing for limited time to authors and inventors the exclusive right to their respective writings and discoveries". Thus the main reason for copyrights in the U.S. is granting the artist an exclusive right to exploit his or her work in order to set financial incentives to create more respective artistic work. Basically this is influenced by the labour theory of John Locke^[28]. According to this theory property should be a reward of useful labour. Only the one who invested labour in his or her work should be assigned the property of a certain good^[29]. A utilitarian influence is however not deniable as well. The author has to be fed since his creative work is useful for the community. Therefore copyright in the U.S. is mainly a commercial right and no personal right. Consequently it is completely transferable^[30]. In the music business that happens for instance to young performers, who transfer their complete copyright on their songs to the producer as an asset to finance the album.

In Europe on the other hand copyright is seen as a natural right. Additionally to the economic reasoning of granting the author reasonable royalties of the use of his work it follows a personality approach. Already the technical terms like the German “Urheberrecht”, the French “droit d’auteur” or the Spanish “derecho de autor” indicate that it does not only imply a right to copy, but focuses on the creating author. This author’s right protects “the author in his intellectual and personal relation to his work”^[31].

Thus the two major philosophical foundations of copyright are first to provide a reward for useful labour and second to acknowledge the personality of the creator.

2. Economic Rationale of Copyright

The economic rationale of copyright law lies in providing financial incentives to the artist to create and disseminate his or her work^[32].

Art. 1, sec.8, cl. 8 of the U.S. Constitution^[33] already indicates that a copyright is an exclusive right to the author in order to exploit his creation. Economically speaking a copyright grants its owner a – temporary – monopoly. This enables the holder of the copyright to exploit his creation by charging prices through a licensing system. Basically any use of the work has to be authorized and paid. Since this rather generous gift of the respective intellectual property regime to the author guarantees him a reward for his efforts it is argued that he therefore has an incentive to create at all. Without this ability to exploit his work through a copyright less would be created, since there is simply no financial incentive to do so.

Besides this incentive to create – argument the second justification of copyright policy is to give a financial incentive to disseminate the piece of creation. It is argued, that without the copyright - the right to copy - nobody would invest in establishing a costly distribution system including the production of the CD, the necessary marketing and last but not least creating, maintaining and expanding the network of retailers (the so called ‘middlemen’) who sell the CDs to the customers. Namely without a copyright the initial distributor would have to invest a lot money while the others just free ride on his efforts and simply copy and sell the same CDs for an accordingly lower price, since they did not have to spend money on advertising and recording the music etc..

However in the following it will be shown, if we actually need copyright in order to set the incentives given above.

[...]

^[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/site-content/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)

^[16] Around 7 according to German case law.

^[17] For instance one can think about creating a copy for the car or the portable disc player and the like.

^[18] 01net.com 22.04.2005 La justice interdit de protéger les DVD contre la copie.

^[19] This is due to the fact that they rather have problems in granting private property anyway since they followed a philosophy of state or public “owned” property.

^[20] BBC of 8.3.2005 'Legal okay' for Russian MP3 site.

^[21] Even Apple’s iTunes was hacked twice although it claimed to have the most secure copy protection available. See Peter Cohen in PCWorld PyMusique Author Hacks Apple's ITunes Fix http://www.pcworld.com/news/article/0,aid,120146,00.asp [last visited 4.8.2005].

^[22] See § 53 par. 1 UrhG; this shows again that the contractual clause of “copy prohibited” is legally questionable.

^[23] Directive 2001/29/EC of the European Parliament and of the Council of 22 May 2001 on the harmonisation of certain aspects of copyright and related rights in the information society.

^[24] In March 2004 there have been dozens of nationwide house searches including confiscations of several PC systems of users connected through a music and movie sharing network. Although the state prosecutors could have easily accused them of infringing copyright law they founded their claim on ordinary computer crime laws of the German Criminal Code.

^[25] For instance in criminal law in order to deter people from committing a crime.

^[26] For a good overview on the philosophical background see Peter S. Menell Intellectual Property: General Theories Levine’s Working Paper Archive 2003.

^[27] Copyright in a Historical Perspective – Chapter 7 Statute of Anne.

^[28] John Locke, Second Treatise of Government rev. in 1963 3d ed. 1698.

^[29] See for instance Lord Mansfield’s statement in Sayre v. Moore [1785] 102 Eng. Rep. 139a: “We must take care to guard against (…) that men of ability, who have employed their time for the service of the community, may not be deprived of their just merits, and the reward of their ingenuity and labour;”

^[30] § 101 U.S. Copyright Act: “A “transfer of copyright ownership” is an assignment, mortgage, exclusive license, or any other conveyance, alienation, or hypothecation of a copyright or of any of the exclusive rights comprised in a copyright, whether or not it is limited in time or place of effect, but no t including a nonexclusive license.”

^[31] See Art. 11 German Copyright Law: “Copyright shall protect the author with respect to his intellectual and personal relationship with his work, and also with respect to utilization of his work.”

^[32] See for instance Raymond Shih Ray Ku – The creative Destruction of Copyright: Napster and the New Economics of Digital Technology, 2001 or Akerlof et al. The Copyright Term Extension Act: An Economic Analysis, May 2002.

^[33] To recall “the Congress shall have power . . . to promote the progress of science and useful arts, by securing for limited times to authors and inventors the exclusive right to their respective writings and discoveries”.