Prof. Ruth Towse’s report on the New IP Lawyers Seminar

Some comments on the New IP Lawyers Seminar “Ethics of Intellectual Property Rights: Challenges & Solutions”

Ruth Towse

Professor in Economics of Creative Industries, CIPPM, Bournemouth University.

It was very instructive for me to take part in the New IP Lawyers Seminar at CIPPM on 18th March. I was impressed by the range and quality of the presentations. It gave me a sense of the different ways people are trained in law and in economics. What differs again is the way people trained in law and economics approach economics: law and economics deals with the economic rationale of law and laws, while economics deals with decision-making in the market economy. I regard myself as doing the latter with respect to copyright: my work is on how copyright impinges on markets in the creative industries.  We may speak of the same concepts, such as market failure, but it seems to me that their use triggers a different response.

The focus was on ethical issues and that made me think about how economics relates to that topic and to several others that came up in the Seminar, about which I have had some thoughts.

  1. What is copyright for? Is it as an incentive or a means of redistributing income between players in market, ie producers and consumers, intermediaries and users? In economic terms, is it about efficiency or equity? Put simply, does it seek to alter the allocation of resources or the distribution of the reward from creative activity? Whichever is the case, copyright is a line in the sand which favours some participants at the expenses of others. That is what it is for.

 

The allocation of resources is about the uses to which resources – inputs of labour, time, capital (human and physical) – are put. The underlying ‘ethic’ is that they should be used to achieve the maximum possible social welfare. That is the goal of social efficiency. Welfare may be thought of in several ways: having material goods and services, being happy, having a fulfilling life. Of course, the usual measure is income and wealth but they are just the means to the other goals.

The way resources are used obviously influences the distribution of income: if robots replace human labour, the incomes of workers fall. But governments could (and probably will have to) decide to redistribute National Income through taxes and welfare payments – or to regulate the use of robots. So the market determines the distribution of income but in most developed countries, the state intervenes to redistribute it. That is an equity goal and requires state intervention in the market economy to achieve it.

Copyright is intended to alter the way markets work, that is, it alters the allocation of resources. It encourages someone to spend their time (a valuable resource) in creative activity rather than working at something else. The value of their time in another occupation is the opportunity cost of that decision. What is not so clear is the effect on the way the resulting income is distributed income, ie the fairness or equity question.

An example

The typical market in the creative industries, say for songs, involves song-writers, music publishers and record labels: the song-writer creates a song and seeks to get it published and performed. She might do it herself or contract with an intermediary. Either way, in order to control its use and appropriate the full market value of the song in all its uses, protection is needed from potential copiers who might steal the song and copyright steps in by awarding her the exclusive right in her creation. Using that bundle of rights, she then contracts with the publisher for a royalty that is a percentage of the future earnings from the song that will accrue via the publisher and the record label. She knows the percentage but she (and they) do not know at the time of the contracts how much it will earn on the market.

So the question about the incentive is: is that percentage royalty and the guessed at[1] future earnings from the song sufficient to cause her to write a song that otherwise she would not do? It might easily take two or three years before she knows how well the song is received by the public – and of course a lifetime +70 years after her death (as a legacy for her grown up grandchildren) before she will know actually how much that the total earnings are. In most cases, she will find out in the next 10 years as most songs, if they even get published and recorded (as only a small proportion do), are no longer commercially available after that.

The question about how fair this is (the equity question) would relate to the final income from the song: does the song-writer get a fair deal from the contracts and from the market? If she is offered a 15% royalty, is that fair (as the intermediary will be getting 85%)?  If the music publishing and record industries operate in competitive markets, the rates they offer would be the highest needed to encourage the song-writer – the efficiency side. However, the song-writer has to compete with other song-writers and if there are more songs being offered than can reasonably get published and recorded, that places downward pressure on the royalty rate. Thus the degree of competition in both these markets (or writers and publishers) is part, at least, of the story about a fair reward for the creative effort (and the opportunity cost of the time spent writing songs, which rarely gets a mention in the literature). Notice that none of this refers to the costs incurred by the publishers etc.

How should the royalty rate be made fairer? By an edict that required a 50:50 split? That is the solution in various equitable remuneration arrangements eg in collecting societies (by their articles not by law), in the Rental Directive and other such. But how would that affect the incentive of the publisher to publish?

It is an interesting question whether one law or set of rights can achieve both efficiency and equity aims. Are these aims of the law compatible? I never hear this being discussed by law students. In fact, one rarely hears a discussion of what the law is actually for: it is mostly assumed that the rationale is sound and the problem is how to make the law work.

  1. To an economist, the next question is does it do the job its sets out to? Is it the incentive it is supposed to be and can it effectively make markets fairer? How do we know? The answer is that there must be empirical evidence brought to bear on these questions. This is not easy since markets in the creative industries have grown up with copyright and their business models are attuned to it. Nevertheless, we can obtain information on what creators earn from copyright royalties and how they compare with what creators would receive in another occupation eg for a song writer, teaching music? We can also find evidence on how those earnings compare with the profits of the creative industries eg music publishers and record labels.

We have done that research! But what do law students make of it? Should it influence their view of copyright law?

  1. The third observation is about the updating of copyright law to take technological progress into account. Technological progress is messy and in a market economy there are many losers as well as winners and it takes time for markets to settle on standards, consumers’ choices and so on. Of course, the law has to adapt but in my opinion it cannot be done without understanding the changes that have taken place in markets. Industrial organization is the field of economics that deals with this and I don’t think that many law students study it. A good start is Richard Caves’ book Creative Industries: contracts between commerce and law. Published in 2000, it does not take digitization into account but it shows the general principles and gives many examples of contractual arrangements and the underlying economic rationale for them.

Digitization has resulted in fundamental changes in the markets for creative goods and services. Just a few points are:

  • Digital goods are now licensed instead of being sold;
  • They are bundled with others eg song catalogues
  • Goods available for free are financed by advertising and the platform makes the profit.

These three points act to break the trade link between producer and consumer/user so that price signals do not work. As a result of these changes royalty rates are set in different ways and uses are often not contracted by the creator or a collecting society acting on her behalf.

  • Anyone can post their work online and some make sufficient income to make it their full-time occupation. This increases competition with incumbent producers.
  • Loss of gate-keeping role of publishers etc has led to increased uncertainty about quality, while ratings are done by algorithm.
  • Networks of social media and ranking systems etc make for dynamic loopbacks in consumer choice which cause increased instability in markets.
  • Consumers’ attention has become one of the main scarce resources in a sea of plenty.

These changes increase uncertainty about a work’s prospects and exacerbate the superstar effects in creative markets. There is little evidence for the long tail enabling the middle-ranking creator to serve niche markets. Fewer and bigger winners take all. Copyright has to take on board these economic as well as the technological changes.

 

[1] An economist would normally see this as a probability but as ‘nobody knows’ in the music (or film, book, art etc) industry, there is radical uncertainty that prevents the probability form being capable of estimation.

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