February 08, 2005

Copyright Musings

Tyler Cowen steps into the copyright debate, prompted by the Supreme Court's addressing the issue of P2P. He decides to take an economist's point of view. Or does he?

His first point (of three) is puzzling.

In ten year's time, what will happen to the DVD and pay-for-view trades?  BitTorrent allows people to download movies very quickly.  Note that DVDs already account for more than half of Hollywood domestic revenue.  Furthermore the process will be eased when TVs and computers can "talk" to each other more readily.  Yes, I am familiar with Koleman Strumpf's excellent work showing that illegal file-sharing has not hurt music sales.  But a song download can be a loss leader for an entire CD or a concert tour.  Downloading an entire movie does not prompt a person to spend money in comparable fashion.

First, bemoaning the death of an industry because new technology destroys its business model is very rarely economic thought. You might as well bemoan the decimation of the buggy whip industry with the coming of Ford's Model T. The creation of IP has little to do with the DVD or pay-per-view trade. If content creators can find a way to make more money via new methods, the passing of intermediary mediated pay-per-view will not be a tragedy.

It's simply not true that movies prompt no further sales. Some do so today and quite shamelessly as any parent knows. If you knew that every bit of clothing, furniture, or other items that appeared in a movie were available at the movie's website for easy purchase, a significant revenue stream would be had, for instance. If the ancillary revenues from selling products placed in the movie were enough, free distribution would increase revenues to the producers of the movie. While this would shake up the distribution industry, perhaps even as much as the buggy whip manufacturers were shaken up by the introduction of the model T, it's no loss that an economist should be crying over.

Tyler Cowen's 2nd point is betterr, but not by much.

Perhaps we can make file-sharing services identify (and block) illegally traded files.  After all, the listeners can find the illegal files and verify they have what they wanted.  Grokster, sooner or later, will be able to do the same.  Yes, fully decentralized and "foreign rogue" systems may proliferate, and any identification system will be imperfect.  But this is one way to heed legitimate copyright suits without passing the notorious "Induce Act."

This is half right. Any economist worth their salt should know in their gut that there are at least two solutions to most problems, one major being the stick of legal enforcement, another being the carrot of superior product/service tempting people to do the right thing. In this case, Tyler lays out some "stick" related reasoning but entirely ignores the possibility of carrots. Apple's iTMS shows the way here. Price your product reasonably, make it easy to get, and you'll explode the available market. Here's a case in point. The 2003 Galactica pilot is available on DVD for about $20. I'm not paying $20 for it, the price is too high. If it were available at Hollywood Video I'd rent it for a buck or two. If it were available as a download, I'd probably pay $5 because it's worth $3-$4 to avoid the hassle of ripping. You price your wares too high, you use distribution chains that are too expensive and your market shrinks.

So which model is right, the carrot or the stick? That's an entirely other question but it's a good bet that both have their uses. The stick works an awful lot better when there are plenty of pleasant, legal carrots around to munch on and carrots increase their appeal when a stick is handy to discourage the use of illegal alternatives.

Turning to Tyler Cowen's 3rd (and final) point, he goes downhill again.

I question the almost universal disdain for the "Micky Mouse" copyright extension act.  OK, lengthening the copyright extension does not provide much in the way of favorable incentives.  Who innovates with the expectation of reaping copyright revenues seventy-five years from now?  But this is a corporate rather than an individual issue.  Furthermore economic research indicates that current cash flow is a very good predictor of investment.  So the revenue in fact stimulates additional investment in creative outputs.  If I had my finger on the button, I still would have pushed "no" on the Mickey Mouse extension, if only because of the rule of law.  Privileges of this kind should not be extended repeatedly due to special interest pressures.  But we are fooling ourselves if we deny that the extension will benefit artistic output, at least in the United States. 
One of the major problems of the copyright extension act was that it actually stopped the flow of product from protected to public domain. That means that the creative "watering" that new public domain material provides is gone from the US scene for the next 20 years for any extended product. Extension could have been done 6 months every year for the next 40 years and achieved the same eventual length as the actual legislation but it wouldn't have dried up the well completely. Of course, such legislation wouldn't have been nearly as popular. That change in popularity would have been telling.

The truth is that the people have suffered a taking without compensation and we're in danger over the next two decades of forgetting the original intent of the system, temporary protection and eventual shifting to public domain, reasserting the fundamental right to copy, in exchange for increased creative product on average. When, 15 years from now, the next extension bill wends its way through Congress, an entire generation will be out there that will not have felt and understood the utility of public domain intellectual product. That's a danger to our constitutional system as corporate interests try to creep us back to the old English system of permanent IP protection. That system is gone because it led to stagnation. If economic analysis doesn't fit the historical data, there's something wrong with that analysis.

Posted by TMLutas at February 8, 2005 02:18 AM