Copyright Unbalanced: From Incentive to Excess (3 page)

4
.    Harold Demsetz, “Toward a Theory of Property Rights,”
American Economic Review
57 (1967): 347–359.

5
.    As F. A. Hayek noted,

The difference between [copyright and patents] and other kinds of property rights is this: while ownership of material goods guides the use of scarce means to their most important uses, in the case of immaterial goods such as literary productions and technological inventions the ability to produce them is also limited, yet once they have come into existence, they can be indefinitely multiplied and can be made scarce only by law in order to create an inducement to produce such ideas. Yet it is not obvious that such forced scarcity is the most effective way to stimulate the human creative process.

F. A. Hayek,
The Fatal Conceit: The Errors of Socialism
, reprint edition (Chicago: University of Chicago Press, 1991), 36.

6
.    U.S. v. Paramount Pictures, 334 U.S. 131, 158 (1948).

7
.    Richard A. Epstein, “Why Libertarians Shouldn’t Be (Too) Skeptical about Intellectual Property,” Progress & Freedom Foundation Progress on Point Paper No. 13.4, February 2006, 8,
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=981779
.

8
.    Of course, this is not a perfect analogy because subsidies for renewable energy tend to be granted to particular firms. Copyright, on the other hand, is made available to all.

9
.    Lawrence Lessig,
Free Culture
(New York: Penguin Press, 2004), 133.

10
.  It should be noted that Walt Disney got many of the characters and stories he used to make his films from the public domain, including Snow White, Sleeping Beauty, the three little pigs, and Robin Hood. This borrowing from the public domain to create new works is precisely the kind of cultural progress that copyright is meant to promote. In fact, the original copyright on Mickey Mouse comes from the character’s first appearance in the film
Steamboat Willie
in 1928. That film, in turn, is a cartoon parody of the Buster Keaton film
Steamboat Bill Jr.
Walt Disney owed his success to his legitimate use of other’s creations.

11
.  One could argue that the Walt Disney Company’s ownership of the Mickey Mouse character continues to incentivize it to make new films and products with that character. This is true, and if Disney were ever to lose its copyright on
Steamboat Willie
, that would not mean that Mickey Mouse would lose all protection. First, Disney would continue to receive copyright for any new original works starring Mickey. Second, Disney will always retain the trademark on Mickey Mouse, which allows it alone to make toys, lunch boxes, clothes, and other products featuring the mirthful mouse.

12
.  Bob Stanley, “Copyright Extension: Good for Cliff and the Beatles, Bad for the Little Guys?,”
Guardian
(Manchester), September 15, 2011,
http://www.guardian.co.uk/music/2011/sep/15/copyright-extension-cliffs-law-beatles
.

13
.  Jessica Litman,
Digital Copyright
(New York: Prometheus Books, 2006).

14
.  Jessica Litman, “The Politics of Intellectual Property,”
Cardozo Arts & Entertainment Law Journal
27 (2009): 313, 314. The Sony Bono Copyright Term Extension Act passed by unanimous consent. Ibid.

15
.  Mark A. Lemley, “Property, Intellectual Property, and Free Riding,”
Texas Law Review
83 (2005): 1031, 1042.

16
.  Donald P. Harris, “The New Prohibition: A Look at the Copyright Wars through the Lens of Alcohol Prohibition,”
Tennessee Law Review
(forthcoming 2012),
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2095193
.

Reihan Salam and Patrick Ruffini

I
N 2012, A
number of institutions that have long defined American communication teeter near the brink of collapse. The US Postal Service struggles under the weight of crushing pension obligations as e-mail, Facebook, Twitter, and Skype render it all but obsolete. Across the country, major newspapers have stopped publishing. And strip-mall anchors from Circuit City to Blockbuster to Borders have filed for Chapter 11 bankruptcy protection.

In politics, traditional modes of wielding power are also being disrupted. One prominent example of this phenomenon is the recent battle over the Stop Online Piracy Act, or SOPA, in which grassroots activists defeated once-powerful Hollywood lobbyists.

What is toppling these formerly invincible companies and institutions? In almost every case, it is the Internet. Now we are engaged in a war over its future.

Unlike pro-Internet consumers, workers, and entrepreneurs, the Internet’s enemies have been vocal, organized, and effective for a very long time. The fact that SOPA was defeated is the clearest indication that decentralized movements in favor of open markets and innovation can succeed despite this considerable disadvantage.

According to a McKinsey Global Institute study published last spring, 2 billion people worldwide are connected to the Internet, and almost $8 trillion changes hands via e-commerce every year.
¹
The United States captures 30 percent of all revenues generated by the global Internet economy, and 40 percent of the net income. Moreover, the Internet powerfully drives economic growth and job creation. In a survey of small and medium-sized enterprises, McKinsey found that for every job the Internet destroyed, 2.6 were created. In the advanced countries whose enterprises were surveyed, including the United States, Internet consumption and expenditure accounted for 21 percent of economic growth over the past few years.

One may be reminded of Jack Kemp’s call in the 1970s and 1980s for “enterprise zones,” in which eliminated regulations and lowered taxes spark entrepreneurship and growth in what were once blighted urban areas. The Internet is the ultimate enterprise zone. Just as Hong Kong’s freedom and prosperity contrasted vividly with China’s desperate poverty for much of the last century, the Internet stands out as an island of low regulation and taxation in a broader economy that grows less free with each passing year. The question is whether to allow Internet-enabled innovation to continue transforming the economy—dramatically reducing the cost and raising the quality of our education and health sectors, for example—or to allow the Internet’s growth to be choked off by cronyism.

For now, the Internet represents the great exception to the rising tide of state-guided capitalism, in which the government favors politically connected firms and industries. As Ian Bremmer observes in his ominous book
The End of the Free Market
, the governments of the world’s rising economies seek to dominate key economic sectors.
²
State-owned enterprises and sovereign wealth funds increasingly manipulate the global markets for energy, aviation, shipping, power generation, arms production, telecommunications, metals, minerals, petrochemicals, and much else.

Even the United States, long the bulwark of entrepreneurial capitalism, has moved in a dirigiste direction. During his recent State of the Union address,
³
President Obama celebrated the bailouts of GM and Chrysler, promising, “What’s happening in Detroit can happen in other industries.” What happened in Detroit? Taxpayers gave a massive cash infusion to politically connected corporations in a collapsing industry.

When we think of state capitalism, we tend to think of the Rust Belt, where automobile manufacturers and steel producers have clamored for bailouts and trade barriers for decades. But in the 21st century, handouts have gone to a wide range of industries, including the television and film production industries. Until 2001, only four US states had programs to encourage film production, typically through tax breaks and other giveaways. That year, the total amount offered was in the neighborhood of $1 million. Between 2001 and 2010, however, the number of states offering incentives climbed from four to forty, and the amount offered increased to $1.4 billion—note the change from
m
to
b
. Thankfully, a handful of states have abandoned their film-incentive programs since 2010, having recognized that they are a terrible deal for taxpayers.
⁴

Yet film-incentive programs are just the tip of the iceberg. Hollywood has pursued numerous strategies to enrich itself at the broader public’s expense, the most egregious of which includes the ongoing extension of copyright terms, as well as the criminalization of infringing copyright law and the expansion of federal resources devoted to its enforcement.

Article I, Section 8 of the US Constitution gives Congress the 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.” Congress has quietly acquiesced to several extensions of copyright terms over the past 35 years, with overwhelming, bipartisan support. Only with the 1998 Sonny Bono Copyright Term Extension Act did the unconstitutional nature of these extensions become too obvious to ignore. It is one thing to offer longer copyright terms to new works, “to promote the progress of science and useful arts,” but extending the copyright terms of existing works simply allows incumbent firms to extract value from creators who expected their copyright to expire after a “limited” time. When asked to strike down the 1998 law, the Supreme Court declined; with uncharacteristic literal-mindedness, the Supreme Court noted that repeatedly extending copyright terms a few decades at a time does not make copyright unlimited. But one thing should be beyond dispute: endless copyright extensions violate the spirit of the Constitution.

Defenders of today’s copyright regime, including at least some conservatives, insist that intellectual property be protected in the same way as any other kind of property. But as attorney and Bush-administration veteran Stewart Baker argues, copyright has come to resemble “a constantly expanding government program run for the benefit of a noisy, well-organized interest group.”
⁵

Before 1976, for example, one had to place a copyright notice on the title page of a book, file with the Copyright Office, and file to renew the copyright after 28 years, at which point the copyright term was extended for another 28 years. These requirements were hardly onerous, yet they helped manage the growth of copyright litigation by limiting copyright protection to those who explicitly sought it. Now, however, every work, including doodles sketched on a napkin, is automatically given copyright protection. This has led to an “orphan works” problem, in which works abandoned by their creators are left in legal limbo.

During the mid-1980s, Hollywood made a concerted effort to ban the VCR on the grounds that it was designed to facilitate copyright infringement. In the end, the courts decided that because the VCR had a substantial non-infringing purpose—to shift the time when people watched television programs—it should not be banned. But in 1992, the recording industry succeeded in pushing through the Audio Home Recording Act, which mandated that digital audio devices have industry-approved copyright protection built in. The new law also created a new tax on cassettes and other blank media designed to pay for the costs of piracy. In 1997, the No Electronic Theft Act dramatically increased the statutory charges for copyright infringement and, separately, the recording industry attempted to ban MP3 players, a bid that narrowly failed.

And in 1998, the Digital Millennium Copyright Act essentially gave the motion picture and recording industries veto power over the design of all digital media devices in the name of controlling piracy. The DMCA is why DVD players will not permit consumers to fast-forward through commercials at the start of a film. The Prioritizing Resources and Organization for Intellectual Property (PRO-IP) Act of 2008 represented yet another expansion of copyright protection. Taken together, this wave of legislation and litigation has helped destroy a number of innovative business models, including MP3.com, an early-2000s service that aimed to allow consumers to listen to their own legally purchased CDs while on the road.

And the Obama administration greatly expanded the federal government’s efforts to protect copyright holder interests, tasking the overburdened Bureau of Immigration and Customs Enforcement with seizing foreign websites accused of copyright infringement.
⁶

Just as copyright terms are growing longer and more restrictive, patent rights are strengthening. As George Mason University economist Alex Tabarrok argues, unyielding patents reduce innovation. In
Launching the Innovation Renaissance
, Tabarrok observes how strong intellectual-property protections can create a “resting on laurels” effect.
⁷
Rather than investing in innovation to outcompete rivals, firms stockpile patents and attack potential competitors with lawsuits. The technology industry now diverts billions from research and development to acquire patent portfolios. As Microsoft founder Bill Gates presciently warned in 1991, “I feel certain that some large company will patent some obvious thing” and use the patent to “take as much of our profits as they want.”
⁸
Microsoft, alas, now plays the role of the large company, as do innumerable patent trolls.

This situation, in which rent-seeking behavior trumps innovation, is where Hollywood finds itself today. As consumers and entrepreneurs seek new, more convenient ways to consume media, Hollywood fights desperate rearguard actions, forcing people to consume media in ways that serve Hollywood, not themselves. The industry’s prodigious success translating glitz, glamor, and timely campaign contributions into political influence lulls it into the belief that the federal government can keep it afloat despite a lack of innovation. While Hollywood failed to ban the VCR and the MP3 player, it succeeded in suing out of existence MP3.com and the streaming-film services Kaleidescape and Zediva. These suits are especially troubling since they represent a largely successful attempt to keep the “first sale” doctrine of copyright law—the basis for everything from libraries to Netflix mail order—from applying to streaming media.

The entertainment industry claims, correctly, that media piracy has increased over the last decade. Last summer, a survey sponsored by the American Assembly, a public-affairs forum affiliated with Columbia University, found that 46 percent of US adults had acquired unauthorized music or video, and that percentage rose to 70 among those younger than 30.
⁹
But only 2 percent had acquired
most
of their media collections through piracy, and the emergence of legal streaming-music and streaming-video services has curbed the appetite for unauthorized content. The emergence of Netflix’s streaming-video service, for example, coincided with a marked decline in the number of searches for BitTorrent, a favorite protocol for exchanging pirated media. The convenience of iTunes has similarly reduced piracy as a share of digital-media consumption. Last year, the Social Science Research Council published “Media Piracy in Emerging Economies,” the most comprehensive study of the piracy problem to date.
¹⁰
The report, notably not funded by the entertainment industry, concludes that business-model innovation, not heavy-handed legislation, curbs media piracy.

Big Media’s reluctance to embrace business-model innovation is understandable: the old model was incredibly lucrative. Between 2000 and 2010, the domestic revenues of the recorded music industry were cut in half.
¹¹
Some of this decline was the direct effect of piracy, but by far most of it was the business-model innovation of iTunes and similar digital downloads markets. The secret weapon of the CD (and before that, LP) business had always been that you couldn’t buy the single you heard on the radio without buying another ten to fourteen tracks that didn’t really interest you. iTunes changed all that by allowing customers to buy singles for $1 or so and not surprisingly the customers usually pass on buying the rest of the album.
¹²
This is a long-standing pattern in copyright industries: pirates introduce a new business model at a low price point (e.g., Napster and MP3s) and the industry at first attempts to suppress the pirates (e.g., getting injunctions against Napster) but eventually resigns itself to adapting to the new business model (e.g., iTunes).
¹³

However, while recorded music revenues may be down, by many other metrics popular entertainment shows great vitality. Michael Masnick, a blogger and venture capitalist with a leading role in technology-policy debates, released “The Sky Is Rising,” a 2012 report on how the rise of digital consumption changed the entertainment industry.
¹⁴
Between 2005 and 2010, the global music industry increased in value from $132 billion to $168 billion. Despite a weak economy, the share of total household spending devoted to entertainment increased by 15 percent in the US over the same period. US entertainment industry employment increased by 20 percent from the late 1990s to the late 2000s, in part because of an explosion of activity that occurred outside the largest media companies. In short, the industry is booming.