I’m currently taking part in CopyrightX. Today I present both a review and summary of one of the readings by William Fisher (2004) – ‘Promises to Keep: Technology, Law and the Future of Entertainment’ – Chapter 6: An Alternative Compensation System.
Incentives are misaligned in innovation. This stems from two concepts; (1) ideas are public goods by nature, (2) innovation and creative acts have significant positive spillover effects. Public goods are those which are both nonrivalrous and nonexcludabile in nature. This leads to appropriability problems for potential creators. Combining this with financing concerns, inherent uncertainty and high fixed costs, leads to socially suboptimal levels of both innovation and creativity. This is the innovation problem. Note – While this social dilemma does not solely relate to innovation, this will be the focus of the discussion today.
This innovation problem has been debated for centuries, rendering several government solutions. Fisher (2004) focuses on five of these; (1) government supply of the goods themselves, (2) government paying private actors to supply the goods, (3) concept of post-hoc prizes or rewards, (4) granting of exclusive rights to reduce appropriability concerns, (5) assisting private parties to appropriate through increasing the excludability of the goods (either directly or indirectly, such as trade-secret law).
These solutions form the innovation system. They are all government-imposed institutional solutions to the innovation problem, and can loosely be placed into either private (such as intellectual property) or public (such as Research and Development subsidy). It is important to note from the outset that the focus of the innovation system is on increasing incentives for creativity while not reducing the substantial benefits of open or cumulative innovation.
Today, we will focus on variants of the fourth strategy, which incorporates copyright law. This institutional solution represents significant debate in the literature. And, based on this, Fisher (2004) suggests a “fundamental change in approach.”
More specifically he “… proposes that we replace major portions of the copyright and encryption-reinforcement models with a variant of the third strategy – a governmentally administered reward system.”
The system, in a crudely brief outline, runs like this. Instead of providing exclusive rights of individuals to sell their work, authors would register new works with the Copyright Office. From here, the digital distributions of the files would be tracked (various means are suggested). Government taxation (again, various means) would provide funds. Compensation would be distributed based on numerous criteria (you guessed it… lots of criteria). Theoretically, the result would be lower costs for consumers (always good), more reliable compensation for artists (providing incentive to create) and the pathway for cumulative innovation and derivate use of works (the major disadvantage of providing exclusive rights). On the other hand, this system would be an extremely complicated one, with distorted behavior and inability of artists to control their products in the public domain. And, from a libertarian economists’ view – is inherent with regulatory capture/rent-seeking, public choice pitfalls and other forms of government failure (unavoidable when moving away from a market system).
While my latter comments may suggest this system is fraught with danger – it should be taken more as a form of constructive criticism. The copyright system is in need, undeniably, of revision, and few innovative solutions such as this come along. This, I hope, is a broader movement away from thinking of the ‘optimal level of copyright protection’ towards a re-vamp of the system as a whole.
The remainder of the Chapter is focused on the more specific details of the Alternative Compensation System. I will only briefly explore the sections – you should do so yourself, here.
Registration – One of the essential elements of the system is a way in which to track the digital copies of songs and movies. Fisher suggests some type of “unique and durable digital fingerprint”. Similarly, a centralized registration system is suggested – possibly the current Copyright office. This would involve submission over the internet, with a small registration fees, and the registration of details such as the percentage of material from other registered recordings.
Taxation – Money is raised through one of two means; (1) increases in federal income tax, (2) taxation of the goods and services used in gaining access to music and film. These both have benefits and costs, yet analysis suggests the first would be the better of the two approaches. The former (income tax) has two main benefits. First, it is efficient (only on the basis it does not require significant additional administrative costs). Second, distortions are claimed to be less as the deadweight losses are moderate in scale. On the negative side, tax increases are inherently politically unpopular. The second solution focuses on taxing goods and services such as “… (1) equipment used to make copies of digital recordings; (2) media used to store such copies; (3) services used to gain access to the Internet, either to download files or to stream recordings; and (4) peer-to-peer systems or other services used to share files.” One of the most prominent potential tax targets is internet access services themselves, as well as the online services that assist in locating or sharing creative content. Advantages and disadvantages of these methods are both complex and widespread. Fisher suggests that this is likely to be more politically popular, and would be perceived as more voluntary. Negatively, the approach is cumbersome and riddled with adminisstrative costs.
Measuring Value – When distributing money, the obvious solution rests on the basis of objective. Fisher suggests that “… our objective would be to make each artist’s share of the pot proportional to the total value that, during a given year, consumers derived from his or her creations.” We need to continually adhere to this for three reasons; (1) proivision of appropriate signals to authors, (2) fairness, and (3) to avoid the pitfalls of government failure in judging the benegfits to society. In the current system, we determine value through the price system. The most basic technique in the new system would be to rely on the frequency of downloads. Theoretically, it is much easier to determine the number of downloads compared to the number of times a piece is enjoyed by any given individual. Another issue is that if we were to count the number of downloads, it would “…make it discouragingly easy to unscrupulous people to “game” the system.” Fisher suggests the most promising alternative it to enact some form of sampling of the population (much like that currently employed in television ratings, yet on a much larger scale). Further, discussion and adjustments for the duration of various works is warranted. Even further, we need to ask whether frequency of consumption has a strong correlation with enjoyment, and hence benefit to society. In response to this, Fisher suggests a voting system.
Derivative Works – The proposed system would make it possible “to divide the stream of revenue attributable to such a derviative or composite recording among the various contributors to it.” The division would be arbitrary and problematic, yet is nonetheless theoretically possible.
Following the discussions above, Fisher goes into length over the merits and demerits of the proposed system. The most exciting, for myself, is this:
The proposed system would help us to reconcile two goals long considered to be in conflict – facilitating cumulative innovation, and ensuring that pioneers are adequately compensated – p36
As I mentioned earlier – current discussions in copyright tend to focus on a continuum of balancing these two objectives, Fisher tries to reconcile them.