Flexible exceptions to copyright have negative economic costs, says study

For years, the Computer & Communications Industry Association (CCIA ), an organization that represents Google, Yahoo and other companies in the computer, Internet, information technology, and telecommunications industries, have advocated for broad copyright exceptions arguing that they substantially contribute to economic growth. In a series of studies culminating in a 2011 paper published by the CCIA titled Fair Use in the U.S. Economy, the claim was made that a group of identifiable industries called the “fair use industries” accounted, in 2008 and 2009, for an average of $4.6 billion in revenues in the U.S. In a similar paper published by the CCIA in 2010 titled Economic contribution of EU industries relying on exceptions and limitations to copyright, the claim was made that the value added generated by industries in the EU relying on exceptions and limitations to copyright amounted to $1.1 trillion or 9.3% of GDP in 2007.

In August this year the Australian Digital Alliance, a body representing copyright users including Google, Yahoo, and other computer, Internet, information technology, and telecommunications industries, universities and library associations, published two papers written by Lateral Economics (LE) that adapted and applied the methodology used in the US and EU to Australia. The first, titled Exceptional Industries attempted to measure the size of Australia’s  industries that rely on copyright exceptions and limitations, concluding that in 2010 they contributed 14% to Australia’s GDP or $182 billion. The second, Excepting the Future, went further and claimed that the value of introducing a set of unspecified “flexible exceptions” into Australia’s copyright law would produce a welfare gain to its economy of $593 million while having “negligible downsides for rights holders”.

The methodology and conclusions in the Australian studies, and by implication the U.S. and EU studies published by the CCIA, were critically reviewed by Dr. George Barker, the Director of the Centre for Law and Economics, at the ANU College Of Law, Australian National University in the paper titled Estimating the Economic Effects of Fair Use and Other Copyright Exceptions: A Critique of Recent Research in Australia, US, Europe and Singapore.  Dr Barker concluded that contrary to what the studies asserted, “economic theory suggests that any weakening in the enforcement of copyright, through introduction of ill defined exceptions and safe harbours of the kind promoted in the LE reports, would have significant negative economic costs, and little or no benefit.” Further, if “there are flexible copyright ‘exceptions’ and better crafted ‘safe harbours’ that would make a substantial contribution to Australia’s economic growth and innovation, with negligible downsides for rights holders, then in all likelihood they would have already been agreed to in the market or may be expected to emerge over time through automated market based electronic payment systems.”

Dr Barker identified fundamental flaws in the theoretical economic analysis, the empirical analysis, and in the legal analysis. In his opinion, the flaws “make the analysis unreliable and its recommendations irrelevant.” Some of the notable criticisms include the following.

• LE’s analysis assumed that adding “flexible exceptions” would result in costs, but it never attempted to quantify them or to show why they would be “negligible”. In fact, he says they would be substantial.

• LE’s analysis did not demonstrate any welfare gains to the Australian economy. The study did not provide economic evidence that “flexible exceptions” would prodcue any marginal economic benefits when compared to those already existing in Australia.

• The study did not demonstrate that any of the suggested benefits of new exceptions would exceed the costs of introducing them.

• The unintended consequence of broadening exemptions to include, for example, U.S. style fair use, would have negative feedback effects over time. It would reduce investment and the overall size of the copyright market and copyright output over time. Further, over time, this would limit the growth of the internet intermediary services market which relies on demand for new copyright content like new music, films, games and books to fuel its growth.

• LE’s analysis paid no attention to issues of equity including identifying who would benefit from the redistribution of rights and exceptions nor did it justify why any particular beneficiaries of the exceptions should be favored over others.

• LE’s analysis assumes that copyright law imposes “limitations” on the production and distribution of creative content requiring a need for broad exceptions rather than establishing the need. However, economic theory suggests copyright does the opposite by limiting only unauthorized distribution, but not voluntary exchange and legal dissemination. Further, exclusive rights reduce free riding on creative output and provides incentives for creation and dissemination.[i]

• The Excepting the Future study asserts various costs and risks that face intermediaries including some of the largest and most profitable firms on the planet such as Google. The study does not explain why these intermediaries should not pay for content as one of the ordinary costs of doing business. Dr Barker asks “Why should the law shift these costs and risks onto others, when the intermediaries are best placed to manage and minimise these risks, including legal compliance?

• Dr Barker posits that organizational arrangements such as market based electronic payment systems will be developed over time to reduce transaction costs of clearing rights in the context of competitive markets. These new arrangements will complement the existing power of the Internet in reducing transaction costs. He criticizes the LE study as being unwilling to give this time, instead proposing “ill defined exceptions and safe harbours” and rather than establishing a legal regime that requires payment for access rights in a competitive market, the study recommends “legislative fiat to transfer rights. It is like a coalition or cartel of road or railroad builders seeking the right to acquire easements across private property without paying the market price.” The effect of this subsidy will lead to “inefficiency higher prices and reduced supply of content in the short run, and long run.”

• The study suffers from a basic and fundamental flaw. It assumes that creative goods exist in the first place, and that new “flexible exceptions”  like fair use do not affect the investment in and distribution of copyright goods.

• Studies which purport to demonstrate the importance of exceptions or limitations by linking them to the value of the industries that rely on them are fundamentally flawed. LE and the other studies incorrectly value exceptions and limitations to copyright by endeavoring to measure their value as if they were inputs to a production process. However, copyright, and not exceptions, are the inputs. “The concept of an exceptions or fair use industry… that could be identified on the basis that exceptions are an input to them in this way is meaningless – a fiction. Markets depend on rights, and exceptions undermine them.”  In fact, the short run or immediate loss of revenue and sales in the copyright market from broad exceptions would have a negative feedback effect, by reducing investment and the overall size and output of the copyright market over time. This in turn eventually limits the growth of the industries which rely on them including the internet intermediary services market.