Creative Destruction

April 29, 2006

Copyright, Software, and the Recording Industry

Filed under: Economics,Popular Culture — Brutus @ 12:57 pm

Arguments that software and music sales and distribution models are outdated and need to be reconfigured are gaining currency these days. Two things are driving these opinions: the steady advancement of technology that makes copying and file sharing a low-cost or cost-free activity and the natural, if self-serving, desire among the consuming public to get it for free. Typical supporting arguments include contentions that no real harm is being done because these products exist in electronic forms, that artists and creators stand to gain from exposure and promotion of their work as a byproduct of file sharing, and that it's the wave of the future that can’t be stopped, so creators of intellectual property would be smart to recognize that fact and simply cooperate. These arguments are bogus for reasons I will try to show below.

Intellectual property rights grant owners exclusive control over use and/or license their own creations. Others are prohibited from copying, adapting, and/or distributing owners' works without permission. The terms "infringement" and "piracy" apply to illegal acts of duplication and adaptation, whether in whole or part. Exclusive rights provide a mechanism for creators to control quality and to profit from their own work, without which much creative endeavor would be discouraged or be of inferior quality. Those rights, however, are balanced by the need for free flow of ideas, which is regarded as a social good.

Copyrights, which cover musical works in a variety of formats and software programs, are granted a significantly longer term of protection than patents. This is because, from a historical perspective, the creator (author, composer, painter, photographer, etc.) typically took a long time to earn back his or her investment of time and expertise in the act of creation and because patents were more frequently held and exploited by large corporations with greater access to mass markets than the typical garage inventor. Those facts have changed over time, as ease of electronic duplication and distribution has given nearly everyone access to mass markets. The rapid accumulation of wealth by corporations that establish a virtual monopoly over a market segment and by a few high-profile, popular artists mitigates against the need for a long term of copyright protection. However, those cases are the proverbial "tip of the iceberg" when it comes to creative work. Beneath the surface, there are many, many creators and inventors working in relative anonymity, without the support of large distribution networks or audiences, or creators who work in niche markets where rapid accumulation of wealth is simply not the nature of the endeavor.

By insisting that copyright protection only or unduly enriches already wealthy individuals or corporations and should therefore be limited or abolished, the activity of countless as-yet-unsuccessful creators of intellectual property are discouraged from their activity. Further, without an expectation of eventual return on one's effort beyond the most popular and short-lived forms of expression (software or music with a shelf life of less that two years, for instance), the marketplace is discouraged from developing and embracing works of lasting value. We already tend toward being a throwaway culture, which isn't a good thing. Removing or reducing intellectual property rights dramatically would exacerbate that failing.

The idea that free use of others' creative ideas only hurts deep-pockets institutions or doesn't hurt anyone because the product is electronic also fails to account for the fact that creators of electronic media derive revenue streams from sales of their own work. By taping, burning, ripping, or sharing an electronic copy of, say, software or mp3s, the user is literally depriving the intellectual property owner of a sale the same way that the manufacturer of clothing would be deprived of sales if there were some magical copy button that worked for blue jeans. (Intellectual property is qualitatively different from real property, which is why a recognized body of law stretching back hundreds of years recognizes unique protections necessary for intellectual property versus, for example, manufacturing.) Sales revenues fund all aspects of a company’s endeavor, from research and development to promotion to talent searches to employee training to continued education, etc. When revenue streams shrinks due to illegal copying, there is less capital to develop new projects, ideas, and creations. Similarly, individual authors, composers, or painters must have a personal economy sufficient to allow dedication to the art or craft without instead having to devote their waking hours to earning a living. Sales revenue provides, in part, that freedom to create.

Many software and media infringers contend that their copying functions as a promotional tool, in effect stimulating later sales, or that no lost are sales because they buy legitimate media of things they really want but only copy things they wouldn’t otherwise buy. Both arguments may in some sense be true, but they don't justify infringement. Moreover, a typical consumer's media or software library is often littered with copies that do not split so neatly into illegal wouldn't-have-bought-it-anyway copies and legal bought-and-paid-for copies. While pirating Album A may indeed lead to purchase of Album B (ends still failing to justify means), only a chump follows the pirate version of Album A with a legitimate, purchased copy of the same album once the pirate determines the work is worth owning. This is even more true of working software.

Of course, the difference between a pirate and an infringer is a gray area. The large-scale piracy done by Chinese companies that repackage movies, CDs, CD-ROMs, and other media by the millions literally rob sales from companies that create the media in the first place. Knock-offs and of this sort are functionally no different from counterfeits of designer label clothing except that in the case of electronic media, the copy is often (though not always) exact rather than a close (yet inferior) imitation. In either case, such piracy is a blatant misrepresentation of the point of origin of the goods (which is illegal) and is financially damaging to the property owner. Some may argue that a typical, individual purchaser of pirated goods may only account for one sale every three years, say, but the aggregate behavior of millions of typical, individual purchasers accounts for a steady stream of lost or redirected revenue. That enables the pirating and/or distribution of millions of copies by one clearinghouse, such as Napster. Similarly, the 13-year-old girl ripping her legitimate Britney Spears CD to load her mp3 player (acceptable under the fair use doctrine) and then sharing the mp3 files with her gaggle of girlfriends (illegal in the extreme) is a drop that, in the aggregate, represents a deluge. Lack of compensation for file-sharing is irrelevant to the act of unauthorized copying.

Promotional copies of music and software, or copies with limited content or functionality, have always been a tool of intellectual property owners to increase their market share. The argument has been advanced by Adam Gurri that all copies should be promotional copies so that emerging artists and foundling software companies can build their market shares. That's wishful thinking from the perspective of an end-user who wants it for free, but it's naïve to believe that giving away work early in the development of one's market leads to later enrichment. It's just as likely to condition the consumer to expect that it should always be free or to move from one emerging artist to another as the supply of freebies continues to bubble up from the bottom. This effect has already been noted in the area of corporate internships, where unpaid employees, in exchange for contacts, networking, and the hope (no guarantee) of eventual employment, perform the work a paid worker might have done. The cost of living is borne by the unpaid intern, who may indeed be developing some skills, but who edges out a legitimate paid employee (even though perhaps entry level). The cycle creates a depressed labor pool and the expectation among employers that potential employees should be willing to defer remuneration in favor of intangibles that may never actually manifest. The aphorism "why buy the cow …" comes to mind. If, for example, musicians were to give away their product, where, then, would the revenues come from that lead to new works and development of skill? Concertizing and public appearances are costly and are typically undertaken to promote record sales, not the other way around. If software were distributed free, where would the revenue to develop it come from?

It's certainly true that some software is provided free to entice customers to become paying customers of some service. While that business model is valid, it can hardly be considered universal. Similarly, Hewlett Packard is known to sell its printers at a loss to drive the sale of replacement ink and toner cartridges (and subsequently installs means for the printer to refuse to recognize cheap, third-party replacement cartridges). Not every business has a durable good sold at a loss to drive sales of a consumable good. In the case of music and software, it probably more accurate to describe them as consumables.

The last argument I'll offer in this already overlong post (though others could be made) is the notion that the die is already cast, that software and record companies may as well succumb, and that they should try to figure a way to co-opt new distribution methods. I'm usually a fatalist, but this line of thinking rings hollow. Those who create and develop a market (energy, politics, soup, tires, etc.) are certain to take steps to protect it. Record companies, the RIAA, and software developers are no different. One major issue informing this argument is that when one technology replaces another (the computer/printer for the typewriter), that's an innovation. But when it's illegal activity (supported by hundreds of years of legal precedent) that threatens the market, market leaders are accused of being money-grubbing corporatists. It's a hollow charge, as intellectual property holders have always had the responsibility for policing and protecting their own rights. Perhaps some of the strong-arm tactics, such as charging 13-year-old girls, are a bit much, but then some 13-year-old girls are notoriously prolific infringers.

Nonetheless, many record companies have already begun electronic distribution of their media (downloads from iTunes or Wal-Mart). They've done so in response to market demand but with the full knowledge that subsequent infringement is being enabled. Similarly, development of new media formats usually include means to thwart copying, but workarounds follow on their heels relatively quickly.

It's said that in the end, there is always death and taxes. The human condition is marked by, among other things, our resistance to these inevitable tolls. To develop intellectual property for the greater good and enjoyment and then fritter it away is what I see argued most of the time. Economics, rather than principles, are offered in support, but solutions to the problem of giving it away versus charging for one's product haven't been solved any more by consumers who want it for free than by businesses that try to operate profitably. It's a time of transition, certainly. (What time isn't?) But rather than sweep aside property rights established to enable activity that benefits both the creator and the culture, we should recognize that without respecting property rights, there is no reason to expect that the software we use won't be full of flaws and the music we listen to reduced (even more so) to pablum.


  1. Eloquently put; I’m at work at the moment but I promise a timely response

    Comment by Adam Gurri — April 30, 2006 @ 12:56 pm | Reply

  2. The vast majority of copyright law critics, myself included, don’t think that there should be no remedy for illegal pirating of software, music, etc. My beef is with the intellectual construct of a “property right” which insufficiently respects free speech values and the magnitude of the harm.

    As my DVD from Blockbuster happily reminds me, the penalty for illegally copying something, even if there is no monetary gain from doing so, is 5 years in prison and thousands of dollars in fines.

    But, the real harm from illegal copying is not that the owner has been deprived of control of his property (the traditional justification for criminal penalties for violating property rights), but that the owner has not gotten his cut of the profits. The gravamen of the harm is unjust enrichment, not theft. Unjust enrichment in other contexts has been dealt with through compensatory damages, not criminal punishment, and this is a sufficient remedy.

    The gal who shares a Britney Speers song on her MP3 player with a friend, ought to owe the $15 bucks that it would have cost to buy another CD (or perhaps only the couple of dollars it would have cost to buy that particular song from iTunes) (plus costs and attorneys fees to bring the action) to the copyright owner, not thousands of dollars and jail time.

    Civil lawsuits work. If they didn’t credit card companies would all go broke. But, we don’t throw people who don’t pay their credit card bills in debtor’s prison, even if the amount would have been a felony if it was theft, and we don’t need to throw copyright infringers in prison to maintain a functional marketplace in intellectual property. Routine infringement cases should be the mass produced stuff of small claims court, not federal cases.

    More importantly, the property right analogy is particularly insidious with regard to free speech rights when it comes to derivative works. A right to be paid for straight copies is only one of the rights that come with a copyright (and is itself hardly offensive when the book is out of print and the copier is willing to pay a market price to the right holder who may simply refuse to negotiate). Another is the right to prevent others from using your material for any reason, or no reason whatsoever, even if you refuse to sell it yourself. It is a crime to write a sequel to a 1930s published novel, or to make a movie based upon it, or to translate it into a language that the publisher has not deemed fit to because it isn’t profitable to do so, or to write fan fiction made available for free to the public while clearly disclosing that it isn’t written by the main author. Sure, the original author should be entitled to a take of the profits in those cases, if any (which is only partial, as some of the derivative work is original). But, the original author shouldn’t be able to obtain an injunction against the new work’s distribution or put the new work’s author in prison. This is particularly problematic as the scope and duration of copyright has been expanded to the point where the public domain isn’t growing at all. Pre-1976, for example, unpublished works weren’t protected at all, and the term only 28 years, except in the case of intentionally renewed (and hence profitable works). Thus, the default rule was that non-profitable works swiftly entered the public domain.

    This is particularly problematic in multi-media or sampling type works, where there a many sources for even a modest product (e.g. a single song or blog post). Often the unjustment enrichment involved per work is in the pennies, but the transaction costs of negotiating licenses one by one would be crushing. Yet, copyright holders have not developed the equivalent of the kind of license that a commercial radio station can get, that allows it to play just about any published music work for a fixed annual fee, in exchange for keeping good records about what they play.

    It is also a problem for people who simply don’t like negative views about them released. Copyright wasn’t meant to be a trade secret pact, but the combination of digital technology and groups like Scientologists, often try to create that result.

    Many so called infringements in the digital world also don’t jibe well with traditional fair use or ownership rights in print works. A library that buys a book from anyone, can lend it to hundreds of people without being infringing, and are purchased for precisely that purpose. But, libraries didn’t kill the publishing industry. I can lend my neighbor my hard copy of Harry Potter’s latest adventure or my physical CD and not infringe. Yet, if I give someone else access to my MP3, even if I don’t access it myself during that time period, I am infringing for digital purposes on the holder’s copyright.

    Comment by ohwilleke — May 1, 2006 @ 5:42 pm | Reply

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