Lawyers Discussing Business Models

from the dancing-about-architecture dept

Doug Lichtman's latest "IP Colloquium" podcast is on the question of whether or not "content can survive online." Specifically, it's a discussion about "online content business models." Oddly, though, rather than having business model experts, it's a conversation with four lawyers, starting with Doug, and including Brad Smith, General Counsel, Microsoft; Scott Martin, Executive Vice President, Intellectual Property, Paramount Pictures; and Dan Cooper, Vice President, Legal & Business Affairs, MySpace. Lichtman starts it off, oddly, by stating -- as if fact -- that talking about business models online is depressing because there's just not much in the way of business models online for content. I think that's damning things a bit early in the process -- something that comes up again later.

While I realize that the podcast is a legal podcast, it still strikes me as odd to bring together four lawyers to have them discuss business models, when their expertise is not in business at all, but in the law.

The podcast starts out with a discussion on the Google Book search and settlement, but oddly no one even seems to give any credit to the fair use question. But, again, since these are lawyers we're talking about, there really isn't much of a discussion on business models around Google Book Search, but on legal questions -- including a hope that Congress steps in to solve it. Amusingly, Microsoft's Smith early on suggests that it's a question Congress could solve "if the industry got behind it; if copyright holders got behind it." Striking, huh? He basically admits how copyright law works in this country. It's not about what's best for the overall society or economy. It's not about the politicians fixing things where they see a problem. It's not about consumers. It'll happen if the industry gets behind it. Welcome to the way things work in DC. The rest of this part of the discussion is interesting -- and it's one (rare) case where I mostly agree with Lichtman, that as a resource, Google's Book search is incredibly useful, and we should figure out some way for it to happen.

From there, the discussion moves on to other business models, and quickly seems to head off in directions that I don't think are accurate from a business model standpoint. It starts off with two premises set forth by Lichtman, each of which I think is suspect. First, he claims that piracy is a problem because "you can't compete with free." Frankly, I'm sick of this argument because it makes no sense economically or from a business standpoint. Economically, saying that you "can't compete with free" is the same thing as saying you can't compete -- period. It assumes, falsely, that the only way to compete is on price, but the history of the economy shows that's not true. You compete on price or you compete on benefits, and competing on price is often a losing battle anyway. Saying "you can't compete with free" just means you only know how to compete on price. If that's the case, you shouldn't be in business.

And, to make that point clear, tons of companies compete on benefits, and allow other companies to offer lower priced offerings. The popular example, of course, is "water," whereby it's free (or near free) to drink out of the tap, but the bottled water business is a multi-billion dollar business. Why? It tries to compete on other factors -- such as convenience, quality or safety (though, there are arguments that many of these benefits are perceived rather than real). But it's true in just about any other business as well. In the automobile business, a BMW costs more than an entry level Ford, and that's because BMW is seen to have a lot more scarce value. Ford could "copy" BMW, but BMW has its reputation and some amount of prestige that Ford simply can't copy.

Anyone who's in business recognizes that you don't just compete on price. So why is it that so many seem to assume that the only way to compete in the content market is on price?

Lichtman's second premise is that online business models don't work. He says that Hulu hasn't been a success because it doesn't make as much as TV, and that if Hulu displaces TV we "won't have the money to pay for" expensive TV show production. He claims that even if Hulu is really successful, it'll never make enough money to pay for the production of a show like Battlestar Galactica. First off, huh? How does he know that? If Hulu is successful, it absolutely could pay for such production. Already, we're seeing that some of the online ad rates are higher than TV ad rates. Hulu's barely been around for two years at this point. I'd be willing to bet that Hulu's revenue today greatly exceeds the revenue of television two years after it was invented. Give it time, Doug!

He then jumps on Redbox -- sarcastically saying "we're renting movies at a dollar per day?" Suggesting that this will never sustain the development of movies. Really? I always find it amusing when people insist that problems in the DVD market will mean the death of Hollywood. It really was just 25 years ago that Hollywood insisted that the VCR would kill the industry (Boston Strangler, anyone?). Now they finally get their "original" wish, and find that putting movies on recordable media is going away, and it's the worst thing in the world?

Either way, the economic fallacy that Doug seems to be relying on here is twofold. First, he assumes that early business model experiments are set in place and no further innovation will occur that allows them to flourish. He assumes that the markets won't grow, and some of these experiments won't click and get much bigger. Second, he seems to assume that the old revenue numbers for these industries need to be sustained. He doesn't consider that the old revenue numbers may have been a result of monopoly rents, limited competition or technological limits. Markets change all the time, and usually what comes out in the end is much better (subjective, I know, but I'm a believer that the world is a better place today than it was 25 years ago -- and that it will be even better 25 years from now).

But, of course, no one challenges him on this. Scott Martin at Paramount, of course, worries quite a bit about piracy of movies. While he admits (finally!) that he's just the lawyer, rather than the business guy, he discusses it in the terms of adding more windows to movie releases, rather than any discussion of adding more value to the product, or giving people reasons to buy beyond just the content. Then Martin repeats the myth that you can't compete with free, but leads in with a different myth -- claiming that the "copyleft" people say that piracy would go away if they just priced their movies better. That's a strawman argument. Perhaps someone out there made that argument, but it's hardly common. Then he says that "the idea that if we charged $2 a download instead of $10 a download, we'd get rid of piracy is a myth." Sure, it's a myth, but no one said that. You can't get rid of piracy. No one thinks you can get rid of piracy. No one suggested anything you do would "get rid of piracy." What many of us are suggesting is that you can build business models where that piracy isn't a problem. Even the people suggesting you just charge $2 instead of $10 aren't saying it would "get rid of piracy," but that at $2, enough people would pay for it that it would increase profits beyond what the $10 DRM'd version gets you.

Anyway, the discussion goes on from there, including a discussion of the DMCA that again doesn't make much sense to me, but the business/economic analysis throughout doesn't strike me as accurate at all. It's still an interesting discussion, but frustrating because I wish there were at least someone on the panel who would challenge a lot of the "accepted wisdom," put forth by everyone, that doesn't seem to be accurate. Brad Smith, at one point, does point out that this is all a "revenue" problem, and does a pretty good job describing the revenue problem... but then falls into the trap of saying the law needs to "fix the piracy problem" because without that, business models can't be built up.

The last analysis I'll talk about that is again faulty from an economics standpoint again comes from Scott Martin at Paramount, where he tries to defend the importance of DRM, noting that if he flies into JFK he has various price options on transportation: he can buy a car, rent a car, take a cab or take a train. So there are price differentials. He says that without DRM, content is like saying his only option is to buy a car. That is, if he had DRM, they could offer different "rental options" for content, with "one day pricing or one week pricing." But that's totally wrong again. There's a reason for the differential pricing in the transportation options: it's related to the marginal cost of each option and the competitiveness of the market. That's what sets the prices. But with content, the marginal costs are zero, so what he's doing is trying to set up an artificial barrier to pretend the markets are the same.

While I like listening to these discussions, I just find the economic fallacies frustrating.

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By The AP's Own Logic, The AP Ripped Off Obama

from the creative-thinking... dept

Law professor Doug Lichtman has a monthly podcast (on an annoyingly flash-only website) called the Intellectual Property Colloquium. A few months back, we discussed the episode that looked at file sharing damages. I must admit that I tend to disagree with a significant percentage of Lichtman's conclusions on intellectual property, but unlike many copyright maximalists, I tend to believe he's much more intellectually honest on these issues. His positions don't seem to come from a "more is absolutely better because it makes me/my clients more money" position, but he honestly tends to believe that greater copyright leads to a greater net outcome, and tends to argue reasonably about it -- though, I believe some of that reasoning, and the assumptions that underpin it are faulty.

In the latest podcast, Lichtman and three guests discuss "fair use" with most of the focus being on the Shepard Fairey case. Lichtman talks with one of Fairey's lawyers (Mark Lemley), a lawyer for the AP (Dale Cendali) and finally the General Counsel of the NY Times, Ken Richieri. It won't surprise many, I'm sure to say, that I strongly agreed with the points Lemley made, in explaining (a) how Fairey's use is almost certainly fair use. But the debate between Lemley and Lichtman is still quite worthwhile.

The key point that Lichtman keeps jumping back to is an interesting attempt to justify blocking fair use on what (at first glance) appears to be free market principles. That is, Lichtman states, repeatedly, that because Fairey could have licensed an image of Obama prior to making his artwork, there shouldn't be fair use. His argument is that this is as free market approach, and that fair use might not even need to be considered. To Lichtman, if there is a "functioning" market that can be made, there's no fair use. At a first pass, this may sound quite appealing to free marketer/libertarian types. But it's wrong. That's because what he's talking about is not a true free market at all. It's an artificial market, based entirely on a gov't backed artificial scarcity. It's a market built on a monopoly, which is no free market at all.

It also seems to go against the very intent of copyright itself, in that it suggests that as long as there's a "reasonable" tollbooth that can be placed on things, there shouldn't be fair use. But if that tollbooth is actually creating friction and decreasing, limiting or hindering creative output, then it can and should be seen not as "promoting the progress," but the exact opposite. Lemley does a decent job on the spot to warn against the frictions caused by such a "permission" culture, in that it's quite unreasonable in many cases to have to get permission, but Lichtman dismisses this as a minor issue, or really one that can be worked out separately. To me, that suggests a rather distinctly poor assumption about creativity and creative culture these days. Requiring ad hoc permission on any potential use would create massive chilling effects on all sorts of creativity. Lichtman also suggests that a third party intermediary (perhaps YouTube) could serve as a clearinghouse for such rights, but that too creates all sorts of problems.

Overall though, this highlights the problem I have with those who continue to support strong copyrights under a "free market" perspective. A true free market for a good with infinite supply will price that good at zero. But copyright distorts that market to limit that possibilities. It's as if some believe that any market represents a free market, even if that market is massively inefficient. Back in the days of the sugar monopolies, there was "a market" for sugar, but it was not a fair market price, because of the gov't backed monopoly. Or, to make the point clearer, today there is no "market" for air, despite the fact that it's quite valuable to all of us mammals who like to breathe. We could, in theory, create a gov't backed market for air, recognizing its value, and forcing people to pay to breathe, but most people inherently recognize how inefficient and wasteful that would be. Yet, content has the same fundamental (effectively) limitless supply as air (if anything, air is more limited). And yet, some think it needs a similar artificial and inefficient market.

As for the rest of the podcast, Cendali's defense of the AP's position was an incredible stretch (and, it was disappointing that Lichtman softballed his responses to her, pretending to "channel" what Lemley might say). Her defense was effectively: "The AP relies on licensing to survive. We need to survive. If what Shepard Fairey did was fair use, then it would destroy the AP, thus it can't be fair use." That's wrong on a variety of levels, and Lichtman barely touched on any of them. The purpose of copyright isn't to protect the business model of a single company. I could create a company that is harmed by fair use of my works, but that doesn't mean they're not fair use. Cendali also induced a guffaw from me in response to Lichtman's question about why the AP didn't notice the fact that its image was being used. Her response was that since the AP has so many images, it would be impossible to track them all and see if they're being used. Indeed, but no one was asking that. What Lichtman asked (and failed to follow up on) was why the AP didn't notice that this image -- which was being used everywhere -- was based on an AP image. No one expected the AP to track all its images, but you would think with such an iconic image getting so much coverage, that the AP would notice.

Cendali, keeps trying to suggest that the Mannie Garcia photo was something special, but fails to explain (even Lichtman pushes back somewhat, and Cendali answers a different question) what parts of the photo are actually protectable under copyright. She basically just says that because Garcia was a professional photographer, that the work is clearly covered by copyright. That's not how copyright works, though. She also keeps saying that because Fairey picked this particular photo it proves that the photo had something special. But, if he'd picked a totally different photo, she'd say the same thing. The simple fact is that Fairey could only pick one photo to make this picture, and this is the one he chose:

"He could have selected any one of probably hundreds if not thousands of photographs, But he selected this particular photograph, and he selected it for a reason, as he's already stated in various interviews. He was looking for a particular photograph that presented Obama in a particular way, in a hopeful way, in a way looking forward to the future... This wasn't just any random photograph... He was looking for a particular photo... and for him to now minimize that is not fair."

No, what's not fair is claiming that any of that is the AP's to own. None of it. Not a single part of it was. All of that -- the hope, the way he was looking, was simply there. What made him choose it was the look on Obama's face -- which is not Garcia's creative output, and thus cannot be covered by copyright. In fact, the most frustrating thing of all is that Cendali repeatedly claims that Fairey was ripping off Garcia (and the AP), but misses the obvious problem with that argument: which is that if her argument is correct, then the AP and Garcia also ripped off Obama, since it was his creativity in looking the way he did and making the facial expression he did. Once again, such externalities are apparently only acceptable when the AP benefits. But, Cendali seems to ignore that, and Lichtman lets her get off, noting that he basically agrees with her.

The final guest was actually a pleasant surprise. Richieri notes that he's not a copyright lawyer, but a newspaper lawyer, and thus doesn't approach things from an "ownership" perspective, but a "fairness" perspective, and notes the importance of fair use in the news business. He doesn't add too much new to the conversation, but it is refreshing to hear someone who, unlike the AP, seems to recognize that trying to own every last word/phrase/headline doesn't really make much sense.

Overall, the podcast is worth listening to, but the Cendali section may involve a bit of headbanging for it being so blatantly mistaken on the very basics of copyright law.

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File Sharing, Damages And The Constitution...

from the getting-into-the-legal-weeds dept

Doug Lichtman is a well known intellectual property law professor who is a fairly big supporter of the copyright system. He's reached out to us, because of a podcast he recently recorded discussing the Joel Tenenbaum lawsuit. To be honest, I'd pretty much stopped covering anything to do with that lawsuit, because over the last couple of months, it's turned into something of a circus side-show, with both sides running around and making decisions as if they've never actually been in a court of law before. Even the judge has been making mistakes.

However, Lichtman specifically was hoping for the perspective of folks around here on the podcast, because (as he noted in his email), most of his listeners tend to be strongly pro-copyright, and he was hoping to at least find out what those of us less sure of the benefits of copyright think. To be honest, after listening to the podcast twice, it may be a bit too down in the legal weeds for many readers here -- though, if you really are interested in the legal specifics, have a listen. The first part involves Lichtman talking to Charles Nesson himself about the case, followed by three "legal experts" and then a guy from the RIAA who seems to honestly believe that the RIAA's lawsuit strategy was a success because it taught more people that file sharing was illegal. This is wrong on many different levels, since it clearly didn't impact user behavior, and has created other problems, such as the false belief in some that all file sharing is illegal (even of authorized content) and has framed the RIAA as being anti-consumer, making it that much harder for the major record labels to eventually make the shift in business models that are necessary to succeed these days.

The overall "conclusion" that Lichtman comes to is that Nesson and Tenenbaum are likely to lose the case, as precedent suggests that courts will likely find the statutory damages in the copyright act to be within the range of being constitutional. I actually agree that this is the likely outcome, though I find it, and the reasoning behind it, quite troubling. I also hope that, when (if) the case really goes to trial, Nesson has worked up a better argument than he gave on the podcast. While he does raise some good points, a lot of it feels like he only has a superficial understanding of both what's happening and the law itself. When really pressed on legal issues by Lichtman, he resorted to an emotional argument ("it's just a kid clicking on links!") which hardly is legally compelling.

However, in listening to the "experts," it sounds like it would be possible to make a more compelling case against the statutory rates by pointing out some rather simple facts: file sharing, in and of itself, creates no damage for artists -- and thus, the statutory rates have nothing to do with being a "remedy," but have everything to do with being punitive, which would make it a criminal issue, rather than a civil one.

Now, I can hear the copyright supporters (including Lichtman) shouting that it's ridiculous to claim that file sharing creates no damages for the artists -- but that's not what I said. I said, file sharing in and of itself creates no damage. And that's easily proven: just point to the increasingly large number of artists who have embraced file sharing on purpose and who have found that it's helped them earn more money. Then, what you realize is that file sharing combined with a bad business model may create damages, but those damages may be alleviated by putting in place a better business model (again, pointing to evidence of artists who have done exactly that). At that point, the "damages" have gone away. The fault is almost entirely on the part of the artist who picked a bad business model, and then did nothing to alleviate the problem when it became clear that the market was going in a different direction.

In that case, there's no actual evidence of damages, and it's difficult to see the constitutionality of charging someone $750, let alone $150,000, when there's no actual evidence of damages -- and the only actual "damage" may have been caused by the artist themselves by picking a bad business model.

Part of my problem with all of these discussions is that copyright supporters seem to automatically assume that file sharing must be bad -- but there's plenty of evidence to counter that, with artists' wide embrace of it (successfully in many cases) being exhibit A. If file sharing was really so damaging, there would be no such examples. But we see more and more every day. So it's not file sharing that's the problem. The real problem is a bad business model combined with file sharing. And it's rather ridiculous to fine Joel Tenenbaum (or anyone) because some record labels and musicians chose a bad business model.

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Is That The Best Cato Can Do In Defense Of Copyright?

from the yikes dept

We've been covering the Cato Institute's online debate over the future of copyright, which began with a detailed explanation of how copyright has been stretched so far that it has broken, followed by a partial defense of modified copyright law where copyright would only be applied to commercial use. While I disagreed with the second piece, both were well written and thought provoking. You knew one of the pieces in the series had to be a defense of copyright, and that role seems to have fallen to Doug Lichtman, law professor at UCLA, and I'm rather disappointed. There are eloquent and interesting defenses of copyright out there -- but this is not one. Lichtman basically attacks the first piece as being wishful thinking, claiming that it would be wrong to "put copyright in the corner" but can't come up with a good reason why.

Instead, Lichtman basically complains that he personally can't come up with good business models that would come around in the absence of copyright. The thing is, no one's asking him to do so -- they're saying that the market can and will come up with those business models, as it inevitably does. So, his weak attempts to pick apart the business models suggested in the first piece in the series fall flat and are easily responded to. For example, Lichtman claims that since Rasmus Fleischer skipped over movie industry business models, it means there really aren't any -- other than mockingly suggesting something silly: selling action figures from movies, and notes that no one would buy action figures for "A Beautiful Mind."

But just because Lichtman can only think of a bad business model for the movie industry, it doesn't mean that there aren't business models that don't rely on copyright. For example, while he just assumes that you can't sell movie tickets anymore -- that's not true at all. We've listed out plenty of ideas on ways to make the movie-going experience worth paying for -- and we're sure, given a world without copyright, many others would quickly pop up, as the history of free markets tends to show.

Lichtman really should have been able to come up with a better response than "but... but... but... I can't think of any way to make money without copyright." It says a lot more about Lichtman than it does about copyright.

Lichtman then claims that Rasmus Fleischer's piece suffers from a flaw that the models he describes work for some content, but not for others. But that's missing the point. Fleischer's point is that a variety of business models do pop up -- and, even better, new business models pop up to support content not currently being created. When Lichtman brushes off Fleisher by saying: "Fleischer is not merely interested in allowing alternative models like free peer-to-peer distribution to compete with traditional approaches; he wants to take away the traditional options and leave intact only his favorite alternatives," he again is missing the point. Fleischer is not saying leave only his favorites intact. He's saying get rid of the artificial system set up by government to support one favorite model -- and then let any model show up.

In the end, Lichtman's defense of copyright comes across as similar to defenses of protectionist anti-trade policies: claiming that taking away the protectionist barriers will hurt an existing business model -- while ignoring all of the new business models and more free and open markets that result. History has shown time and time again, that removing such artificial protectionist barriers ends up being better for the overall market -- including both producers and consumers. I would think the burden should be on Lichtman to explain why this time is different. Unfortunately, he does not shed any light in that direction.

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