Saturday, March 17, 2012

"Copyright Math" is a Joke

A few days ago I watched a TED Talk by Rob Reid entitled the "$8 billion iPod" where Mr. Reid, a comedian and the founder of music subscription service Rhapsody, "unveils Copyright Math (TM), a remarkable new field of study based on actual numbers from entertainment industry lawyers and lobbyists." This Ted Talk is Mr. Reid's tongue-in-cheek take on what's wrong with copyright law. Mr. Reid was engaging, entertaining, and funny, but was this an idea worth spreading

Complex issues that are oversimplified and distorted for comedic value are enjoyable and even valuable in providing us with a respite from serious deliberation on such things. But, if these oversimplifications and distortions are presented as truthful representations of facts -- that are just delivered in a funny way -- they risk undermining serious discussions that can create workable solutions. This TED Talk is simply a comedic straw man ... not an idea worth spreading!  

To give an example, Mr. Reid defines the $150,000 in statutory damages contained in Section 504 of the U.S. Copyright Act as Congress and Hollywood's view of "the precise amount of harm that comes to media companies whenever a single copy of a copyrighted song or movie gets pirated." This is a gross misrepresentation of the Copyright Act's damages section. Section 504(c) of the copyright act sets two types of damages:
(1) Actual Damages: which is actually the precise amount of harm from an infringement -- currently this would be somewhere between $.99 and $1.29 for a digital song 
and 
(2) Statutory Damages: which ranges from a low of $200 to a high of $150,000 per work infringed and depends on the intent of the infringing party.  
Mr. Reid portrays statutory damages as actual damages and thereby creates an easy target to attack. But you might ask, why do we have statutory damages in the first place? Is that just a semantic argument? No, it is not. Let us pretend there is no statutory damages available under copyright law. What would most people do if they want the newest digital release of their favorite musical act? They could go online and purchase it from the record company who would charge them $1.29 for this one song. Or they could go find a pirated copy somewhere online for free. What is the potential cost of downloading the pirated copy? Well, it ranges from $0 if they get away with it to $1.29 if they get caught.  

Where would this system leave the record company? They would have a simple choice: either hire a lawyer and bring a lawsuit in federal court against the the person for $1.29 or do nothing and absorb the loss of that sale. What would the cost of a lawsuit be? Well, I can assure you it would be higher than the potential return of $1.29. So the only rational act for the record company would be to do nothing. With this system, would you expect a vibrant music industry? How much quality music would we have? 

To further examine the need for statutory damages, let us look at one more illustration from the world of retail sales. If you were to walk into a store, take an item, and walk out without paying for it, what are the potential risks? If caught, you face criminal prosecution that could result in a fine that exceeds the value of the item stolen, time in prison, and a permanent criminal record. Why have such laws? The answer is obvious: if the only risk to theft was paying for the item you attempted to steal, most people would have an incentive to attempt to steal the item first and then just pay for it if they were caught. Indeed, if there is no cost placed on the act of theft that exceeds the cost of the item stolen, we would be creating an economic incentive to steal and theft would become the norm. The potential benefit (free stuff) would far exceed the cost (paying for the item), therefore,you're no worse off for attempting to steal the item than you would have been had you not attempted to steal the item. 

But, as economists like to remind us, everything has a cost. The costs of this increase in theft and the countermeasures that would be needed to combat it would then be passed on to all consumers whether or not they are participating in this unethical behavior. Some otherwise ethical persons would see that they are being unfairly treated in this system and would decide that theft is the only way to keep from bearing the cost of others' theft and a new social norm would ensue. There is a reason that nations like India and China, who culturally do not value intellectual property rights, have very little innovation despite the impressive level of educational attainment and talent of their people. 

The statutory damages clause of our Copyright Act is an indication of the value we place on innovation and creative endeavors. Statutory damages attempt to place a cost on the act of the theft itself and thereby deter such behavior and encourage innovation and creativity. To state otherwise, as Mr. Reid does to much applause and many laughs, is to not understand the issue, to distort the facts, and to spread misinformation. It in no way lives up to the TED Talk's mantra of presenting "ideas worth spreading."