Friday, August 29, 2008

UK IPO Consultation on EU Copyright Term Extension

Today is effectively your last chance to submit to the UK Intellectual Property Office's request for comments on EU Commissioner Charlie McCreevy's proposal to extend the term of copyright in sound recordings. A copy of the rather rushed comments I sent to Barbara Squires at the IPO at can be seen below. Sorry about the formatting. Word and Blogger don't seem to want to play nicely and I haven't got the capacity to debug the horrible html underlying it all at the moment.

Comments on proposed EU extension of copyright term in sound recordings

Ray Corrigan, Senior Lecturer in Technology, Open University

Retroactive copyright term extension

I would start by noting there is no economic justification for retroactively extending the term of copyright in sound recordings, as Andrew Gowers concluded in his independent review into the UK Intellectual Property Framework in December 2006.[1] Gowers, unusually in the annals of intellectual property policy making, commissioned a specific economic study[2] to consider the extension of copyright term in sound recordings and firmly came out against such a move.

There should be a principle whereby there is no retroactive extension of the term or scope of copyright laws. Retroactive changes to law cannot affect past behaviour. Such behaviour is what accountants might call a “sunk cost”.

Simply put, no amount of extra incentive created today can affect the actions of creative artists in the past. We cannot enable an artist to record a song with any more zeal 50 years ago by telling him now that he’ll get an extra 45 years worth of copyright when the EU gets round to it in a few years. Everyone who has made a sound recording in the EU to date has arguably been aware that they signed up to a deal which meant that the copyright ran out and the work passed into the public domain after 50 years. No one is losing anything they were entitled to and anyone lucky enough to have a 50-year income from one of the small percentage of recordings with a 50 year commercial life has had 50 years to plan for the day when the income from that recording would cease.

A plumber does not expect to derive a 50 year income from fixing a sink. He/she certainly would not expect to derive a further income for another 45 years just as the term of the contract ran out, if by some quirk of nature he/she had negotiated such a contract. Whether the plumber or the recording artist, who spends the same amount of time in the studio as the plumber did fixing the sink, add more value to society is a value judgement. Under our intellectual property laws the recording artists get the 50 year income if they are lucky enough to record a song which turns out to have commercial value for the 50 year term.

Internal Market Commissioner Charlie McCreevy recently committed himself to extending the term in sound recordings at an EU level to match the US term of 95 years. This raises a number of questions, two of which I will note but I do not intend to pursue them or other related questions in any detail in this paper:

If the economic case against term extension is so strong, as Gowers concluded, are there other compelling reasons for such an extension and how can we test them?

If the move is to match the US situation, will it mean that artists lose royalties on radio play in the EU which are not available for radio play in the US?

The interested parties

Perhaps it might be helpful if we examined a breakdown of a generic set of interested parties in the copyright term extension debate. There are three main parties with a stake in the copyright pie:

  • Creators
  • Agents (and I use the term in the economic sense here to cover all the commercial entities involved in the copyright arena e.g. music, film, software, media companies, publishers etc.)
  • And society as a whole (also known as the general public or consumers)

Each of the three sets of stakeholders overlap to some degree and will have within them a massive range of different kinds of creators, businesses or consumers – all of which will have their own demands of the copyright system – but for simplicity sake I am just going to look at the three groups.

Optimal Copyright
View SlideShare presentation or Upload your own.

Figure 1: Optimal Copyright[3]

We can take a theoretical stab at how the state of the copyright system – depending on, for example term, scope, penalties, case law, enforcement – will affect each of our stakeholder groups.

The graphs in Figure 1 (above) show that the optimum system is different for each group but for it to work the interests of all three groups must be catered for. So immediately we see the need for compromise. Strong copyright might raise economic incentives to create and commercialise, for creators and agents, but it may restrict public access and the access of creators to build on the work of earlier creators. Weak copyright lowers economic incentives for creators and agents but consumers and second generation creators have greater access and freedoms.

So there always have to be trade offs for the system to work, since theoretically:

ZA > ZC > ZS

(possibly) and we can construct a model illustrating that the “best” copyright system, at least from an economic perspective, is one where the weighted sum of the benefits to creators, agents and the public is maximised.

The problem is that there is very little empirical evidence available on copyright and intellectual property policymaking more generally. And the studies that are available are often contradictory.

The real value of copyright term extension

So who are the winners and losers when copyright term changes?

Let’s take Commissioner McCreevy’s proposed 45 year term extension in sound recordings for example.

Clear winners are the small numbers of creators and agents with commercially successful works which would otherwise fall into the public domain 45 years earlier. Only about 4% of copyright works older than 20 years are commercially available, so 96% remain locked up for another 45 years even though no one is selling them. The public therefore lose out, as do creators who would like to build on those works (and the 4%).

Commissioner McCreevy has noted a nominal re-registration “use it or lose it” proposal for deriving the full benefit of the extra term extension. However, it is inconceivable that the four largest music companies – which control more than 80% of modern sound recordings – would not create administrative processes to routinely re-register their entire catalogues, for fear that works they did allow to slip into the public domain would subsequently be commercially exploited successfully by other agents.

Systemically copyright term extension is a bad deal for most interested parties. In addition, if we do some basic discounted cash flow calculations we discover the real present value factor of the increase in economic incentive of a term extension of 45 years is surprisingly small. Commissioner McCreevy, as a chartered accountant and past Minister for Finance in the Irish government for more than seven years (June 1997 to September 2004), will be familiar with this kind of mathematical reasoning. The present value (therefore specific differential economic incentive at the time of recording) of the extra 45 years on top of the current 50 years would be:

1/(1+r)51 + 1/(1+r)52 + … + 1/(1+r)95

- Where r is the equivalent of a standard rate of inflation (expressed as a decimal) for the 45 years. In fact with the help of some neat mathematical manipulation we can derive a formula for the present value of a constant income (C) for a particular copyright term:

Present value = C(1-e-rt)/r

Where e is Euler’s number, a universal mathematical constant (and the base number for natural logarithms)

r is the percentage annual discount rate expressed as a decimal,

and t is the copyright term in years.

So for a term t of 50 years and a discount rate of 10%, the present value of an income stream C of £1000 per annum would be £9933, approximately. That sounds like a decent income. Now compare it with the present value of an equivalent yearly income if the copyright term were 95 years (just change the t in the calculation from 50 to 95), which turns out to be £9999.

The extra present value of the 45 year term extension is just £66 or 0.6%.

In fact if the copyright term were to last forever, the present value of the same annual income stream would be £10,000. (Present value of an infinite income flow at a constant discount rate =C/r, where C is the annual income and r the discount rate)

A 95 year term of copyright is worth 99%, in present value terms, of the value of a copyright that lasted forever.

We can repeat these calculations for different discount rates and income streams and demonstrate that the differential in real present value terms or the economic incentive provided by an extra 45 term extension is very small.[4]

So clearly we need to be extremely sceptical of arguments declaring that the only way intellectual property owners are going to derive an appropriate income from their creative assets is by further extending the term.

James Boyle[5] put it like this when considering the music industry’s representations to the Gowers review:

The recording industry’s proposal for retrospective extension is effectively a tax on the British music buying public to benefit the copyright holders of a tiny proportion of sound recordings. The public loses twice. It loses first when it is forced to continue to pay monopoly prices for older, commercially-available music, rather than getting the benefit of the bargain British legislators originally offered; 50 years of exclusivity, then the public domain. The public loses a second time when, as a side effect, it is denied access to commercially unavailable music; no library or internet enthusiast can make the forgotten recordings available again.

The whole idea is very stupid. But if this is the stupid idea we wish to pursue, then simply increase the income tax proportionately and distribute the benefits to those record companies and musicians whose music is still commercially available after 50 years. Require them to put the money into developing new artists – something the current proposal does not. Let all the other recordings pass into the public domain.

Of course, no government commission would consider such an idea for a moment. Tax the public to give a monopoly windfall to those who already hit the jackpot, because they claim their industry cannot survive without retrospectively changing the terms of its deals? It is laughable. Indeed it is. Yet it is a better, saner proposal than the one before us. Which tells us something about the current state of copyright policy.[6]

He could have been talking about the Commissioner McCreevy’s copyright term extension proposal of 2008.

A pension for poor musicians?

The argument that the move is primarily designed to benefit session musicians, who will be denied a pension if the copyright on 50 year old recordings expires, holds no water. By the music industry’s own figures the session musicians still gaining some small income from 50 year old recordings are not getting anywhere near enough to constitute a living wage. So if the object of the exercise is to provide pensions for ex session musicians on a small income then the extension of copyright term is a very expensive and economically inefficient way to do so. The parties who derive the most benefit from such a change are not the session musicians but creators and agents with commercially successful works which would otherwise fall into the public domain 45 years earlier. And the session musicians on a low income would still not get a living pension. So not only is the proposal expensive and economically inefficient but if the primary objective to provide a living pension to retired or retiring musicians it will also fail to meet that objective.

In practice, even if a sound recording does fall into the public domain there are still multiple opportunities for the copyright owner to derive revenues from it. If the copyright expired on a popular artist’s recording, for example, that artist is still at liberty to record and release an end-of-copyright-celebration version of the song. Then it hardly matters that the Jo Public Band has recorded a version too. The original artist’s new recording is still likely to achieve significant sales.

I would also draw your attention to the case against term extension made by a large number of leading EU intellectual property scholars.

The perspective of leading intellectual property scholars

Leading EU intellectual property scholars have written to the President of the EU Commission in June[7] and the Times newspaper in July[8] robustly condemning the proposal to extend the term of copyright in sound recordings. The letter to the President of the Commission was accompanied by a full impact assessment[9] of the empirical affects of the extension produced by the leading centres for IP policy research in the EU at Cambridge, Oxford, London, Queen Mary College, Amsterdam, Edinburgh, LSE and a whole host of others, coordinated by Martin Kretschmer and Philip Hardwick at Bournemouth University.[10]

They suggest:

"It is a spectacular kowtow to one single special interest group: the multinational recording industry...

The proposed Copyright Extension Directive will damage European creative endeavour and innovation beyond repair.

They go on to say that competition will be impeded, consumers harmed and the EU's balance of trade damaged.

"If the European Commission wishes to support European artists, there are many possible measures that would not result in monopolising the back catalogue of recorded music for another 45 years. At the level of member states, policies include (i) the regulation of copyright contracts, and (ii) social security and insurance schemes; at the European level, policies include (i) equitable remuneration rights only available to living performers, and (ii) the regulation of collecting societies and licence tariffs, such as the nature and distribution of income from any copyright levy scheme.

The record industry was offered a generous commercial bargain when investing in recorded music under the current exclusive term of 50 years. This already far exceeds the protection available to other R&D intensive industries. It cannot be the job of the European Commission to protect the revenues of incumbent companies at the cost of consumers, creativity and innovation.

World renowned US intellectual property scholar, William Patry agrees with them. He says:

I have avoided commenting on the EU's proposed 45 year extension for sound recordings because the effort is so clearly wrong, so clearly another example of politicians ignoring the public interest in favor of hobnobbing with (in this case aged) stars that there is nothing constructive to say. Term extension will benefit a very few a great deal, and most not at all. The public will suffer as it always has done, but because the suffering is suffered in small amounts and diffusely, politicians are spared confronting directly the ugly consequences of their failure to act in the public interest. But yesterday, a succinct letter on the topic was published in the (UK) Times online by a number of European scholars

This is pretty hard hitting stuff from academics who usually use much more neutral language.

Every serious academic study relating to term of copyright has come to the conclusion that there is no justification for extending the already overlong term. 17 economists in an amicus brief[11] supporting Eric Eldred’s case to the US Supreme Court in 2002 challenging the Copyright Term Extension Act (CTEA) of 1998 stated:

The main economic benefit from copyright protection is to give an author an incentive to create new works. The size of this economic incentive depends upon the “present value” of compensation, as anticipated by the author at the time of creation.

The two components of the CTEA differ markedly in their economic effect. The longer term for new works provides some increase in anticipated compensation for an author. Because the additional compensation occurs many decades in the future, its present value is small, very likely an improvement of less than 1% compared to the re-CTEA term. This compensation offers at most a very small additional incentive for an economically minded author of a new work. The term extension for existing works makes no significant contribution to an author’s economic incentive to create, since in this case the additional compensation was granted after the relevant investment had already been made.

The CTEA has two further effects on economic efficiency. First, the CTEA extends the period during which a copyright holder determines the quantity produced of a work, and thus increases the inefficiency from above-cost pricing by lengthening its duration. With respect to the term extension for new works, the present value of the additional cost is small, just as the present value of incremental benefits is small. By contrast, the cost of term extension in existing works is much larger in present value, especially for works whose copyrights would soon or already have expired but for the CTEA.

Second, the CTEA extends the period during which a copyright holder determines the production of derivative works, which affects the creation of new works that are built in part out of materials from existing works. Where building-block materials are copyrighted, new creators must pay to use those materials, and may incur additional costs in locating and negotiating with copyright holders. Such transaction costs are especially large where the copyright holders whose permissions are required are numerous or difficult to locate. By reducing the set of building-block materials freely available for new works, the CTEA raises the cost of producing new works and reduces the number created.

Taken as a whole, it is highly unlikely that the economic benefits from copyright extension under the CTEA outweigh the additional costs. Moreover, in the case of term extension for existing works, the sizable increase in cost is not balanced to any significant degree by an improvement in incentives for creating new works. Considering the criterion of consumer welfare instead of efficiency leads to the same conclusion, with the alteration that the CTEA’s large transfer of resources from consumers to copyright holders is an additional factor that reduces consumer welfare.

Essentially the same conclusions apply to Commissioner McCreevy’s proposal to extend the term of copyright in EU sound recordings from 50 years to 95 years.


I have argued above that there is no case for retroactive extension of copyright term in EU sound recordings from 50 years to 95 years.

Copyright holders have had 50 years to plan for when their works would pass into the public domain. Creative artists and recording companies, like plumbers, have to plan for their retirement (or retirement of their recordings into the public domain).

Of the three generic sets of interested parties – creators, agents and society as a whole – only a small proportion of creators and agents – those holding the copyrights in the small number of perennially successful sound recordings – benefit from an extension in term. By far the biggest beneficiaries are the four largest music recording companies and a small number of timelessly successful (and sometimes already wealthy) artists who hold the copyrights in works soon to fall into the public domain.

Orphan works with no easily identifiable copyright owner, and those with identifiable copyright owners but which are not made commercially available, get disproportionately locked out of the public domain by copyright term extensions.

The real differential present value incentive of a 45 term extension is very small and likely to be less than 1%.

A 95 year copyright term is worth more than 99%, in real present value terms, of what an infinite copyright term would represent.

Even the current 50 year term is worth more than 90% of an infinite term and under the right conditions could amount to more than 99%, in real present value terms, of what an infinite copyright term would represent.

So rather than looking at extending the copyright term it might be more appropriate to consider reducing it. To quote the Eldred economists again:

it is highly unlikely that the economic benefits from copyright extension … outweigh the additional costs. Moreover, in the case of term extension for existing works, the sizable increase in cost is not balanced to any significant degree by an improvement in incentives for creating new works. Considering … consumer welfare … leads to the same conclusion… the … large transfer of resources from consumers to copyright holders… reduces consumer welfare.”

Copyright term extension is a very expensive and economically inefficient means of attempting to pay a pension to retired musicians. As an attempt to provide a living pension income it would be highly likely to fail.

To conclude then, there is no economic justification for extending the term of copyright in sound recordings in the EU.

[1] Gowers Review of Intellectual Property, December 2006 (ISBN: 978-0-11-84083-9)

[3] Corrigan, Ray and Mark Rogers. 2005. “The Economics of Copyright.” World Economics Vol 6(3), p159.

[4] If we use a rate of 5% for example, an infinite term of copyright is worth £20,000, 95 years is worth £19,827 and 50 years £18, 358. So the 95 year term is worth 99.1% of an infinite term using a 5% discount rate to allow for the time value of money. The existing 50 year term would be worth 91.8% of an infinite term or 92% of a 95year term. See also Posner, Richard A. and William M. Landes. 2003. The Economic Structure of Intellectual Property Law. Harvard University Press. Cambridge. Pp210 – 253.

[5] William Neal Reynolds Professor of Law and co-founder of the Center for the Study of the Public Domain at Duke Law School

[6] ‘Breaking the deal’ by James Boyle, Financial Times, November 16, 2006.

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