Submission to

Senate Judiciary Committee

in response to:

Request for public comment in relation to Protecting Creative Works in a Digital Age.


Submission by:
Brendan Scott (contact details at end of submission)

Submission dated: April 22, 2002 (update to submission of April 8, 2002)

[BAS notes:
(1) a similar submission was made to a House Committee at roughly the same time covering similar ground as this submission;
(2) one of the themes of this submission is that "rich content" has been a poison pill for businesses on the internet.  Shortly after this submission was made AOL Time Warner issued a profit warning (May 02).  As such, that profit warning is not dealt with in this paper, but it is further evidence of the danger of focussing on "rich content".]

1. Executive Summary

(a)  When applied to multi-use appliances such as PCs, the impact of the CBDTPA and similar schemes is qualitatively different from schemes design for single use appliances (eg Macrovision for TV). They create an unacceptable level of risk to the economy as a whole and should not be pursued.

(b)  Extreme care should be taken in assuming that commercial content will have a significant part to play on the internet. History indicates its role will be marginal.

(c)  An overemphasis of the importance of content has, to date, resulted in many poor investment decisions and caused substantial damage to the economy. Some examples from the telecommunications sector are provided.

(d)  The broader economy should not be engineered to suit copyright. Rather, copyright should be engineered to suit the broader economy.

(e)  Copyright is an important component of the economy. However, there is a growing perception that copyright has entered the realm of corporate welfare. If this perception is allowed to continue respect for copyright generally will be undermined.

(f)  Copyright protectionism should only be pursued so as to reduce the Aggregate Content Cost of each item of content while securing the production of that content.

(g)  Creation of content is not an end in itself and must be balanced against the damage which copyright protectionism, and the overall emphasis given to protecting content, does to the rest of the economy.  

(h)  The focus of copyright protectionism should be on fostering the difficult task of the creation of content not on protecting the relatively simple task of distribution. Indeed, competition in the distribution, publishing and production of content should be fostered, perhaps by giving competitive distributors/publishers a right of access to content prior to finishing.  

(i)  All legislation extending copyright protectionism should include a statement identifying: (a) the main beneficiaries in practice of that extension; (b) in what way those beneficiaries are engaged in “science or the useful arts”; and (c) how the extension relates to a “writing” or “discovery” within the meaning of the Constitutional mandate in Article I, Section 8, Clause 8.

2.  Scope

2.1  This submission supplements an earlier submission dated April 8, 2002 by providing some examples, taken from the telecommunications industry, showing the adverse effects of overemphasizing the importance of rich media content on the internet. This submission also adds paragraph numbering and makes some incidental amendments. A copy of this submission marked up from the April 8 submission is available on request.

2.2  This submission focuses mainly on issues relating to music and video with particular attention to the Consumer Broadband and Digital Television Promotion Act, and its former incarnation, the Security Systems & Standards Certification Act. The later part of the submission makes comments on policy in this area. While some aspects of this submission can be extended by analogy to other subjects of copyright protectionism (including convergent media) the analysis undertaken here has not considered these other subjects in detail.

2.3  The term “content” is used with varying meanings within this submission. At one end of its spectrum, the only thing available over the internet is content. This submisison is not addressed at that meaning of content. Except where the context requires otherwise, the term “content” is used in this submission to mean content which would not be produced without the benefit of a legislative monopoly.

2.4   This submission is made in my personal capacity, not on behalf of my employer or any other body.

3.  Problems with CBDTPA and Macrovision like protection schemes applied to technology generally 

3.1   The Senate is currently considering the mandating of a copy protection scheme into the operation of technological devices. These schemes are subject to a number of difficulties including:

(a)   Exploitation by foreign nationals. For example, citizens of non-TRIPS or non-Berne Signatories could distribute content within the US encoded in accordance with the scheme, achieving de facto protection without being required to offer reciprocal protection to US content as required by those treaties.

(b)    A technological protection scheme effectively forces the ratcheting up of copyright protectionism. Should legislators decide in the future that a reduction in protectionism for the content industry is warranted such protection will not be able to be achieved in practice for existing works because it will be set in the stone of the outdated standard.

(c)    Any scheme must necessarily be anti-innovative in that new technologies must be forced to fit within the scheme.

(d)    Finally any scheme will increase the “minimum to play” for any would be entrants to the market. Effectively this means that some smaller players will be locked out of the market because of inability to bear compliance costs. Further, it will have widespread unintended consequences. If a home owner wanted to write their own software to monitor and control the lighting in their home such a scheme would prevent it (in so far as they would not have the expertise to comply with the scheme), and would criminalize that home owner giving it to his neighbor.

3.2   While the Macrovision experience has been appealed to by way of precedent, the analogy is a poor one. Indeed, the fundamental problem with a Macrovision-type scheme is that it makes a very mean instrument of a computer. It assumes that a computer is little more than a glorified television. There is a wealth of empirical evidence to show that consumers use computers for almost everything but watching television. They use it to transact business, to communicate with loved ones, to lobby. They use it across the whole spectrum of human activity. While one might argue that a protection scheme can be applied with some success and with little impact more generally to an instrument which has but one purpose, it is extremely courageous to assert that the collateral damage of such a scheme applied to so universally utilitarian a device as a computer is even knowable, let alone to assert that that damage is acceptably small. A 1% reduction in efficiency of someone when they’re watching a movie is a fundamentally different proposition to a 1% reduction in efficiency for any use of a computer – a 1% reduction of the economy across the board is a very serious thing.

4.  Copyright hinders broadband/ Content is not king, but handmaiden

4.1    It is difficult to see how copyright laws can do anything but stifle demand for broadband. Prima facie, the weaker the restrictions on copying, the more copying will occur and therefore the more demand for broadband. Further it is a dubious proposition that content ideally suited for circuit switched technology supported by strong quality of service metrics (such as music and video) will find a natural home in a packet switched one in which quality of service is difficult, if not impossible, to guarantee (broadband internet). Quality of service is discussed in more detail in section 5.

4.2    That said, it is the author’s view that the main use of broadband will occur through consumer to consumer interactions, whether it is through the exchange of happy snaps of the kids or videos of skiing holidays. That is, and despite the mantras throughout the 1990s, it is unlikely that commercial content will hold a place of any significance on the internet in the short to medium, and perhaps even in the long term. The technologies to develop and deliver commercial content (free to air, cable and radio) are already cheap, well developed and undergoing continual innovation. They have business models which are effective off line, but have been conclusively proven by experience to be ineffective on line. Further, they are supported by established value added services for the selection and presentation of content and the distribution of program guides. There is a wealth of empirical evidence to show that consumers will not pay for content over the internet and there are no successful business models based on the sale of content (although there are suggestions that sex related content has unique characteristics which permit it to have a viable internet model). This experience extends from the failed Microsoft Network in 1995 through to the dot com crash of 2000 to the present day. No one wants to buy content over the internet. In short, consumers have sent the resoundingly consistent message that they do not see their $1000 computer as a substitute for their $150 TV set, particularly where they are required to be more active in the identification and acquisition of content.

4.3    The best analogy to the internet is perhaps the telephony system. The internet implements its functionality in a low friction way. While there are examples of telephones being used as a means to acquire proprietary content, they are, by and large, used to exchange content in a non-proprietary way. There no reason to believe that applications such as video on demand or music on demand will have any greater market on the internet than astrology hotlines do on the telephony system. That is, they will have value as a niche, and a profitable one for some people, but in the scheme of things they will be comparatively unimportant.

4.4    For these reasons it is vitally important that the tail does not wag the dog in policy making. That is, copyright, and the expectations of copyright owners, should be engineered to fit within the broader computer and telecommunications infrastructure rather than causing that infrastructure to be engineered to fit in with copyright’s requirements. This is especially important given that any damage to the efficiency of that infrastructure must necessarily impact all users of that infrastructure – that is, on the economy as a whole.

5.  Overemphasis on Content - Case Study Demonstrating Some Impacts

5.1    It is wrong to assume that overemphasising the importance of content, and consequently overprotecting the content industry, simply provides a benefit to content holders with no effects on the broader economy. The area of telecommunications provides some counter examples.

5.2    In the early to mid 90s, as the internet came more to the attention of the broader community, certain interest groups promoted the idea that rich media content was a necessary component of a successful broadband economy – “Content is King”, to use the catchphrase. This misreading of the importance of rich media content was a significant contributor to the great tech wreck of 2000 and continues to affect strategic investment decisions within the telecommunications industry.

Examples

5.3    Money wasted on content

“[Excite@Home] squandered a fortune creating content nobody wanted. Ask the millions of Excite@Home subscribers what they think of the service and they rave, but most switched their home page to Yahoo or their employer's Web site within days of being hooked up and never looked at Excite@Home's pages again.”

R Fixmer, Interactive Broadband Fantasy v Reality, March 4, 2002. www.eweek.com/article/0,3658,s=721&a=23547,00.asp

(a) One of the value propositions of the failed Excite@Home strategy was to provide subscribers with access to a selection of premium content. Excite@Home paid very high costs for the acquisition of content. There is no evidence to suggest that subscribers ascribed much, if any value to this premium content stable. Indeed, there is evidence to the contrary.

(b) The Excite@Home experience is not unusual. General encouragement and boosting of the importance of “content” led telecommunications companies the world over to create invest in content products as an adjunct to their stable of carriage products. In their wake now lay the discarded remains of countless portals, vortals and all manner of internet content hubs.

5.4    Rich Content has skewed Telecommunications Investment

“The excess capacity problem is most severe in the telecommunications sector. Lots of fiber has been buried to expand long-distance capacity. At present this part of the industry has a utilization rate of 2.5%. Yes, 2.5%. Cut-price competition among long distance providers promises to continue.”

Bruce Yandle, THE ECONOMIC SITUATION

VOLUME IX, NO. 2 A quarterly report on economic trends. MAY 2001.

http://www.strom.clemson.edu/teams/ced/esr/9-2Summer01.pdf

(a)    This beguiling allure of content has also affected the strategic architecture investment decisions of telecommunications companies. The technology underlying the internet is fundamentally different to that of free to air and cable TV services. The different technologies which underly them are called respectively packet switched (internet) and circuit switched (broadcast/cable TV). On the internet data is crunched into millions of little packets which are sent when there is an opportunity, with the packets reassembled by the recipient. On cable, a whole circuit (in this case a channel) is reserved for use and the data is sent in one big continuous chunk. The great advantage of circuit switched technologies is that you can give quality of service guarantees in relation to data carriage – you know that you will have capacity because you’ve reserved the whole of the circuit in advance. The great drawback of circuit switched technologies is that they are hideously inefficient – the capacity is reserved (and therefore you need to pay for the whole of it) whether it is used or not (so in order to be economical, content must be found to fill it).

(b)    The great value of the internet is that it is miraculously efficient. In a circuit switched world (ie TV), if you are talking to someone on the telephone each moment of silence (eg while you collect your thoughts and there are plenty even in the most animated of conversations) is carriage capacity which is lost. Under a packet switched regime (ie the internet) much more of this capacity is able to be used. In this example, the wires between the speakers are not dedicated solely to talking. Therefore they can use the physical wires send non time critical data (eg an email) on a “best efforts” basis, whenever there is silence on the line.

(c)    The drawback of the internet is that it is very difficult to give quality of service guarantees. As there is only one pipe through which all content passes, content takes its chances once it arrives at the pipe – it can’t reserve its trip in advance.

5.5    Practical impacts at an infrastructure level – long distance architecture

(a)   Normal internet usage is a store and forward or store and review implementation (eg downloading reports from the internet to read later). As such it is highly forgiving of short lived failures of service. It operates in bursts, but those bursts can be delayed for a short time (on the order of seconds) without having any perceived impact on the acquirer of the carriage service. Early dial up services have relied heavily on this fact assuming that most of the time spent online by consumers is not spent acquiring content, but rather finding and reviewing it. As such, they are able to provide “attractive” time based rates, even though their costs are data acquisition costs.

(b)    On the other hand, “rich content” implementations if they are streamed or interactive are highly unforgiving of low quality service. Anyone who’s had drop outs on their cell phone knows that poor line quality is just plain unacceptable.

(c)    Telecommunications companies have pursued a strategy of allowing the support of interactive and streaming rich content implementations as part of their broadband implementations. This is partly because of content hype, but also because of the creation of streaming media. One of the reasons for the emergence of streaming media is that they allow a greater degree of control over content – they play the content in real time without the user being able to save the file for later access. As such they have been strongly endorsed by copyright protectionists.

(d)    Because of the architecture of its carriage techniques, in order to provide acceptable quality of service over the internet to support the delivery of rich media content it is necessary to engineer the size of the “pipe” against expected peak usage.

(e)    In an effort to support the prophesied explosion of rich media content on the internet telecommunications companies have drastically overengineered their capacity requirements. During 2001, the world was swimming in excess capacity that no one could use – see quote from Bruce Yandle above.

(f)    In this way overemphasis of the importance of content has already led to large and direct costs to telecommunications companies around the world.1

5.6    Practical effects at the investment level – reticulation to kerb

(a)    Another way in which the content centric view of the world has affected telecommunications infrastructure is in the manner in which broadband to the home has been implemented. As a general rule, these implementations have taken place on the assumption that internet usage would mirror TV usage in that users would expect to have a huge pipe leading into their home (to access data) but with only a small pipe leaving their home (to serve data – mainly requests to access other data). In short, it is faster to receive an email via broadband than it is to send that same email.

(b)    This is most prevalent in, for example, the popular v.90 modem standard, where the advertised 56K per second speed only applies to downstream rates. The upstream rate for these modems is only 33.6K per second. This is a technical limitation resulting from early modem design decisions which has been inherited today. A similar approach has been taken in relation to the manner in which broadband implementations to retail customers have been implemented. Customers are provided with attractive download speeds, but very unattractive upload speeds. That is, design decisions were made that technical limitations on the rate at which data can be sent from a consumers computer to the rest of the internet were acceptable and such limitations were, and continue to be implemented.

(c)    If end users want the ability to share their data, the design decision to limit upstream capacity means that products which fill this need are more difficult to provide, and perhaps not available if there is mass demand (both upstream and downstream capacity is shared across users at some point much the same way as turning the tap on in the kitchen affects water pressure in the bathroom).

(d)    As content has been widely endorsed as important telecommunications carriers have tried to create a separate value added market for the housing and serving of content. In order to push their value added hosting services, and because of the upstream design limitations discussed above, carriers’ broadband terms often prohibit the running of servers by end users. This serves as a barrier to entry for small, and especially not for profit participants, who are unable to afford the value added fees (and for whom the value add, such as server housing, administration and maintenance are unnecessary).

5.7    Impacts at the retail level - carriage

(a)    As a follow on effect of the blind focus on content, retail products offered to consumers have been packaged on the assumption of acquisition of rich media content by consumers. To support this, those packages must have high (or unlimited) caps on the amount of data the consumer is permitted to download.2

(b)    There is a direct relationship between data served to customers and the price of providing the service to the customer (ie interconnection fees to acquire data from other networks). Ironically, while high download caps are of great benefit to pirates ripping off “warez” or mp3s from the internet (and devouring capacity) they are of comparatively lesser value for the majority of users who are surfing the web for their favourite eggplant recipes (whose capacity usage is moderate).

(c)    If carriers impose a low cap while still touting their premium content as a market differentiator the cap will not be reasonably commensurate with the ability to acquire that premium content and they will consequently be exposed to misrepresentation suits. Note it costs nothing to the carrier to provide their own premium content to their subscribers because the content is housed on the carrier’s own network. The carrier is not therefore exposed to interconnection fees to acquire it. In practice however, high use subscribers are not interested in the carrier’s premium content and savvy enough to use their high cap to acquire warez and mp3s from other network carriers forcing their own carrier to incur interconnection fees.

(c)    As such, and in addition to the costs of excess capacity referred to in section 5.5, the price to consumers of broadband packages has been unnecessarily inflated in that low usage customers are subsidising high usage customers.

5.8    Poor billing systems mean these effects cannot be solved by the market

(a)    It is tempting to think that these design decisions can be set arights by the operation of the market. For example, one might argue that if someone wants premium content imported from another network, they can be charged additional carriage (as opposed to license) fees in relation to it to cover the infrastructure expenditure incurred by their carrier. Conversely, content acquired from the carrier’s own network could be charged at a reduced rate. Unfortunately, this is impossible at present and will be for the near future.

(b)    Systems to produce bills for retail customers on internet usage are advancing at a snail’s pace. It is often difficult to determine what network the data served to the customer has originated from, let alone the web site and the type of content (in order to do this the switches directing data need to take time to record where data is from – there is a trade off between speed and record keeping which has, to date, favoured speed). This is complicated by the packetized nature of carriage over the internet. There is no way that these additional costs can be apportioned to the users which want them. Indeed, for similar reasons it is difficult for carriers to determine what proportion of their users are accessing premium content sites. Carriers have little choice but to provide bundled prices to their consumers, perhaps broken into on net and off net components (ie sourced from the carrier’s own network or a third party network).

(c)    Again, this means that the architecture decisions of carriers determine a bundled price to users. In practice, this means that the price to users who are tolerant of low quality of service guarantees has been inflated by the (incorrectly in the author’s view) perceived need for content. It is the author’s belief that this class of user is by far in the majority.

6.  Calculating the Price of Monopoly - Aggregate Content Cost

6.1    A cost can be attributed to each item of content. That cost can be calculated by aggregating all sales in relation to that content which occur throughout the duration of monopoly rights over it. For example, if an item of content costs $10 a copy and 100 copies are sold through the duration of the copyright monopoly for it, then the cost of that content (which we refer to as its Aggregate Content Cost) would be $1000.

6.2    Clearly this analysis has been structured to convey the essence of a costing model and it is not the intention of this submission to describe a more complex model. However, it should be noted that it is appropriate that the complete sale price should be taken as the starting point and not just the content licensing component of that cost (for example, content will have other costs such as distribution, marketing, advertising, warehousing etc. It might be argued that these costs ought not be attributed to the copyright monopoly). The reason for this is that copyright protectionism effectively protects such things as post-production and distribution and therefore inflates the prices of those services.

7.  Practical Effects of the Copyright Monopoly

7.1    The practical effect of current copyright protectionism in the content industry is to shield distributors from competition. The justification for this shielding is stated to be to promote the creation of content. In a world in which the cost of distribution is fast approaching nothing consideration should be given to reworking the system so that it directly rewards creation, rather than doing so indirectly through protecting distributors or distribution of content.

8.  Aims of the Copyright Monopoly

8.1    The commonly espoused doctrine of the purpose of the copyright monopoly can be paraphrased as the provision of incentives for the creation of content. The author believes that this statement overemphasises the “incentive” component of content and does not tell the whole story. Rather, in the author’s view, the aim of copyright protectionism should be to minimise the Aggregate Content Cost for each item of content while still securing the creation of that content. Further, there should be recognition that the creation of content is not an end in itself.

8.2    The recent history of legislation in this area appears to operate from an almost opposite presumption – that the Aggregate Content Cost ought to be inflated as much as possible (on the basis that it increases the incentive for authors to create). This occurs in many ways, from structuring the monopoly in a way which applies to different or new forms or media, to extending the length of monopoly protection.

8.3    For example, before the invention of VCRs movie makers still made movies. That its distributors now have an exclusive right to distribute a movie on video is a direct benefit to distributors – and an increase in the Aggregate Content Cost for that movie – but without giving any incentive to the creation of that movie. One might argue that video distribution of movies is a good thing and that it is acceptable that the Aggregate Content Cost increases, even where those movies are pre-existing. However, the Aggregate Content Cost ought to be increased only by the distribution and marketing costs of a competitive distribution environment – not one in which these costs have been inflated as a result of the copyright monopoly locking out competition.

9.  How much is too much?

9.1    As copyright protectionism was structured to automatically give exclusive rights over the distribution of movies on video, the invention of VCRs effectively increased the cost to society of the creation of the movie. What is more, it increased that cost after the movie was made – had VCRs not been invented, the movie would still have been made, the licensing costs would have been less and the excess able to be funnelled into more productive parts of the economy.

9.2    In this way copyright protectionism redirects resources away from elsewhere in the economy. It is for this reason that content creation should not be an end in itself and that care should be taken to ensure that there is not too much incentive for content creation. For example, according to RIAA and under the current level of copyright protection, only 10% of CDs are profitable (see http://www.riaa.com/MD-US-7.cfm). This 90% failure rate is counted against released CDs so does not include the initial culling done by publishing houses. In anyone’s terms this is a lot of wasted effort by musicians, producers, advertisers – by everyone involved in the industry. Serious consideration should be given to whether this effort would have been put to better use in other industries.

9.3    Copyright protectionism should be subject to review of its effects and the overall cost to the community. In essence, protectionism of the content industry occurs at the expense of other sectors of the economy. This leads to increased costs to consumers, and a diversion of resources from less protected sectors of the economy. An interesting thought experiment would be to consider how the creation of content would be affected if the term of protection were brought into line with that of patent protection.

10.  Copyright is important

10.1    The author strongly supports the securing for limited times to authors the exclusive right to their writings to promote the progress of the useful arts. However, the creation of content is not an end in itself and must be viewed as part of the broader economy. Further, copyright protectionism is, of itself, a restriction of the rights of, and therefore a taking from, each citizen and consequently must be approached with extreme caution. Few other industries receive the level of protection that the content industry does. Some commentators even argue that the content industry would not exist without that protection. Consideration should be given to how much longer a grant of protection should extend beyond a reasonable (and objectively determined) opportunity to amortise costs and secure a return on investment.

10.2    While the nature of content is such that some protection is appropriate to foster its creation there is a point beyond which protection becomes mere subsidy or corporate welfare. There is the growing perception that current copyright protectionism is in the realm of mere corporate welfare and that it has been there for some time. If this is the case, copyright protectionism in fact harms the economy by inflating prices to consumers and drawing resources away from more fruitful pursuits. It also has the effect of generally undermining respect for copyright.

11.     Recommendations:

(a)   When applied to multi-use appliances such as PCs, the impact of the CBDTPA and similar schemes is qualitatively different from schemes design for single use appliances (eg Macrovision for TV). They create an unacceptable level of risk to the economy as a whole and should not be pursued.

(b)   Extreme care should be taken in assuming that commercial content will have a significant part to play on the internet. History indicates its role will be marginal.

(c)    An overemphasis of the importance of content has, to date, resulted in many poor investment decisions and caused substantial damage to the economy. Some examples from the telecommunications sector are provided.

(d)    The broader economy should not be engineered to suit copyright. Rather, copyright should be engineered to suit the broader economy.

(e)    Copyright is an important component of the economy. However, there is a growing perception that copyright has entered the realm of corporate welfare. If this perception is allowed to continue respect for copyright generally will be undermined.

(f)    Copyright protectionism should only be pursued so as to reduce the Aggregate Content Cost of each item of content while securing the production of that content.

(g)    Creation of content is not an end in itself and must be balanced against the damage which copyright protectionism, and the overall emphasis given to protecting content, does to the rest of the economy.

(h)    The focus of copyright protectionism should be on fostering the difficult task of the creation of content not on protecting the relatively simple task of distribution. Indeed, competition in the distribution, publishing and production of content should be fostered, perhaps by giving competitive distributors/publishers a right of access to content prior to finishing.

(i)    All legislation extending copyright protectionism should include a statement identifying: (a) the main beneficiaries in practice of that extension; (b) in what way those beneficiaries are engaged in “science or the useful arts”; and (c) how the extension relates to a “writing” or “discovery” within the meaning of the Constitutional mandate in Article I, Section 8, Clause 8.

12.  Details of Author

This document is submitted by: Brendan Scott

C/: Level 37

2 Park Street

Sydney, Australia 2001,

bscott@gtlaw.com.au

1 To be fair, the excess capacity can be attributed in part to technical advances in carriage technology.

2 A similar argument might be made in relation to download speeds offered to consumers, although it is less clear that download speeds have been overengineered.