Stan Liebowitz
The entertainment industry has always exaggerated the damage to itself that each new copying technology would bring—from reel-to-reel tapes and videorecorders, to MP3s and Napster. Crying ‘wolf’ too many times, however, shouldn’t by itself negate claims that a new technology will harm copyright owners. Napster is one of those cases where it does.
When record companies estimate the harm they suffer from illicit copying activities, they incorrectly assume that every unauthorized copy substitutes for a sale of an original. No less an authority than Alan Greenspan, when he was still a civilian economist with record companies as his clients, was willing to estimate the harm in this manner.
The are two key factors that actually determine whether copying harms copyright owners, however. First is the question of whether the material being copied substitutes for a sale of an original. Obviously, not everyone willing to use a pirated copy of a work would also be willing to purchase an original. The second, more subtle factor, which I first examined two decades ago, is whether it is possible for copyright owners to indirectly collect revenues from the copying activity.
This last point can be illustrated with the following example. If all purchasers of CDs were to make a single cassette, say for use in their automobiles, record producers need merely raise the price of the CD by an amount that roughly captures the additional value consumers receive from making the cassette. This would allow record companies to indirectly capture the revenue from the copying activity. Illicit copying then increases the price that consumers will pay for CDs and record producers are not harmed.
Alternatively, if certain users made numerous copies, and those users could be identified and charged a higher price than other users, the copyright owner might also benefit from the copying activity. This is what currently happens with photocopying in libraries. Libraries pay a price two, three, or even four times as much as personal subscribers for the same heavily copied journals, and this price differential only arose after the introduction of photocopiers.
Note that if this unauthorized copying were eliminated, copyright holders might actually be worse off. In a world with no copying, record producers might find that consumers are unwilling to pay as much for CDs, lowering revenues and profits (it is not clear how many, if any, of the former copiers would purchase legal copies).
The Betamax case, so called because at the time the case was brought VHS had not yet begun its obliteration of the Beta video format, represented another instance where copying was unlikely to harm copyright owners, althouh for slightly different reasons. Almost all viewing in the early 1980s was of advertising-based over-the-air broadcasters, particularly the big three networks—ABC, CBS, and NBC. Viewers made tapes to timeshift programs for more convenient viewing. Although remote controls made it possible for viewers to fast-forward through commercials, close attention had to be paid to ensure that the viewer wouldn’t also skip by the programming. Combined with the fact that the amount of time-shifting had to be small, it is clear that Betamax was not going to harm copyright owners.
Why would the amount of time shifting be small? Because there was too little free viewing time. The average household viewed six or seven hours of TV a day, including virtually complete participation in prime time programming. There was little free viewing time to watch tapes since a family could not both watch a tape and record a program on their single videorecorder.
Thus it was proper to conclude that videorecorders would not harm the revenues of copyright holders. Fortunately, the courts managed to get it right. Several years later, Hollywood learned that by lowering the price of prerecorded movies from $100 to $20, they could sell a ton of them, so that now Hollywood’s sale of videotaped movies generates more revenue than theatrical showings.
Fast-forward to 2000. Napster’s supporters claim that the online sharing of songs is a latter-day Betamax scenario. They claim that Napster users actually purchase more CDs because Napster allows listeners to sample music with which they might otherwise be unfamiliar. Although some such effect undoubtedly occurs, it seems most unlikely that it would outweigh the negative impacts on copyright holders.
Unlike the cassette example mentioned above, Napster does not allow record companies to indirectly capture the value of the copies being made from legal originals since some originals will have dozens or hundreds of copies made and others none. Nor does it seem likely that the amount of copying will be small—there are no time constraints or confusing instructions preventing widespread copying. Finally, copies are likely to serve as substitutes for the purchase of originals in this case. The people making the copies are the very group that was expected to purchase originals (that is why it is not surprising that surveys indicate that Napster users are among the heaviest purchasers of CDs).
Record companies are right to fear Napster. The Internet, however, should prove a boon to them, once they can get the right pricing. As was true in the video example, record companies need to learn that they are currently charging way too much for music downloads. When they learn that it is more profitable to lower their prices, even if it largely destroys record stores, the old distribution methodology will be seen for what it is—primitive and inefficient.
Stan Liebowitz
teaches at the University of Texas at Dallas where he is writing a book on
Internet Economics.