Archives for 2003

The RIAA has settled its lawsuits against four college students, dropping the suits in exchange for a payment of between $12,000 and $17,500 from each student. The settlements did not require the students to admit any wrongdoing.

The students had been accused of direct infringement (for allegedly offering copyrighted files directly from their own computers) and of contributory infringement (for allegedly running search engines that others used to find infringing files).

The RIAA spin appears to be that the students’ decision to settle on these terms indicates that the students expected to lose on the contributory infringement claim. This spin is, to say the least, implausible. Getting out of this lawsuit for $15,000 or so was a great deal for the students, considering the legal expenses involved in going to trial, and the very real possibility that the direct infringement claim alone would have led to a judgment for tens of millions of dollars.

In my view, these lawsuits tell us nothing new about the legal status of the kinds of general-purpose search engines these students were running. The lessons of these suits are simpler: (1) don’t be a direct infringer, and (2) getting sued by the RIAA is expensive.

Eric Rescorla, in response to my previous entry on music economics, offers an analysis of the politics of copyright.

Roughly speaking, there are two camps working to loosen (or at least prevent tightening) of intellectual property. For lack of better words let’s call them Idealists and Pragmatists. The Idealists really don’t want to have any kind of intellectual property at all. They see copyrights and patents as evil and want to do away them altogether. Richard Stallman and the Free Software Foundation are probably the best-known advocates of this point of view.

The Pragmatists tend to view Intellectual Property as a necessary evil. The traditional economic analysis of IP is that it’s required to incentivize people to engage in the kinds of intellectual effort that produce content. (Boldrin and Levine argue against this, but it’s still the majority point of view in economics). In the view of the Pragmatists, the amount of protection given to IP has gone beyond the point of efficiency and so should be reduced. See the “economist’s brief” in the Eldred v. Ashcroft case for a pretty good exposition of this view.

Both sides agree that protection for Intellectual Property is too tight currently, and so they’ve temporarily made common cause for the purposes of fighting the IP lobby (the RIAA and the MPAA primarily) who want to see copyright strengthened. Despite that temporary alliance, [] there are still a lot of people who don’t agree with Ed’s statement [about the need to pay creators somehow]. These people are quite loud (go check out Slashdot) and they naturally scare the hell out of the content producers, who fear a complete loss of control.

[Though I like Eric’s analysis, I’m not thrilled by his terminology. I would instead label the three factions (which he calls the IP Lobby, Pragmatists, and Idealists) as the “Big-IP”, “Small-IP”, and “No-IP” factions.]

So far, the Big-IPs have done a pretty effective job of cementing the alliance between the Small-IPs and the No-IPs, most notably by treating the Small-IPs as if they had taken No-IP positions. Perhaps this is because Big-IPs overestimate the numbers and influence of the No-IPs. Or perhaps it is because some Small-IPs are being cagey about their beliefs, so as not to alienate their No-IP allies.

If I were a Big-IP, I would be wanting all the allies I could get, and I would be looking for a way to pry apart the Small-IPs and the No-IPs. If the Big-IPs decide to do this, things could get very interesting.

Why should the Big-IPs care what the Small-IPs think, given that the Big-IPs can get their way in Congress without any help? Because Congress, by itself, can’t solve their problem. To solve their problem, the Big-IPs need cooperation from their customers, most of whom are still Small-IPs.

In today’s Daily Princetonian, Josh Brodie reports that an “announcement” will be probably made today regarding the RIAA lawsuit against Princeton student Dan Peng. Reading between the lines, it appears the predicted announcement probably involves some kind of settlement of the case.

Many reports are circulating about the RIAA’s use of instant-messaging features of Kazaa and Grokster to send warning messsages yesterday to users of those systems.

Conventional wisdom in blogland seems to be that this will have little if any impact on users’ behavior. I disagree. Consider this excerpt from Amy Harmon’s New York Times story:

“People feel invincible when they’re doing this in the privacy of their homes,” said Cary Sherman, president of the Recording Industry Association of America. “This is a way of letting them know that what they’re doing is illegal.”

It’s all too easy for those who understand the technology to dismiss Sherman’s assertion that users feel invincible. After all, file-sharing systems don’t actually do much to protect the anonymity of their users.

But based on my conversations with file-sharers, I think Sherman has a point. File-sharers do seem to believe that they won’t be identified, even though, when pressed to explain why they feel that way, they can’t come up with a good reason. It may just be the false feeling of privacy that comes from sitting alone (or with close friends or family) in a room with a computer that doesn’t look like a portal to the rest of the world.

I think Sherman is wrong, though, when he implies that illegal file-sharers don’t know that they are breaking the law. Many of them see it as a small, harmless infraction that doesn’t merit more than a slap on the wrist. They tend to get very uncomfortable at the mention of $150,000 statutory damages.

My guess is that the RIAA’s message came as a nasty shock to quite a few people, who will now reconsider their use of Kazaa or Grokster. [Update (4:00 PM): Jim Tyre points out that the RIAA’s message to file-sharers included a pointer to instructions for disabling or uninstalling the file-sharing program.]

Interestingly, though, while one hand of the RIAA is sending out these warning messages, the other hand seems to be trying to minimize their effect. An AP story by Alex Veiga quotes Cary Sherman as saying that “there’s no enforcement connected to this.”

This seems like an extraordinarily counterproductive thing for Sherman to say. One reason users feel invulnerable is that they don’t think the RIAA would ever actually sue an ordinary user. (Sure, the RIAA sued four college students, but they made a big point of accusing those students of singling themselves out by running “Napster-clones”.) By announcing that they can identify individual users but have chosen not to sue them, the RIAA will only bolster the impresssion that they will never sue ordinary users. The RIAA may try to counter this problem by saber-rattling, but that will only work for a short while. Eventually the RIAA will be forced either to accept widespread file-sharing as reality or to sue their own customers. I’m glad I’m not in their shoes.

Orin Kerr at the Volokh Conspiracy points to Terry Fisher’s data on where the $18 paid for a typical music CD goes: $7.00 to the retailer, $1.50 to the distributor, $9.31 for record company expenses (including performer and composer royalties of $2.85), and $0.19 for record company profit. Kerr comments:

I understand that the record companies have done some pretty bad stuff in the past, and of course they are the industry that every one loves to hate. If I understand Fisher’s figures correctly, however, record company profit makes up only about one percent of the price of a compact disc. If record companies decided to operate on a not-for-profit basis, the average price of CDs would drop from $18 to $17.81. This is certainly news to me. Am I missing something, or does downloading hurt local retailers the most– with artists, record companies, and manufacturers all taking their share of the hit as well?

The $7.00 cut for retailers is surprising. If a download replaces an in-store sale, there is a big hit for the retailer to absorb. In the long run, though, it looks like in-store sales of music will not recover from the impact of the Net, as illegal downloads will be replaced by legitimate on-line downloads (if they are replaced at all). Most of today’s in-store retailer revenue will be swept away by technology, one way or another.

Nineteen cents of record-company profit is surprisingly low, but on further reflection, I don’t think the profit numbers, by themselves, rebut the proposition that record companies are parasites. Even if the record companies made zero profit, their expenses and overhead would still account for a sizable share of a CD’s cost. According to Fisher’s data, record company overhead, A&R expenses [i.e. talent scouting and artist relations], and marketing add up to about $5 per CD. This is what pays for executives’ salaries, parties, big shiny buildings, and so on.

All of this expense is reasonable if the record companies add enough value to the process, for example by developing artists’ talent and packaging the product attractively for listeners. Whether the record companies add this much value is open to debate. The answer to that question will someday be clear to us in hindsight, but I’m not sure we know it now. In any case, record companies consume much more than nineteen cents per CD.

In all this quibbling about numbers, we mustn’t lose sight of the big picture, which Kerr sees clearly. If the revenue per song is zero, it doesn’t matter what share of that zero goes to the artist. No matter what future you hope for, if you want to enjoy recorded music it had better involve some kind of payment.