Burdens and Business Models

Jerry Brito’s new podcast is even better when I’m not the guest. His latest episode features Michael Sawyer, of the Berkeley Center for Law and Technology, who has written about the User-Generated Content Principles that were negotiated between copyright holders and UGC sites a couple of years ago. Sawyer argues that the filtering technologies that the principles require UGC sites to employ give short shrift to fair use, and he proposes reforms whereby users could contest fair use determinations.

117698468_ae94a2bcecI agreed with much of what Sawyer had to say, but one place where I didn’t agree is when he characterized it as a “huge burden” for content companies to police UGC sites for infringing content. I don’t doubt that such policing costs a lot of money, but I also think we need to clearly understand the economics here. Content providers have a virtually unlimited number of options when it comes to the ways they might earn revenue from their works. Because of the particular economic and technological environment of the 20th century, the dominant paradigm in a lot of content industries is to sell copies of the works. But there are other models, including blanket licensing, ad-supported content distribution, and the sale of complementary goods such as concerts or popcorn.

One of the factors any business considers is the costs of enforcing their rights. If you’re opening a diamond shop, you need to consider the costs of locks, surveillance cameras, security guards, bars on the windows, and so forth. If you have a choice between a high-crime neighborhood and a low-crime one, you have to weigh the lower rent in the high-crime neighborhood against the higher costs of securing your store there. True, the police and your landlord should do what they can to help prevent crime, but the bulk of the costs almost always falls on the business owner himself. This is a good thing, because it encourages entrepreneurs to consider these costs when deciding where and how to run their businesses.

The same principle applies in content industries. If Business Model A produces $10 million in revenue but requires $5 million in enforcement activities, while Business Model B produces $8 million in revenue and requires only $1 million to be spent on enforcement, then the company should employ business model B. Yet if the law shifts enforcement costs onto a third party, then the company is going to pursue business model A, even though doing so inflicts larger costs on third parties than the increased revenue enjoyed by the content holders.

So if it’s true that policing user-generated content sites is so expensive that content-creating companies can’t afford to do it, then the right response is for content companies to change their business strategy. The most obvious approach is to sign an agreement with the UGC sites that allows their content on the site in exchange for a cut of ad revenue. The beauty of this approach is that it makes the fair use issue go away entirely. If content-detection software is merely used to determine the size of payments, rather than for filtering, then it doesn’t really matter if the software can detect which uses are fair.

Now, I’m not saying this is the business model content companies should pursue, and I’m certainly not suggesting that Congress impose a compulsory license to this effect. My point is simply that it’s not a bad thing that copyright holders bear most of the costs enforcing their own copyrights. Putting the costs of the copyright system on the same parties who receives the benefits gives those parties the right incentive to choose an economically efficient business model. If they decide that monitoring, threatening, and suing millions of users is the right way to run their business, that’s their choice—but they’re not entitled to any sympathy for the costs this business model imposes on them.

One thing I am reasonably sure of is that if you’re hiring human beings to make fair-use determinations on millions of individual videos, you’re doing it wrong. Our focus shouldn’t be on figuring out who should pay for human review, it should be on finding approaches that don’t require such a pointless waste of labor.

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2 Responses to Burdens and Business Models

  1. Adam Thierer says:

    Tim, I think you’re spot on in suggesting that “The most obvious approach is to sign an agreement with the UGC sites that allows their content on the site in exchange for a cut of ad revenue.” Such a voluntary licensing process is a win-win for all involved. The content flows and the lawsuits stop.

    Of course, the really sticky question is: What happens when such a deal cannot be reached? Does the copyright holder still have rights in your opinion? Can they ask/force the site to take down the content? I know that’s where fair use determinations will enter the equation, but how broadly should those be read absent a licensing agreement. Because many copyright skeptics seem to suggest that fair use can be read so broadly as the trump any rights of the copyright holder to request take-down.

    Not saying I have answers, just trying to better frame the questions I have been personally struggling with for many years to hear what you think.

    Personally, as much as I hate the sound of it, I think we’re eventually going to get to mandatory compulsory license as the solution to these intractable problem of a lack of voluntary licensing agreements. I itemized my reservations with such a system here: http://techliberation.com/2008/12/01/lessigs-call-for-a-simple-blanket-license-in-remix


  2. Hey Adam,

    I think if a licensing agreement isn’t reached, then we’re stuck with the DMCA notice-and-takedown process. A lot of what gets uploaded to UGC sites are not fair use, and so copyright holder will have to issue a lot of take-downs and file some lawsuits. Which is expensive for copyright holders, giving copyright holders an incentive to be reasonable about the terms under which they’ll license their content. In the long run, I suspect that in the long run, we’ll end up with something like the Imeem business model: users upload whatever they want, and social networks share advertising revenue with content companies. But Imeem isn’t doing so well, so I don’t think anyone’s figured out the perfect business model yet.

    I don’t really see a need for Congress to get involved. Sooner or later, content creators will either come to their senses or be replaced by companies that understand the Internet.

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