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.

I 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.