Is legal intervention the appropriate response?  Changing business models

Commoditization

“Commoditization” of copyright works refers to a phenomenon whereby the industry’s mode of competition moves away from innovation of the underlying product (the copyright work) and towards alternative methods of building value.

Under this analysis, as the market matures and barriers to entry erode, competition intensifies and prices for the underlying product are pushed down.  As a result, rights holders look for new ways of leveraging the value work itself to create new revenue streams.

The IIA stresses the need to ensure that policy does not damage Australia’s capacity to innovate and compete in the global digital economy.  It says, “to the extent that internet users, mainly the young, engage in infringing activities, we suggest the causes may be rooted in market failure more than they are in any regulatory shortfall.”[35]

A recent report by the UK Intellectual Property Office found that, “digital technologies have altered the value chain.  Authors can publish directly in the online world: commercial rights holders can sell product in new ways, and consumers have an enormous quantity of legitimate content at their fingertips, both free and paid for.  For many creative businesses, the changing value chain is making the situation more complex as it is more difficult to realise economic benefits with digital technology, but there may be new opportunities to do so.”[36]

TalkTalk (a UK ISP advocating against the measures in the Digital Economy Bill 2010 (UK)) highlights “the notion that stealing copyright is socially acceptable, akin to breaking the speed limit by one or two miles per hour”.[37]  TalkTalk argues that most infringements occur because of user frustration with digital rights management (the IIA manifesto adds to this – suggesting that many infringements in Australia occur because we do not have ready access to legal content and many Australian websites/credit cards do not support micropayments (payment for 1 song).

According to TalkTalk, “Record labels and film studios need to find new ways of persuading people to pay for their content.  Those that can’t find new ways of making money in the digital age won’t survive.  They will be replaced by new ventures which see the online environment as an opportunity rather than a problem.”[38]

And even the Australian High Court recognized in 2002 (albeit in a different context) that, “where the new problem is as novel, complex and global as that presented by the Internet…a greater sense of legal imagination may be required than is ordinarily called for” (per Kirby J in Dow Jones v Gutnick (2002) 210 CLR 575).

The IIA states that it, “supports the development of new models to facilitate maximum access to content and innovative content based services.  Possible examples include; revenue sharing arrangements with ISPs, ‘hyperdistribution’ where, for example, advertising is embedded in the content, and arrangements like those between YouTube and Warner Music which now permit users (who now number in the tens of millions) to upload self created video content with commercial soundtracks, owned in this case by Warner, in return for a revenue share arrangement on advertising.”[39]

Examples of commoditization of digital content

Not surprisingly, then, business models have emerged which allow the user to use a copyright work for free and rely on advertising, or generating a massive, loyal following (rather than the worth of the product itself), to create revenue.

These models may be contrasted with traditional revenue-generation models, such as buying a CD, or downloading songs from iTunes.

Google (including Gmail, YouTube, etc.) and Android phone technology

In a somewhat insightful article entitled, ‘Google’s Business Model: YOU are the product’, Mark Elgin asks: “Why do they do it?  Why does Google invest so heavily in great products, then just give them away?  There’s only one way to understand Google’s business model , which is to understand that Google’s services are not products.  In fact, Google only has one product.  And that product is you.  Or, rather, us – all of us.”[40]

According to Elgin, “Advertisers are Google’s customer.  What do they [Google] sell to advertisers?  They sell you.  Or, at least, they rent you out or provide access to you.”

Essentially, under the Google model, advertisers pay to be the top hits (“sponsored links”) in any combination of search words (this is done through auction every time a search is conducted) as well as paying for ads in side bars.

This has proved to be a highly effective model, to the point where an estimated 60% of internet users use Google.  This has earned Google billions of dollars in annual revenue and being declared “an economy unto itself”.

And Google has taken the concept further with its Android technology, which is offered as “less than free” to phone companies.  That is, Google actually pays phone manufacturers to use the Android operating system, because Google potentially makes money from every click on Google (as advertising is sold on every click).

Guvera – “paid for” (by advertisers) music downloads

Guvera is an Australian initiative (it is an unlisted Queensland-based public company).

Under the Guvera model, advertisers create channels for specified groups of consumers, and then pay for music on behalf of targeted consumers.  The initiative is still in its infancy, but Guvera hopes that its website will be “a piracy killer”, emphasizing that its Website was designed in recognition that a whole generation of internet users believes that downloaded music should be free.[41]

Radiohead – free music downloads

In 2007, British alternative rock band Radiohead offered the entire album In Rainbows through their website: fans were asked to pay whatever amount they wanted to digitally download it.

According to internet marketing blog DoshDosh, this “donation-style” system is significant because of Radiohead’s reputation and the size of their fan base, which easily reaches into the millions globally.[42]

The band is able to offer their songs in a digital rights management-free mp3 format because they do not have a record label; hence they own complete distribution rights over their music.  This essentially bucks the industry trend of reliance on record companies and marketing teams to produce, commercialize and promote music records.

Alongside the digital download of their album, Radiohead is also selling a £40 box-set which consists of the CD album, vinyl records, additional songs as well as artwork and lyrics.  Whilst this “viral” marketing assault by Radiohead clearly resulted in massive foregone album sales revenue, it also reportedly resulted in enormous revenue in other areas, including a sell-out concert tour, as well as unquantifiable augmentation to their fan loyalty, reputation and brand awareness/strength.

Similarly, rock band The Smashing Pumpkins released their Machina II album for free on the internet by sending 25 physical copies of it to fans active in the online music community, with explicit instructions for re-distribution.

This approach has been successful for a number of (already highly popular) bands and contrasts with the approach taken by rock band Metallica, who sued Napster in 2000, thereby distancing them from fans and leading to a major public relations disaster for the band.

The following table summarizes some of the models for commercialization of copyright material (music), both traditional and new.  Of particular interest is the fact that not all successful (or potentially successful), non-traditional sales models involve copyright infringement:

Model

            Issue

Copyright held by…

Licence to use paid for by…

Copyright infringement?

Encourages artistic innovation?

Value lies in…

Issues?

Traditional online sales model (e.g. Sony, iTunes)

Musician/ record label, etc.

Consumer

No

Yes

The song itself

Goes against developing social expectation that internet materials should (and can) be free

P2P file sharing

Musician/ record label, etc.

No-one (no licence to use)

Yes – by the person making the song available via P2P and by each person who downloads it

No

No value

Illegal; no reward for those who are creative

New Model (Radiohead)

Musician/ record label, etc.

Musician chooses to make music available for free but (in some cases) charges advertisers to place advertisements on the page where the song is available

No

Yes – if the song is a success then people will pay more to advertise (analogous to ad breaks in a successful TV show)

The sheer number of people downloading (advertising potential)

Arguably will only work for bands that are already successful

New Model (Guvera)

Musician/ record label, etc.

Advertisers on behalf of consumer

No

Yes – copyright owner still receives $$$

The sheer numbers of people downloading (advertising potential)

Untested as yet; needs industry support to succeed

 

Conclusion on protection of online copyright works

Policy in relation to the protection of online copyright works is currently in a state of flux.  This is largely because the advent of broadband (and projects such as the NBN) is a game changing development and policy-makers are still in “catch-up” mode.

Legislatures and courts in Australia and abroad have so far taken a fairly traditional approach to dealing with the protection of online copyright works.  Some novel measures (such as the “three strikes” approach) have been touted, although it is yet to be seen what impact such measures will have, and indeed what counter-measures might be adopted by ever-exuberant copyright users.

Ultimately, however, it is expected that creative creators will continue to think outside the square to develop new business models – and that this group will manage to stay “ahead of the curve” when it comes to generating value (and new revenue streams) from their creative efforts.

 

_______________________________________________

 

For more information, contact Matthew Nicholls

 

The assistance of Rebecca Measday and Alex Maschmedt, Law Clerks at Nicholls Legal, in preparing this whitepaper is gratefully acknowledged.

 

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[1] Australian Copyright Council, An Introduction to Copyright in Australia (March 2007) <http://designroyale.copyright.org.au/admin/cms-acc1/_images/1889836124c8dbfe7b2fba.pdf>. 

[2] Re: Aimster Copyright Litigation (2003) 334 F 3d 643 (Posner J).

[3] Roadshow Films Pty Ltd v iiNet Ltd (No 4) (2010) 269 ALR 606

[4] Universal Music Australia Pty Ltd v Sharman Licence Holdings Ltd (2005) 220 ALR 1.

[5] Universal Music Australia Pty Ltd v Cooper (2005) 150 FCR 1.

[6] Roadshow Films Pty Ltd v iiNet Ltd [2012] HCA 16, [79].

[7] See Roadshow Films Pty Ltd V iiNet Ltd (2011) 275 ALR 1.

[8] Roadshow Films Pty Ltd v iiNet Ltd [2012] HCA 16 [75].

[9] See ibid [79].

[10] Ibid [120].

[11] See for example ‘European police in pirate raids,’ BBC News (online), 9 September 2010 <http://www.bbc.co.uk/news/technology-11227813>. 

[12] Viacom International and Others Inc. v YouTube Inc and Others (2010) WL 2532404 (S.D.N.Y.).

[13] It is assumed for the purposes of this paper that the NBN (or something much like it) will in fact proceed, although at the time of writing this is by no means certain.

[14] Andrew L Shapiro The Control Revolution (Public Affairs, New York, 1999), 79.

[15] See Viacom International and Others Inc. v YouTube Inc and Others (2010) WL 2532404 (S.D.N.Y.); more recently, YouTube has claimed that the figure is closer to 35 hours of new video footage being uploaded every minute.

[16] Explanatory Note, Copyright (Infringement File Sharing) Amendment Bill 2010 (NZ), 1.

[17] Explanatory Note, Copyright (Infringement File Sharing) Amendment Bill 2010 (NZ), 2.

[18] Internet Industry Association, ‘Principles for a Digital Economy’ (Manifesto, Industry Internet Association, 27 July 2010), 7.  

[19] Internet Industry Association, ‘Principles for a Digital Economy’ (Manifesto, Industry Internet Association, 27 July 2010), 7.  

[20] James Eyers, ‘Copyright law to be reviewed’, Australian Financial Review (Melbourne), 24 September 2010, 18.

[21] Copyright (Infringing File Sharing) Amendment Act 2011 (NZ).

[22] http://blog.labour.org.nz/index.php/2010/11/03/no-nzers-will-have-internet-access-terminated-in-copyright-bill/.

[23] See for example Charles Arthur, ‘Digital economy bill rushed through wash-up in late night session’, The Guardian (UK) 8 April 2010.

[24] Senator Stephen Conroy, ‘Realising Our Broadband Future – Keynote’, (Speech delivered at University of NSW, Sydney, 11 December 2009).

[25] ‘Web founder warns of internet disconnect law “blight”‘, The Age (Melbourne), 29 September 2010.

[26] Internet Industry Association, ‘Principles for a Digital Economy’ (Manifesto, Industry Internet Association, 27 July 2010), 36.

[27]Encouraging legitimate use of Online Content: An iiNet view’, (15 March 2011) iiNet, <http://www.iinet.net.au/press/releases/201103-encouraging-legitimate.pdf>, 6

[28] Ibid

[30] Internet Industry Association, ‘Principles for a Digital Economy’ (Manifesto, Industry Internet Association, 27 July 2010), 38.

[31] ACTA Art 27(3).

[32] ACTA art 27.2.

[33] La Quadrature, ‘ACTA: Updated Analysis of the Final Version’ <http://www.laquadrature.net/en/acta-updated-analysis-of-the-final-version#footnote8_2yu96lg>

[34] ACTA art 12(4); see Electronic Frontiers Foundation, ‘2011 in Review: Developments in ACTA’, <https://www.eff.org/deeplinks/2011/12/2011-review-developments-acta>

[35] Internet Industry Association, ‘Principles for a Digital Economy’ (Manifesto, Industry Internet Association, 27 July 2010), 34.

[36] UK Intellectual Property Office, ‘© the way ahead: A Strategy for Copyright in the Digital Age’ (Report, Department for Business Innovation and Skills, 2009), 13.

[37] TalkTalk ‘Digital Economy Bill cannot protect copyright’ http://www.dontdisconnect.us/digital-economy-bill-cannot-protect-copyright

[38] TalkTalk ‘Digital Economy Bill cannot protect copyright’ http://www.dontdisconnect.us/digital-economy-bill-cannot-protect-copyright

[39] Internet Industry Association, ‘Principles for a Digital Economy’ (Manifesto, Industry Internet Association, 27 July 2010), 35.

[40] Elgin, M, ‘Google’s Business Model: YOU are the product’, Earthweb 5 February 2009.

[41] Claes Loberg in Emma Connors, ‘D-Day for music revolutionaries’, Australian Financial Review (Melbourne), 5 October 2010, 34.

[42] See http://www.doshdosh.com/radiohead-anti-marketing-in-the-music-industry/.

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