Intellectual Property Rights:
An Economic Analysis of Weak Versus Strong
Copyright Enforcement for Digital Assets (2005)
With an increasing proportion of business assets shifting from traditional capital to intellectual property, the past decade has seen the face of global commercial enterprise take on a new look. The classical “bricks-and-mortar” approach has given way to smaller, versatile organizations centered on innovative services and largely technology-driven assets. This has established firms’ intellectual property as the primary and most valuable factor of production. However, as much as markets have decisively shifted from “hard” to “soft” capital, the question remains as how best to use proprietary information to maximize total welfare in the Digital Age.
In 2005, for the first time ever, the number of Americans with high speed internet access, either via DSL or cable connections, was greater than those with traditional dial-up telephone service (Drucker, et al.) This has allowed consumers to use their home computers to download and distribute larger amounts of information than ever before. The impact of this and the resulting rise of peer-to-peer (P2P) file sharing networks, using the popular Bit Torrent technology in particular, have been significant, especially in the business and home computing software and media markets (Lerner, et all.) According to BigChampagne, an online media measurement site, an estimated 6.7 million people used a P2P network to illegally obtain material in September of 2005, a 43% increase from that month a year earlier (McBride.) Senior Intellectual Property Attorney Fred von Lohmann estimates that 1 in 5 American Internet users are downloading illegal material from P2P networks despite the threat of lawsuits against individuals and companies (Von Lohmann.) Clearly, consumers are taking advantage of the ease of distribution of digital material offered by the Internet and P2P technology. What was formerly an activity relegated to a small but dedicated population of file-swappers or “hackers” has now become popular and widely accessible to even a novice computer user.
The years that followed the technology boom of the late 1990’s produced two competing industry views on how to address the threat to traditional copyright protection of digital assets given the reality of file sharing technology. The established technology and media industries have argued that freer duplication and distribution of their products is clearly in violation of federal law. Indeed, their influence in Congress has resulted in several new pieces of legislation designed to bring traditional patent and copyright law, which was originally written to address the design of physical assets, into the 21st century.
In 1998, the Digital Millennium Copyright Act (DMCA) was enacted to provide more specific protections for the software and media industry by updating the legal language used to define the unauthorized use of protected material. Prior to DMCA, the Copyright Act of 1790 had been the legal foundation for enforcement of intellectual property protection. Given the outdated nature and scope of the law, the intent of DMCA was to bring the legal standards into the 21st century. However, the DMCA has been widely criticized for placing an undue burden on producers for the search and enforcement costs of its provisions. Producers of protected works became obligated to encrypt or otherwise provide technical remedies to prevent copying and, under Section 1201 of DMCA, merely attempting to circumvent technological prevention measures, absent of any intent or substantive distribution of a protected work, became specifically prohibited. Additionally, DMCA exemptions providing for the non-commercial use of material, such as the Library of Congress archives and academic research, were judged as too narrow to be practicably applied, putting pure research activity at risk. A year later, the Digital Theft Deterrence and Copyright Damages Improvement Act of 1999 increased the minimum and maximum fines for violating the DMCA by 50% over traditional copyright violation statues (DMCA.)
Championed as a step in the right direction, numerous media groups such as the Motion Picture Association of America (MPAA), the Recording Industry Association of America (RIAA), and the National Music Publishers’ Association (NMPA) supported the legislation and, in Congressional testimony before the House subcommittee on Courts, The Internet, and Intellectual Property in March of 2005, reaffirmed their stance that “most peer-to-peer systems are not used to share files. They are used to steal” (GPO.) From their perspective, electronic music files, and, by extension all digital assets, should be strictly protected to ensure firms’ profits and guarantee ownership rights for the authors of such material. In their view, failure to do so would have dire financial and economic consequences.
On the other side of the argument is the community of businesses and consumers who argue for the idea of open access to intellectual property, a movement dubbed “open source.” Open source advocates claim that strict copyright protection endangers market innovation and, given the ease of copying and distribution of digital assets, is impossible to realistically enforce. High costs for encrypting software, locating violators, and the enforcement of copyright protection are prohibitively costly, lead to market inefficiencies, and reduce total welfare (Einhorn.) Additionally, the inherent nature of technology as developments based upon previous work, and, in many cases, the difficultly of locating ownership of intellectual property are also cited by the open source community as reasons why the traditional technology business model is no longer viable (GPO.) While they do make allowances for authorship and differentiate based on private versus commercial uses for open-source software, the overarching emphasis is on transparency, open standards for development of new technology, and the sharing of information, all of which is predicated on the relaxing of current copyright legislation (Apache.)
These two competing approaches toward copyright enforcement are championed by the largest forces in each respective camp. On the one hand stands Microsoft, the most venerated and staunch opponent of the open-source push, and on the other, Google, wunderkind of the internet and the first real threat to Microsoft’s long established dominance in the home computing market. Since its inception in 1985, Microsoft has been the single most driving force in personal and business computing. It has the largest market share in the personal and business operating system market (Windows), is the chief supplier of desktop software (Microsoft Office), has the most popular Internet browser (Internet Explorer) and web server software (Windows NT), and remains the standard by which all others are judged in the industry. Often to its legal detriment, the core of Microsoft’s business strategy has always been the strict protection of the source code that drives its applications. No business entity in the industry has been the largest target or the most ferocious defender of strict copyright protection, and to its very last, Microsoft has indicated that it will not accept anything less than the most specific and enthusiastic protection of its intellectual property allowed under the law.
Until recently, Microsoft had no clear opposition in the home computing market until Google appeared on the scene. Since its inception in 1995, Google has pioneered the open source approach to business, gaining popularity through innovation and an unconventional approach to the technology business. Primarily a search portal, Google generates over 98% of its revenue from advertising generated by the results of visitor searches (Stahl.) Given such dependence on its search function, it seems counter-intuitive that Google has always made available its search code, or API, for free download and unrestricted modification. Many industry analysts saw this as a major mistake and cautioned investors to be weary of Google as another Internet flop. However, as users integrated the API into their sites and Google gained exposure within the early-adopting Internet community, their focus shifted into other areas of popular Internet use, such as web-based email (Gmail,) instant messaging applications (Google Talk,) as well as a desktop search (Google Desktop) and a mapping program that uses satellite imagery (Google Maps and Earth.) These forays into the territory traditionally dominated by Microsoft have only recently generated concern from Chairman Bill Gates and Chief Operating Officer Steve Ballmer. With the support of other open-source advocates, like Sun Microsystems, creators of the popular Linux operating software, Google has spurred on a movement for open standards in technology development that now challenges the market dominance established software companies have enjoyed for years.
Given the push to legislate for more strict copyright enforcement, it is possible that the government and the technology community will rely on the long history of copyright law and maintain strict protection standards. Recent court cases involving the prosecution of websites facilitating the illegal distribution of material, such as Napster, certainly indicate that enforcement efforts remain active despite the proliferation of file-sharing technology. In June of this year, the Supreme Court upheld a lower court decision to allow the music industry to sue file-sharing businesses if they knowingly assist in disseminating copyrighted material for free. That case, involving Grokster, a website that provided copies of music for consumers to download without permission, highlighted the intent of the courts to hold businesses liable for violations resulting from their activities, even if the product or service has other lawful uses (Gomes.)
However, in November 2005, Sony BMG Music Entertainment was forced to recall over 5 million music CD’s equipped with flawed anti-piracy software that prevented legal copying of the audio files to consumers’ computers. Additionally, the software contained security flaws which permitted some websites to gain control of personal computers in order to send spam e-mails (Krebs.) This indicates that while the courts have been willing to enforce strictly current copyright laws, encryption efforts have a long way to go before they can reasonably provide viable protection against digital piracy. This reality is a key component in the open source case for relaxed copyright enforcement: as explicit and implicit costs remain high and absolute encryption is persistently untenable, market efficiency will be achieved through more relaxed, vague standards.
These rulings ensure that if producers wish to assert claims of copyright infringement on individuals or businesses, they will most likely be successful in court. Although this does not necessarily spell trouble for the open source movement, it does mean they must use market forces rather than legal tactics to be successful in the industry. For example, Cisco Systems, who provides networking hardware, has historically avoided extensive patent registration for innovations that foster the growth of the Internet (Cukier.)
From an economic perspective, the open source approach presents a quandary for traditional technology firms: either give away the key to profitability or be forced out of niche markets as smaller firms collaborate to offer a lower cost alternative to dissatisfied or disenfranchised consumers. High search and enforcement costs, as well as the growing expense of digital encryption represent additional obstacles to holding the course for strong enforcement advocates. If the assumed proliferation of pirated material ceases after a hypothetical relaxation of standards, would firms be able to maintain operations under such conditions? These are among the many as yet undecided questions the industry and legal establishment currently face, with little empirical evidence to look to for answers.
Ultimately, the market for digital media, whether it be for computer software or music files, will need to resolve the main issue of what are the permitted uses of legally obtained material. New technologies such as cell phone ring tones, web casts, online music purchasing sites like iTunes, and “locked”, as well as future unrealized innovations, will continue to challenge copyright precedent and, in many cases, make compliance with complex laws like DMCA prohibitive. A showdown between Google and Microsoft, representing the two sides of the argument, now seems imminent. Perhaps, only when these two sides meet will we see which approach – strict or vague copyright enforcement – will survive.
References
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Drucker, Jesse, Kevin Delaney and Peter Grant. “Google's Wireless Plan Underscores Threat to Telecom.” The Wall Street Journal. 3 Oct 2005.
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McBride, Sarah. “For Grokster, It's the Day the Music Died.” The Wall Street Journal. 8 Nov 2005.
Stahl, Leslie. “Defining Google.” 60 Minutes. 2 Jan 2005. http://www.cbsnews.com/stories/2004/12/30/60minutes/main664063.shtml. 11 Nov 2005.
Von Lohmann, Fred. “Interpreting MGM v. Grokster: What is the Practical Impact and What is Left for Congress to Do?” Electronic Frontier Foundation. http://www.eff.org/IP/P2P/MGM_v_Grokster/grokster_one_pager.pdf. 16 Nov 2005.
US House of Representatives Judiciary Subcommitte on Courts, The Internet, and Intellectual Property. Hearing on Digital Music Licensing and Section 115 of the Copyright Act. Washington, DC: GPO 2005.
Krebs, Brian. “Sony's Fix for CDs Has Security Problems of Its Own.” 17 Nov 2005. http://www.washingtonpost.com. 10 Nov 2005.