p2p news view / p2pnet: Howard Knopf has a great article on the Internet Educational Copyright Exemption Debate in Canada. I agree with him in that both the educational community and the collective societies have got it wrong, as I’ve written in the past (Paying protection money to Access Copyright and Reply to Hill Times about AUCC guest column).

Both parties are pushing a false rhetoric that work is either in the “public domain” (ie, no longer subject to copyright) or royalties are legitimately expected. This ignores the vast majority of works published on the “no password required” part of the Internet where neither is true.

Underlying this debate is the rhetoric coming out of Heritage Canada. Informal discussions have revealed that bureaucrats at Heritage believe there’s no problem statutory or extended licensing can’t solve. This is a familiar anti-democratic political tactic: create crisis though bad policy, and then present your pet ideas as if they were a solution.

Statutory or extended licensing is intended to only be used where there’s a market failure. This is a case where royalties are reasonably expected by copyright holders, but where market conditions make it impossible or impractical to collect these fees. Well known examples in the past were the legalization and monetizing of commercial radio (See: Section 19 of the Canadian Copyright Act), and cable television (See: Section 31).

Most people I’ve spoken with agree the non-commercial sharing of music, movies and television shouldn’t be harder or more expensive than commercial broadcasting or retransmission, suggesting a similar (and less expensive) regime should apply to the non-commercial sharing.

Where there’s a clear market failure, statutory or extended licensing are an appropriate solution to that problem.

An issue that doesn’t get discussed enough is: what happens when this “solution” is applied to situations where there is no market failure? It took many years for the medical profession to recognize the harm of over-prescribing antibiotics in cases. It’s not well understood by Heritage the massive harm that is caused when extended or statutory licensing is applied to markets where there’s no market failure.

My own primary form of commercial creativity is software. The software marketplace is going through a massive transformative change (See: The Innovator’s Dilemma By Clayton M. Christensen), with this change not being a technological one but a change in methods of production, distribution and funding of software.

The incumbents use a method known as “software manufacturing” where software is treated like a tangible manufactured good that’s manufactured, distributed by retail channels and funded per-unit the same way hardware would be. The most successful company with this methodology is Microsoft, which has listed Linux and Open Source as the largest competitive threat in its SEC filings in the United States.

Free/Libre and Open Source Software (FLOSS) doesn’t treat software as similar to tangible goods, but seeks to benefit from the intangible nature of software. One of the features of software is that it has a natural marginal cost (cost to creator/distributor for each additional unit after the first) that approximates zero for both production and distribution. The most successful business models will be those that accept this natural state and allow the marginal price (the price charged per unit) to be zero, and create business models which focus entirely on the costs of producing the first unit.

To motivate customers to pay for the up-front costs for the improvement of software, there needs to be a longer-term benefit to them, with the fact there will be no per-unit costs (to manage the counting or pay royalty fees) being the largest motivator. If our competitors are able to super-impose a per-unit fee, then this greatly harms our market.

During this transition there’s a lot of “sky is falling” rhetoric from the incumbents. The Business Software Alliance (and their Canadian counterpart CAAST), a lobby group for the “software manufacturing” business model, put out statistics claiming an amount of money is lost due to software copyright infringement.

To arrive at their alleged total loss to the economy, they make an unreliable guess at the number of units they didn’t sell, and include the lost mark-up revenue of the retail channels.

Their guess is based on counting the number of computers shipped, subtracting the number of boxed sets of their software that shipped, and declaring much of the difference as “infringement”.

It turns out that FLOSS, the largest competitors to the “software manufacturers”, is counted as if it were “infringement” since it doesn’t count in their “number of boxes” and predominantly doesn’t use a “retail channel” for distribution.

While there are many consultants that make money providing support services and value-add software feature upgrades, the entire FLOSS economy is discounted by the “software manufacturing” studies.

I fully expect these manufacturers to eventually propose an extended or statutory licensing scheme to eradicate their competition. If a per-unit fee is applied to all software, the marketplace that funds the creation of FLOSS would disappear entirely.

Software isn’t the only marketplace where extended licensing would destroy the marketplace. Currently, the Internet allows for a multitude of methods of production, distribution and funding to co-exist. Works where payment is required exist within a “membership required” part of the Internet, such that the copyright holders are able to negotiate with customers appropriate fees. Works made accessible to anonymous persons by a copyright holder are quite clearly intended to have limited use without additional permission or payment, with various royalty-free licensing systems such as the Creative Commons growing which document additional uses of the work which do not need permission or payment.

Applying a collective licensing system to the Internet would destroy many of the multitude of methods of production, distribution and funding. Like FLOSS, many of the Open Access and other models rely on motivating customers to pay a “once only” fee for a work that’s then allowed to be freely distributed. If a royalty system is applied, this motivation ceases to exist.

We need to get principles into government thinking to deal with this issue. We need to ensure that extended or statutory licensing are appropriately used in situations where there is a market failure (such as unauthorized non-commercial sharing of music, movies and television), but to ensure that these schemes are never used in situation where there is a competitive market between multiple methods of production, distribution and funding (such as software, educational materials, scientific research, etc).

We need to ensure that organizations like the CMEC and Access Copyright are not able to push policy forward that would destroy the growing competitive market for educational material that exists, imposing a “one size fits all” that is increasingly the wrong choice.

Russell McOrmond - p2pnet contributing editor
[McOrmond is an independent author (software and non-software) who uses modern business models and licensing (Free/Libre and Open Source Software, Creative Commons). He’s also the CLUE policy coordinator.]

This entry was posted on Thursday, June 1st, 2006 at 2:47 pm and is filed under Uncategorized. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.

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