"I don't have to show you any stinking badges" Bandit


We have commented on the lamentable state of current copyright law and the gradual erosion of consumer rights through incremental legislation. As a result of the Napster phenomenon Congress is considering for the first time moving in the opposite direction. The Senate Judiciary Committee is holding hearings beginning April 3, 2001 to consider possible changes to the copyright law. A key item under consideration is statutory licensing under which copyright holders would be obligated to license their work. This seem to us a significant step in the right direction.

Jim Griffin has written a white paper laying out some history of the copyright law in the music industry, and the arguments in favor of moving to a scheme of statutory licensing. We have written a letter supporting this white paper, the text of which is reproduced below. You may also be interested in Napster's campaign to lobby Congress through letter writing.

Here is the text of our letter:

Dear Jim:

We have reviewed your White Paper "IMPASSE: TECHNOLOGY, POPULAR DEMAND, and TODAY'S COPYRIGHT REGIME." We are two professional economists expert in markets, organization, strategic behavior and growth. Central to our research is the role of innovation in fostering growth and prosperity. Our current endeavor focuses on the determination of the system of property rights most favorable to production and diffusion of intellectual innovations. This has lead us to support a strong protection of the right of creators to sell their work, because this is crucial to provide the financial incentives needed to assure a continued flow of artistic creations and innovations. However, we are highly skeptical about the need for restrictive copyright protection after the first sale. The points you make in your paper are similar to those we have made in our own research: we endorse the recommendations you make. If implemented, they would open the way to a more efficient and socially useful system for copyrights protection and distribution of artistic products. Allow us to elaborate briefly on the most relevant issues.

· Curtailment of the digital delivery of music
You argue persuasively that the current copyright law, as applied by the courts, will lead to the curtailment of digital delivery of music. You also argue, and we find this crucial, that the current situation of impasse is not sustainable, that it is damaging both to American consumers and the overall economy, and that, due to continuous technological advances in this area, a substantial reconsideration of copyright legislation is urgently needed. We also agree with you in calling attention to the anti-trust problems generated by the ongoing attempt of the "majors" to coordinate in establishing a music-delivery business and to collude in preventing the entry of independent competitors. Vigorous competition, especially following major technological breakthroughs such as the Internet is crucial in stimulating innovation and in providing better products at lower prices. In the long run the new delivery technology should lower barriers to entry and lead to cheaper and more varied music (and arts) accessible to a wider audience. Current efforts by the majors, if successful, may severely tilt the playing field in their own favor. This would prevent new companies from providing such services and stop superior delivery technologies from being adopted. Encouraging innovation by new companies such as Napster instead strengthens the technological leadership upon which the increasing wealth of American households is built.

· Transactions costs
Quite correctly, you compare the reduction of transaction costs achievable through peer-to-peer networking to the increase in such costs caused by ongoing byzantine attempts to control, monitor and neutralize the economic impact of the Internet technology upon established monopolies. Economists widely recognize the effort by incumbents to suppress new technology as one of the most significant social costs of market concentration. In the long run, such efforts are seldom successful. Still, they delay the social benefits of new technology in the meanwhile, and lead to the development of wasteful and undesirable black markets. Incumbents' efforts not only increase current transaction costs but also paralyze future progress: newer products and techniques are always fed by the ongoing adoption and experimentation of previous ones.

· Fair use
You observe that efforts to prevent piracy also prevent fair use. This is one of the most insidious consequences of overprotecting intellectual property. Fair use constitutes the core of consumer sovereignty. Producers of any kind, and those of intellectual property in particular, always profit from greater market power, and for this reason have always argued against fair use. Congress and the Supreme Court have wisely resisted this pressure, recognizing that eliminating fair use serves no broad economic purpose and thwarts the copyright laws' goal of maximizing the use and enjoyment of protected work. Given that Napster and related technologies have had little impact on the profits of the majors, it is hard for us to avoid the conclusion that much of what is being sold as an effort to prevent piracy is in fact an effort to prevent fair use and so increase future monopoly power. We are especially concerned about the economic consequences of adding copy protection to multi-use devices such as computers. Complex software and hardware invariably have bugs. While buggy VCRs and DATs pose little threat to economic growth, the loss of data and time from buggy hardware and software in computers can lead to significant economic harm.

· Statutory licensing
Your paper supports consideration of statutory licensing, correctly pointing out that these schemes are already widespread under circumstances similar to those involving Napster. Indeed, the music industry itself is arguing for statutory licensing for music broadcast over internet radio. Statutory licensing seems to us a sensible middle ground between the extreme copyright protection demanded by the currently dominant firms and a competitive system based only on the right of first sale. While, in our view, it will not be the final answer to the momentous problems generated by ongoing technological innovation, it does constitute an important step in the correct direction. We want to emphasize that mandatory licensing will reduce incentives to piracy and the black market generated by the current, unsustainable, status quo.

Overall then, we support your effort and that of Napster to improve existing copyright law to better "promote the progress of science and the useful arts."