Intellectual Property 4:1 - 1(87) Entertainment and Media: Markets and Economics Professor William...

Intellectual Property4:1 - 1(87)

Entertainment and Media:

Markets and Economics

Professor William Greene

Entertainment and Media:

Markets and EconomicsProperty Rights

Intellectual Property

Agenda

Intellectual property: Definition, types Economic foundation for valuation Fair and unfair use Royalties A chain of value – book publishing Copyrights – the entertainment business Trademarks – more entertainment Patents

Property

Tangible property: Usually dealing with natural resources

Intellectual property: Output of creative activity Copyright: Writing Patents: Invention and design Trademark: Marketing symbols Secrecy and contract: “Know how” (e.g., Coca

Cola, KFC seasoning formula, business secrets)

Property Right

Property: After transformation, a stream of rents Right

Ownership of the stream of rents generated by the property Control over usage Note: “Rent” is important. No “rent,” no need for a right; it would not

be contested.

Establisment of property rights Foundational function of a government Provision of a court system in which to defend property rights

Pursuing Rent for Creative Works

Through Time Nonperishable, e.g., sculpture Works of art – resale

Across Space Different markets –

U.S. & Int’l films Spinoffs and licensing

The Lion King Hybrids:

Wyeth’s Helga paintings; Resale of the paintings, catalog, Museum exhibition

Jackson Pollock’s paintings: Which ones are fakes?

Tangible Property Rights

Tangible property Exhaustible resources Consumption is private and exclusionary

Motivation Conserve and manage resources Avoid the tragedy of the commons (e.g., American vs.

Australian lobster industry) Creates a social good: Conservation

Intellectual Property Rights

Intellectual property Consumption is nonexclusionary (public good) Production is often input to further innovation

Motivation: Reward producers and ensure others access Incentivize creative, beneficial activity

Two Views of Intellectual Property

Creates a social bad: Monopoly Social point of view – monopoly Private: Strategy? Coca Cola and KFC. Patent does not

pass cost benefit test.

Merely establishes a property right to a piece of capital (like real estate)

Conflicts: Applications of copyrights The Sonny Bono law – did nothing to spur creative activity;

merely extended the life of a stream of rents.

Economic Motivation for IP Rights

• (Lesser, mainly for patents) Exchange for Secrecy: Reduction of costs that results from reinvention or rediscovery.

• (Greater) Profit incentive: Profit motive calls forth desirable innovation that might not occur otherwise. (Not everyone believes this.)

Monopoly in Intellectual Property

Price, MR, MC

Demand

= Deadweight loss

= Consumer surplus

= Producer surplus

The counterpoint is the competitive form of the same market with P=MC and no deadweight loss. Compared to no market, the monopoly is unambiguously better.

Ownership and Valuation

Property right = ownership claim to the stream of rents.

Long lived stream of benefits

Copyright: 95 years (Mickey Mouse’s new law)

Patent: 20 years (17 previously)

Trademark: As long as the trademark continues to be both used

and productive (PTO classifies as “DEAD or ALIVE”)

Year1 Year 2 Year 3 Year 4 Year 5 Life of the right

Property ValuationGeneral Result

Years in the rightt 1

Net benefits (rents, profits) t(1 interest rate)

Prozac (Eli Lilly): Scheduled to expire 2003 Generic by Barr Labs – successful patent challenge – due out in 2000. Lilly stock fell from 109 to 76 the day of the ruling.

Valuing Happy Birthday

By the time its copyright runs out in 2030, Happy Birthday should have made nearly 55 million pounds.

American sisters Patty and Mildred Hill wrote the lyrics in 1893 It is now among the top three most popular songs in the English language, along with Auld Lang Syne and For He's A Jolly Good Fellow.

The lyrics were copyrighted in 1935, 11 years before Patty's death, and the ownership has swapped hands in multi-million pound deals ever since.

The song generates royalties of 625,000 pounds per year for the current owners Warner Communications, who bought the rights to the simple tune for more than 15 million pounds ($28,000,000) in 1989

Currently owned by Summy-Birchard Music (AOL-TW). Current royalties about $2,000,000/year.

http://www.snopes.com/music/songs/birthday.asp

A Market for Property Rights

Copyright Lifetimes

http://en.wikipedia.org/wiki/Copyright_Term_Extension_Act

Pre Bono: Life of the author + 50 years or 75 years for a work for hirePost Bono: Life of the author + 70 years or 120 years for a work for hire. Works made for hire from 1923 to 1998 (such as Mickey Mouse) do not enter the public domain until 2019 (instead of 1999).

Advances Against Royalties: Retain Rights

A Bank

Conventional banks don’t like the uncertainty (risk) and don’t understand the workings of the market.

Accepts risk

Advance will discount against the uncertain royalty stream.

Property Valuation, Uncertainty and Technological Change

AA Milne-Winnie the Pooh Shirley Slesinger Lasswell held then sold the rights in the 1930s

Disney, 1961, rights for merchandising (more lucrative than the mouse)

Videocassettes? DVDs? Could not have been foreseen in the 1930s. Who’s entitled,Shirley or Walt? Value? Rights? Court case (Dismissed after 13 years, 3/29/04. Walt Disney

wins.)

Fair Use

The concept of fair use Relevance: Commercial value of posted

videos to YouTube even if not to the person who posts the material

Fair use by Professor William Greene(1) Change of form(2) Not using in an attempt to earn money

Not Fair Use

The Pirate Bay has been involved in a number of lawsuits, both as the plaintiff and as the defendant. On April 17, 2009 Peter Sunde, Fredrik Neig, Gottfrid Svartholm and Carl Lundstrom were found guilty of assistance to copyright infringement and sentenced to one year in prison and payment of a fine of 30 million SEK (app. 3,620,000 USD; 2,385,000 GBP; or 2,684,000 euro), after a trial of nine days. After appeal, the verdict was upheld.

The entire operation was disbanded in 2010.

It has reformed (zombie like). Exists now in the Seychelles. Proxy servers exist worldwide.

The Anti-Pirate Bay

Renmin University of China

All 827 pages

Definitely Not Fair Use

Called into question what was meant by fair use

Application: Who Owns Fame?

The Right of Publicity Who owns the value of a public figure?

The public figure who is famous? The public who make them famous? The paparazzi as agents of the public?

Alison Chang vs. Virgin Mobile USA

(Diss in Australia)

Alison v. Flickr and Virgin

Alison Chang, a 16-year-old Texan teen girl, sued Virgin Mobile phone company for stealing her photo which was taken by her youth counselor Justin Ho-Wee Wong during a Christian camp in Australia.Chang's family filed a lawsuit late Wednesday (September 19, 2007) in state district court in Dallas against Virgin Mobile USA LLC, its Australian counterpart, and Creative Commons Corp., a Massachusetts nonprofit that licenses sharing of Flickr photos. The case vs. Creative Commons was dropped in November, 2007. The case against Virgin was dismissed for lack of jurisdiction in 2009.

http://blog.internetcases.com/2009/01/22/no-personal-jurisdiction-over-australian-defendant-in-flickr-right-of-publicity-case/

Ryan Hart vs. Electronic Arts

Ryan Hart is one of the most famous quarterbacks in the recent history of Rutgers football. He led the 2005 Scarlet Knights to the Insight Bowl, the first bowl game that Rutgers had played in decades.Four years later, Hart took on another leading role, this time as the named plaintiff in a class action lawsuit against Electronic Arts. Hart's legal team claims that EA has infringed Hart's "right of publicity". Hart also claims EA infringed the rights of other college players by including their information and statistics in EA's college football games without authorization. Specifically, Hart's complaint is about a nameless quarterback that appears on the Rutgers team in EA's 2004, 2005, and 2006 games. The player wears jersey number 13, is six feet and two inches tall, weighs 197 pounds, wears a wristband on his left wrist, and hails from Florida. Not coincidentally, that is all true of Ryan Hart. Since the EA games additionally have allowed players to fill in names on team rosters, many people play the nameless Ryan Hart under the name Ryan Hart. Downloadable and accurate rosters of all the featured college teams are currently shared online. Last fall, a federal district court dismissed Hart's case, explaining that the free speech rights of Electronic Arts trumped Hart's right of publicity claims. Hart appealed and now is arguing his case before a federal appellate court in Philadelphia.

Hart won his appeal before a 3 judge panel of the Federal Appeals Court in Philadelphia (May, 2013)

Right of Publicity vs. First Amendment Right of Free Speech. Right of Publicity wins … so far.

Fantasy Baseball Is (Definitely Not) a Game

Who owns the numbers the day after the game?

Yahoo Fantasy Baseball Provider

The Market

• 300+ Operators of fantasy sports leagues• Subscriptions• Prizes• NFL, MLB, NBA

• At least $1.5 billion• Input data source: Yesterday’s newspapers• Content Purchase: License arrangements with Major

League Baseball• E.g., CBC Distributing and Marketing (St. Louis) – 9%

of gross = royalty paid to MLB.

The Economic Issues

• Ownership of the personna.• Not a copyright issue; Statistics are public

domain (1997 case against NBA)• First Amendment? Ostensibly

• The issue is control of a valuable resource – the fame of the players in their role as sports figures

• Who owns the “right” to exploit that fame?

The Scrum The “Right of Publicity” was created in a 1953

baseball card case 1996: Several 1940s/1950s players sued MLB

asserting the right. They lost on other grounds. 2005 MLB paid $50M to the players’ union for the

rights to internet and wireless use of their personna.

2005 CBC application for license renewal is denied. MLB wants to (greatly) restrict the number of licenses. (The foreclosure) CBC sues, claiming it doesn’t need a license The case began in court September 5.

Right of Publicity?

BOSTON (AP) – A Red Sox fan angry that Johnny Damon defected to the New York Yankees has fought off an attempt by his high-powered agent to stop her from selling baby bibs with a very grown-up insult.Tucked among the "I Love My Mommy" bibs and "Pregnant Princess" maternity clothes, Ann Sylvia also offers bibs and onesies adorned with the ballpark epithet "Damon Sucks." Last month, eBay pulled the listings after the Scott Boras Corp. complained that they violated Damon's right of publicity, a legal claim that allows celebrities to control the products they endorse. (hmmm… is this the “right?”)

On the “Right of Publicity:” http://www.law.cornell.edu/wex/Publicity

(The end of that story…)

Sylvia hadn't sold any of the Damon items at the time, but the complaint threatened to blemish her eBay rating and jeopardize her PowerSeller status. "I'm just a stay-at-home mom. I just want to raise my children, sell my stuff," said Sylvia, who works part-time at The Standard-Times of New Bedford, which first reported on her struggle. "It's all a little nerve-wracking, a little scary."If so, she didn't show it in her negotiations with Boras' staff. During an hourlong phone call, she pointed out to attorney Ryan Lubner that there are other baseball players named "Damon"; how did he know, after all, that she wasn't the world's biggest critic of Tampa Bay's Damon Hollins? "Then I knew I had him," she gloated. "So I said, 'Let's make a compromise."'Lubner agreed to lift his objection -- and clear her eBay record -- if Sylvia agreed not to use "Johnny," "Boston," "Red Sox," "New York," or "Yankees" in the listing.

Royalties Royalty rate per “use” is the monopoly price. Marginal cost = 0, so revenue maximization. Applications

Patented technologies, drugs, mathematical techniques

Authors Actors – reruns and syndications Music Others?

Outright sale price = DPV of stream of royalties

Royalties

Book Royalties: Simple

Music Royalties: Amazingly Complicated

Book Royalties

“In consideration of the author’s performance… the publisher will pay to the author the following royalties based on the publisher’s net cash receipts: On copies of the work sold in the United States … 15%. However, if in any year, sales exceed 4500 copies, then … 18%” (Econometric Analysis/Prentice Hall)

Kindle edition, $147.63

Making Sense of Music Royalties

You do not trigger or incur a royalty by listening to music.

You justify a royalty to the owner of the music when you use music to make money Music is a factor of production Royalties are the rental paid to use that factor.

There are many different uses of music and many different kinds of royalties

A Chain of Value (Added)? Music

A chain of value added Composer creates the musical work Publisher develops the work and brings it to

the public Performer interprets the work and provides

the musical experience Aggregators package (mix?) music for

further use Where are the claims to the value of the

musical work?

Music Royalties – Where they Go

Writers/Composers Sales of music in

fixed form (CDs) Public performances

Publishers

Recording Artists NONE from public

performance (radio, TV, bars, etc.)

Digital arena if not interactive and the listener is a subscriber.

(From the DPRSRA)

http://entertainment.howstuffworks.com/music-royalties.htm

The Property Rights

Claims to the stream(s) of rent The property rights are (nearly all)

Mechanical Rights (reproduction) Performance Rights (bars, concerts, internet, etc.) Synchronization Rights (TV Ads, etc.) Print Rights (sales of print music)

Additional rights attach to music videos

Mechanical Rights

Juliet is “innocent”

YouTube is not. (Or, are they a safe harbor.)

CD Costs: Mechanical Royalties

Commodity Pricing Exceeds MCMC to Apple is not really zero. Royalty = 66 cents per tune.Resource cost net of royalty is close to zero.

A Highly Successful Business Model

Priced as “downloads”

Experience is reproducible.

Technology is restricted (to iPods, iPhones, computer, etc.)

Claimants to the Stream of Rent Authors/Composers Publishers Performers Recording Companies (“Labels”, SoundExchange on their behalf

(monopoly)) Performing Rights Organization (ASCAP, BMI, SESAC) Mechanical Rights Agency (Harry Fox Agency, (monopoly))

What value added is produced by each player? What is the basis of the claim in each case?

Music Videos Have Additional Value

Produced and owned by the record labels: EMI-Universal, Sony (BMG), Warner

Once free: Distributed free as advertising to VH1 and MTV

Free no more – millions in royalties paid by users.(1) The music(2) The video(3) The composition of the music with the video

Royalties for Performers

The Digital Performance Rights in Sound Recordings Act (DPRSRA) created a right in sound recordings to perform the copyrighted work publicly by means of a digital audio transmission, as well as established a compulsory licensing scheme.

(Compulsory license = the owner cannot deny the request. Disagreements on terms must be litigated.)

Royalties for Performers

From: http://entertainment.howstuffworks.com/music-royalties.htm

Mechanical Royalty from Sales of Recorded Music

Label Publisher Composer (50/50)Statutory rate: $.091/song 5 minutes or less or $.0175/minute in 2014

Recording Artist: 8% - 25% of retail price Less 25% of retail for packaging Less other expenses (promotion, tour, music video, manager,

producer, band) Net, frequently close to $0 (There is no net?).

Note: Controlled Composition when Composer is the Recording Artist. A separate category – e.g. Paul McCartney(http://www.nmpa.org/pdf/copyrights/RosenthalLandslide3_4Mar_April2011.pdf)

Copyright Office Proposal for Webcasting and Rebroadcasting

Webcasting (Musicmatch.com, RealNetworks.com, Beethoven.com)

Retroactive to 1998

Webcasting:

0.14 cents per listener per song

Rebroadcasting of AM or FM

0.07 cents per song

Noncommercial broadcaster

0.02 cents for radio rebroadcasts

0.05 cents for Internet only programming

What do these numbers mean. Where do they come from?

Who gets the royalty income?????

CRB Outcome in March 2007

Internet Radio Minimum $500

A single collection agent: SoundExchange (monopoly?)

Per play rates became impossibly unwieldy

Amended CRB Ruling

Royalty is per song play or based on average listening hours.

New CRB Rates: 2010

Paid to SoundExchange. Now, how does SoundExchange resistribute these to the multiple record labels and other claimants?

Satellite Radio (Sirius-XM) Royalty Rates: Optimal Tax. There is no meter

Understanding CRB’s Rates

The law requires rates to be based on the price that would be set by a marketplace of willing sellers and willing buyers. Much of the discussion centered around deciding issues like who would be the willing sellers. The Board decided that an individual record company was the basic unit of a "willing seller".

This is an impossible construction. There can be no such market outcome.

See Capital Cities, page 7

http://en.wikipedia.org/wiki/Copyright_Royalty_Board#License_fee_rates

On Economic Viability

An issue that smaller webcasters raised was the desire to be assured that their fees would not exceed their revenue. The Board rejected this reasoning in their final decision because the ability of smaller stations to generate revenue from their operations has little or no bearing on the market value of the rights held by the copyright holders.

(Protecting competitors vs. protecting competition)

Mechanical and Performance Royalties

Variations on 66 cents/tune – paid to SoundExchange

If you listen to the music while you download it, is that a performance that triggers a royalty obligation to ASCAP? (No.) If you listen to music on the site (sample it before buying it) does that trigger a performance royalty? (Yes)

Performance Royalties

Song is added to PRO data base (“collection”) PRO tracks the royalty trail (TV, Radio,

Concerts, Restaurants, Elevators, etc.) Revenue (minus fees) is distributed

Source of profit: Low (zero) marginal cost, economies of scale.

Usage is estimated using statistical sampling

The Users

Performance Royalties Market

Internet Radio Television and Terrestrial Radio

Bars and Lounges

Elevators

Department Stores

How big? $ Several billion

The Gatekeepers

Capital Cities, 1993

From the opinionQuoting prior cases:

14 Million!

Spotify is customizable internet radio.

Blanket licenses

You “share” the playlist.

Spotify plays the music.

New Economy Performances

Internet Radio: Spotify AOL, Yahoo Internet Subscriptions: Rhapsody,

RealNetworks YouTube – videos, music videos,

musically scored videos

Royalty Rate Determination: Questions Why do we need the Copyright Royalty Board?

Why do we have the special court for determining performance royalties (ASCAP, BMI, SESAC)?

What economics motivates these?

Is making Sound Exchange a monopoly a good idea?

Free users trigger performance royaltiesPremium users who customize their own playlists trigger mechanical royalties

U.S. vs. ASCAP, 2008

How to tax the internet users of music An optimal tax based on public finance

principles: Zero marginal charge Flat percentage of total advertising revenue. (More or

ASCAP won.

A Threat to ASCAP and BMI Business Model

1. DMX licenses all 5,000,000 ASCAP titles and pays $40/location for the right to use all the music

2. DMX separately obtains a license from SONY to use SONY music in its locations. $25/store

3. DMX requests that ASCAP reduce the $40 by proportion p of the total ASCAP music they use that is SONY music. Reduced fee to about $15.

Under AFJ2 and compulsory licensing, BMI and ASCAP both said no. DMX sued in rate court. DMX won both cases.

DMX Case: Analysis

DMX purchased from SONY a license it already had from ASCAP

SONY did not sell anything to DMX – SONY could not prevent DMX from using SONY music even if it wanted to.

DMXs deal would be a total loss if they lost the rate cases. Under AFJ2 ASCAP and BMI are not able to sell separate

licenses for SONY and others. DMX won both cases. Where do they go from here? … stay tuned.

March 14 Decision (This can and probably will be appealed)

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