Costs Cost: Key Considerations when Making Choices about Remuneration for Uses of Copyrighted Works

Modern creative industries have, to a large extent, built themselves on the basis of copyright. Their business models depend on having – or acquiring – rights to sell or use content, which they can then sell in exchange for remuneration.

These rights are what lies behind the need to pay for initial access to a work. They are also the reason why, once a library or other user has legitimately bought or licensed a work, they may also need to pay extra in order to make certain uses of it.

For example, restaurants often need to get a licence in order to play music which they have already bought, schools and universities may have to pay to be able to copy legitimately acquired works for students, and libraries can be asked for money to put copies of works in their collections on the internet.

These payments can represent a source of revenues for creators and publishers. However, they also represent a cost to users.

As such, when thinking about whether obliging such payments is a good idea – for example in the context of a copyright reform – it is important to think about whether they are really desirable from a public policy perspective. This blog sets out some of the key questions that policy-makers need to bear in mind.

 

How High are the Transaction Costs? Making a payment isn’t necessarily free – ‘transaction costs’ refer to the costs that are linked to how a seller and buyer (or in our case, rightholder and licensee) are connected.

For example, a library may incur costs simply to count the number of times a certain use was made, or how much was used. This will almost always require an investment in people’s time and may require financial investment in technical infrastructure to do the monitoring. Administering the sourcing and distribution of payments also costs money, both in terms of staff and operational costs. All of this represents an inefficiency that reduces the overall sum of money that goes to authors and publishers.

Clearly in many cases, it is possible to limit the costs of collecting information – for example by using simpler tools – and by reducing the costs of administering the scheme it will make it fairer . However it is also possible that the costs of running a licensing system are too high be worth it.

Recommendation 1: Governments need to ensure that, when designing copyright systems, the relative costs of administering payments are not so high as to make it pointless.

 

Is there a Way of Controlling Moral Hazard? Collecting societies and other intermediaries like publishers who are responsible for distributing money collected for the uses of in-copyright work have a duty to work hard to identify and pay out revenues to authors.

When the rightholders are stronger – for example publishers who are members of such collecting societies – they can work to ensure that they receive payments. However, where rightholders – such as authors – have fewer resources, they may find this more difficult.

Strong regulation can help ensure that collecting societies and publishers pay out royalties to authors where these are due. However, where such regulation is lacking, there is a risk that money will be used for other purposes, for example lobbying or payments only to the more influential or famous members, there is a risk to the legitimacy of the system as a whole.

Recommendation 2: Governments need to ensure that there is effective regulation to ensure that the distribution of royalties and fees is efficient and legitimate.

 

What is the Impact on Users’ Decision-Making? When anyone makes conscious choices, they are carrying out a form of cost-benefit analysis – i.e. is it worthwhile to do something, or at least more worthwhile than doing something else.

In digitisation projects, for example, it is rare that there are sufficient resources to do all that you might want to, and so a project manager will need to select what to prioritise. Questions such as the importance of a work, or the risk of it being lost will favour digitisation, but the need to pay for a licence can undermine this.

Indeed, this may lead to project managers choosing to spend resources on digitising works which are less important, or less vulnerable, simply because this is cheaper. Effectively, mis-judged licencing obligations can skew priorities. It is important to ensure that imposing costs does not lead to sub-optimal decision-making in heritage institutions.

Recommendation 3: Governments need to ensure that the introduction and design of remuneration systems do not lead to distortions in decision-making which harm the public interest.

 

Does it Even Make Sense? Ordinarily, it would make sense to impose costs on a user – such as a heritage institution – when their actions in turn impose costs on a rightholder. This can happen, for example, if library copies substitute for sales of works, and so reduce income.

This is why, for example, the ‘Three-Step Test’ in international law underlines that exceptions should only apply where there is no conflict with normal market uses, and where there is no unreasonable impact on the legitimate interests of rightholders.

The key question then, in deciding whether to impose costs on users, is whether there is an unreasonable  impact on rightsholders. This is keenly debated of course, as we have seen in Canada, where a Parliamentary Committee dismissed claims that an expanded education exception had led to a sharp decline in sales, and instead suggested that more credible research was needed.

But there are other areas, such as preservation, where the actions of heritage institutions do not harm markets, but rather provide a valuable service by ensuring the survival of works into the future. This is essential if works are to be available in the medium to long term.

In this case, it can seem absurd to want to impose costs, when in fact it is the heritage institution taking on a responsibility on behalf of rightholders.

Recommendation 4: Governments need to ensure that they do not introduce remuneration obligations for uses where there is no clear impact on markets, and indeed where this may end up working against the interests of rightholders. 

 

As highlighted at the beginning, copyright lies at the heart of the dominant business model for today’s creative industries. Beyond payments for access in the first place, there are ongoing discussions about where and whether to ask for further payments for use.

In trying to draw the line between where such payments are desirable or not, policy makers need to take considered decisions, based on the reality of the situation they are in. Transaction costs, managing moral hazard, the potential to skew decision-making, and simply good sense should all be borne in mind.

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