Keeping politicians' hands off the Net & everything else related to technology

Over the past year, as the debate over internet radio royalty rates has raged, I have been a lonely voice calling for the repeal for compulsory licensing of digital performance rights altogether. I did so at the Cato event for my book, Copyright Unbalanced, in January at a State of the Net panel, and in my Reason column. The reaction I often received was either one of outrage by the Pandoras of the world, or condescension for my naive optimism. Well, optimism can pay off. Yesterday Rep. Mel Watt, ranking member of the House Judiciary Committee’s Subcommittee on Courts, Intellectual Property and the Internet, introduced the “Free Market Royalty Act,” which among other things gets rid of compulsory licensing.

The problem with the compulsory licensing scheme is twofold: Not only does it rely on federal bureaucrats to set the rates that artists must accept for their music (rather than allowing a free-market negotiation take place between copyright holders and those who want to broadcast their songs), but it also allows Congress to pick winners and losers by assigning different royalty rate standards to different users. As I explained in Reason:

While AM, FM, cable and satellite radio, and Internet radio services like Pandora can all opt for compulsory licenses, they each pay different royalty rates. The rates are set by a panel of government lawyers called the Copyright Royalty Board, and they have the effect of favoring some business models over others. Internet radio services pay over 60 percent of their revenue in royalties, while Sirius XM, the only satellite radio company, pays only 8 percent. AM and FM radio aren’t subject to a digital sound recording right, so it pays zero.

Watt’s bill would blow all this up, making terrestrial broadcasters, Internet radio services, and the rest to give up their price-fixed compulsory licenses and have to negotiate in a market the rates they pay. This truly levels the playing field, especially vis-a-vis interactive music services like Spotify and Rdio that have never benefited from compulsory licenses.

Whether you talk to supporters of Rep. Chaffetz’s Internet Radio Fairness Act or Rep. Nadler’s Interim FIRST Act, they each will say their bill is the true fre market approach, and that their rate-setting standard would best approximate a market. To them I say, nothing better approximates a market than the market itself, so if they are truly concerned about ensuring a free market level playing field, here is the way to do it.

One advantage of compulsory licensing is that it can reduce transactions costs. The Watt bill retains some of this advantage by designating SoundExchange, a nonprofit agency, as the common agent for copyright owners to facilitate negotiations, but allowing labels and artists to retain the right to opt-out and negotiate on their own. If this bill passes, I think we’ll see some very interesting experimentation with business models on the part of both the artists and the radio stations.

Finally, looking at the) press coverage of this bill, what has gotten the most attention is that it would, for the first time, require terrestrial AM/FM radio stations to negotiate and pay royalties for the sound recordings they broadcast. The way I see it, it’s not clear to me why broadcasters deserve yet another subsidy, so I shed no tears for them if this bill passes. Broadcasters argue that they provide promotional value for the songs they broadcast, that this benefits copyright holder, and that they should therefore continue to pay nothing. If it is indeed the case that airplay provides substantial promotional value, that will be taken into account in the course of negotiations and we should expect the ultimate rate to reflect that. Indeed, you can even imagine an outcome where the free market rate for terrestrial stations would remain at zero, or even that copyright holders would want to pay the stations. That’s the beauty of the market, so let’s unleash it.

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Yesterday the MPAA issued a report commissioned from the global PR firm Millward Brown looking at "the role of search in online piracy." This coincided with the RIAA's Cary Sherman testimony before the House IP subcommittee that search engines are not doing enough to protect his industry from piracy. Here are some thoughts on the new report and the issue generally.

The report tries to ascertain how much of the traffic to infringing content is sent there by search engines. To measure this, the report employs "a customized, hybrid approach" that doesn't merely look at whether the visit to an infringing URL came from a link on a search page. Instead, it looks at whether a user searched for a "qualifying" search term within 20 minutes of reaching the infringing URL. "Qualifying" search queries, the report says, are associated with attempts to find illegal content and include "domain terms like '1Channel' and 'sidereel', generic terms like 'watch movies online' and movie and TV title-based terms like 'Dark Knight Rises'." As the report puts it, "This holistic approach contrasts with a more narrow definition that counts search only when a visit is preceded by a visit to a search engine."

The report is clear that "this method did not seek to indicate the degree to which infringing content appears on search engine results pages themselves," but merely sought to show that search engines "influenced the path" users took to reach infringing content. It concluded that "approximately 20% of all visits to infringing content were influenced by a search query from 2010-2012."

I have a couple of concerns with this methodology. First is that it implicitly puts search engines on the hook not just for linking directly to infringing content (for which there is a notice-and-takedown process available), but also for "influencing the path" that a user takes on their web travels. As we all know, correlation is not causation, so it's not clear to me that because I searched for "transformers" 15 minutes before I visited the URL for a pirate stream of Game of Thrones that necessarily means that the search engine influenced me in any way, and much less should be responsible for my behavior.

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