Transcript Standard Setting in High

Class 2
Antitrust/IP Policy Seminar, Spring, 2005
Copyright As …
Randal C. Picker
Timothy Wu
The Law School
The University of Chicago
Today’s Reading

Randal C. Picker, Copyright as Entry
Policy: The Case of Digital Distribution
http://papers.ssrn.com/sol3/papers.cfm?abs
tract_id=307005

Tim Wu, Copyright’s Communication Policy
http://papers.ssrn.com/sol3/papers.cfm?abs
tract_id=532882
July 7, 2015
Copyright © 2005 Randal C. Picker
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Today’s Reading

Randal C. Picker, Rewinding Sony: The
Evolving Product, Phoning Home and the
Duty of Ongoing Design
http://papers.ssrn.com/sol3/papers.cfm?abs
tract_id=692746
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The Test of Sony v.
Universal
“Accordingly, the sale of copying equipment, like
the sale of other articles of commerce, does not
constitute contributory infringement if the product
is widely used for legitimate, unobjectionable
purposes. Indeed, it need merely be capable of
substantial noninfringing uses.”
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Picker, Antitrust Bulletin,
2002
July 7, 2015
“It is hard to see how the substantial noninfringing
use test is correct. Even without considering the
question of alternative designs—an issue I pursue
momentarily—just on a standalone basis, the test
seems to have substantial problems. Think of any
object really. The object generates $100 worth of
social benefit and $1000 worth of social harm. On
balance, this is clearly a terrible product, and if we
forced the manufacturer to internalize the harm, it
would never be produced. It instead we merely ask
whether there are some beneficial uses, this
product, and almost all others, will pass with flying
5
colors.” Copyright © 2005 Randal C. Picker
Picker, Antitrust Bulletin,
2002
“The design issue makes the point even more
powerful. You could spend $5 to design the
product to eliminate the social harm while still
creating a $100 in social benefits. Should you
spend the money to redesign? Again, the answer
should be straightforward and with a sensible
liability rule, would be. In contrast, Sony removes
any reason to redesign to minimize copyright
infringement.”
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The Evolving Product

Key Conditions
Malleability

Rewritable memory
Communications
Cheap network
 Makes it possible to “phone home” (contact
the mothership)


Creates the Networked Product
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Key Consequences

Design
Easy
to change the design of a product
after transfer of the original manifestation of
the product

Reduces Installed Base Tyranny
You
July 7, 2015
can change the installed base on the fly
Copyright © 2005 Randal C. Picker
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Bottom Line

Design ceases
To
be lumpy
Becomes an ongoing process

Products are Converted into Services
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A New Two-Part Test

For the Isolated Product
 If
the producer chooses to let go of the product so
that the producer cannot exercise control going
forward and therefore cannot evolve the product in
response to actual use, the producer should face a
hard use test. I haven’t spent much time thinking
about whether that should be framed as “primary
use,” “dominant use,” “predominant use” or
something else.
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A New Two-Part Test

For the Networked Product
If
instead the producer ensures that the
product can phone home so that updates
can be promulgated throughout the system
for the networked product, the producer
should face a substantial noninfringing use
test, coupled with the duty to evolve the
product to [eliminate] infringing uses.
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Key Issue

What is the capability of the system to
distinguish legitimate and illegitimate uses?
Bricks
Grokster
Credit
cards
Prescription drugs
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[SC: Today’s NYT]
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Leza: The Lessons of
History

Professor Wu’s diachronic review of the
contentious history of copyright’s
communication policy during the XX
century and these first five years of the
present century allows us to see the
incessant struggle between incumbent
disseminators (representing “property
rights” holders or actually acting as such)
and threatening entrants.
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Cont.

History has proved that the position assumed by
entrants is ultimately reduced to piracy. The moral
that can be drawn is that the judicial and political
struggle sooner or later produces an outcome in
which authors are compensated, generally
through some type of transfer payment, be it
monetary or in kind, that nevertheless allows the
challenger to price according to his technological
advantage thus increasing efficiency in the
dissemination process.
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Carroll: The Difficulty of
Predicting the Future

As a starting point, consider two business models
that are currently threatened by technological
advances: broadcast television with commercials,
threatened by digital video recorders, and music
sales, threatened by online music piracy. It is
difficult to imagine ex ante how new technologies
and the adjudication of the extent of copyright
protections will impact these technologies, but a
look at the recent and distant past suggests a
high degree of adaptability.
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Beurskens: Need Abuse
Initially

This approach is justified as unpredictable
long-term benefits will often outweigh shortterm social cost. Without some (initial)
abuse innovation as such might be stifled
(e.g. pornography on the Internet has lead
to widespread emergence of broadbandlines). …
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Cont.

Without widespread adoption of video-recorders
there would be less sales and rentals of movies.
Similarly, the original incentive for users to access
Napster might have been to download music by
famous artists, but the service might have
eventually opened up the market for lesser
known Garageband-style-groups (e.g. by
providing a “sounds-like”-service as offered early
on by MP3.com).
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Benner: Choice
Mechanisms in Copyright

Copyright is mandatory. … However, not all
artists necessarily need or even want copyright.
Complicated questions like contributory
infringement, where error costs are high, can be
evaded by making copyright entirely opt-in, like
patent. Alternatively, we can make copyright
easily waiveable at the point of creation. Perhaps
by affixing the symbol: . Artists can benefit from
wider distribution, over the long run. Moreover, if
they are not making money directly, little can be
lost from a new regime.
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Gottlieb: Gatekeepers and
Bottlenecks

One of the reasons for “why online
distribution matters”, is the fact that due to
internet characteristics, the effect of
gatekeepers and bottlenecks is
“weakened”, allowing fast distribution and
‘opens’ the market for more products, that
under the physical distribution, might not
have made it to the market.
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Gottlieb: Entry Paths for
New Content Creators

What would be today typical path of a new band? When
will such a band be able to ‘make a living’ out of their
product? The band will create the work, if a music
company should decide to sign them (that is the heavy
barrier) that music company will act as their agent
‘assigning’ to their benefit not only its financial resources,
but also its knowledge, connections, experience for
designing an appealing product and promote it to the right
audience target that was identified (the DMU - decision
making unit, maybe even by using the internet).
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Cont.

Will cheaper internet distribution channels lower
barriers and induce entry? Not so sure. Since
new artists will still need publicity and promotion
powers, it might just be that nothing will change in
regard to music companies’ power or with the
level of entry of new artists to the market. To go
even further – the new cheap internet distribution
might lower the music companies’ costs in a way
that will make them even more powerful than
today.
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Beurskens: No Judicial
Balancing Under Sony

Unlike Professor Wu I do not believe that Sony
provides any standard for “judicial balancing”,
as a judge can only guess blindly whether a
product has “capability for significant noninfringing use”. Even if there is such “capability” it
might never be realized. Instead Sony badly
disguises an “open approach” requiring longterm solutions for new technologies by the
legislative as opposed to individual decisions by
the judiciary.
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Beurskens: The Software
Arms Race

The option to update computer-software at
any time only seemingly reduces its
“lumpiness”. Since software is not customtailored, users require different aspects of
the software. Updates to help one group
may lead to unexpected regressions for
another. Insofar software-manufacturers
are reluctant to update their software.
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Cont.

Requiring software-manufacturers to update would also
lead to an “arms-race” against intentional circumventions
(while the filter catches “Madonna”, intentional misspelling
as “Modonna” can be used). The cost for countering these
abuses would be imposed upon the software-developers
who would be unable to achieve reimbursement from
either (legal) users or infringers. Dynamic updates would
also not be helpful against open-source-filesharingsoftware, where the users can easily eliminate the filters
by applying a patch.
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Beurskins: The Declining
Need for Disseminators

While the cost of distribution has been steadily declining,
the relevance of the disseminators in copyright-law has
steadily increased: The copyright-war has been moving
further and further away from the authors into the
distribution market (composer  publisher of printed
compositions  recording industry  broadcaster 
cable). While Sony’s BetaMax failed against the “open”
VHS-standard, the entertainment- and consumerelectronics-industries have partially merged - so we now
have Sony Entertainment and Sony Music on the plaintiffside against defendant Grokster.
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Bartholomeeusen: Sony’s
Mistake

Nevertheless, the Court missed the opportunity to
question to what extent the problem could have been
solved more efficiently in requiring Sony to make the
infringement technically impossible. Relevant questions
include: (1) Was the Court concerned that imposing such
a requirement would have been too costly for Sony? (2)
Did the Court consider not only that the benefits from non
infringing uses (A) was greater than the costs of infringing
uses (B) [A > B] but also that the cost of making the
infringing use technically impossible (C) was greater than
A – B? [C > A – B].
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Bartholomeeusen: Zero
Marginal Cost Goods

Digitization can modify the cost structure and
therefore the shape of the music market; for
instance, the Internet is now perceived and used
as a distribution medium. Marginal Cost (MC) is
even closer to 0, and demand for music is very
heterogeneous. Therefore, bundling is seen by
the music industry as the perfect commercial
strategy to maximize profits with regard to
digitization: adding a song to a bundle costs
nothing but captures some revenue.
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Cont.

Indeed, the more songs there are in the
bundle, the flatter the demand curve will be.
This strategy deters entry, and would
probably increase or reinforce the
consolidation trend that can be observed in
the music industry. However, it could also
be argued that the same technology might
as well allow new entrants and reverse the
consolidation trend.
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Bartholomeeusen: Napster
Is Good

It seems that Napster is socially efficient in the sense that
it reduces the costs of music distribution to nothing. Now,
the concern remains with the possible reduction in
incentive for creation (without speaking of the war of
attrition argument). As to that, Napster, which distributes
music and albums much more cheaply than actual albums
sales, helps to make authors more famous. The question
then becomes how will a band still be able to exploit its
famousness when it can earn no money from the albums
sales? This would give the band a huge incentive to
perform live more frequently. Thus, the market for live
performance would expand.
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Leza: The Content Relay
Race

The issue seems to me to be analogous to a relay race in
which competition forces an incumbent to handover the
stick to the superior more efficient entrant, but as
copyrighted works are an essential input for both, it is in
their own interest to guarantee not only the survival but
the future sustainability and flourishing of the creative
process. Online distribution would have nowhere to go
absent the product it distributes and the diversity and
quality of such product is strictly dependent on the
existence of adequate copyright protection.
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Leza: The Need for
Intermediaries

In the current system, as Professor Wu points
out, authors are strongly dependent on
incumbent disseminators. This is due to
comparative advantages that specialized
disseminators have vis-à-vis authors. Such need
for specialized intermediaries has not fluctuated
in the wake of the Internet revolution and there
are only a few examples of rich and famous
authors who have attempted to directly distribute
their work through digital means.
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Cont.

I therefore concur with Professor Wu in his
skepticism towards Jane Ginsburg’s
contention that digital media simply by
making the means of production and
dissemination available to any computerequipped author, could provide him with a
“realistic opportunity” to bring his work to
the public without having to depend on
traditional intermediaries.
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Lampl: Prospect Theory
and Innovation

Prospect theory would argue that government should
provide strong property rights and provide those rights
early. Content holders with strong property rights have a
distinct incentive to create new and interesting distribution
mechanisms to further their goods. Yet, some
commentators fear that content holders will control future
innovation in distribution; that innovation will be stifled by
the content holders; and that distribution or technological
advancements in distribution will be controlled by the
content holders. But prospect theory would argue that this
control is not normatively bad but in actuality a positive
development given the incentives of the content holders.
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Lampl: Managing
Technology Changes

Content holders should support innovation in
distribution technology and should also have the
strong incentives to ensure the optimal rate of
technological advancement in those technologies
at the consumer level. Ensuring the optimal rate
of change in technology should not be
understated given the difficulties of changing
standards when there is decentralized investment
in the standard by consumers.
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Lampl: The Bad Match
between Theory and Reality

Descriptively, at least, non-content holders
seemingly create innovative distribution networks
and content holders oddly seem to fight the new
distribution networks. This seems at odds with
prospect theory. In fact, without the benefit of
history and current events, one might have
thought that the content holders would be
subsidizing innovation in distribution to more fully
gain from their property rights in the content.
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Lampl: Vertical Integration
and Entry Incentives

Napster may have arrived too early. It did not quite have
the power to monitor its own network efficiently. Free
music did prevail for some time and it still is a major
problem for the record labels. Maybe the fighting
between the content holders and the distribution
technology providers concerns the optimal rate of
technological change. The content holders perhaps have
a greater incentive to ensure the proper rate of change
and ensure that a new technology does not enter the
market until it can adequately control piracy and other
negative externalities.
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Cont.

This “story” may not fully explain the intense
fighting that occurs between distribution providers
and content providers but it does have some
theoretical appeal. The distribution providers are
not internalizing the full costs of their decisions
whereas an integrated firm – one which owned
both content and distribution technology may
have waited to unleash Napster until it could
efficiently and effectively control the technology.
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Bartholomeeusen: Sony
and Ads

In regard to the social benefits, VCRs made it more likely
that viewers would watch fewer advertisements than
when watching movies directly on TV. … From a social
perspective, the harm caused by the fast forwarding
technique (A) should therefore be the reduction in
advertisement revenues for the network TV (which
ultimately amounts in less movies creation) (B) – the
positive value that viewers extracted from this new feature
(C). [A = B - C]. Of course, it is not to say that there is no
distinction between how viewers can value something
from the question how valuable that is.
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Gottlieb: How TV will
Change

The issue of the ‘free TV’ claim can also reach a different
solution – a different kind of trade off between the
advertisers and viewers. We can have the viewersconsumers to agree to a different lesion of the content –
using in content advertisement. Product placement ads
started in the American movie industry at the eighties, is
not a new idea, but given the decrease of ‘conventional’
TV commercial (not only due to the technology means but
also because of emergence of more sophisticated and
‘fed up’ viewers) it becomes more and more popular
among advertisers.
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Carroll: The VCR v. The
DVR

The VCR case can arguably be redefined as the
victory of laziness and limited technology over the
end of the broadcast television economic model.
People were neither motivated enough nor savvy
enough to tape shows to watch in the future with
their remote handy to skip the commercials. …
Still, the programmable DVR overcomes both
problems with expanded storage and, in some
manifestations, the ability to skip commercials
entirely with the touch of a button.
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Carroll: Business Responses
to Business Problems

The legal response of the content providers to the
DVR and VCR was predictable, but the non-legal
responses are perhaps more interesting. The
possible disruption of the traditional economic
model of broadcast television has accelerated a
trend in advertising. As viewers become more
familiar with advertising strategies and
commercial breaks, television has become more
adept at incorporating advertising messages into
the shows themselves.
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Carroll: Responding to Tech
Change

Two ideas at least should cause concern when
these potential coping mechanisms are
discussed. First, how do imbedded product
placements affect the artistic qualities and
sociopolitical aspects of broadcast content and
music? Second, can a presumption be made that
music and broadcast content providers can
successfully adapt to a new technological regime
that renders some aspects of their business
model obsolete?
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Carroll: Cont.

A further option to solve this problem would
be to allow bifurcation. Content providers
could designate some portion of their
products as not commercial-skippable.
Viewers with DVRs would not be able to
skip commercials entirely (even if they
could fast forward), ensuring more of an
audience for the advertisers.
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Carroll: Yes, They Can Make
Money: Do We Want That?

For judges dealing with challenges to Tivo and Napster,
the question of whether the music and broadcast
industries can make money under in a world of file
sharing and commercial-skipping should not be difficult to
answer. … Even if a judge or legislator is certain that filesharing will not bankrupt the music industry, she may not
know whether the adaptations that industry will make
might culturally bankrupt music. Therefore,
acknowledgment or expectation that an industry will adapt
to new technology cannot weigh very heavily in any
judicial or legislative decision regarding the acceptability
of that technology.
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Chen: Wu’s Three
Approaches

Professor Wu summarized in his paper (the
Communication Paper) three approaches
as to communication (I think it also includes
competition and innovation) policy as to
copyright: the open approach (or
destructive creation approach), the
stewarded approach (or strong copyright
approach) and the judicial balancing
approach.
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Chen: Separating Wu and
Picker

The reason that the Sony court errs, according to
Picker, is that it failed to provide such an antiinfringement incentives for Sony to design its
technology in a fashion so as not to induce
infringement of copyright, without demonstrating
that the social benefits of using current Sony
technology would exceeds the social harm
caused by the infringement to current copyright.
…
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Chen: Cont.

To me, what Wu and Picker differ seems
about the default rule in terms of copyright
and entry of intrusion technology: copyright
owner enjoys a per se right not to be
infringed (Picker), or new technology
entrant has a per se right to infringe and
enter into the market (Wu).
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Chen: The VCR and the
Compulsory License

Without knowing whether the net social
benefits would be positive or negative, it
seems therefore sensible impose a
compulsory licensing regime and make
Sony to pay a royalty out of its proceeds of
VCR sale.
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Davis: Why Picker is Wrong

My first puzzle is why the proper test should be different
for networked products than non-networked. In both the
case of a networked product and a non-networked
product, we should be asking the same two questions.
First, should the product be on the market at all? (Do the
benefits, including potential future ones, outweigh its
harms?) And second, do the potential benefits of
networking the product (e.g. ability to stop infringing uses)
outweigh the costs of networking the product? If these
are always the questions to ask, I am not sure why the
proposed test needs a bifurcated analysis.
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Davis: Just Do Cost/Benefit

My second puzzle is why the proposed “primary use”
(which applies to non-networked products) test is the
proper one. If we are trying to make manufacturers
produce only products whose benefits outweigh their
costs, I don’t see why the product’s “primary” or
“dominant” use is relevant. What matters is how the
overall harms the product causes compare to its overall
benefits. If the product imposes harms (from copyrightinfringing or other uses) that outweigh the benefits, the
product simply should not be on the market.
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Davis: Or Do Strict Liability

A third test might be even cheaper to apply,
however: Why not impose strict liability on
manufacturers when their products are used for
copyright infringement? This test would give
manufacturers the appropriate incentives
because they would be able to afford to sell a
product only if its benefits (as reflected by the
price they can charge) exceed the costs of strict
liability for copyright infringement.
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Auricchio: What Harms
Should We Take into Account

There are two elements of this analysis that raise
interesting issues. First, in the example of the
product creating $ 10 million of beneficial uses
and only $ 100 of harmful uses, one could
wonder whether a social harm of $ 100 is really
relevant, even if it could be eliminated by a $ 5
improvement. Maybe, following a strict approach,
the answer to this question should be positive,
given that copyright does not adopt a de minimis
approach.
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Auricchio: Understanding
Use Across Time

Second, I don’t understand how the problem of design
incentives solves the issue of the balance between
infringing and non-infringing uses. In other words, if it
provides a solution to one problem (a design that
eliminates infringing uses should be promoted), it seems
to add a further problem. Imagine that in the previous
example, due to technological constraints, the $ 100
harmful effects cannot be immediately avoided. In this
case, shouldn’t also uses prohibited today, but that could
be eliminated in the future, be taken into account? Or
does this mean that a product yielding a $ 10 million
beneficial uses should be banned if it produces only $ 100
of harmful uses that can not be instantly eliminated
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Auricchio: When Should We
Allow Vertical Integration?

Cases like My.Mp3, Napster and Aimster
show a strong sense of hostility towards
distribution systems different from the ones
controlled by copyright owners. This raises
problems of vertical foreclosure that create
the effect described by Paper 1, i.e. to
disincentivize the creation of innovative
distribution systems.
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Lund: The Bargaining
Solution

Copyright communication’s policy disputes have typically
been solved by a period of fighting between incumbent
and competitor, followed by some sort of compromise
whether by statute, court decision, or Coasian bargaining
after the fact that often resulted in a compulsory license
system. The advantage of this program was that, as Wu
points out, that the amount of time and money spent
disputing the issue was a substitute for a market
determination of whether the benefits of a new technology
outweighs the costs associated with it.
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Lund: The Use of
Compulsory Licenses

Because theoretically parties will Coasian bargain around
whatever rule is adopted, the most efficient outcome will
be achieved by post judgment bargaining. Courts and
Congress sometimes try to jumpstart this process by
enacting a liability rule—compulsory license—instead of a
property rule, perhaps because of concerns of a bilateral
monopoly. The basic features of a compulsory license
scheme is that it guarantees that the work will be
available, and it remains available regardless of how
many other parties have already received a compulsory
license
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