Compensation for
private copying :
an economic analysis
of alternative models
Final Report
July, 2010
• Compensation for private copying:
an economic analysis of alternative
models
July, 2010
By
José Luis Ferreira
ENTER - IE Business School
María de Molina, 6
28006 MADRID (Spain)
Tel.: (34) 917 875 107
Fax: (34) 915 647 691
[email protected]
www.ie.edu
Contents
Foreword . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
3
Executive Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
5
Synopsis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
7
1 . Some economics . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
1.1. The economics of copyright . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
15
1.2. The economics of private copying . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
18
1.3. The economics of private property rights and their implications to private copying . . . . . . . . . . . . . .
21
1.4. The economics of fair compensation for acts of private copying . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
23
2 . The current copyright levies system . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
2.1. Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
31
2.2. Economic cost of the current system . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
34
2.3. Apparent economic benefits of the current system of copyright levies . . . . . . . . . . . . . . . . . . . . . . . .
45
3 . Alternatives to the current system of compensation for private copy . . . . . . . . . . . 51
3.1. Alternative 1: European harmonised compensation system administrated at national level . . . . . . .
52
3.2. Alternative 2: Payment of levies at retail level . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
55
3.3. Alternative 3: European harmonised compensation system administrated at a European level . . . .
57
3.4. Alternative 4: Free choice of licensing collecting society within the EU . . . . . . . . . . . . . . . . . . . . . . . .
58
3.5. Alternative 5: Application of levy to original work . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
60
3.6. Alternative 6: Compensation collected as indirect taxes on digital devices . . . . . . . . . . . . . . . . . . . . .
64
3.7. Alternative 7: Payment of fair compensation through State fund . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
65
3.8. Alternative 8: Compensation clause in the right-holders’ labour contract . . . . . . . . . . . . . . . . . . . . . .
67
Appendix . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 71
Compensation for private copying: an
economic analysis of alternative models
3
Foreword
Copyright Levies have existed for more than 50 years as a means to compensate right
holders for the act of private copying of music, audiovisual works and books. Over the
years the copyright levy schemes have expanded within the EU - both in geographical
and technological terms in order to address more countries and more products.
Yet these schemes have not been researched until today from a perspective of its economic impact on the markets.
Given the rapid development of technology, content (from analogue to digital) and the
subsequent change in consumer behaviour, it is now the right time to look at the current
copyright levy systems and compare their economic impact with some alternative models of compensation.
The underlying Report may serve as a basis for fostering discussion with regards to a
potential redesign and realignment of private copying compensation models in the future.
ENTER - IE Business School
Compensation for private copying: an
economic analysis of alternative models
5
Executive Summary: Copyright Levy Systems - a nuisance by economic standards
Research reveals that copyright levies
cause an economic loss of at least 51.2
Cents for each Euro collected
In the early 60’s of the last century, private
copying of music became a reality for the
consumer through the advent of analogue
tape recorders. Legislators reacted to this
technical development by introducing a
‘rough justice’ system in the form of copyright levies. Monopolistic entities, called
Collection Societies, were mandated by
Governments to collect those copyright
levies from the manufacturers and importers of devices dedicated to record copyright works, and to distribute them later to
right-holders whose works may had been
copied by consumers. Arguably a logical
decision, as back then the individual consumer who performed the copying act
was not traceable and then-existing tape
recorders and recording media were specifically intended to make private copies of
copyrighted works.
Today nearly 50 years later the world of
copying has changed dramatically from
tapes to USB sticks, from dedicated personal audio or video copying devices to
multifunctional devices for either personal
and/or professional use, and increasingly
from analogue content to digital content.
Since the advent of Copyright Levy systems, practically the entire copying landscape has changed: devices, distribution
methods, copying behaviour and even the
copyrighted works that are the subject of
private copying. Content is now consumed
in a manner which has little or nothing in
common with the practices of the 60’s,
70’s, 80’s and even the 90’s. What has not
changed with time are Copyright Levy systems themselves. Why is this?
This may be due to the fact that Copyright Levy systems have never been analysed from the perspective of what harmful financial impacts may result from the
status quo. However, research undertaken
by the Spanish think-tank Enter - IE Business School compares economic effects
of current copyright levy schemes against
those of alternative methods to compensate right-holders for private copying of
their copyrighted works.
A conservative estimate of the quantifiable
costs resulting from current Copyright Levy
systems show that they cause an economic waste of at least 51.2 Cents for each 1
Euro collected according to ENTER-IE. For
example, if Legislators were to decide to
change the system and place levies on
the original copyrighted work itself rather
than on digital devices suitable for copying,
then the financial welfare impact would be
reduced from 51.2 to 19 cents per 1 Euro
collected. Other alternatives such as Indirect Taxation or National Funds, a system installed in Norway to secure private
copying compensation, would be the least
distorting options from an economic perspective. Even some simple harmonisation
measures to the system and some minor
changes like having levies collected at a retail sale level, rather than at a manufacturer
or importer level, could already reduce the
financial impact and the causation of further economic waste.
All in all current Copyright Levy systems are
no longer an adequate nor efficient solution to the challenges posed by technological and societal innovation, now or in the
future. They are a poison to the economic system and do not even support rightholders as mandated. It is time to replace
these 50 year old relics with better, more
efficient alternative methods that encourage the rapid deployment of legitimate new
business models.
We now have the opportunity to avoid extra
economic waste and bureaucratic burden.
Efficiency and innovation should be the key
concepts of the future, ensuring that the
Copyright systems evolve in tandem with
the technologies within scope.
ENTER - IE Business School
7
Compensation for private copying: an
economic analysis of alternative models
Synopsis: Research on alternative compensation models for private copying
i. Scope and Conclusions
This research report examines the economic principles that are relevant to the
analysis of compensation for the act of private copying of music, audiovisual works
and books. It then studies and compares
a number of alternatives to implement this
compensation, concluding that current
copyright levy systems are, in economical
terms, the most harmful alternative to compensate right holders for private copying.
ii. Overview
From an economic perspective, the level
of cultural production may be considered
a ‘public good’ if the society as a whole
decides that market provision does not
achieve a desired level. This is a political
decision. Once it is taken, standard public goods economics indicates that public
financing is the way to implement the solution. Indeed many countries already promote and subsidise the production of literature, music, and even films in one way
or another.
Ideas, on the other hand, are not, and cannot be considered ‘public goods’. An idea
has no economic value until it is encoded
in a book, disc, concert, conference, or
any other communication device. These
devices are either ‘private goods’ or ‘local
public goods with exclusion’. In general,
markets are very efficient in the provision
of such goods.
It is the technology behind the production
of some of these private goods – books,
pre-recorded CDs and DVDs typically –
and not the production of the local public
goods with exclusion of concerts, conferences, among others, that may cause an
economic problem. The problem lies in the
fact that part of the production costs, for
example the writing of a song or writing of
a book, can be avoided by a rival producer
that makes a copy of the original. Thus, piracy and other illegal copying behaviours
including use of Peer-to-Peer (P2P) technologies, may reduce the demand of the
original producer (while there are good arguments that challenge this view, this is not
the topic of the present research). However, as the European Commission clearly
states, compensation for legitimate private
copying cannot be used to compensate for
piracy and other illegal copying behaviours,
including the use of P2P technology.
The act of private copying is not the cause
of an inefficient market. In fact, the technology that makes private copying possible increases the consumer’s value of their legitimately purchased goods. The reason being
that now the consumer is enabled to use
the goods in new ways. Consumers’ higher
valuation leads to a new market equilibrium
that is as efficient as the old one. Typically,
the new equilibrium implies a higher demanded quantity, although the new situation may be proportionally more beneficial
for the consumer than for the producer.
This asymmetry is the only economic basis
for compensation. From the economic efficiency perspective, the asymmetry needs
no correction, but politically, it may be interpreted as a harm that needs correcting.
Once the decision to compensate is made,
an economic analysis may help to discuss
the merits of the different alternatives.
iii.Alternatives to the Existing Compensation
Schemes
Below we analyse the costs of the current system of compensation via copyright levies and the costs of various alternative compensation schemes/methods.
The alternatives considered in this report
are described in Table 1 below. They represent either different amendments to the
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8
Compensation for private copying: an
economic analysis of alternative models
Table 1. Amendments/Alternative Compensation Schemes
Amendments to
improve the
current
Levies System
Alternative
Compensatory
Schemes to
replace the
current Levies
System
Alternatives
Description
1. European harmonised compensation system
administered at national level
System of copyright levies administered by collecting societies in each country
subject to a set of common European rules on levies assessment and payment
2. Payment of levies at retail level
Refine current system by having final-tier retailers that sell to consumers (and
not manufacturers and importers) held liable for payment of levies to collecting
societies
3. European harmonised compensation system
administered at a European level
Similar to alternative 1, but with collection and distribution administered at a
single European level
4. Free choice of licensing collecting society
within the EU
‘One-stop-shop’ system that will permit debtors to pay copyright levies to
one-single collecting society in charge of collecting and distributing those levies
European-wide
5. Application of levy to original work
Payment of compensation to be collected directly as part of the price of the
music CD, film DVD or book that may be copied
6. Compensation collected as indirect taxes on
digital devices
Application of a % fee under the form of an indirect tax on certain categories of
devices manufactured or imported in Europe
7. Payment of fair compensation through State
fund
Allocation of an annual amount from Governmental Budget to compensate right
holders for private copying exception
8. Compensation clause in the right-holders’
labour contract
Include compensation for private copying as one of the various intellectual
property rights compensated by producers and publishers when hiring authors
and artists
current levy system or alternative compensation mechanisms replacing the existing system.
iv.Costs of Current Copyright Levy System
The conclusions from our research on
the current system when scrutinised from
an economic point of view can be summarised as follows:
•
•
The current system of copyright levies on an expanding number of electronic devices that is in effect in most
European countries, is very costly in
economic terms. Its only merit is that
it represents the Status quo and that,
consequently, those that benefit from
it will find it more attractive, and will
defend it fearing that a change may
damage their interests. The current
system contains several quantifiable
and non quantifiable costs.
The quantifiable costs of the current
levy system measured as part of the
present analysis include direct losses
in the market (mostly to consumers),
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losses to device manufacturers operating in the ‘honest’ market, losses in
the grey market, losses due to inefficient price policies, and losses due to
litigation. A conservative estimation of
the quantifiable costs to the economy
as a whole adds up to 51.2 cents lost
per collected Euro. In other words, collecting 1 Euro implies at least a cost of
51.2 cents to the economic system. In
addition, there are non quantifiable
costs of the current levy system such
as the cost of legal uncertainty, the cost
of being business unfriendly in a global
economy, the cost of being unfair to
consumers and business customers
(which by definition cannot make ‘private copies’) and to producers.
The amounts below represent the
magnitude of the various costs to the
whole economy resulting from each
Euro collected in copyright levies under
the current, non-harmonised scheme.
Not included in the analysis above
is the percentage of each Euro collected by means of levies that do not
9
Compensation for private copying: an
economic analysis of alternative models
use’ solutions are now technologically
available. If it were true that the act
of private copying introduces a distortion in the market, only a mechanism
that charges per actual private copy
can serve as a fair corrective mechanism. Since the levy cannot be linked
to the actual making of every private
copy, it is limited in its ability to serve
as a corrective mechanism. In this respect, the current mechanism is no
better than, for instance, alternative
6 above, that applies the levy in the
market for original work (books and
pre-recorded CDs and DVDs). The
European legislation recognises this
fact, and mandates that any system
must be compensatory in nature rather than a correction to economic inefficiencies. The appropriate compensation can be achieved through many
different mechanisms, whose main
pros and cons are detailed below.
Table 2. Quantifiable costs per 1€
collected in copyright levies
Types of costs
Amount
% of total
Loss for consumer welfare
19.2 cents
37.50%
Loss for honest producers
15.8 cents
30.86%
Loss from grey market
10.1 cents
19.73%
Loss from inefficient price policy
2.3 cents
4.49%
Loss from litigation
3.8 cents
7.42%
51.2 cents
100.00%
TOTAL
reach the respective genuine rightholders subject to private copying (for
example deduction made by collecting societies for administrative costs
or management fees, deductions for
cultural funds allocation, or funds that
are not distributed to right-holders
because collecting societies cannot
identify them or because right-holder is not a member of the concerned
collecting society and does not actively ask for this compensation to be
transferred). These additional deductions or funds are not quantifiable as
a loss to the whole economy and are
consequently not reported as a cost
in the calculation above.
•
The reason generally argued to impose a levy on the products that
contain technology facilitating private copying, is that these types of
schemes are supposed to be better,
as they target the owners of devices
that are assumed to make private
copies. Although this ‘rough justice’
system was arguably the only real option in the analogue world, customer
behaviour (purchasers such as public administrations, commercial firms
and many private consumers that do
not engage in private copying) and
technical possibilities are different in
the current digital world when using
the devices, for example, ‘pay-per-
•
The current system of copyright levies distorts the Internal Market and
appreciably affects trade between
Member States. For example, products subject to levies in the country
of manufacture or first importation
find barriers for exportation to other
Member States, as process for reimbursement of levies upon exportation, if any, are subject to cumbersome administrative burdens. As a
result of this, exported products are
subject either to double payment of
levies in case another levy system
exists in the country of destination or
to non-competitive prices compared
with similar products that did not pay
levies first. In addition, a high ratio of
grey market imports by non-honest
producers result in unfair competition
for honest producers that comply
with their copyright levies payment
obligations. Finally, legal uncertainty
about copyright levies systems existing in the country of destination act a
barrier to trade and is a major factor
of litigation.
ENTER - IE Business School
10
•
Compensation for private copying: an
economic analysis of alternative models
With the exception of some Member
States (Finland, Sweden and Denmark) providing appropriate levy exemption processes for business users, the current systems imply that
copyright levies are charged indiscriminately to all potential users of
certain products, even professional
customers acquiring these goods for
their own business activities. As far
as those users are not legitimised to
make private copies, levy payments
mean an obligation to incur in unfair,
non-equitable and disproportionate
payments against which users receive no economic value and no consideration.
v. Advantages and Disadvantages of Individual Alternatives
•
Alternative 7 (Payment of fair compensation through State fund) primarily, but also Alternative 6 (Compensation collected as indirect taxes on digital devices), are the least
distorting models from an economic
perspective. The compensation goes
from all consumers and producers in
the economy to the authors and producers of intellectual work for whom
compensation is mandated. These
alternatives acknowledge the fact
that the decision to compensate is a
political one, and, therefore, that the
society as a whole has to pay for it.
Between these two alternatives, alternative 7 is optimal, as it minimises
distortion on the market and allows
for differing levels of compensation in
different countries. Furthermore, it is
well-known that distortion imposed
from a direct tax is in general lower
than the one from a comparable indirect tax.
•
Alternative 2 (Payment of levies at
retail level) would be a simple but effective improvement of the current
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system, as it helps fighting the grey
market and the double payment of
the levy that often takes place in case
of export of goods, for which a significant levy has already been paid. It also
reduces the administrative burden for
importers /exporters, and consumers
engaging in cross-border commerce.
It also allows for a different treatment
depending on the identity of the final
consumer. For example, it can easily
avoid charging the levy to the public
administration or to commercial firms
by applying it to private consumers
only. This mechanism is compatible
with the current system and with all
the alternatives 1, 3, 5 and 6.
•
Alternative 1 (European harmonised
compensation system administered
at national level) and Alternative 3
(European harmonised compensation
system administered at a European
level) call for European harmonisation.
The basic limitation is that a maximum
levy per product would need to be
determined at European level to avoid
market distortions. We estimate that
the application of a copyright levy in
major electronics commodities in the
range of 1-3% would yield the same
amounts as would be collected under
the current system, if there was no
grey market. These alternatives can
even be adapted per type of device
and adjust the levy depending on the
estimation of its use for private copying. However, the higher the levy, the
greater the risk of a grey market developing. Therefore, there is a limit
to the magnitude of the levy. A European administration (Alternative 3)
would avoid some of the administrative problems that the collecting societies face with paying non-nationals.
The quantifiable cost of these mechanisms, not counting the differences
in the administrative burden between
the two of them, is estimated to be
about 31.7 cents per collected Euro,
11
Compensation for private copying: an
economic analysis of alternative models
almost half of the cost of the current
copyright levies system.
•
•
Alternative 4 (Free choice of collecting society) is essentially similar to the
‘one-stop-shop’ system already requested by the Commission to collective entities in other IPR areas (music
online), and would mean opening up
competition among different collective management entities across the
Internal Market. This system avoids
the problem of double payment of the
levy for re-exportations and would
avoid many cross-border trade issues, also for consumers that engage
in cross-border online shopping. For
example, double payment of levies in
several countries in case the products
are moved from one country to another one, avoiding barriers existing today as a result of nonaligned systems
to reimburse levies upon exportation,
and avoiding costs resulting from disparate collection and reimbursement
systems in each country. They could
be replaced by a centralised collection process and the leveraging of a
cross-charge system that is already in
place in several instances, in virtue of
reciprocal agreements between collecting societies.
Alternative 5 (Application of levy to
original work) calls for moving the
charge of the levy to the original recorded CDs, DVDs and books. In this
system, the payment of the compensation fee would be collected directly as part of the price of the original
work when the work susceptible to
being copied is purchased. Therefore,
buyers of the original work such as a
book, a music CD or a film DVD that
are legally allowed to make private
copies would pay the compensation
on the original work. An estimation of
its application on the Spanish music
market in the year 2005 shows that a
mere 2.5% levy on music CDs would
have been enough to collect as much
compensation as what was actually
collected via copyright levies. In the
worse-case scenario analysed for the
music market, the economic costs
are estimated to be 19 cents per collected Euro, which is much lower than
the current systems or alternatives 1,
2 and 6. Similarly, a levy lower than
1% on books would have provided authors with the same amount as collected under the current system, albeit in a less distorting manner.
•
The pros for Alternative 6 (Compensation collected as indirect taxes on digital devices) are, in part, the same as
for alternatives 1 and 3 that called for
European harmonisation, except that
the collection takes place in the form
of a tax, and not as a private copyright
levy. The fee would be collected using the same infrastructure as the VAT
system such as declaration rules, exemption rules, collection procedures
etc. From the economic perspective,
consumers’ behaviour is no different
if the price rises because of a tax or
a levy. Thus in principle this system
has the same economic consequences as the current levy system. It has,
however, an interesting feature, as it
is collected by the State Administration, and may also be managed by
the political authorities and not by the
collecting societies. This reflects better the fact that the compensation is
in our view, a political decision based
on political considerations of fairness.
This being the case, the state authorities must make the decisions on how
to redistribute the collected tax, and
this may be done by allocating to the
collecting societies, the responsibility
of this distribution among right-holders, or directly based either on own
state authorities’ criteria (as it does
today with cultural related public aids),
or on data to be provided by collecting societies. The quantifiable cost of
this system is about the same as with
ENTER - IE Business School
12
alternatives 1 and 3, i.e., 31.7 cents
per collected Euro.
•
Alternative 7 (Payment of fair compensation through a State fund), as
mentioned above, seems the ideal
(and therefore preferred) compensation scheme from an economic point
of view, minimising market distortion
and allowing a different approach
customised to the particular circumstances of each Member State. It has
the caveat that indirectly imposes the
financial burden on all tax-payers, and
not only on those that are presumed
to make private copies either because
of their purchasing of ICT/CE devices
(current levy systems and proposed
variants), or purchasing original works
that may be copied as per alternative
5. However, this option does not deviate substantially from current public
funding aid provided to the cinematographic industry or some other cultural industries and is fully aligned with
the political component inherent on
current levy systems.
•
Finally, Alternative 8 (Compensation
clause in the right-holders contracts)
would imply the application and negotiation of intellectual property
rights (including private copying fair
compensation) of all right-holders,
except producers and publishers, as
ENTER - IE Business School
Compensation for private copying: an
economic analysis of alternative models
if they were labour rights. This mechanism would be very comparable to
the one in place in the United States
and would imply including intellectual
property rights in labour legislation.
These can be negotiated by and between entrepreneurs (publishers, record and audiovisual producers), and
authors or the owners of the products (audiovisual, musical authors,
interpreters etc). We do not provide
a quantitative estimation of the cost
of this mechanism, as this quantification itself may be the subject of
a separate research. However, one
can foresee the obvious benefits of
this system, such as a better guarantee for each right-holder to receive
their respective share of payment
based on the amount of physical
sales, instead of relying on estimates
by each local collecting society on
their sales, amount of private copies
of their work vs. copies of other right
holders, value assigned to each private copy and similar proxies.
vi.Comparison Table of Alternatives
The table below compares the current system and the various alternative compensation mechanisms analysed by ENTER to
provide compensation for private copying
to right-holders.
13
Compensation for private copying: an
economic analysis of alternative models
Table 3. Alternatives to the current system
0.
1.
2.
Current
System
European
Harmonisation
administered at
National Level
Payment at
retail
level
51.2% (*)
31.7% (*)
31.7% (*)
31.7% (*)
Not applicable
19% (*)
Consumer
friendly
NO
NO
NO
NO
Not applicable
Slightly
Slightly
YES
YES
ICT / CE business
friendly
NO
Slightly
Slightly
Slightly
Not applicable
YES
YES
YES
YES
Avoids or minimises
double payments
NO
If combined
with 2
YES
If combined
with 2
YES
YES
YES
YES
YES
Avoids or minimises
payments by noncopying users
NO
If combined
with 2 or 4
Slightly
If combined
with 2 or 4
If combined
with 2
Slightly
NO
NO
YES
Flexible to target
harmed right-holders
NO
NO
NO
NO
NO
NO
YES
YES
YES
Avoids or minimises
litigation
NO
YES
If combined
with 1 or 3
YES
YES
YES
YES
YES
YES
Possible to
combine with other
alternatives
Not
applicable
2, 4, 5
1, 3, 4, 5
2, 4, 5
1, 2, 3
1, 2, 3, 4
Not
applicable
Not
applicable
Not
applicable
1
2
3 (4 if
combined
with others)
3
3 (4 if
combined
with others)
3
4
5
Not quantified
Economic Waste
General Economic
Assessment (1-5)(**)
3.
4.
5.
European
Free Choice Levy on Original
Harmonisation of Collecting
Work
administered at
Society
European Level
6.
7.
8.
Indirect
Tax
National
Fund
Clause in
Labour Contract
As low as any As low as
indirect tax any direct tax
Low (not
quantified)
(*) Economic waste will be lower if that alternative is combined with other compatible schemes (e.g. payment by retailers in a European harmonised system administered
either at a national or European level).
(**) General assessment of each option is based on their economic impact and ability to avoid current problems. Lowest punctuation is assessed as 1 and maximum (best)
punctuation is assessed as 5.
ENTER - IE Business School
1.
Some economics
‘The protection of intellectual and industrial property - copyrights, patents, trademarks or
designs - is at the heart of a knowledge-based economy and central to improving Europe’s
competitiveness. This is a priority for reform: grounded on sound economics, not just legal
concepts, and concentrating on solutions that foster innovation and investment in real life.’1
Charlie McCreevy
Former EU Commissioner for the Internal Market
1.1.
The economics of copyright
The arguments in favour of a copyright system are, more or less, the same general arguments in favour of granting monopoly power to the authors of any other intellectual work
(such as patent granted to the author of an invention).
The standard economic arguments take the following forms:
1.1.1. Ideas as public goods
The economic definition of a public good is as follows: a good that is costly to produce,
and that, once produced, may be consumed by all without the need to pay a cost. Further, consumers cannot be prevented from consuming the public good (non-exclusion),
and the consumption of the good by one consumer does not preclude consumption by
any other (non-rivalry).
The economic consensus is that, for goods satisfying this definition, a market mechanism fails to provide an efficient amount of the good. A possible alternative to markets is to require public financing to produce the goods (for instance, after taxing the
consumers and firms that benefit from the existence of the public good).
1
Speech of 21 November 2006 at the European Parliament’s Committee on Legal Affairs. Quoted in the ‘Creative Content in a
European Digital Single Market: Challenges for the Future: A Reflection Document of DG INFSO and DG MARKT’ (Oct. 22, 2009)
16
Goods like literary works or recorded songs
do not exactly fall into this category. Unlike
the light of a lighthouse, the idea of a novel
or a song cannot be a public good, as it
cannot be consumed by anyone, except
(perhaps) the person or persons that have
the idea in their minds. It can only be consumed after the idea has been encoded
in a copy (a book, a CD, a concert or any
other mean of transmission). Since we are
heading towards the economics of private
copying, let us focus on books, music CDs
and film DVDs. These goods contain copies of the idea. The consumption of copies
neither diminishes the ability of the creator to make more copies, nor the ability of
other consumers to consume other copies. But, at the same time, these copies are
private goods. If a person owns a book, a
pre-recorded CD or a pre-recorded DVD,
no one else owns that same copy.
Nevertheless, some countries decide that
a high level of cultural life is desirable, and
that this level is not sufficiently provided by
the market. This may be justified if people
enjoy not only the private act of reading a
book or attending a concert, but also enjoy
living among people that consume these
goods. In fact, such activities are very often subsidised (as good economics would
advise). For instance, according with the
last report available for Spain2, live music
generated 535.9 Mio € in revenues in 2003,
of which 115.9 Mio € came from the sale of
tickets, and the other 420 Mio € (more than
78%) mainly from public financing.
There is also a great deal of public funding
(or private, but required by law) for movies3
and for literary production4. Thus, at least in
2
White Book of Music in Spain (Promusicae , 2005) produced
for Promusicae by PriceWaterhouseCoopers. Available at
http://promusicae.es/english.html (under ‘Resources’).
3
As an example, the Spanish law requires that all TV channels
invest 5% of their revenues in European cinematographic production, 60 % of which must be of Spanish origin.
4
Among other measures, books have a lower VAT as cultural
ENTER - IE Business School
Compensation for private copying: an
economic analysis of alternative models
Spain there is already a big effort from the
part of the State to promote this kind of intellectual work. This can be easily demonstrated for other European Member States.
1.1.2.The production of encoded copies
of ideas constitutes a natural
monopoly
Because of the above discussed characteristic of the books, music CDs and
film DVDs, even if intellectual goods are
presented as public goods, the economic rationale that is claimed to defend a
copyright system is more in line with what
economists call a natural monopoly.
It is argued that it takes a big fixed cost to
generate an idea, and a very low cost to
produce each of the copies that encode
the idea. As such, the economic problems
present in the production of books and
music CDs are not different from the production of many other goods in the economy. The problem is this: perfect competition (and economic efficiency) requires
that the product is sold at marginal cost
(the incremental cost of producing just
one more unit of the good). If the marginal
cost remains constant (or decreases) as
more units are produced, selling at marginal cost implies that the fixed cost cannot be recovered, and thus, that there are
no incentives to start production for this
commodity in a competitive market.
The conclusion is that either the market for
this good is not competitive (and then it is
inefficient), or that a system different from a
free market operates (e.g., some regulatory
mechanism applies). In the recent years,
the economic and political consensus has
been developed in favour of shifting from
regulated markets to more competitive
goods (for example in Spain a 4% rate compared with general
18% VAT rate).
Compensation for private copying: an
economic analysis of alternative models
ones. This is the case, for instance, of the
Telecommunications or Energy industries.
Production in both these industries requires
a big fixed cost along with a low marginal
cost. In the past, regulation was based on
different compensation schemes for the
producers. For instance, some mechanisms granted a monopoly status to the
producer to avoid duplication of the fixed
cost (hence the term ‘natural monopoly’),
and required it to sell at a political price
close to marginal cost, but high enough to
recover the fixed cost. A long time ago, it
was realised that mechanisms like this encouraged an overestimation of the costs
and gave firms little incentive to innovate.
Thus, competition (even if not perfect) was
presented as a much better alternative.
The industry of producing encoded copies
of intellectual work has traditionally worked
as a market (perhaps not a perfectly competitive one, but competitive enough), and
not as a regulated monopoly. However, it
has one more important feature not shared
by other industries with the economic characteristics of a natural monopoly. The owner of an encoded copy may make additional
copies at a low marginal cost, but may not
need to pay the big fixed cost. If competition by this copier is allowed, firms will be
forced to set a price close to marginal cost,
and therefore, will not recover the fixed cost,
with the consequence of not having incentive to be in the market. This is the standard
economic rationale to grant copyrights that
prohibits unauthorised competition. This rationale is not exempt from criticism, as authors have other means to profit from their
ideas, and as there is always an advantage
to be the first seller of copies. Nevertheless,
in this work we accept as given the fact that
copyrights are granted, and that the economic reason is as stated in this paragraph.
Thus, once copyrights are granted, the industry can work as any other industry with
17
big fixed costs of production. The only difference is that competition comes not from
firms offering perfect substitutes (like two
stores offering similar cloths), but from other authors offering close substitutes (two
rock bands trying to sell their last CD’s).
This motivates the next subsection (1.1.3.)
on monopolistic competition.
A further case can be made that in this
industry the manufacturer (producer in
economic terms) is the publisher, and not
the author or the artist. If the number of
publishers is small, the industry responds
better to the model of an oligopoly. If the
number is big enough, monopolistic competition is again a good enough model to
analyse the industry. Recall that in a market with ‘monopolistic competition’ each
firm is the only seller of the product it sells
(hence the monopolistic part of the term)
but faces competition from other firms
selling close substitutes of the product
(hence the competition part of the term).
Profits are lower in the case of monopolistic competition compared to oligopoly
(competition will drive prices down).
Compensation for private copying is, in
fact, an extension of the copyright. First,
copyright means that the author of an intellectual work could prevent others from
producing commercial and non-commercial copies of his or her idea / work. As
it is very difficult to enforce this right in
the case of non-commercial copies made
for own consumption, an exception to
this exclusive right is granted and a compensation is due. As we are interested in
analysing the economic rationale behind
this extension of copyrights, we will consider the alternative compensation model
which performs best in terms of providing
the compensation related to the extension
of the copyright for own consumption.
This model will most likely be the most
economically efficient.
ENTER - IE Business School
18
1.1.3.The production of encoded copies
of ideas constitutes a case of
monopolistic competition
There is one more characteristic of the industries of books, recorded music or films
to be analysed. Each author has the monopoly power on the production of copies of its idea, but, at the same time, faces competition from other authors selling
competing products that are substitutes of
its own idea (another novel or song). The
standard economic model that fits this
scenario is one called monopolistic competition. In this model, producers face an
individual downward sloping demand in relation to the supply (like monopolists, and
unlike firms in competitive markets that see
virtually no demand for their products if they
price above market price). But, because of
the substitutes, this demand has a big elasticity (meaning that prices cannot change
much without implying a big change in the
demanded quantity). In this kind of market,
new producers enter until profits go down
to the average profits in the economy, and
that must be enough to recover the fixed
costs. Also, the price will be a little above
the marginal price. This situation is not considered a big economic problem, although
is not entirely efficient. Alternative mechanisms aimed at lowering the price further
(for instance, by regulating that price must
be equal to the marginal cost, while subsidising the fixed cost) may be even worse.
The conclusion after this analysis is that,
so far, there is nothing particular in the
market for music, books or movies that
is not present in many other markets that
work perfectly well (or well enough) and
that merit no less protection than music,
books and films market. In the next section we will see to what extend there is a
case to be made for a market correction
due to the ability of consumers to make
private copies of the good.
ENTER - IE Business School
Compensation for private copying: an
economic analysis of alternative models
To sum up
• Ideas are not public goods; expressions of
ideas are private goods.
• A level of cultural production may be considered a public good, and cultural production is already subsidised.
• The production of an intellectual work implies
a cost. The revenues obtained with the commercial activity of producing and selling (encoded) copies of this work must be enough
to compensate for the cost. Anyone who can
just make copies without the need of producing the idea in the first place will have an advantage in the market, as it does not need to
recover that cost to make profits.
• Standard copyright protection is about
granting a monopolistic power on the production (and economic exploitation) of (encoded) copies of an intellectual work.
• Intellectual property protected works compete with each other, although not perfectly*.
* It will be shown in section 2.3(iii) that there is also competition between different
types of works or various forms of leisure (e.g. music and films markets are in
competition with videogames market).
1.2.
The economics of private
copying
In Section 1.1.3 we have seen that if copyrights are enforced to prevent the production of unauthorised copies to be sold in the
market, then the economics of producing encoded copies of intellectual work (e.g., prerecorded music CDs and film DVDs) pose
no particular economic problem (except for
the criticisms that we outlined above, in the
sense that even in this case protection may
not be necessary, as the advantage of being
the first and the original may give enough
rents to incentivise production, and which
19
Compensation for private copying: an
economic analysis of alternative models
go in the direction of relaxing, not strengthening, the copyright laws).
In the past, to publish an illegal edition of a
film or of a music of similar quality as the original still implied the high fixed cost of manufacturing. Of course, not having to incur the
fixed cost of actually producing the idea, the
fixed cost was lower for the copier than for
the legitimate publisher. However, this cost
was high enough to discourage private copies, which usually were of poor quality.
The problem, so is said, arises when a new
technology allows for very cheap private
copies. Now the consumer can make copies of its (encoded) copy, and, therefore, can
end up with many copies having paid only
one. It is argued that this fact has both legal
and economic implications:
•
5
On the legal side, it is alleged that the
rights of the right-holder (producer) of
the intellectual work have been damaged because the owner of the legally
bought copy had no right to engage in
this copying activity in the privacy of its
home (even if there was no intention of
selling the copies) without the consent of
the right-holder. Justice, it seems, could
require some form of compensation5.
This principle of Justice may be also argued against. For example, for sure that when you buy a book, then you enjoy by
taking the book with you in order to read either at home in your
favourite sofa, or on the beach while you are on holidays, or why
not those few minutes that you find when going by metro to your
work. Would you defend that a general principle of Justice requires you to pay a royalty for that book on top of the price you
already paid for it, each time that you take it with you to enjoy
from its reading in a different location? It is hardly to believe that
anyone will answer ‘Yes’. A book is the perfect example of interoperable content. You do not need to shift it from one format
to another one in order to enjoy its content in a different location. No additional compensation is required for enjoying your
book in multiple places. However, other copyrighted goods are
not offered in a format permitting so easily to enjoy it wherever
you want (e.g. music or video). In our view, we can draw some
parallels between the book example (and the lack of compensation for enjoying it in multiple different ways) with the controversial application of levies in relation with other copyrighted
goods that require to be shifting to another format (for example
a pre-recorded music CD) to be enjoyed by legitimate user in a
different location. Is ‘fair’ to request ‘compensation’ automatically in those situations where you are required to move that
content to another format in order to enjoy it (e.g. a music CD
•
On the economic side, it is argued that the
new technology means that the original
work (e.g. a music CD) has a higher value.
Since the right-holder does not profit from
this higher value it does not internalise it,
and does not receive the right economic
signal to produce more of these goods.
Efficiency, it also seems, could require
some form of compensation.
We will analyse in detail the fallacy behind
this economic argument. This will be done
in the rest of this subsection. After this, and
after reviewing the economic basis of private property rights (Section 1.3), we will
discuss the economic foundations to extend
the standard copyright provisions to private
copying (Section 1.4).
•
Example 1: Consider a standard competitive market for screw-drivers and other tools, and that consumers find more
uses for these goods as do-it-yourself
books become more widely available. No
one thinks that this new value for screwdrivers should imply some compensation
from the editors of these books to screwdrivers manufacturers because they are
selling more books as a result of the existence of screw-drivers. The reason is
that the better value of the screw driver is
reflected in a shift of the demand for this
tool. Consumers demand more tools,
and their prices would go up (in the short
run), with higher profits to screw drivers
manufacturers. This provides incentives
for more manufacturers to enter the market until a new equilibrium is reached in
the long run. In the new long run equilibrium the quantity will be higher, but the
price can be lower or higher depending
of the cost structure of the industry for
that you need to transfer to your MP3 player to listen its songs
on the beach or when going to work by metro). We believe that
this format-shifting does not justify per se the application of a
compensation in favour of right-holders. Harm caused as a result of this behaviour should be carefully assessed to determine
whether is ‘fair’ to provide any additional payment or not.
ENTER - IE Business School
20
screw-drivers. Typically a higher market
allows for investments in better technology or for uses of economies of scale, and
the price will be lower. If the economies
of scale have been exhausted and no
better technology is available, the price
may go up. The bottom line is that the
new situation would be efficient. The increase in the demand provided the (sufficient) incentive to serve the market. No
extra compensation is needed to incentive production of more screw-drivers.
•
•
Example 2: Consider the market for
fiction books or music CDs (which may
not be perfectly competitive, as we saw,
but still competitive enough). Suppose
now that books and CDs have more value to consumers because of increased
rates of literacy or because new technologies allow for more leisure time. Or
maybe consumers find new uses for
recipe-books because it is now easier to
find more ingredients in the local market
due to an improvement in the transport
technology. Again there is no reason for
the book or the music CD industry to demand compensation for the increased
value of their products. As before, the
higher value of the goods is translated
in a higher demand for them and that
is enough to settle in a new equilibrium
that is equally satisfactory to the old one
from the economic perspective.
Example 3: Consider again the market
for copies of intellectual works. Suppose
now that the higher value of these copies comes from a new technology that
allows them to be enjoyed in more circumstances. For instance, the invention
of the electric bulb allows the consumer
to read at night, in her bed, and not only
during the afternoon in the porch. Or a
new portable device (e.g. a portable CD
disc-man) is invented that allows for a
music CD to be played anywhere in the
ENTER - IE Business School
Compensation for private copying: an
economic analysis of alternative models
house. The same argument as before applies. No compensation is necessary beyond what the market already does.
•
Example 4: Consider now that the new
technology that allows for a time-shifting
or a format-shifting requires making a copy
of the legally-bought copy. For instance, a
consumer can scan a book to save weight
and read it as she travels, or a paid-for TV
program can be recorded to watch it later,
or a music CD can be converted into the
MP3 format to be listened while exercising. From the economic point of view, this
is the same case as the previous examples: an increase in value of the good that
produces a shift in the demand that produces a new equilibrium as efficient as the
old one6. As in the previous examples, no
extra compensation is needed to produce
more books or music CDs.
The conclusions that come from these examples follow from standard economic analysis. We are not aware of any piece of peerreviewed economic research that proposes
a non-standard treatment to the issue of private copies, or, a fortiori of any research that
proposes any kind of compensation for private copies to restore the alleged destroyed
efficiency after the making of private copies.
Furthermore, research7 shows that, for example, music industry has found new sourc6
For example, IFPI Digital Music Report 2008 acknowledges that
the spread of digital devices drove digital music demand more
than any other factors (broadband, cheaper prices, vouchers),
showing that technology increases value of those works.
7
TNO Report ‘Ups and Downs. Economic and cultural effects
of file sharing on music, films and games’ (Feb. 18th, 2009).
Commissioned by Dutch Ministries of Education, Culture and
Science, Economic Affairs and Justice.
The Opinion of Advocate General Kokott delivered on 18 July
2007 in Case C-275/06 (Promusicae / Telefonica) indicates
that ‘to what extent private file sharing causes genuine damage
is in fact disputed’ and cites the report DSTI/ICCP/IE(2004)12/
FINAL of 13 December 2005 to the Working Party on the Information Economy of the Organisation for Economic Cooperation and Development (OECD) as source (report available at
http://www.oecd.org/dataoecd/13/2/34995041.pdf , S. 76 ff.).
See also report ‘Legal, Economic & Cultural Aspects Of File
sharing’ Nico van Eijk, Joos Poort, Paul Rutten (April 16th,
21
Compensation for private copying: an
economic analysis of alternative models
es of revenue. New marketing and income
generating models are being developed
where income is generated not so much directly by music recordings, but increasingly
by live concerts, merchandising and sponsorship. And music down-loaders are found
to go to concerts more and to buy more
merchandise, showing that market secures
compensation in other form for music rightholders, even for P2P acts that are outside
the legitimate private copying exception.
Thus, economic efficiency cannot be a justification for the imposition of levies on devices that permit private copying.8 Other considerations must be brought into question.
We will explore some.
8
To sum up
• A new technology that makes private copying
possible also makes legal original works more
valuable and attractive for customers. This
drives up demand for those goods directly,
or secure indirect means of compensation
resulting from higher access to those goods.
• There is no economic reason (based on
efficiency arguments) to impose a burden
on a technology that allows for more or
better uses of existing goods and increases
their value and return for right-holders.
1.3.
2010), Institute for information Law (IViR) of the University of
Amsterdam, which indicates that: ‘Buying and file sharing turn
out to go hand in hand. Music sharers are as equally likely to
buy music as other people: 68% of file sharers also purchase
music. File sharers buy as much music as non-file sharers.
However, file sharers spend more money on merchandise and
go to concerts significantly more frequently. As for films, file
sharers turn out to buy significantly more DVDs than non-file
sharers. On average, file sharers and non- file sharers go to the
cinema equally often.’ Full report available at http://www.ivir.
nl/publications/vaneijk/Comunications&Strategies_2010.pdf.
The economics of private
property rights and their
implications for private
copying
As an example contrary to economic sense, we find the following statement in the report ‘Economic Analysis of Private Copy
Remuneration’ published by ECONLAW in September 2007 (see
page 8): ‘The appearance of digital CE devices on which IPRprotected content already in the possession of consumers can
be uploaded, stored and played has increased consumers’ valuation of those IPR-protected goods. Were it not for PCR charges, the additional social value by the new use of IPR-protected
works would be appropriated exclusively by consumers and the
CE industry, while creators would remain uncompensated.’
Private property is one of the cornerstones
of market economy. Without well-delimited,
well-enforced private property rights it is difficult to engage in productive activities. If my
production can easily be stolen or confiscatENTER - IE Business School
22
ed, I have little incentive to produce beyond
what I can consume or trade before someone steals my private property or beyond
what I produce for pleasure. The tragedy of
the common exploitation presents another
example of the problems of undefined property rights: if no one owns the resources of
a lake, it will be over-exploited and depleted
of fish very soon. If the resources have an
owner (say, a cooperative, a city or a firm),
then it will have strong incentives to avoid
over-exploitation.
However, even in the most capitalist-oriented societies, private property has its limits.
One cannot build as he wishes on his land.
There are regulations for that. Further, the
limits may come after the adoption of new
technologies in the society. For instance,
once the property of the land assumed the
right to all the space up or down from the
surface. As air travel become commonplace, these rights needed to be limited.
In any case, the default position is that any
limitation to the property rights needs a justification. Economic efficiency is a good limitation, and has been so defended in many
cases (among them, in the case of planes
flying thousands of meters above my land).
Of particular importance is the limitation of
property that the anti-monopoly laws imply.
For instance, many big firms are required
to sell parts of their assets in order to avoid
having a dominant position in the industry.
In other words: according to economic and
legal principles, private property should not
be used to exert monopolistic power.
In the case of private copies, there are two
property rights involved. On the one hand,
the law recognises the right of the owner of
an idea (or encoded copies of the idea) to
prevent its unauthorised reproduction (and
distribution, modification or public communication). This is viewed as the legal consequence that comes from the recognition of
the property of the idea. However, this kind
ENTER - IE Business School
Compensation for private copying: an
economic analysis of alternative models
of property implies a monopoly power on
the idea. When we reviewed the economics of intellectual property, we saw that a
monopoly cannot be granted without important economic reasons. In Sections 1.1
and 1.2 we have explored some of these
reasons, and found that there could be reasons for granting monopolistic power over
publications, but definitely not for extending this power to privately owned copies.
On the other hand, there is the property right
of the owner of the legally bought copy. This
copy is a private good and its property can
only be limited in the name of economic efficiency (or in the name of a common interest).
Again, we have seen in Section 1.2 above
that no economic arguments can be found
to show a lack of efficiency that should be
corrected. Furthermore, we observe that
very often the arguments in favour of compensations for private copying are just statements claiming that these compensations
are deduced or inferred from the arguments
for copyright protection. Again, our exposition shows that this is not the case.
Let us be clear on this. The making of unauthorised copies for commercial purposes
creates unfair competition that may reduce
the incentive to create an efficient quantity
of original work. This activity can be monitored and thus prohibited. However, in one
hand, the making of private copies does not
reduce per se the incentive to produce efficient quantities of original work. Besides,
this activity could not be easily monitored
(while there are some possibilities now by
virtue of technical protection measures to
prevent it), and thus was difficult or impossible to prohibit. If the activity of private copying could be monitored by right-holders the
result would also be efficient (this time with
a higher profit to the right-holder). It may
be that, from the political point of view, the
second situation is seen as more fair. It is
this fact that could justify the compensation
23
Compensation for private copying: an
economic analysis of alternative models
as the only means to restore fairness. The
economics of this compensation is studied
in more detail in the next section.
Even if we are wrong and economic arguments based on efficiency considerations
in favour of compensation for private copying could be found, they would definitely be
of a very different nature than the economic
arguments in favour of prohibiting the commercial use of unauthorised copies, and,
thus, would not be deduced from the economic arguments for the standard copyright
protection. Therefore, the legal provision
that the granting of a copyright monopoly
necessarily implies the subsequent right for
a compensation for the act of private copying cannot be deduced after the fact that
there is an economic rational to prohibit the
commercial use of unauthorised copies.
Private copying is not comparable at all to
commercial use of unauthorised copies. If
and when economic arguments are found
to point the economic inefficiency of private copy, then the appropriate institution
to restore efficiency could be proposed.
As we stated before, no one has yet found
these arguments.
To sum up
• Private property can be limited in the name
of public interest.
• Private property can be limited to prevent
the exercise of monopolistic power.
• The granting of monopolistic power should
only be done after a clear and undisputed
claim in favour of it.
monopolistic power to having economic
rights over private copies.
• There is no economic basis to consider the
extension of copyrights to private copying
as a logical extension of the private property
principles.
• The property right of the creator of an
idea (and its encoded copies) has to be
balanced against the property right of the
owner of a legally owned copy.
1.4.
The economics of fair
compensation for acts
of private copying
The case can be made that the compensation
for private copy is not based on economic efficiency but on ‘fairness’ considerations. Economics cannot say whether this is desirable
or not. This is a political and may be a legal9
issue. Nevertheless, the economic analysis
can show asymmetry, unbalance, and other
effects that can be the basis for ‘fairness considerations’ and can provide insights into the
economic implications of different mechanisms to transfer rents to authors.
In line with what the European Commission10 has reported extensively in connection with the Directive 2001/29/EC on the
harmonisation of certain aspects of copy9
Fairness seems an intrinsic requirement of the Community
legal concept of ‘fair compensation’ that is provided in Art.
5.2.b. of the Directive 2001/29/EC on the harmonisation of
certain aspects of copyright and related rights in the information society (the so-called ‘Copyright Directive’), which deals
with the definition of the private copying exception and its ‘fair
compensation’.
10
For example, in ‘Fair Compensation for Private Copying in a
Convergent Environment. Commission Staff Working Document. ( December 2006)’.
• There may be a case to grant monopolistic
power to prevent the exploitation of
unauthorised copies.
• There is no economic case (based on
efficiency considerations) to extend the
ENTER - IE Business School
24
right and related rights in the information society (‘Copyright Directive’) the following legal premises have to be taken into account
in the economic analysis:
•
•
Private copying is construed as a noncompulsory exception that Member
States may provide to the exclusive
right of reproduction. The exception is
made only for natural persons who copy
for private use and for non-commercial
purposes.
The Copyright Directive envisages fair
compensation for legitimate acts of
private copying. Fair compensation for
right-holders was originally based on the
premise that an act of private copying
could not be licensed for practical purposes and thus could cause economic
harm to the relevant right-holders. Thus,
fair compensation is linked to the harm
that derives from the act of private copying. Any payment to right-holders must
be compensatory in nature.
•
The Copyright Directive is neutral as
to the form of compensation. Some
EU Member States (most) have chosen a private copying levy on recording equipment or blank media, two EEA
Member States (Norway and Estonia)
have chosen to provide ‘fair compensation’ by means of a state-run fund,
others yet have chosen not to provide
for copyright levies (Ireland, UK, Malta,
Cyprus and Luxembourg) and limit the
scope of the private copying exception
(for example, as it happens in the United
Kingdom, where today11 users are only
11
UK Gowers Review of Intellectual Property Report (December
2006) explicitly recommended ‘Introduce a limited private copying exception by 2008 for format shifting for works published
after the date that the law comes into effect. There should be
no accompanying levies for consumers.’ Report available at
http://www.hm-treasury.gov.uk/media/6/E/pbr06_gowers_report_755.pdf (see sections 4-67 to 4-76). This recommendation
for a limited format-shifting exception has been finally not considered for implementation by the UK Intellectual Property Office
ENTER - IE Business School
Compensation for private copying: an
economic analysis of alternative models
authorised to make copies for timeshifting purposes).
In this report we will briefly analyse these
and other alternatives to fair compensation
for private copying. But first a few words on
the economics of fair compensation are in
order.
It seems that the reason why the monopoly that is granted by intellectual property
rights is not extended to private copying
behaviours is just a matter of physical impossibility. In other words, it seems that if
it had been possible to monitor the activity
of private copying, the exclusive intellectual
property rights would automatically apply.
But would it?
The Copyright Directive provides the possibility for Member States to grant a private
copying exception subject to the condition
that right-holders receive fair compensation
which takes account of the application or
non-application of technological protection
measures. This fair compensation requirement implies that any payment to right-holders must be compensatory in nature, and as
such must be linked to the harm that it is
derived from the act of private copying itself
(‘harm to the right-holders resulting from the
act in question’). Thus, it is not immediate
that all forms of private copying harm the
right-holders, and therefore not all of them
require fair compensation.12 By contrast,
notice how different the situation is with the
protection against unauthorised commercial
copying, where no harm has to be shown to
declare it illegal according to typical copyright laws. This is an implicit acceptance
that there are more differences between
commercial and private copying other than
in the draft statutory instrument [the Copyright (Permitted Acts)
(Amendment) Regulations 2010] published in December 2009.
12
Recital 35 of Directive 2001/29/EC goes even beyond: ‘In certain situations where the prejudice to the right-holder would be
minimal, no obligation for payment may arise.’
Compensation for private copying: an
economic analysis of alternative models
the private copying cannot be monitored.
In other words, it is recognised that private
copying, per se, does not require a compensation for the creators. Private copy plus
harm might. As we will see, this fact has important consequences in favour of considering compensations for private copying only
in terms of fairness.
More to the point, it is interesting to note that
in the Copyright Directive the cause of the
harm is left undefined. In particular it is never
said that the fact that private copies are made
amounts to unfair competition (unlike the
unauthorised commercial copies). Then the
question is: what may be the cause of harm?
We already saw that it can not be economic
efficiency. We have already shown that the
ability to make private copies increases the
value of the legally bought copy, and thus,
increases the demand of those goods, plus
other indirect positive effects, as demand for
concerts / public performances, merchandising, etc. This can hardly be seen as harming
the right-holders. We are only left with fairness considerations: it is only fair that the
right-holders profit even more from the higher economic value of the legally sold copy. If
private copies could be monitored, the rightholders could, in principle, profit more from
the higher economic value, as they could
charge a price for the act of private copying.
Such a monitoring not being feasible, it is
the consumer that gets most of the surplus.
Both situations could be equally efficient, but
it seems that, through the fair compensation
envisaged by the Copyright Directive, a middle point is implicitly claimed as desirable:
any extreme causes harm to the other part.
(See that this is the point of the argument by
consultancy firm ECONLAW in the report referred in footnote 8). The exact place of this
middle point is left undecided, and it may
be up to the Member States to establish to
what extent there is an economic harm due
to unfairness. This can be done by showing
that there is indeed a surplus that is divided
25
unevenly. Sometimes this cannot be shown.
For instance, if there were no private copies
of books (e.g., because they are too costly,
as it’s easily arguable for copies made with
home-printing devices), then there would be
no case for a fair compensation even if the
copies could be made ‘in principle’, as the
possibility of private copy generates no economic value for the consumer.
The next graphs clarify these points. They
are not meant to represent any particular
market. Figure 1.2 presents a typical supply
(S) and demand (D) graph, and the market
equilibrium (E) with price P and quantity Q.
Quantities are measured in the horizontal
axis, and prices in the vertical.
The demand can be read in three different,
but equivalent, ways:
(i) The demand shows, for each price, the
quantity that consumers are willing to buy.
(ii) For each quantity, the demand shows the
highest price at which this quantity can
be sold.
(iii) For each quantity, the demand shows the
valuation that consumers assign to the
ENTER - IE Business School
26
last unit of this quantity (after the previous ones have already been consumed).
Similarly, the supply can be read as the smallest price at which a quantity can be sold,
which is the cost of putting the last unit of his
quantity in the market (the marginal cost).
In this way, every unit sold in the market is
valued by consumers as shown in the demand (D), but paid at price P. This means
that the difference is a benefit for the consumers. The area below the demand and
above the equilibrium price (the triangle
APE) is the total benefit for consumers in the
equilibrium E. This area is called consumers’
surplus. In the same fashion, the area BPE is
the producers’ surplus (however, this area is
not entirely the producers’ benefits, as it has
to cover the fixed cost of production). In the
figure, the relative size of both areas shows
the way the benefits of the market are divided between producers and consumers.
Compensation for private copying: an
economic analysis of alternative models
are produced, and all sold at price P. Other
situations are possible. For instance, the first
units may be sold at different prices (lower
or higher than P). As long as a total of Q units
are produced, the situation is still efficient.
This is shown in Figure 1.3, where the first Q1
units are traded at the lower price P1, and the
rest at price P. This gives consumers a higher
share of the total surplus. Such a mechanism
is, for instance, used in some cities to charge
for the consumption of water. As long as, for
every consumer, the last unit is paid at the
market price, there is no efficiency problem.
With these general ideas, it is now possible
to say something relevant in the market for
books (or music CDs, or film DVDs, which
would result in similar conclusions) in Figure 1.4.
Now, efficiency deals with providing the largest total surplus (consumers’ plus producers’), and does not address the fairness of
such a division. In the market equilibrium E
we have an efficient situation in which Q units
The case of fairness compensation is illustrated in Figure 1.4, which represents the
market for books (or recorded CDs or DVDs)
before and after the availability of technology
for private copy. Before the new technology
(for example a reader for digital books or a
copier for analogue books), the consumers’
and producers’ surpluses are areas APE and
BPE, respectively. After the new technology is
ENTER - IE Business School
Compensation for private copying: an
economic analysis of alternative models
available for consumer usage in the making
of private copies, the areas are A1P1E1 (new
consumers’ surplus) and BP1E1 (new producers’ surplus). It can be argued that the share
of the producers’ supply is more unfair after
the new technology is available. A system
like the one in Figure 1.3. can be called for
by the producers, but now with a higher price
on consumers for the first units (note that the
first units are the ones with a higher value for
consumers – those consumers who benefit
most from the new situation). Such a system
has several problems. First, in practice it may
be impossible to identify and find those consumers that will be charged a lower price (or
to find and identify which are the first units of
the good that will be priced at a lower price).
Second, the mechanism could be circumvented as one consumer may buy from another one who bought the product at a lower
price. Of course, there is always the problem
of justifying that the new situation, with a
higher percentage of the surplus going to the
consumers, is a wrong that needs to be fixed.
It seems then that it is the impossibility of devising a mechanism like the one in Figure 1.3
(or similar), where different units of the same
good are traded at different prices, what calls
for a different solution to the unfairness in the
market of copyrighted works. Surprisingly,
the solution – the current levy system – forgets this market altogether and translates all
the economic policies to the market where
the new technology (e-book readers, MP3
players, MP4 players, CD and DVD burners, copiers, scanners, blank media, etc.) is
bought. The only possible answer is that both
consumers and copyright-holders (authors,
artists and publishers of music, video and
books) get a high surplus in this other market,
and that this surplus is caused by the higher
demand in the markets of copyrighted goods,
but we saw that the causation goes the other
way. In any case, since the producers in the
market for encoded IP-related copies (call
them copyright-holders) are neither the con-
27
sumers nor the producers in the market for
the new technology, there will be no direct,
efficient ways to translate rents (or surpluses)
from that market to the copyright-holders.
This will be seen in the next Figure 1.5.
Thus, Figure 1.5. represents the market for
Information and Communications Technology (‘ICT’) and/or Consumer Electronics (‘CE’)
devices, where a levy is imposed. Without
the levy, the equilibrium is given by point E,
the intersection between the demand (D) and
the supply (S). This equilibrium E is efficient.
A levy (whether a fix amount or a percentage
of price) implies a supply shift upwards of the
size of the levy at that price. The levy changes the equilibrium from E to E’, with a new
price P’ and a new quantity Q’. Without a levy
(equilibrium E), the consumers’ and producers’ surpluses are APE and BPE, respectively.
With the levy, they become AP’E’ and (P’-L)BC,
with L being the levy at equilibrium price P’.
The collected amount is the area P’(P’-L)CE’,
that can be calculated as LxQ’. The area E’EC
was part of the surplus that was generated in
this market before the levy (divided between
consumers and producers), and that after the
levy goes to no one. It was a benefit that now
is totally wasted as a result of the inefficiencies created by the imposition of the levy.
ENTER - IE Business School
28
This is the well-known cost of an indirect tax
as explained in any introductory text in economics (and the levy produces the same economic consequences as an indirect tax).
Levies as an incentive for creativeness:
the incentive paradigm13
A final argument can be given against the
idea that compensation for private copying
(either in the form of levies or otherwise) is an
efficient incentive to create. We believe that
private copying compensation can only be
justified under a fairness consideration, when
appropriate, but not under this efficiency fallacy. In fact, it has never been documented
that the increase in protection of copyright
leads to an increase in the production of
creative works. For example, in Figure 1.6
we show a graph with the number of literary
copyrights per capita registered in the United States in the last century14. The various
copyright extensions along the century have
13
The known as ‘incentive paradigm’ has been recently analysed in research study ‘The Recasting of Copyright & Related
Rights for the Knowledge Economy’ (Nov. 2006) produced
by The Institute for Information Law (IViR) of the University of
Amsterdam, commissioned by the European Commission. It
provides that ‘Stronger protection will not automatically lead
to more creation, innovation and thriving markets; it can also
impede the same’ (see page 103) and explain in general terms
the incentive paradigm as follows (see pages 105-109):
‘The incentive paradigm is described as the ‘main contemporary law and economics framework for the analysis
of intellectual property’. The underlying idea is the following: granting record and film producers or performers certain intellectual property rights will provide them with incentives to create and invest their time, effort and money
in performances, phonograms, or films. (…)
It is important to be aware that, from an economic point of
view, there is no real evidence yet whether, and if yes, to
what extent intellectual property rights in general, and related rights specifically, actually provide the necessary incentives to promote innovate, create and invest. It is not even
clear whether granting or extending related rights protection
is the optimal and proportional response to stimulate investment in production and distribution of e.g. phonograms.’
Full report available at: http://ec.europa.eu/internal_market/
copyright/docs/studies/etd2005imd195recast_report_2006.pdf
14
The original graph is taken from Boldrin and Levine (2008)
‘Against intellectual monopoly’, and can be seen in http://www.
dklevine.com/general/intellectual/againstfinal.htm. The copyright data (including series of data added for 2000-2007) are
from the annual registrations reported in www.copyright.gov.
ENTER - IE Business School
Compensation for private copying: an
economic analysis of alternative models
not led to an increase in the output of literary
work. There was, for instance, the 1909 Copyright Act, after which nothing happened.
There was an important improvement of copyright protection in 1998 with the approval of
the Digital Millennium Copyright Act (DMCA)
and the extension of the monopoly term with
the Copyright Term Extension Act. Again, no
one has documented the slightest increase in
activity of music or literary production after it.
The next graph (Figure 1.7) tells a more recent history. It shows the number of literary
works produced in Spain from 1999 to 2007
and the revenues of the publishing sector
had no relation at all with the increase in
collected levies to compensate for private
copying of books and assimilated publications15. As it can be immediately appreciated, the dramatic increase in the collected levies had no impact whatsoever in the
number of works created or in the amount of
books that were sold.
It is important to stress the scope of this argument, as many discussions on copyright
15
The data on new titles are taken from Agencia Española del
ISBN (Spanish agency for ISBN). The data on collected levies
and reprography licences come from CEDRO, the collecting
agency representing writers and publishers in Spain, and can
be seen in www.cedro.org. Additional data is available at the
Ministry of Culture website: www.mcu.es.
29
Compensation for private copying: an
economic analysis of alternative models
focus on the need to generate more income
to the right-holders via extension of term of
copyright protection or any other measure
increasing their intellectual property rights.
The appeal to the direct effect that a higher
protection will have on creativeness is often
invoked. Reality, however, is different. As we
will see, the income received by authors via
copyright is a low part of their total income.
The data do not show an increase in creativity after more protection. Further, the size of
the literary, music and film industries has not
decreased with the new technologies (only
some formats and particular activities - like
the sale of recorded music in CD formathave declined). In sum, the patient (say, the
music business) is healthy, the medicine (a
levy on electronics products) has never been
shown to improve its health but has strong
side effects (for example in the electronics
industry, as we shall see). The question is,
then, how far are we willing to go in the administration of the medicine in the name of
fairness?
To sum up
• Private copying does not cause economic inefficiencies.
• The technology that makes private copying possible increases the consumers’ welfare (as they find more
uses to the goods the buy), the new technology producers’ welfare (their new technology is valuable
and is sold), and the ‘producers’ (IP right-holders) of copyrighted goods (as they are in greater demand).
Copyrighted goods increase their value because of the availability of the private copying technology.
Some of these surpluses increase more than others.
• There are few examples of accepted economic policies to compensate for this asymmetric share of the
total surplus, and they typically deal with necessity commodities like water.
• Even in the cases where the compensating policies are implemented, they take place in the market for the
commodity where the unfair share takes place (in our case, the market for copyrighted goods) and not in the
market for a different good (in our case, the market for ICT and CE goods), as the compensation necessarily
implies an economic loss in the market where such compensation is paid (ICT and CE goods market).
• Unfairness is, then, the only source of harm after the act of private copying. But fairness is a political,
not an economic, consideration, and has to be analysed as such. However, economic analysis can help
providing the best system to attain this goal. The relevant question now is how to redistribute the surplus
for consumers generated by the ability to make private copies in a way that less distorts the economic
decisions of the parties involved: the intellectual property right-holder, the consumer and the manufacturer of
the devices that make private copying possible. It is along these lines that several alternatives are analysed.
• There is no evidence that copyright levies or any other increase on the protection granted to intellectual
property rights will result in higher creativeness.
ENTER - IE Business School
2.
The current copyright
levy system
‘The current levy systems are, as we all know, both complex and controversial. Not alone are
there huge differences in rates applying to the same or similar equipment used for private
copying – there is no uniformity among Member States in setting levies for identical digital
equipment. The result is a huge array of different levies imposed on the same products across
Europe – with differences in levies of up to 1500% applied to identical products.’
Written answer by the European Commission to MEP Question
on Copyright Levies Reform (H-1023/07; January 17, 2008)
2.1.
Introduction
It is well-known that from an economic point of view - and while its legal nature is different – a copyright levy payable on sale of ICT and CE devices acts as any indirect tax. The
economics of indirect taxes are well understood. In the absence of negative externalities
by the manufacturer (like the production of pollution), it generates a loss of economic surplus: the collected tax is always smaller than the sum of the reduction of the consumer’s
and the manufacturer’s surpluses. This fact is so clear that it is accepted by the defendants of the current copyright levies system16.
However, more importantly, issues resulting from levies go beyond this well-known economic effect; the current systems of ‘fair compensation’ for private copying under the
form of a copyright levies system has many sources of inefficiencies and unfairness:
•
First, different countries decided different forms of ‘fair compensation’ that are applied on different categories of devices (and sometimes under generic definitions
without providing legal certainty to economic operators about what specific product
16
For instance, the report ‘Economic Analysis of Private Copy Remuneration’ published by ECONLAW (September 2007) acknowledges this fact in its static analysis of the economics effects of the levy.
32
categories are subject to levies in each
country).
•
Second, the countries that chose the
form of a levy on a certain category of
device that can make or store private
copies decided different monetary levels for the levy on the same devices (and
in most cases, using different countryspecific criteria for the calculation of the
amount to be paid)17.
•
Third, a levy has been imposed on some
devices even if it is widely accepted that
they are almost never used for private
copying. Similarly, a device sold to a
private consumer may be used to make
private copies, but the same device
sold to a professional, a small-medium
business, an enterprise or even a public
office, by definition, will never be used
to make such ‘private copies’ (only a
few EU Member States, including Sweden, Finland and Denmark, provides for
a real exception from levies on devices
sold to professionals, SMBs and enterprises in general)18.
17
18
For example, inkjet multifunctional printers with photocopying
functionality are subject to levies in 12 out of 27 EU Member States, subject to different criteria: in Germany a flat levy
is applied since 2008 in all those inkjet devices; levy amount
is defined as a % of the import or resale price varying between 0.5% and 5.26% in 7 Member States (Austria, Bulgaria,
Greece, Hungary, Poland, Romania and Slovakia); in Czech
Republic a fix levy is charged for each product that is priced
within a range of prices; in Spain a flat fee is provided in case
product weight is under 17 kg and a levy scale based on
standard copying speed is applied for products above that
weight; and finally Slovenia and Belgium apply the levy based
on the copying speed of the device. This speed criteria is not
out of troubles either and claims by Belgium collecting society
(Reprobel) have been initiated seeking to maximize its income
by claiming the retroactive recalculation of levies based on
consideration of copying speed when printing the copy in draft
mode instead than on normal / default printing mode, which is
the one actually used by most consumers and that may result
in a levy multiple times higher than the high levy already paid
for inkjet multifunctional printers.
This issue is particularly extended and important. For example,
IDC’s report (‘Market Analysis: Personal Computing in Western Europe, Forecast and Analysis, 2006 -2010’ – April 2006)
indicates that only 13.8% of Desktop PCs and 46.7% of Notebook PCs are sold to ‘home users’, while the remaining major
share are sold to offices, business, government and non-private customers. A levy system that does not distinguish be-
ENTER - IE Business School
Compensation for private copying: an
economic analysis of alternative models
•
Fourth, if different countries impose a
different levy (or no levy) on the same
device, a ‘grey market’ might be created to take advantage of arbitrage opportunities. All the resources devoted
to this market are an economic waste,
as they could be completely avoided
with a uniform policy. In fact, depending on the importance of the levy, many
firms may be forced to compensate for
the differences in the levies between
different countries to avoid losing sales
to the grey market19 (e.g. while the levy
is applicable in one single country, the
levy is spread on the price of all the
products sold in the various countries).
This does not dilute the distortion, it
only translates some of the benefits
from the arbitrators to the firms. In fact,
it is not clear a priori whether this practice increases or decreases economic
efficiency20.
•
Fifth, the fact that, without the levy, the
same product has different prices in
different countries does not imply that
tween private users (legitimated to make private copies) and
professional / business users (non-legitimated to make private
copies) and applies levies on all devices, independently of the
nature of those acquiring the products, implies an unfair application of levies to all those users that by definition do not
engage in private copying. The same can be said regarding
IDC market analyses for shipments of Multifunctional Printers (MFPs) and Printers to Consumer, SMBs, Enterprise and
Public Administration customers, which typically provide for
an estimate of 41-42% of printing devices being bought by
home users, representing a much lower share if measured not
in units but in value.
19
A high levy in one category of devices may have the effect of
losing almost all of the sales to the grey market. To spread
the levy among different countries may mean losing a smaller
amount in every country. This may pay off from the economic
perspective of the firm, not only because the total losses may
be lower, but also because of the image of the firm (see section 2.2.iv for an analysis of a case study on cross-border price
policies based on copyright levies).
20
To appreciate the size of the distortion, see NOTA ENTER 35
/ 2006, and examples therein: the then-existing levy for a DVD
is Spain represented 60% of its original price. Also, the thencurrent or litigated levy on a 30GB iPod was at that time 2.56€
in Germany, 9.87€ in Italy, and 90.6€ (litigated) in Spain. In
the UK the levy is zero for those products. Nathan Associates
report (May 2006) provides an exhaustive list of the differences
on levies among countries.
33
Compensation for private copying: an
economic analysis of alternative models
•
the imposition of different levies on the
same product category is irrelevant. A
different price policy in different countries may be a result of many factors21. If
the opportunities for arbitrage are higher
after the levies are imposed, then, there
is a distortion in the market, and an economic inefficiency.
firms the current system of reporting, paying and refunding of levies as an impediment to cross-border e-commerce and as
an incentive to a fragmented online Internal Market, where ‘at present, cross-border
traders may end up paying and reporting
copyright levies in several countries for the
same goods’.
Finally, the imposition of a levy on devices that are never used for private copying (for example products sold to Public Administration) presents a distortion
no different from the ones imposed on
devices that are used. However, it goes
clearly against the principle of ‘fairness’
that should apply to the compensation
(which is compensatory in nature, and
has to be specifically ‘fair’, as provided in
Article 5(2)(b) of the Copyright Directive).
All these problems result in an economic waste for the economy that should be
carefully assessed, quantified and compared with the (apparent) economic benefits of the system and those resulting from
some private copying compensation systems proposed as an alternative to copyright levies.
The stakeholder consultations for the reform
of copyright levies completed by the European Commission in 2006 and 2008 identified similar issues resulting from copyright
levies, such as cross-border trade and ecommerce issues, issues for business users
of ICT equipment, grey market, consumer
issues, double payment, alternative licensing and levy distribution issues22.
Further, recent Communication from the
Commission on Cross-Border Business to
Consumer e-Commerce in the EU23 con21
For example, clothes have different prices among the various
Member States, and they are not subject to any special taxing in
any country. Indicating that levies have no trade effect because
pricing may be even higher in a country with no levy (as it happens also with clothing sold for example in the UK) is a fallacy.
22
See for example ‘EC Internal Market – Background Document
– Fair Compensation for Acts of Private Copying’ (February 14,
2008) at http://ec.europa.eu/internal_market/copyright/docs/
levy_reform/background_en.pdf.
Additional information on EC’s consultations on copyright levies systems, including responses provided by stakeholders,
is available at http://ec.europa.eu/internal_market/copyright/
levy_reform/index_en.htm
23
‘Communication from the Commission on Cross-Border Business to Consumer e-Commerce in the EU’ (Brussels,
22.10.2009; COM (2009) 557) and related press-releases and
Frequently Asked Questions; available at http://ec.europa.eu/
Furthermore, the problem is not only economical but also judicial, and a number of
prejudicial questions dealing with these issues have been referred by several national
courts to the Court of Justice of the European Union24. This report does not concentrate
consumers/strategy/facts_en.htm#E-commerce.
24
The reference for a preliminary ruling from the Court of Appeal of Barcelona (Spain) lodged on 31 October 2008 (Case
C-467/08; SGAE v. Padawan) deals among other questions
with the link between the presumed use of the products and
the payment of the compensation and whether is compatible
with Community law the payment of levies by business users
that clearly purchase digital reproduction devices and media for purposes other than private copying. The Opinion of
Advocate General Trstenjak delivered on May 11, 2010 proposes that the Court should answer the questions referred by
the Audiencia Provincial de Barcelona as follows:
‘1.The concept of ‘fair compensation’ in Article 5(2)(b) of Directive 2001/29 on the harmonisation of certain aspects
of copyright and related rights in the information society
is an autonomous Community law concept which must
be interpreted uniformly in all the Member States and
transposed by each Member State; it is however for each
Member State to determine, for its own territory, the most
appropriate criteria for assuring, within the limits imposed
by Community law and by the directive in particular, compliance with that Community concept.
2. The concept of ‘fair compensation’ must be understood
as a payment to the right-holder which, taking into account all the circumstances of the permitted private copying, constitutes an appropriate reward for the use of his
protected work or other subject-matter. Regardless of the
system used by each Member State to calculate fair compensation, the Member States are obliged to ensure a fair
balance between the persons affected – the intellectual
property right-holders affected by the private copying exception, to whom the compensation is owed, on the one
ENTER - IE Business School
34
on legal analysis but on economic analysis;
however, evidence of the impact that levies
have on the Internal Market should be an important component for the legal assessment
of those systems.
To sum up
• The current system of levies was supposed
to correct harm due to ‘unfairness’, not to
correct any economic inefficiency. However,
the current system of ‘fair compensation’
by mean of copyright levies is the source
of many unfair treatments and economic
inefficiencies.
hand, and the persons directly or indirectly liable to pay
the compensation, on the other.
3. Where a Member State opts for a levy system in respect
of compensation for private copies on digital reproduction
equipment, devices and media, that levy must, in accordance with the aim pursued by Article 5(2)(b) of Directive
2001/29 and the context of that provision, necessarily be
linked to the presumed use of those equipment and media
for making reproductions covered by the private copying
exception, meaning that the application of the charge is
justified only where it may be presumed that the digital reproduction equipment, devices and media are to be used
for private copying.
4. The indiscriminate application of a levy, on the basis of
a private copying rule, to undertakings and professional
persons who clearly acquire digital reproduction devices
and media for purposes other than private copying, is not
compatible with the concept of ‘fair compensation’ within
the meaning of Article 5(2)(b) of Directive 2001/29.
5. A national system which indiscriminately provides for a
levy for compensation for private copying on all equipment, devices and media, infringes Article 5(2)(b) of Directive 2001/29, in so far as there is insufficient correlation
between the fair compensation and the limitation of the
private copying right justifying it, because it cannot be assumed that those equipment, devices and media will be
used for private copying.’
The reference made to the Court of Justice of the European Union by another Spanish court in October 2009 (Case
C-387/09; EGEDA v. Magnatrading) also deals with the link
between compensation, actual use and resulting harm, and
whether Member States have complete freedom to lay down
the criteria and mechanisms for determining which devices
are subject to the payment of fair compensation for private
copying and the amounts thereof.
Finally, another set of prejudicial questions has been logged
on 25 November 2009 by the Dutch Supreme Court (Case
C-462/09 –Stichting de Thuiskopie v Mijndert van der Lee
and Others) dealing with the influence of the concepts of ‘fair
compensation’ and the ‘three-step-test’ in the Copyright Directive on the application of private copying levies on Internet
cross-border sales to consumers located in a Member State
different than the country where the Internet seller is based.
ENTER - IE Business School
Compensation for private copying: an
economic analysis of alternative models
2.2.
Economic cost of the
current system
In this section, we provide a quantitative
analysis of the main direct costs of the current levy system, as applied in most European Union Member countries. Our final goal
is to give an indication of the relative merits
of different alternatives as compared to current copyright levies system(s). Any such attempt will, by nature, give only an estimation
of the quantities that are measured. Two
things are of special importance, then: first,
the approximation has to be in the lines of
what is admissible by standard economic
analysis, and, second, the methodology has
to be consistent among the different cases
considered.
We will focus on the most measurable costs,
which can be estimated according to standard economic analysis. There are, however,
important costs that are not so easily measurable, at least with the kind of data available. These difficult to measure costs include:
•
The cost of imposing a burden on the
sector that contributes most to the
productivity and economic growth: It
has been estimated that ICT industry
(between 3-5% of GDP in most European countries and around 6% in the USA)
contributed to about 40%-50% of productivity improvements in the European
economy in the most recent years25.
25
The growth and competitiveness of the ICT (knowledge-economy) sector is, therefore, a very first priority of the European
Union (Lisbon strategy) and the levy systems create difficulties
and burdens to the goals established by the EU in this sector.
The European Commission reported in June 2005 that ‘Information and communication technologies are a powerful driver
of growth and employment. A quarter of EU GDP growth and
40% of productivity growth are due to ICT’ (‘i2010 - A European Information Society for growth and employment’ - Communication from the Commission to the Council, the European
35
Compensation for private copying: an
economic analysis of alternative models
•
The cost of legal uncertainty: In section
(v) below we compute the litigation costs,
but they do not include the cost of the
uncertainty associated with decisions on
disputed claims or on future levies.
•
The cost of being business unfriendly
in a global economy: ICT and CE firms
may choose to establish their headquarters, R&D activities and invest their constrained marketing budgets in countries
or regions that do not impose an unfair
burden on their products and where costs
of operation and sale are more limited.
•
•
The cost of limiting product development and innovation: ICT and CE firms
may decide to limit R&D activities on
products that may be subject to levies
or limit innovative functionalities that
may trigger the application of copyright
levies (e.g. copying speed / capabilities
may be modulated and/or restricted by
manufacturers in order to avoid application of higher levies that may impact
merchantability of the product on the
concerned country).
The cost of being unfair to consumers
and business customers: Consumers,
Parliament, the European Economic and Social Committee
and the Committee of the Regions; June 2005, page 3). The
data on the percentage of the GDP that corresponds to the
ICT industry can be seen in the same report. ‘The economic impact of ICT: evidence and question’ note published by
the i2010 High Level Group (April 20, 2006) provides further
evidence on the economic impact of the ICT sector. And the
recent consultation ‘Post-i2010: priorities for new strategy for
European information society (2010-2015)’ launched by the
Commission in September 2009 emphasizes the need for a
new European digital agenda to accelerate the economic recovery and maintain its world leadership in high-tech sectors,
to kick-start ICT-led productivity to offset GDP stagnation as
the labour force starts to shrink when the baby boomers retire
and to foster new, smarter, cleaner technologies that can help
Europe achieve a factor for growth, among other goals.
More recently, the weight attributed to ICT sector as engine
for productivity growth has even increased; in such regard,
the EU Ministerial Declaration on the European Digital Agenda
(Granada, Spain, April 19th 2010) indicates that ‘the ICT sector
is a crucial driver of growth and jobs in the EU economy, ICT
is contributing 50% to productivity growth and a key source of
innovation and new business opportunities.’
for instance, may feel an unfair treatment as a justification to circumvent
the legal stipulations and avoid the payment of levies26. This antipathy against
levies may be especially high for those
customers that do not engage in private copying activities and may feel legitimated to copy any copyrighted work
even beyond the legal limits authorised
by the private copying exception.
Other studies dealing with the economic
impact of copyright levies have focused on
the cost of the system to the honest firms
and consumers; for example, the Nathan
Associates research study27, which concludes that ‘each €1 charged in copyright
levies imposes a €2 cost on the European
economy through lost sales and competitiveness’.
Here we estimate the cost to the economy
as a whole which, almost by definition, will
be smaller, as some (but not all) losses to
the honest firms are gains to firms in the
grey market, or as some (but not all) losses
to consumers may be gains to the rightholders that get the collected levies.
The magnitude of the issues that may potentially result from copyright levies system(s)
can be easily understood when considering that ‘in principle, a total of over 6% of all
26
See, as an example, the views of Juan Iranzo (General Director
of Instituto de Estudios Económicos, Spain) in Cuadernos de
Información Económica, 202 (January - February 2008), pp.
60-61, where he says: ‘I found very suggestive the warning
raised by Professor Carrillo on the effects on the levies on the
increase of abuses on intellectual property. He says, correctly,
that ‘the collection of levies in a coercive manner will reduce
dramatically the scruples of an average Internet user when
downloading a movie or a song and disseminating it among his
friends.’ Many will think that they already paid for that. Thus,
unintentionally, the levy may become in a moral alibi for incorrect behaviours.’
27
‘Economic Impact Study: Private Copying Levies on Digital
Equipment and Media. Direct Effects on Consumers and Producers and Indirect Effects on Sales of Online Music and Ringtones’ - Nathan Associates Inc. (May 2006). Report available
at http://www.digitaleurope.org/fileadmin/user_upload/document/document1162906994.pdf
ENTER - IE Business School
36
intra-EU imports and exports, amounting in
total to over €100 billion, are goods which
actually or potentially attract a levy.’28
It is impossible to provide exact amounts for
the losses we estimate. Different methodologies will give different numbers. We are interested in the order of magnitude of the losses
and in the comparison of losses among different alternatives. This means that if we estimate a loss of 100 with Alternative A, and a
loss of 50 with Alternative B, one may think
the actual loss with Alternative A to be in the
range of 50-200, and that the actual loss with
Alternative B within the range 25-100 (a big
difference, but in both cases within the estimated order of magnitude). What is more important, one can be more confident that the
loss with Alternative B is about half the size of
the loss with Alternative A (or, at least, significantly lower), as both losses were computed
with the same methodology.
In this line, our analysis will be focused on the
four largest EU country markets with a copyright levy system (France, Germany, Italy and
Spain), and will use available data for the year
2005. This selection of data is especially interesting because is sufficiently representative
of the different amounts of levies in different
devices, exhaustive data is publicly available
from Nathan Associates research study29 and
data correspond to more stable market-conditions preceding the last economic crisis.
Our findings can be summarised in the next
tables. (The details of the calculations can be
found in the Appendix).
Compensation for private copying: an
economic analysis of alternative models
a reference the collectable amount, the quantity that could have been collected if every
product that was supposed to pay the levy
had paid it. It seems that some of the disputes and of the lobbying in favour of extending the system of levies come after the realization that the collected money did not meet
the expectations. In any case, the information
will be given in a way that will make it easy to
change the point of reference.
Figure 2.1 shows some economic concepts
relevant to our analysis. The letters in the
graph are as follows:
D: Demand
S: Supply
E: Equilibrium without the levy
EL: Equilibrium with the levy
p: Price
q: Quantity demanded at price p
pL: Price with a levy
qL: Quantity demanded at price pL
Levy = pL - p
A: Collectable amount (i.e., if there is no ‘grey market’)
B: Direct loss in welfare (consumers’)
C: Lost revenues in the honest market (producers’)
Finally, because of grey markets, not all products that were due to pay a levy did pay it.
This implies that there is a collectable amount
and an actually collected amount. We take as
28
EC Internal Market, ‘Background Document – Fair Compensation for Acts of Private Copying’ (February 14, 2008). http://
ec.europa.eu/internal_market/copyright/docs/levy_reform/
background_en.pdf
29
See footnote 31
ENTER - IE Business School
The imposition of a levy changes the equilibrium from E to EL. Area A (the collectable
amount) is a transfer of money from con-
37
Compensation for private copying: an
economic analysis of alternative models
sumers to the Collecting Societies30. Area
B is a net loss of welfare in the economy:
consumers lose this amount, and it is transferred to no one, it is just wasted. Finally, as
the supply is usually given by the costs to
provide the good, area C is typically considered neutral in computing the welfare loss in
the economy, as this amount ideally compensates costs (more on this later).
Table 2.1 shows the sizes of areas A, B and
C in each of the four countries31 for all the
products that are levied (but not for those
under dispute).
Table 2.1. Quantification of effects of introduction
of a levy. Million euros (2005)
Country
Collectable
amount
A
Direct
welfare loss
B
Lost
revenues
C
France
278
61
206
Germany
226
22
259
Italy
199
32
165
Spain
222
63
88
Total
925
178
718
In the case of France and Italy, levies are collectable only in connection with audio and
video reproduction devices (including media).
In the case of Germany and Spain, levies are
collectable in connection with audio, video
and, additionally, book reproduction devices.
In order to make our comparison more homogeneous, Table 2.2 next shows the difference
between the collectable amounts and the actually collected32 in each of those 4 countries
30
In the situation considered in Figure 2.1 the levy is translated
into the price entirely (and, thus, paid by the consumer). In a
more realistic situation, competition will make part of the levy
to be absorbed by the manufacturer. For simplicity, we have
imputed the whole burden to the consumer.
31
The collectable amount is taken from research report by Nathan Associates Inc. ‘Economic Impact Study. Private Copying
Levies on Digital Equipment and Media’ (May 2006): www.
nathaninc.com.
32
In order to make possible to compare data on collectable levies based on sold units reported by Nathan Associates Inc.
for 2005 with annual revenues for levies actually collected the
Table 2.2. Audio and video related levies.
Million euros (2005)
Country
Collectable
amount for Collected in
all audio and all audio and
video devices video devices
Difference
% of
collected over
collectable
France
278
155
123
55.75%
Germany
211
147
64
69.66%
Italy
199
73
126
36.68%
Spain
196
58
137
29.74%
Total
883
433
450
49.03%
for all audio and video devices (excluding additional book reproduction copyright levies in
effect in Spain and Germany). This table provides an idea of the order of magnitude of the
grey market.
Now we can proceed to the study of the costs
of the current levy system. Next is a list of
possible losses. We will give the losses in absolute terms and also in cents per collected
Euro. When we say that it costs x cents to
collect one Euro, it means that, for every Euro
the collecting society collects, the economy
as a whole incurs in a cost of x cents, that
represents a total loss to the economy (i.e.,
the collecting society gets one euro, someone
pays that euro, and, in addition, x Euros are
lost because of the generated inefficiencies).
(i) Direct loss in the market (consumers)
This is Area B in Figure 2.1 (loss of consumers’ surplus). In our case, as shown in Table
2.1, we find that to collect 925 Mio € via copyright levies, 178 Mio € are directly wasted.
I.e., for every euro collected, more than 19
cents are lost. We would reach the same estimation if we used the data on the actually
same year by collecting societies in the respective countries,
collected amounts are taken from the ‘International Survey on
Private Copying Law & Practice, 17th Revision 2006’ published
by the Dutch collecting society Stichting de Thuiskopie. Successive versions of this survey (18th Revision for 2007, 19th
Revision for 2008 and 20th Revision for 2009) do not provide
information on annual revenues from levies per country, but
simply information on levy applied per type of device.
ENTER - IE Business School
38
collected amount and the corresponding estimated consumer surplus, as each of these
magnitudes would be around half the size of
the figures.
(ii) Indirect loss in the honest market
(manufacturers / producers)
To compute the losses in this point we concentrate on the so called ‘honest market’ (producers that are paying copyright levies). By
this, we mean the market formed by companies that pay their levies. Let us go back to
the meaning of area C in Figure 2.1. The conditions for the welfare neutrality of these lost
revenues are (among others) that we are considering (i) a single competitive firm within a
big market or (ii) a single sector within a big
economy. Things are different if the sector in
question is big within the economy, the market is not perfectly competitive or the sector
uses resources that have a lesser value when
used in a different sector. These three circumstances are present in the ICT and CE sectors. In an industry with a big fixed cost and
relatively small marginal costs of production,
the supply schedule does not correspond to
the rule ‘supply curve = marginal cost’, but
typically with the rule ‘supply curve = marginal
cost + mark up (or average cost + mark up)’.
If the industry is competitive enough, firms
Compensation for private copying: an
economic analysis of alternative models
will enter and produce until the mark up just
cover the fixed costs and gives normal profits
(this means that the mark up is smaller than
the profit rate). A mark up of, say 10%, means
that 10% of the total lost revenues are lost.
This adds 73 Mio € to the total losses. Note
that this mark up is not the profit rate or profit
margin, which can be much lower because it
has to deduct the fixed costs33. This economic
loss may be seen in Figure 2.2 as the area (PMgC)x(Q-Q’).
Furthermore, if the resources not used to produce the quantity q-qL go to a different sector,
one can expect that they will be productive as
in the average sector in the economy. Now,
the ICT and CE sectors grow at a faster level
than the average, and produce a higher rate of
profits. The ICT and CE industries have been
growing at an average rate above 5% for most
of the recent past years preceding the current
economic crisis34, and it may be legitimately
expected to grow at this level once the crisis
is over, while the rate of growth for the European Union during the same years had been
at a more modest 2% (and it is not expected
to be higher in the near future when the crisis is over). Thus, resources not used in the
ICT and CE industries (due to no-market decisions) and used somewhere else will provide
less than half the growth. This is translated
into a loss of efficiency when these resources
go to a different sector. A modest difference of
productivity of another 10% between the ICT
and CE sectors and the average sector in the
economy would account for another loss of 73
Mio € , amounting to a total loss of 146 Mio €.
In the absence of precise data on the causes
of these indirect losses, the numbers we pro-
ENTER - IE Business School
33
See the Appendix for some examples on profit margins.
34
See the market analysis by IDC: ‘An Overview of IT Distribution
in Western Europe. Country Channel Development Forecasts
2005-2010’ (published in July 2006): ‘Figure 1 presents current
IDC forecasts of IT spending in Western Europe. It indicates
that total spending will grow by a CAGR of 5% between 2005
and 2010. This is far short of the double-digit growth seen in
the late 1990s but is still twice the average growth in GDP forecast for the region.’
39
Compensation for private copying: an
economic analysis of alternative models
vide have been chosen to be conservative.
To be consistent, when analysing the costs
for other alternatives, we will be using similar
proxies. One can, then, compare how different
these losses must be under the different alternatives to make a case for a particular one.
market for these products. Figures 2.3 and 2.4
illustrate the size of the grey market for blank
DVDs in several countries37.
(iii) Losses in the grey market
The European Commission has identified the
existence of grey markets as one of the main
problems related to the current copyright
levies systems that needs to be resolved35.
The term ‘grey markets’ usually refers to the
flow of goods through distribution channels
other than those authorised or intended by
the manufacturer or producer. In the present
case, grey markets are identified as those
trade flows that avoid levies by not declaring
these trades at import.
According to our calculations in the four countries (Germany, France, Italy and Spain), a total
of 433.3 Mio € was collected, out of a collectable amount of 926 Mio € (if every product had
paid the levy). This means that a little over half
of the goods that were due to pay the levy, did
not in fact pay it. There is evidence that most
grey market activities take place in the blank
media markets. Some estimates for the year
2005 in Spain36 reported a 60-65% size of the
grey market for blank media. Other estimates
give an even higher figure for Italy. And grey
market data will be even higher nowadays.
Whichever figure is more accurate, the grey
market represents a great loss for the honest
producers and for copyright holders. A conservative 60% of the 781.2 Mio € collectable
revenues in the market for blank media gives
a figure of 468.7 Mio € as the size of the grey
35
European Commission – Internal Market ‘Background Document: Fair Compensation for Acts of Private Copying (Feb.
2008). See page 12-13, specially footnote 28. Available at
http://ec.europa.eu/internal_market/copyright/docs/levy_reform/background_en.pdf .
36
Spanish newspaper Público (October 22nd, 2007) refers to a report made by industry association ASIMELEC along these lines.
If the products in the grey market come from
within the European Union single market, the
loss to the honest firms may not be a loss
to the European Economy, although sure
enough there is a cost to the economy because there is an added cost to operate in
the grey market (for both producers and consumers), and because there is a social and
political cost in the establishment of policies
that are unfair to the honest compliers.
37
EICTA’s Submission to the European Commission’s Second
Call for Comments ‘Fair Compensation for Acts of Private
Copying’, April 2008.
ENTER - IE Business School
40
Compensation for private copying: an
economic analysis of alternative models
If the products come from outside European
Union market, there will be costs similar to
the losses in the honest market (in addition
to the ones just mentioned above).
The exact impact of these losses is difficult
if not impossible to assess. A range of 20-40
in the percentage of the loss of revenues as
losses to the ICT and CE industry in Europe
look conservative. A 20% of 468.7 Mio € (the
estimated revenues in the grey market for
blank media) give a total loss of 93.7 Mio €.
This is an additional 10.1 cents wasted in the
European industry for every collected Euro.
(iv) Losses due to inefficient price policy caused
by differences in levies across countries.
One can get an idea of the distortion that different levies in different countries impose on
the ICT and CE industries by observing the
wide range of levies. Table 2.3 shows these
comparisons for flash memory and equipment38. In the case of blank media, the percentage of the levy, where it is imposed, is
usually so high, that a policy to balance the
levy across countries cannot work.
Table 2.3. Levy as % of price (without levy)
2005, disputed levies not included
Blank CD-R
Blank CD-RW
Blank DVD-R
Blank DVD-RW
Blank DVD+R
Blank DVD+RW
Flash memory
CD Burners
DVD Burners
Mobile+MP3
Video Recorder
Portable Player
38
France
Germany
Italy
Spain
225%
34%
270%
143%
289%
215%
9.7%
4.64%
9.09%
2.8%
36%
19%
39%
29%
2.8%
22.51%
13.97%
3.75%
2.5%
156%
24%
155%
82%
166%
124%
2.91%
2.91%
2.91%
2.91%
2.91%
144%
22%
298%
157%
318%
237%
8.06%
-
The numbers in this table are computed based on the data
that is provided in columns (1) and (2) of Tables A2-A5 in the
Appendix.
ENTER - IE Business School
It is impossible to provide an accurate estimation to the losses caused by this inefficiency. In the Appendix we provide more details
about a model that can be used to estimate
the order of magnitude of these losses. In the
model, a price policy aimed at eliminating the
differences in price caused by the different
levies gives an additional loss of €21.2 Million, or 2.3 cents per collected Euro.
Appendix shows the losses of distributing
the levies imposed in some countries over all
countries. It is important to realize that this
policy has costs in both types of countries
(those where the price is now higher and those
where it is lower). The reason is that, previous
to the equal price policy, the price was adjusted efficiently, while the new price generates
a distortion in all countries. Of course, for the
firms this cost is lower than loosing part of the
market to arbitrators or grey market.
Figure 2.5 shows this argument with only two
countries and one product. The levy is imposed only in one of the countries. In both
countries supply is given by S, and demand
by D. Say that now there is a levy L in Country A. This translates the supply offer to S+L.
The equilibrium in Country A with a levy and
in Country B without a levy are shown in E.
Now, let us have a unique price in both countries, with the restriction that this price is
computed by adding a compensating levy of
size CL, and with the property that CL x Q’ in
both countries generate the same revenues
L x Q that were generated in Country A in situation E. This means that the sum of the areas limited by (P+CL)E’B’P in Country A and
(P+CL)E’BP in Country B is of the same size as
area (P+L)EBP in Country A.
In Country B an economic loss of the size
of the area BEE’ is generated. In Country A,
consumers add to their surplus the area limited by points (P+L)(P+CL)EE’, while producers reduce their surplus by the area limited
by (P+L)(P+CL)AE’. The difference is the eco-
41
Compensation for private copying: an
economic analysis of alternative models
nomic loss in the change from E to E’, and is
given by the triangle EE’A39.
Case Study: inkjet multifunctional
printers in Germany
Here is another illustrative example. Say
that a given commodity product is currently priced at an average price P=100€
in all Europe, and that at this price 13
Million units are sold in Europe. If for example one country only within Europe
is considering imposing a levy of 100€
on that product and that this country is
currently selling 2.6 Million units. What
would be the consequences?
Consider two potential reactions to this
situation by honest producers41:
This ‘hypothetical case’ represents the
then-existing situation with almost accurate numbers for the market for inkjet
multifunction devices in Germany and
Europe in 200540 (see also Figure 2.6).
39
Table A.7 in Appendix computes these losses for a market
formed by the four countries.
40
Precise numbers can be found in IDC Market Analysis ‘Western European MFP Forecast and Analysis 2006-2010’ (April
2006), pg. 45-46: Germany’s total market was 2,585,673 inkjet
multifunctional printers, Western European Inkjet Multifunctional Printer Unit Shipments in 2005 were 13,013,741. Average selling price was 109€ in 2005. Disputed levies for inkjet
multifunctional printers were in the range of 76.70€ (for units
copying up-to 12 ppm / pages per minute) and 102.26€ (for
units copying between 13-35 ppm), with the average in terms
of category of units sold closer to the higher end. Interestingly,
(1) No attempt to avoid the price distortion in the
German market is made by producers
Under the hypothesis of constant marginal costs that we are following in this
report, the price of these devices in Germany will increase to €200. This price increase translates into a decrease on the
demand of these products in the honest
a flat copyright levy amounting 12€ has been settled between
collecting societies and industry for inkjet multifunctional printers for 2008-2010.
41
See the Appendix for details and calculations.
ENTER - IE Business School
42
German market from original 2.6 Million
units to 1.03 Million units.
Now, as a result of that increase on price,
some consumers will buy in the grey market or ship their device from other European country with no or lower levy42. If
half of the consumers do this43, then the
direct economic loss can be estimated to
be 28.83 Mio €. Indirect losses (to honest producers) can be computed to be
another 31.32 Mio €. Total loss is, then,
60.15 Mio €.
(2) Producers decide to increase the price in all
countries in the European market
Since Germany’s market is 1/5 of the
so-called Western European market,
the final price will move up from 100€
to 120€. Now direct losses are 26 Mio
€, and indirect losses 56 Mio €, giving a
total of 82 Mio € as annual loss for the
European economy.
Legitimate firms’ reaction to avoid the
price distortion and the grey market and
protect honest business has the consequence of an additional economic loss of
82 - 60.15 = 21.85 Mio €. Note that the
smaller loss with the first price policy is
42
This would be a legitimate move by consumers. As Prof. B. Hugenholtz and N. Helberger remind us in ‘No place like home for making
a copy: private copying in European Copyright Law and Consumer
Law’ (Berkeley Technology Law Journal, 2007-3, p. 1061-1098):
‘Principle One of the EC’s Ten Basic Principles of Consumer Protection in European Union is Buy what you want, where you want’.
43
We saw before that for smaller changes in prices, the grey market
was at least 60% for blank media. A similar behaviour may be
expected from users of multifunctional printers, who may take
several options, such as not buying this product or buying it from
a non-levied source (either grey market from non-honest channel
or legitimately on Internet from a country where no levies are applied on this product). In addition, consumers of inkjet multifunctional devices would have an additional way to avoid the high
levy, which is buying products subject to lower levies that perform somehow equivalent functionalities, such as a PC-connected multifunctional printers (which in Germany were subject to the
much lower scanner levy: €10.23 settled levy instead than €76.70
disputed levy, or €31.96 settled levy instead than €102.26 disputed levy) or eventually some users may choose the much less attractive option (which in our view is even not an imperfect substitute from an economic perspective) of getting and connecting 2
stand-alone devices (a scanner plus a printer) that in combination
ENTER - IE Business School
Compensation for private copying: an
economic analysis of alternative models
due to the fact that consumers buying in
the grey market do not lose and thus they
do not compute as a loss to the economy
(without the grey market, the annual loss
of the first price policy for the European
economy would have been €89 Million,
higher than with the second price policy).
One may think that to avoid this extra cost
for the economy, the second price practice (not charging the full high levy in the
concerned country but spreading it over
the whole European market) should be
prevented. Furthermore, anyone will deem
as unfair to have non-German customers
paying a higher price for their products because of high German levies (and to have
German right-holders compensated by
users in countries that do not make private
copies of German works or do not foresee
copyright levies or apply on different set of
products in their own countries).
However, there are several arguments
against it, among others:
• First, it seems to go against the freedom of firms in setting their price as
long as it is not an anti-competitive
practice.
• Second, it makes innovative products available to a larger audience of
consumers (remember that German
market would reduce more than 60%
from 2.6 Mio to 1.03 Mio units in case
of full application of disputed levy in
Germany).
• Third, it is quite unfair to firms to tell
them not to protect themselves from
grey markets / dishonest producers
that sell into German market without
were subject to a lower levy. Any of those behaviours will drive
to a lower income for collecting societies, what takes legislator
and collecting societies to the same dilemma as governments
face when fixing taxes: a lower tax rate may increase collection
of revenues and be less harmful to the economy.
43
Compensation for private copying: an
economic analysis of alternative models
to regulate how ‘fair compensation’
for private copying can be secured.
charging copyright levies and to loss
their market-share.
• Fourth, we need to emphasize again
that the smaller loss with the first
price policy is due to the fact that
consumers buying in the grey market
do not lose. Without the grey market,
the annual loss of this price policy for
the economy would have been €89
Million (higher than the alternative
price policy).
• Fifth, the collected quantity is greater
with the second policy: more goods
that pay the levy are sold in Germany,
which local honest market would get
depressed if the full levy was transferred into the local pricing.
• And finally, this potential consequence
on the European common market
would be the economic result of a political decision by European authorities deciding not to harmonise copyright levies (or alternative compensation schemes) at a European level and
leaving discretion to Member States
Table 2.4. Effects of a 100€ levy on the 2.6 Mio units
of inkjet multifunction printers sold in Germany
(Current average product price: 100€ - 2005)
No price
No price
Price
harmonisation harmonisation harmonisation
(Scenario 1.1: with
no grey market
assumption)
(Scenario 1.2:
with grey market
assumption)
Demand of levied
goods in Germany
(million units)
1.034
0.517
2.04
Collected levies
(million euros)
103.4
51.7
204
Direct loss
(million euros)
(consumers)
57.668
28.834
26
Indirect loss
(million euros)
31.32
31.32
56
Total loss
(million euros)
89
60.154
82
(v) Losses due to litigation
The current system, with no harmonised and
transparent methodology to determine devices subject to levies and their fees, encourages disputes and litigation. The establishment
of different levies in each of the many types of
products, and the development of the technology resulting in ever new products with
new features, makes it almost impossible to
determine smoothly which product is subject
to which levy (if any) in many cases. Further
the disparity in the amount of the levy for similar and different devices in an individual country and within Europe, means that the applicable levy has a supreme economic effect on
the profitability and/or market. Manufacturers
and importers dispute whether levies (and if
so in what amount) are to be paid on certain
categories of devices. Both firms and collecting societies suffer the costs of litigation. In
addition to the cost of lawyers and other expenses to both parties, companies have to
make financial accruals and the collecting societies have to explain to their members why
they cannot distribute the levies not received.
The ICT and CE44 industry reports a litigation cost of about $2.5 Mio in external legal
costs, plus $1.9 Mio in internal legal expenses in the year 2008. Also, the estimation for
the lost interests may be more than $700
Mio for the period of 1997-2010 on all disputed products.
The collecting societies would have a comparable litigation cost (at least in the order
of magnitude). A rough estimate of $50 Mio
a year to the economy during the litigation
period looks like a reasonable cost ($700
Mio divided by 14 years gives a figure of
$50 Mio a year; adding the internal and ex44
Information provided by ICT industry. More details in the Appendix.
ENTER - IE Business School
44
Compensation for private copying: an
economic analysis of alternative models
ternal lawyers by both the ICT and CE industries and the Collecting Societies gives
$55 Mio a year, or about €35 Mio in the
four countries under analysis). The collecting societies also have the additional costs
of actions taken against firms that do not
pay the levy (the grey market) on products
that are paying levies by honest importers.
Therefore this calculation is conservative,
as there are significant additional litigation expenses as a result of fighting against
grey marketers45. Litigation is likely to continue as new products become available
in the electronics market and current levy
45
For example, there are dozens of ongoing lawsuits in Spain for
levies not paid by many firms on recordable media (CD-R/RW
and DVD-R/RW discs).
schemes are attempted to be transposed
to those devices by collecting societies.
The following table summarises the losses resulting from those conservative calculations
provided in the various sub-sections above.
Table 2.5. Losses from current Levy Systems
Type of costs (loss)
Amount Cents lost per
(Mio €) collected euro
Loss for Consumer Welfare
178
Loss for honest producers (20% of lost rev.)
146
19.2
15.8
Loss from grey market (blank media)
93.7
10.1
Loss from ineff. price policy (excl. blank media)
21.2
2.3
Loss from litigation and lost interests
35
3.8
473.9
51.2
Total
To sum up
• There are many non quantifiable costs of the current levy system. Among them:
––
––
––
––
––
The cost of imposing a burden on the sector that contributes most to productivity and economic growth;
The cost of legal uncertainty;
The cost of being business unfriendly in a global economy;
The cost of limiting product development and innovation; and
The cost of being unfair to consumers and business customers.
• There are many quantifiable costs of the current levy system. Among them:
––
––
––
––
––
Direct loss in the market (mostly to consumers);
Indirect loss in the honest market (producers);
Losses in the grey market;
Losses due to inefficient price policy; and
Losses due to litigation.
• A conservative estimation of the quantifiable costs to the economy as a whole add up to 51.2 cents lost to
the European economy per Euro collected in terms of copyright levies (in other words, one Euro goes from
different economic agents to the collecting society and 51.2 cents are wasted to accomplish this transfer)*.
* This 51.2% economic waste estimate does not include copyright levy incomes that are not distributed to right-holders but are retained
by collecting societies for various reasons (collection and administration fees; cultural funds; non-identified right-holders; right-holders
identified that do not claim their share proactively; etc.), as they are not a loss of the economy as a whole. However, it should be
noted that copyright levies income detracted by collecting societies prior to distribution to right-holders may be also substantial: the
Stakeholder Consultation carried out by the Commission in 2006 revealed that management and other fees incurred by different
authors’ societies in general in 2004 ranged from 4.2% to 20% and that amounts detracted for social, cultural and/or collective
purposes ranged from 0% in countries such as Finland and Sweden to 51% in Austria. The amount of un-identified rights was not
reported by the Commission, but the report published by Governmental agency AEVAL in Spain in April 2009 revealed that nondistributed rights represented 13.65% on average (for all right categories, not specifically for private copying; see page 60 - http://
www.aeval.es/comun/pdf/evaluaciones/E12B.pdf ) and that administration and collection fees ranged from 2.84% to 28.77% in 2007
(see page 36); these amounts must be considered in combination with additional cultural and social deductions in effect in Spain,
which by law amount 20% for private copying income, and which also decrease the amount of levies that are finally distributed among
right-holders.
ENTER - IE Business School
45
Compensation for private copying: an
economic analysis of alternative models
2.3.
Apparent economic
benefits of the current
system of copyright levies
At the next section of the report we will provide a comparison between the current system of copyright levies and the proposed
alternatives. Here we will comment on the
benefits that are claimed in some reports
defending the continuing application of current copyright levy system(s).
Several lines of economic arguments of the
supporters46 of the actual copyright levies
system(s) are particularly weak:
(i) Copyright levies correct an economic
inefficiency
It is argued that the ICT and CE products and
the music sector are complementary, and that
an increase in the demand in one sector must
be accompanied by an increase in the other.
As the record companies see decreasing revenues in the last years, this is seen as proof
that markets do not perform well. The fallacy
is evident when we take the music sector as a
whole, whose size and activity has never been
greater47. In fact, in Section 1 we showed that
there are no inefficiencies. The problem of the
record companies to cope with changes in
the markets and consumer demand preferences does not constitute a piece of evidence
to show that markets do not work as they are
supposed. I.e., the declining revenues to the
46
See ECONLAW, Economic Analysis of Private Copy Remuneration, September 2007.
47
For instance, scenic and music arts rights income increased
a 14.4% from 2006 to 2007 and a 4.7% from 2007 to 2008 in
Spain; and live variety music and classic music concerts in
particular increased an 8.5% and 8% respectively in 2008 in
Spain (source: SGAE Annual Statements 2007 and 2008).
Table 2.6. Forecasts for worldwide music market
(billion USD)
2007 2008
Physical recorded music
30.4 27.4 24.3 20.9 17.6 -13%
2009
2010
2011 CAGR
Online music
4.1
6.0
8.4 11.4 14.6 38%
Publishing
8.0
7.6
7.9
8.2
8.7
2%
Live
25.6 28.2 31.0 34.1 37.5 10%
Total
68.1 69.2 71.6 74.6 78.4
4%
Source: IDATE, DigiWorld 2009
record companies for recorded CD sales cannot be used as the measure of the size of the
whole music sector.
(ii) There are long run effects of a compensation
for private copies in the number of music
works
As we mentioned before, short run effects
must be socially negative. To show a positive long run effect ECONLAW argues along
the following lines: the compensations to
authors increase their willingness to create,
this means more titles, which in turns means
a better value for the CE devices and an increase in their demand.
For the first part of the argument it is estimated by consulting firm ECONLAW that the
compensation is about a 5% of the returns
for copyrights, that the elasticity for labour
is about 0.3, and therefore, that titles will increase by 30% of 5%, i.e., 1.5%, after the
levy is imposed. There is, at least, one big
mistake here, as for most authors copyright
returns are a very low proportion of their incomes from creative activities.
For instance, according to figures from the
UK society distributing performance income
(Performing Rights Society - PRS), out of
30,000 members, only 700 (2.3%) receive
total performance income of more than
25,000 GBP (€36,140) with 16,000 (more
than 50%) earning under 100 GBP (€154)
ENTER - IE Business School
46
a year48. Even more, for those authors that
have a big proportion of copyrights, their incomes are high, and their labour elasticity,
much lower49 (even negative as standard labour economic shows).
Income distributed by Spanish collecting societies to authors does not drive to a different conclusion50: whilst arithmetic average
assignment per author in 2007 was 8,972€
in the case of SGAE (representing music and
audiovisual authors) and 1,921€ in the case
of CEDRO (representing writers), the median
per right-holders was just 266€ and 219€ respectively. Moreover, proper attention should
be given to the index Gini, which measures
the equality or inequality on the distribution
of income between right-holders. An index
equal to zero (0) means a completely equal
distribution; an index equal to 1 means that
only one right-holder received all income
(therefore, the closer to 1 the more concentrated distribution is in fewer right-holder
hands). Gini index for SGAE in 2007 was
94.58% and for CEDRO 87.93%; this correlates with another interesting data, which
is the % of right-holders among which 25%
of the assigned incomes is distributed: in the
case of SGAE, 98.27% of the right-holders
receive 25% of the funds (meaning that only
a 1.73% of right-holders received 75% of the
funds) and in the case of CEDRO as many as
95.68% of the right-holders received 25% of
the funds (meaning that 75% of the funds go
to 4.32% of the right-holders).
48
See ‘Authors’ earnings from copyright and non-copyright
sources: A survey of 25,000 British and German writers’,
Martin Kretschmer and Philip Hardwick - Centre for Intellectual Property Policy & Management – Bournemouth University
(December 2007). Similarly, only 20% of UK writers earn all
their income from writing. Income for German right-holders
is not better either than data indicated for UK right-holders.
Full report available at http://www.cippm.org.uk/downloads/
ACLS%20Full%20report.pdf.
49
See some data on labour elasticities in Spain in the Appendix.
50
AEVAL Report ‘Evaluation of the System of Collective management of Copyright and Related Rights’ (April 2009), available
at http://www.aeval.es/es/evaluacion_de_politicas_publicas/
evaluaciones_de_la_agencia/index.html (main report available
also in English; annexes available only in Spanish).
ENTER - IE Business School
Compensation for private copying: an
economic analysis of alternative models
This means that the theoretical effect of
stronger copyright protection on creativeness / production of titles is much lower, at
least for the large majority of creators, to the
point of being negligible51. The same conclusion is reported as a consensus among
leading economists (including several Nobel
laureate)52.
The second part of the argument, the alleged effect on the demand for ICT and CE
devices, has also errors of this size. For the
videogame console market it is estimated
that the effect on console penetration rates
of an increase of 1% in the number of game
was equivalent to a decrease in 2.3% in the
prices of hardware. ECONLAW translates
this effect to the sales of ICT and CE goods
after an increase in music titles. This argument does not take into consideration the
fact that ICT goods (and most CE goods)
have many other demands than to listen
to music (unlike consoles models available
in 2007, when ECONLAW report was published, used almost uniquely to play games)
or the fact that new titles can be consumed
in many forms that do not require ICT and
CE products (like books that can be read
in paper or CDs that can be played in CD
players, and unlike games, which can only
be played in specific consoles by virtue of
technical protection measures used both in
those devices and copyrighted games).
In any case, we have seen that there is no
need to increase the amount of produced titles because of private copying, as the market already provides an efficient amount.
Even if this is wrong, the compensation via
an extension of copyright protection by ap51
Exactly as we saw in Section 1.4, when analysing the lack of
effect on the amount of literacy works in the US from any increase on copyright protection, or the lack of relation between
literary production and the drastic increases on levies collection in Spain.
52
See amicus curiae brief submitted to the Supreme Court of
the United States in case ELDRED et al. v, ASHCROFT (No.
01-618). Available at http://cyber.law.harvard.edu/openlaw/
eldredvashcroft/supct/amici/economists.pdf.
47
Compensation for private copying: an
economic analysis of alternative models
plying a levy system in favour of right-holders
will not have this effect. Even if this is wrong,
the increase on the number of titles will have
a very small effect on ICT / CE sales, but the
increase of prices due to the levy will. Even if
all this is wrong, any positive effect that the
current system may have, will be preserved
by other forms of compensation (e.g., any of
the proposed alternatives mentioned in Section 3 below), with smaller economic distortions than the current system53.
(iii) The value of sold ICT and CE devices is a
measure of the number of made private
copies
This assumes that the number of private copies is proportional to the value of the sales of
those ICT and CE devices. However, many
considerations are in order: it is the technology, not the value of its sales, what makes
copies possible. The value of the devices may
change due to market conditions or because
they include more other features, but none of
this changes their capacity to make copies.
Also, for consumers, the utility of extra copies
is decreasing, which means that their number
and value are decreasing, not proportional, to
the capacity of the devices to make copies.
This means that, as more people have more
and better ICT and CE goods, there will be
a moment when the number of private copies does not increase by much (if I can make
most of my copies with my first desktop computer, I will probably not copy twice as much
when I buy a laptop as a second PC). Current
devices can make copies very efficiently but
having more and better devices will not significantly change the private copying practice
of most private individuals. It can be argued
53
Moreover, it must consider that the availability of new technologies provide more value to copyrighted goods. For example, IFPI Digital Music Report 2007 acknowledges that ‘portable players drive music demand’, ‘the increasing popularity
of portable digital music players is driving interest in music
services’, ‘portability is a key driver of growing demand for recorded music’ and ‘portable player owners are more likely to
buy music legally than general internet users’.
that other consumers’ actions are more related to private copying, like the act of actually
buying legal copies.
Additionally, in line with explanations provided in previous paragraph (ii) above regarding the videogames console market
and the lack of relationship between their
sales and private copying, we should indicate that this argument does not take
into account that music and film industries
compete with other forms of leisure (for
example videogames) and that users have
limited budget (and time) to spend on multiple types of leisure. A decrease on the
revenues of sales of pre-recorded CDs and
DVDs, while there is an increase on the revenues not only from consoles but especially
from console and PC (software) games54 to
a level that even exceeds combined sales of
CDs and DVDs, means more obviously that
many users prefer this type of leisure than
the one offered by pre-recorded music CDs
and film DVDs. And piracy is not either the
excuse here to justify this situation: piracy
rates for entertainment software are even
higher than piracy rates for other copyright
protected works that benefit from crosssubsidies coming from levies55.
Finally, no one can refute that sales of ICT
/ CE devices to business and professional
54
Detailed data on evolution of worldwide and Spanish games
and consoles market is available ‘ASIMELEC – Informe 2008
de la Industria de Contenidos Digitales – Report 2008 Digital Contents Industry’ available at http://www.asimelec.es/
media/Proyectos/Informe%20Contenidos%20Digitales/Informe_2008_Industria_Contenidos_Digitales.pdf (see pages
13, 56-58).
55
For example, aDeSe (Asociación Española de Distribuidores y
Editores de Software de Entretenimiento – Spanish Association of Distributors and Publishers of Entertainment Software)
reported for 2007 that revenues from Spanish videogames and
console market reached 1,454 Mio €, a 50% growth compared
with previous year. For the same year, the International Intellectual Property Alliance (IIPA) reported a piracy rate of 20% for
records & music, and 34% for entertainment software in Spain.
More current data from IIPA on piracy in multiple European
countries for business and entertainment software, books,
movies, records and music is available at http://www.ustr.gov/
about-us/press-office/reports-and-publications/2009/2009special-301-report.
ENTER - IE Business School
48
users – that by definition do not engage in
any type of private copying – and levies paid
for those sales keep no proportion with the
number of private copies made. Unfairness
and disproportion of any levy payments in
those situations is evident.
(iv) Different prices for the same product in
different countries do not imply a distortion
in the market
The ECONLAW report dismisses any damage
to ICT and CE markets as a result of the application of copyright levies, while many pains
are taken to show important effects in the mu-
Compensation for private copying: an
economic analysis of alternative models
sic market after small changes in incentives.
However, big changes in the electronic markets and pricing structure are dismissed with
no analysis because ‘pricing decisions for
digital CE products depend heavily on other
criteria.’ In Section 2.2 we showed that this
effect is all but negligible, and also that there
are many reasons to have different prices in
different countries in a competitive situation,
which can be even compromised after the introduction of a distortion factor like a levy by
forcing honest producers to follow different
price policies to respond to levies differentials
among EU Member States in a (supposed)
‘Single Market’.
To sum up
• The decline in profits for the record industry is not a sign of economic inefficiencies that can be attributed
to the act of legitimate private copying*.
• Arguments showing long term positive effects of the current levy system are based on spurious,
speculative reasoning, that do not conform with standard economic analysis or empirical evidence.
• An increase on the sales of ICT and CE devices does not correlate with an increase in the amount of
private copying and does not result in harm for right-holders.
• Levies impact the pricing policies on the ICT and CE markets either at a country or European-wide level.
* In fact, it is important to clearly distinguish between legitimate private copying and non-authorised illegal copying of copyrighted works.
Legally speaking, copyright levies are based only on legitimate private copying, and not on non-authorised copying. However, many
defendants of current levies system use the emotional argument of losses coming from piracy to justify the reasonability of getting
some subsidies via levies to mitigate those important losses. Despite that, as evidenced with data mentioned in previous footnote
55, piracy also affects other sectors, such as business and entertainment software, which do not receive any cross-subsidy for
illegal copying of their works. Why other (competing) industries have to be treated in a more favourable manner, except in case those
subsidies are solely justified on legitimate private copying, which is formally not legally authorised in the case of software?
ENTER - IE Business School
3.
Alternatives to the
current system of
compensation for
private copying
The Directive envisages fair compensation for acts of private copying. (…) The Directive is neutral as to the form of fair compensation. Many Member States have implemented the requirement of ‘fair compensation’ for acts of private copying by means of a private copying levy system on recording equipment and/or blank media. But there are other means of providing for fair
compensation. For example, Norway provides ‘fair compensation’ by means of a state-run fund.
European Commission Background Document - ‘Fair Compensation
for Acts of Private Copying’ (Brussels, Feb 14th 2008)56
As the European Commission acknowledges, the Directive is neutral as to the form of
securing fair compensation for private copying. A copyright levies system is just the traditional mean of compensation that has been in place since the beginning of the analogue reproduction era more than 50 years ago. However, nearly the whole spectrum
has changed since levies where first introduced. Today there are several ways to provide
fair compensation to right holders that may be economically more efficient in the Internal
Market than the current national private copying levy schemes, whilst ensuring that ‘fair
compensation’ is provided to right-holders for legitimate private copying of their works.
The following alternative schemes are suggestions on how to make improvements to the
current system or function as alternatives to the current levy collection systems. For each
of the alternatives, a short description is provided as to how it could work, followed by an
economic analysis as to its economic efficiency. Finally, a comparison of the alternatives
is made.
They represent either different amendments to the current levy system or alternative compensation mechanisms replacing the existing system. The first four options are based on
keeping the current levy system with some changes; the other four options are alternative
schemes replacing current levy system. Note that these scenarios are not exclusionary
per se, but some of them are compatible with other alternative(s) and may be implemented accumulatively.
56
EC Background Document ‘Fair Compensation for Acts of Private Copying’ (Brussels, Feb 14th 2008), see page 4 - http://ec.europa.
eu/internal_market/copyright/docs/levy_reform/background_en.pdf
52
Compensation for private copying: an
economic analysis of alternative models
Alternatives
Amendments
to improve
the current
Levies System
Alternative
Compensatory
Schemes
to replace
the current
Levies System
Description
1. European harmonised compensation
system administered at national level
System of copyright levies administered by collecting societies in each country
subject to a set of common European rules on levies assessment and payment
2. Payment of levies at retail level
Refine current system by having final-tier retailers that sell to consumers (and not
manufacturers and importers) held liable for payment of levies to collecting societies
3. European harmonised compensation
system administered at a European level
Similar to alternative 1, but with collection and distribution administered at a single
European level
4. Free choice of licensing collecting
society within the EU
‘One-stop-shop’ system that will permit debtors to pay copyright levies to one-single
collecting society in charge of collecting and distributing those levies European-wide
5. Application of levy to original work
Payment of compensation to be collected directly as part of the price of the music
CD, film DVD or book that may be copied
6. Compensation collected as indirect
taxes on digital devices
Application of a % fee under the form of an indirect tax on certain categories of
devices manufactured or imported in Europe
7. Payment of fair compensation through
State fund
Allocation of an annual amount from Governmental Budget to compensate right
holders for private copying exception
8. Compensation clause in the rightholders’ labour contract
Include compensation for private copying as one of the various intellectual property
rights compensated by producers and publishers when hiring authors and artists
3.1.
Alternative 1
European harmonised compensation
system administered at national level
This model involves a system of copyright
levies, but subject to specific European
rules on what specific products may be
subject to the payment of the levy, clearly
laying down the criteria for application, how
calculating the amount of levies to be paid,
exemptions, etc. This does not mean that
all countries where no levies exist today will
adopt levies, but that in those cases where
a Member State decides to provide for the
private copying exception for certain copyrighted works and compensate it by mean
of copyright levies, those national systems
must abide by European harmonised rules.
The levies would be administered at national
level, but in accordance with European rules
(categories of products that may be subject
levies, definition of tariffs, exemptions, reimbursement procedures, etc.).
ENTER - IE Business School
When fixing those criteria and conditions,
the European Union is under the same obligations imposed under Article 5(2)(b) of
the Directive, which requires that any payment has to be compensatory in nature,
so it must be aware of the fact that criteria
and conditions (devices selected, rate of the
levy imposed on each of those devices, ...)
must be in correlation with the real private
copying done by users with each of those
devices in the different Member States and
with ‘the harm to the right-holders resulting
from the (private copying) act in question’.57
Otherwise, the European Union itself would
infringe the principle of ‘fair compensation’
established by the Directive.
57
EC Background Document “Fair Compensation for Acts of Private Copying” (Brussels, Feb 14th 2008):
‘Fair compensation’ was conceived by the Community legislator to provide adequate compensation to right-holders (‘to
compensate them adequately’). The term ‘fair compensation’ is not identical to the term ‘equitable remuneration’ as it
is used in Articles 4(4) and 8(2) of the EC rental and lending
rights directive. While the notion of ‘equitable remuneration’
is based on the assumption that authors are entitled to remuneration for every act of usage of their protected works,
fair compensation is, inter alia, linked to the possible harm
that derives from acts of private copying (cf. recital 35 of the
Directive). Article 5(2)(b) therefore requires that any payment
to right-holders must be compensatory in nature.
53
Compensation for private copying: an
economic analysis of alternative models
This alternative could be implemented by
making a rigorous assessment on what is
the size of harm resulting from legitimate
private copying (counter-balanced with a
similar calculation of benefits obtained by
right-holders as a result of legitimate private
copying), and a distribution of the compensation in the form of levy on certain devices
that are actually used for private copying
purposes and in correlation with the harm
caused by each of those devices.
Economically, this alternative has only advantages over the current system. Some of
the costs are eliminated. The political barrier problem of imposing a European harmonised system is the only prevention that may
work against this proposed alternative. If this
minimum harmonisation is a big problem, it
means that different countries have different
opinions about what is ‘fair compensation’.
This would be an indication of two things:
•
On the one hand, that ‘fair compensation’ is indeed a political issue, not an
economic one: if it were an economic issue, there would have been more room
for agreement.
•
On the other hand, that the Commission
should seek for a system that allows different levels of compensation and does
not distort the markets with different
levies. This point would be important in
the analysis of alternative systems. As
we will see in the analysis, the political
problem of harmonisation may be resolved by just stating that the levy rate
should be low enough so as to avoid the
development of a grey market.
In principle, this alternative system would imply to apply a similar levy rate to a range of
product categories that are imported or manufactured into the European Union. Depending on the product category and their intensity of use on private copying (to be defined
at a European level), the % levy could be for
example 0.5%, 1% or 1.5% of the first importation or manufacturing price. To work our
estimation on how much income this alternative could represent, we take a single rate per
country, independent of the product. This
will give a first idea of the size of the necessary rate. Around this rate, one can propose
a lower or higher number to take into account
other considerations like the demand elasticity of the good (it makes economic sense to
tax more the goods for which the demand
is more rigid, as distortions are less) or the
correlation of the purchasing of the good
with the making of private copies. However
these variations cannot give differences of,
say, more than an agreed upon percentage
among different countries for the same good
to avoid grey markets. If some countries
within or outside the EU do not apply a levy,
then the rate should not be higher than the
agreed percentage.
It is hard to estimate how big a difference
in prices can be maintained without encouraging the development of a grey market or
the need for a price policy across countries
to homogenise prices and avoid arbitrage.
Depending on the product, the maximum
difference may be some number between 3
and 5%58. For more expensive product cat58
With some low priced massive high-volume products, even a
1% may trigger significant grey market. However, for higher
priced lower volume products a 5% may be a more reasonable threshold. For example, in Case No Comp/M.4434 -Ricoh
/ Danka - Regulation (Ec) No 139/2004 Merger Procedure, we
find the following reference:
‘23. In the market investigation a majority of customers indicated to the Commission that they purchased their photocopiers, printers and fax machines within the national
geographic area while other customers indicated that they
purchase world-wide, EEA wide or regional. However,
the majority of customers also indicated that they could
switch easily to sources outside their country if national
wholesale distributors would increase their prices by 10%
on a lasting basis, the prices of the sources outside their
country remaining at the same price level. Customers also
indicated that the transport cost expressed as a percentage of the total purchase price for photocopiers, printers
and fax machines is estimated as below 5%.’
This number may be lower for small ICT and CE devices which
can be more easily transported from one Member State to
another one than big and heavy Ricoh / Danka photocopiers
referred in the above paragraph.
ENTER - IE Business School
54
Compensation for private copying: an
economic analysis of alternative models
egories, the % difference should be as low
as possible, because it represents a higher
amount in absolute terms than even a higher
% for cheaper device categories, so savings
for consumers from buying abroad or on
the grey market those more expensive categories would be higher than savings they
may realize in the case of cheaper products.
Therefore, a different % may be defined depending on each product category.
Our model estimates that if a fixed levy (as
a percentage of the price) would have been
imposed on each and every electronic device within the specific categories of blank
media and equipment subject to levies in
2005, the following rates per country in Table 3.1 would have resulted in the same collectable amount. The details of calculations
can be found in the Appendix.
comparable to that of France or Spain would
suffice to collect it. Honest firms estimate
that a difference in price smaller than a 3%
should have in principle no appreciable influence in the formation of a grey market or
in the price policy.
Table 3.2 shows the losses implied by Alternative 1, compared to the current system.
Table 3.2. Comparison between current levy
systems and Alternative 1 (European harmonised
levy system)
Type of costs (Loss)
Standard welfare (consumer)
Losses
Cents lost per collected €
under
Alternative 1 (Alternative 1) (Current system)
16
1.7
19.2
278
30.0
15.8
Grey market
0
0
10.1
Inefficient price policy
0
0
2.3
Litigation
0
0
3.8
294
31.7
51.2
20% of lost revenues (producer)
Total
Table 3.1. Collectable levies (audio, video and
reprography)
Levy
Amount
collectable
Direct
Lost revenue
welfare loss for honest
(consumers)
firms
Country
(rate as %
of price)
(Mio €)
(Mio €)
France
2.03
278
4.2
413
Germany
1.18
226
0.3
330
Italy
2.28
199
3.4
304
Spain
3.22
222
5.5
343
Total
-
925
16
1,390
(Mio €)
Recall that the actually collected amount under the current system was about half the collectable amount (in one country, Spain, the
collected amount was less than a 30% of the
collectable amount). This means that, as an
average, half of the then-current levy would
have been necessary to collect that much.
The low rate in Germany is due to the amount
of disputed claims in this country in 2005. If
just a 30% of the disputed claims were paid
(and it seems that litigation settlements already exceeded that percentage), a levy rate
ENTER - IE Business School
The only place where Alternative 1 gives a
higher loss than the current system is in lost
revenues for producers of ICT / CE devices.
Recall that only half of these losses are losses to the ICT / CE industry (the other half are
losses to the production factors that will be
diverted to other sectors of the economy).
This is due to the fact that with the current
levy, the goods more heavily levied are the
ones with lower elasticity (recordable media), which do not react so much to changes in prices. However, the effect of taxing
these goods is the creation of a grey market.
The fact that the ICT / CE industry prefers
a harmonised, general system is an indication that the other losses (grey market, inefficient price policy and litigation) are greater
than difference in the lost revenues, as is the
case in our computations.
This alternative would have the positive consequence of mitigating grey market and favouring removal of obstacles to free move-
55
Compensation for private copying: an
economic analysis of alternative models
ments within this area (specially because of
the mitigation of the issue of potential high
double payments in case of moving one
product from one Member State where the
product paid a levy to another levied Member State). This alternative may be also improved, in a way or in another, by the European Union either eliminating the possibility of double payments or guaranteeing the
easy refund in the Member State of origin.
It will, of course, establish the devices (blank
media or equipment) that would be subject
to the levy after checking through surveys
and empirical analysis that those devices
are mainly used to copy copyrighted works
for private purposes and it could also establish the rates that would be imposed to each
device category as to guarantee to rightholders just a fair compensation, a revenue
that would erase the actual harm that copies made by consumers for private purposes
cause to them.
3.2.
Alternative 2
Payment of levies at retail level
Under the current copyright levies system,
levies are required to be paid to collecting
societies by importers and manufacturers of the goods in the country where the
levy system applies, and then transferred
through the distribution chain to consumers. This creates a number of issues, such
as free-circulation of goods issues, which
include either no refund of levies upon exportation to another EU country or a great
administrative burdens to get the levy reimbursed in case products are exported
and, in some cases, double payments,
grey market, final payment of levies both
by consumers and professional users and
some other additional issues59.
This proposed Alternative 2 would imply that
levies are not paid by manufacturers and
importers of the goods upon manufacturing or importation of the products in a given
Member State, but would be paid by retailers, which is the level as close to consumer
as possible (other than asking consumers to
pay directly the levy, which seems unrealistic for obvious reasons), and then directly charged by retailers to consumers upon
selling those products to them.
Payment of levies by retailers could be economically more efficient than payment of
levies at the initial level of the distribution
chain, avoiding issues that may exist from
cross-border trade / export refund systems
(or double payment if refund processes do
not work in practice or because domestic laws only acknowledge reimbursement
rights to importers and manufacturers and
not to 2nd tier distributors) when goods are
moved by distributors from one EU Member
State to another one.
Additionally, even more importantly, it would
also permit to establish easily a system that
would distinguish between professional users – that by definition cannot use devices
for private copying – (so they should not pay
the levy) and the rest of private consumers,
excluding application of levies from sales to
public administration, enterprises and other
business and professional customers.
The differences with respect to the current
system, where the payment is made by importers and manufacturers, depend on how
much easier is to solve the problems of harmonisation (different levies in different coun59
See Section 4 (‘Open Issues’) of the EC Background Document ‘Fair Compensation for Acts of Private Copying’ (Brussels, Feb 14th 2008): http://ec.europa.eu/internal_market/copyright/docs/levy_reform/background_en.pdf.
ENTER - IE Business School
56
Compensation for private copying: an
economic analysis of alternative models
tries), and of bureaucracy (a big burden to
avoid double payments) with this system. It
seems that the latter can be handled. The
solution of former depends on whether the
system of levies is harmonised.
circumvent the issue of those national
legislations that acknowledge the right
to deduct levies on exported goods only
to manufacturers / importers that paid
originally the levy and not to 2nd tier resellers. This will also eliminate the administrative costs behind refund processes for exported products, in those
countries where these processes are
available.
In this line, the present alternative has at
least four key benefits:
•
•
60
61
First, it allows for a more fair application
of the levy among final consumers. For
instance, a different levy (or no levy) can
be easily applied when the buyer is the
Public Administration, a business enduser customer or an individual consumer60. This distinction cannot be implemented in practice today, as most ICT
/ CE products are sold to end-users not
directly by manufacturers but through
resellers networks, and therefore manufacturers cannot usually discriminate in
their first sale whether the product will
be finally acquired by a consumer or by
a professional user61.
Second, all the paper work involved to
avoid double payment in case of goods
exportation to another Member State,
which is present in the current system
will be avoided, as the levy is charged
after all importations and exportations
have been made. In fact, this will also
See footnote 18, providing several examples of share of goods
sold to business vs. consumer users [for example, IDC’s report ‘Market Analysis: Personal Computing in Western Europe,
Forecast and Analysis,’ 2006-2010’ (April 2006), which indicates that only 13.8% of Desktop PCs and 46.7% of Notebook
PCs are sold to ‘home users’, while the remaining major share
are sold to offices, business, government and non-private
customers. Thus, any levy payment on CD-burners and DVDburners embedded in PCs sold to those non-home users customers would be unfair accrued].
Only practical way of making a distinction between professional users and home user with current levy system is to apply
levies only on those products that are consumer-oriented (for
example MP3 players), and excluding levies on those products
that are professional-user oriented (for example PDAs and
smart-phones with a ‘qwerty’ keyboard). However, while this
option will reduce the magnitude of the issue, it will not eliminate the problem for those devices that are identical for home
and professional destinations (for example most categories of
recordable media).
ENTER - IE Business School
•
Third, although the necessary general
levy may be a small percentage of the
price (between 1% and 3%, as we saw,
may be sufficient to collect as much as
with current system) it is still possible
that there would be some grey market
(however small). The levy at the retail
level seems to cope with this problem
too, as many of the products currently
available in the grey market that do not
pay the levy, still pay the VAT. The same
system applied to guarantee that VAT is
paid, could be used to guarantee that
levy is paid.
•
Fourth, it would increase transparency
and make more visible to consumers
that they are paying a copyright levy as
part of the price of ICT and CE devices
that they purchase62.
Thus,this alternative is a simple and remarkable improvement to the current system, which
could eventually remain as of today in terms
62
At Roundtable on Digital Issues ‘Key Challenges for Consumer
Policy in the Digital Age’ (London, June 20th, 2008), former European Consumer Commissioner, Meglena Kuneva, stressed the
importance of this transparency and the establishment of a clear
link between actual harm and the level of levies: ‘I would like to
note that the price of many electronic goods is strongly determined by the copyright levies imposed on them. These levies are
meant to compensate copyright owners for consumer behaviour that harms their economic interest. But at present, there is
no transparency for consumers about what they are paying and
what they are paying if for. The fact is that they are paying multiple
times for something many will never do, that is make private copies of content on any number of platforms using any number of
hardware. Copyright owners are entitled to reasonable compensation. But basic considerations of fairness call for transparency
and a link between the actual harm and the amount of the levies.
57
Compensation for private copying: an
economic analysis of alternative models
of levy definition, but transferring the burden
of payment from manufacturers and importers to retailers, and is also an alternative that
is compatible with the implementation of
Alternatives 1 and 3 (European harmonised
compensation system administered either at
a national or European level) and Alternative
4 (free choice of collecting society within the
EU). Other compensation schemes alternative to copyright levies, such as Alternative 5
(application of compensation on the original
work), would also permit that payment of the
compensation is secured at the retail level instead than at the original publisher / producer
level.
3.3.
Alternative 3
European harmonised compensation
system administered at a European level
As with Alternative 1, this system would imply to apply a low % royalty to each single
unit of a range of product categories that are
imported into or manufactured in the Member States of the European Union that has
acknowledged the private copying exception as part of their domestic copyright laws.
The levies for sales completed in those EU
Member States would be collected by a European agency that would then distribute the
incomes among right-holders in the various
countries in accordance with rules laid down
on a European scale and the variations that
may exist for instance on the private copying
definition at a national level, and the amount of
I question if in reality this link currently exists. The level of levies
currently varies widely by country and there is little legal clarity
for traders as to what levies apply to items purchased or sold
cross border. The European Commission is now starting a process to rationalize the system of copyright levies in the EU.’ http://
europa.eu/rapid/pressReleasesAction.do?reference=SPEECH/0
8/347&format=HTML&aged=0&language=EN&guiLanguage=en
private copying that is made from each rightholder repertory in the concerned country.
From the economic perspective, there is no
reason a priori to prefer this system to the Alternative 1 (similar system, but with national
management). Whichever level of management proves to be more efficient will indicate
which system is preferred. There are some
signs to believe that the European management may be eventually better, and these
signs include reports indicating that various
national collecting societies do not seem to
handle efficiently the collection and distribution of compensations to right-holders, either
national, European or from third countries63.
Also, sometimes a levy is paid twice (for goods
that are shipped from one country where levies are applied to another country within the
EU where another levy system is in place),
and, although there may be a provision to get
reimbursed for one of the payments, the complications are sometimes so big, that it is not
worth the trouble and the levy is indeed paid
twice. The problems just overviewed are problems for the current copyright levies system
and for the harmonised system administered
nationally (Alternative 1) that can be avoided
with a European management.
Different countries have different regulations
concerning the uses of the compensations
received by the collecting societies. Some
of them provide for the allocation of a % of
collected levies to fund cultural and assistance activities of the members of the concerned collecting societies, which according
with the European Commission amounted
on average a 22.74% of audio and video
related levies collected in 200464. This is,
63
See section 3.6 and the Appendix for more details on those
reports.
64
EC Background Document ‘Fair Compensation for Acts of Private Copying’ (Brussels, Feb. 14th 2008), see page 10. This data
is disputed by GESAC, which indicates that those deductions
are closer to 15% than to the 23% indicated in the Background
Document. Anyway, the reality is that in many cases it seems difficult to track the exact percentage that is deducted from levies
ENTER - IE Business School
58
again, another political issue regarding what
is considered ‘fair compensation.’ Again, if
Member States insist that they want to have
their say in what is fair, then the Commission
should seek for a system that allows this
without the above mentioned problems65.
In sum, political issues aside, this system
seems better than the harmonised European system administered nationally (Alternative 1) and, a fortiori, better than the current
copyright levies system.
Finally, this alternative may make payments
to right-holders simpler than the actual system. Now there are a number of bilateral
reciprocity agreements among different national collecting societies to compensate to
non-national right-holders for private copies
made in the other country. The process is
cumbersome and may depend on the different agreements, that in the end may depend
on the bargaining power of the different collecting societies, which may not have a direct relation with the size of the amount that
is due to non-national right-holders, and be
subject to the application of administration
or other deductions by the various collectin terms of cultural and social assistance funding, because while
in some cases that percentage is provided by law (for example
in Spain, where it is provided that 10% should be deducted for
cultural activities and 10% for social activities – Art. 39 Royal
Decree 1434/1992, of 27 November), in other cases this deduction is provided in the internal rules of the collecting societies,
sometimes as additional to those provided by law.
65
Maintaining these funds is a political decision, and we believe
that a European centralised process (even via pan-European
organisations representing all national collecting societies)
may be better aligned with European law principles than current nationally-driven system, because these subsidies received by collecting societies in some countries, while not by
collecting societies in other countries, may even open the door
to competition concerns in those cases where collecting societies from different countries are actually competing among
themselves in the Internal Market. Additionally, funding social
assistance activities for their members but not for non-member right-holders, may also open the door to discriminatory
concerns (specifically regarding nationals from other Member
States, which are not normally members of the concerned foreign collecting society, while their works are subject to private
copying in comparable amount to members of the concerned
collecting societies). These issues are not the subject of this
research report, but should be identified already as additional
concerns of current system.
ENTER - IE Business School
Compensation for private copying: an
economic analysis of alternative models
ing societies (national and non-national) involved in the process. Furthermore, while the
existence of those reciprocity agreements
has not been questioned itself by competition authorities, some of their related effects, such as the allocation of geographic
markets, have been questioned by the European Commission66.
3.4.
Alternative 4
Free choice of licencing collecting
society within EU
This alternative is basically the ‘one-stopshop’ system already requested by the Commission to collective entities in other IPR
areas (for example in online music67), and
would mean opening up competition among
different collective management entities. This
alternative calls for the establishment also for
the private copying fair compensation of the
so-called one-stop-shop system.
The current system of compensation via
copyright levies may be continued – in all
cases the Commission in one way or another
66
Case COMP/38.698, CISAC Agreement decision (July 16th
2008): http://ec.europa.eu/competition/antitrust/cases/index/
by_nr_77.html#i38_698.
67
See EC DG Competition press release (July 16th, 2008) on the
antitrust CISAC Agreement decision (case COMP/38.698),
which will allow collecting societies to better compete on the
online music market based on the quality of their services and
on the level of their administrative costs (which are deducted
from the money collected before it is passed on to the author),
providing incentives to collecting societies to improve their efficiency. http://europa.eu/rapid/pressReleasesAction.do?refer
ence=IP/08/1165&format=HTML&aged=0&language=EN&gui
Language=en.
See also DG Competition press release ‘Competition: Commission’s Online Roundtable on Music opens way to improved
online music opportunities for European consumers’ (Oct. 20th,
2009) and related documents: http://europa.eu/rapid/pressReleasesAction.do?reference=IP/09/1548&format=HTML&ag
ed=0&language=EN&guiLanguage=en.
59
Compensation for private copying: an
economic analysis of alternative models
will have to oblige Member States to adjust
the present systems to the conditions and the
scope and limits of the ‘fair compensation’
notion established with the Directive’s private
copying exception-, but under this system
there should be a possibility of negotiating
and paying the levy to be applied with one
single collective society located in the country
where products are manufactured or imported for the first time into the EU or with another
collecting society that would represent rightholders from other countries where products
will be sold in virtue of current or new reciprocal agreements68. Once the levy has been
paid for a specific product unit in that country,
the product would then circulate ‘freely’ within the European Economic Area (or within the
countries covered by the agreement with the
one-stop-shop collecting society) without the
payment of additional levies in other countries and without requiring asking for refund
in case of exportation, because that specific
product would have been already ‘licensed’
to make private copies of protected works.
Based on final destinations of the goods that
may be easily known through market research
and other statistical analysis, it would be easy
for the concerned collecting society to make
cross-payments to collecting societies in the
country of final destination of the goods, similarly as they make today under their reciprocal
agreements in connection with works of rightholders represented by collecting societies of
other EU Member States that are subject to
private copying in the country where the concerned collecting society operates.
This system avoids the problem of double
payment of the levy and would avoid crossborder trade issues. For example, double
payment of levies in several countries in case
68
A reciprocal representation agreement is a contract between
two collecting societies whereby the societies give each other
the right to grant licences for the copyright of the works of their
respective members. For example, a list of reciprocal agreements signed between collecting societies representing book
right-holders is available at the International Federation of Reproduction Rights Organisation (IFRRO) at http://www.ifrro.org
the products are moved from one country to
another one, avoiding barriers existing today
as a result of non-smooth systems to reimburse levies upon exportation, and avoiding
costs resulting from reimbursement systems,
in particular for consumers engaged in Internet cross-border shopping69. This system
would mitigate disparities on levy tariffs and
economic waste from disparate price policies. Simply speaking: goods would be really
in regime of ‘free circulation’ (plus the objective of the free circulation of services provided by collecting societies at a European scale
may become also a reality around copyright
levies). Additionally, this system may help
to limit grey market. Definitively, this system
would allow the establishment of a real internal market for ICT goods in Europe.
On the one hand, it still has the problem of
how costly would be to manage the payments
of right-holders outside the national borders.
However, these cross-border payments are
supposedly already taking place today under
reciprocal agreements between collecting
societies, and may be also soon a reality for
some other IPR sectors (online music), so we
expect that this factor will not be an issue and
be over-weighted by cost reductions for collecting societies from managing multiple payment and reimbursement processes (including, for instance, audits to be run individually
per collecting society and country).
However, on the other hand, it does not solve
the issue of charging levies on devices that
are used for professional purposes (however, note that this issue may be indirectly
addressed under the current levy systems,
and for this and some other alternatives by
excluding application of levies on devices
designed for professional / business use).
69
Copyright levies are reported by the European Commission as
one of the key barriers for Internet cross-border sales of electronic devices (see ‘Communication from the Commission on
Cross-Border Business to Consumer e-Commerce in the EU’;
Brussels, 22.10.2009; COM(2009) 557 final). http://ec.europa.
eu/consumers/strategy/facts_en.htm#E-commerce.
ENTER - IE Business School
60
Anyway, this system would be superior to the
current levies system as the only potential issues detected for this alternative also occur
for the current copyright levies system, but
will eradicate other issues.
Furthermore, in principle, it is superior to the
harmonised system administered nationally
(Alternative 1), as it avoids one of its problems (double payments) without apparently
causing any other. Whether or not it is better
than the harmonised system administered at
the European level (Alternative 3) depends
on how big is the political problem. If it is not
an issue, then this alternative is better than
Alternative 3 (and then, better than current
levies system, and a harmonised system
managed at a national level).
3.5.
Compensation for private copying: an
economic analysis of alternative models
ers (right-holders) of the protected works –
wide sense: authors, performers, producers
– in the market). When the collected money is
given back to the producers, it then acts like
a subsidy by exactly the same amount of the
levy. Thus, the demand curve first is moved
downwards by the fee, and then the supply
curve is moved also downwards by the subsidy. In the end, nothing is changed. Figure
3.1 shows this. Because of the levy, demand
changes from D to D’ (the vertical difference,
A-A’, is the size of the levy) as consumers are
willing to pay for the commodity as in D’ if
they have to add the levy (to make the total as
in D). Similarly, if producers receive the price
plus the levy, they are willing to produce as
in S’ knowing that they will get also the levy
(to get paid as in S). The equilibrium changes
from E to E’, the quantity remains the same,
and the price changes from P to P’. But to
this price the levy has to be added, and both
producers and consumers care not about P’,
but about P, the price plus the levy.
Alternative 5
Application of levy to original work
In this alternative system, the payment of
the compensation fee would be collected
directly as part of the price of the original
work when the work susceptible of being
copied is purchased (either offline or online). Therefore, acquirers of the original
work (book, music CDs, film DVDs) that
are legitimised to make private copies of
it would be the ones that directly pay the
compensation on the original work.
This system would imply that the compensation fee / cost is translated from the market for ICT and CE devices to the market for
original works. The economic implications of
this system are subtle. Recall that the levy
acts economically as a tax, in this case on
consumers. But then, the collected tax goes
back as rent to the right-holders (the producENTER - IE Business School
However, if the collected tax can be given
back to the producer (right-holder) in a way
that does not act like a subsidy, this system
can have the effect of translating surplus
from the consumer to the producer at the
cost of the inefficiencies caused in this market due to the tax effect. In fact, as it will
be said in Alternative 8 below, many right-
61
Compensation for private copying: an
economic analysis of alternative models
holders do not receive a percentage of sales
as an income, hence, for these right-holders
the condition is already met de facto.
Whether the inefficiencies of this alternative
are greater or lower than those under the harmonised system administered nationally (Alternative 1) is a matter of empirical analysis.
One important effect to take into account is
that the act of private copying may be more
related to owning legitimate works – that are
the only source that may be legitimately privately copied – than to owning devices that
could be destined to multiple purposes different than private copying. Thus, it seems
that it has a more direct relationship and
seems fairer a payment of the compensation
on the original work that embeds the right to
make the copy, than a payment on the device that may be used for multiple purposes,
including private copying.
Furthermore, this system would be able
to make an exemption for business, companies, and professionals that buy large
quantities of ICT and CE devices (including
media) for their own professional uses and
should therefore not pay unjustifiably for private copying compensation.
Finally, it will circumvent all grey market and
export refund issues that exist today.
On top of those important benefits, this system would facilitate:
a. a differentiation between works that
are protected to prevent private copying (such as film DVDs that are usually
protected with CSS and other technical protection measures), which should
not be charged with any additional fee,
and those that are not technologically
protected so that consumer can make
private copies, which price would be increased to reflect the levy;
b. a direct identification of right-holders to
whom levies have to be paid; and
c. avoiding multiple payments that take
place when multiple devices are used to
make the private copy (e.g. media, plus
different pieces of hardware) or when
the original work that is copied had been
licensed (with an authorisation to make
a number of copies) and user pays both
for the licence and the devices involved
on the copying process.
One way to get the compensation in a manner that does not act like a subsidy (and
leaves the supply curve unchanged) is to
break the link between the collected compensation and the number of units of music
CDs, film DVDs or books sold70. This can be
done by reaching an agreement by which
the collected amount goes to a common deposit (e.g., the collecting society), while the
amount the producer receives is set beforehand, so that it works as a lump sum, and
does not depend on the sold quantity. The
result is that now the market behaviour of the
supplier does not imply a downward shift, as
decisions to sell are not affected by the compensation, which has already being fixed.
The rate of the compensation fee for each
product (books, music and audiovisual
works) must be established – after making an empirical analysis through surveys
or other means that would be conducted
by each Member State in each of those
products – as close as possible to the actual copying by consumers of these works
(actual harm made) by each concrete device
(equipment or media).
We can provide a very rough estimation of
the impact of this alternative taking book
and music market in Spain as an example.
70
In fact, most contracts between authors and publishers do not
have this link, as compensation for sales are a % of the salary,
not of the revenues from sales, as we will see in Alternative 8.
ENTER - IE Business School
62
Compensation for private copying: an
economic analysis of alternative models
• Book related levies: a mere 1.2% would
suffice to equal the amount to be
collected under current levy system
than current levies on digital devices,
which are additionally more sensitive to
price differences than books demand,
which has been evidenced as poorly sensitive to price changes.
The implementation of this alternative
system in the book market would be simple and more efficient than current levies,
as evidenced with the analysis included
below:
If these reasons did not suffice to justify the goodness of Alternative 5 as
especially optimal in the case of bookpublishing industry, other arguments in
favour of this scheme in connection with
books73 include:
1.Revenues on domestic sales of books
in Spain in 2007 were 3,123 Mio €, with
an average price per book of €12.4571.
i. Selling price of books is regulated (at
least in Spain); thus, implementation
of this alternative by adding this marginal amount on the price of the book
would be very simple to manage.
2.Order PRE/1743/2008, dated on June
18th 2008, which regulates copyright
levies in Spain, indicates that harm
resulting from book private copying
that should be compensated by mean
of copyright levies amounts between
34.8 and 37.2 Mio €.
ii. Books benefit already of a reduced
VAT (for instance a 4% instead
of 18%74 applicable on electronic
equipment in Spain); thus, as far as
levies are increased as a result of
VAT application on them, economic
impact will be lower in the case of
goods benefiting from a reduce VAT
than in goods subject to the standard
VAT rate).
3.Thus, to collect these amounts, it would
be sufficient with a levy amounting between 1.11% and 1.19% of the book
price, what would imply an increase on
the price of the book of between just
13-15 cents of Euro.
This price increase would be insignificant
(just 13-15 cents for each book), even
lower than the lowest levy that is charged
in Spain on any type of recordable media72, and therefore much less distorting
71
72
Spanish Federation of Publishers Associations (Federación Española de Gremios de Editores) – June 2008. The publication of
the Spanish Ministry of Culture ‘Report on the Commercialization of Books in Spain’ (September 2008) indicates 3 average
book prices that varied depending on the source and the book
concept (see pages 57-58): (1) according with the Ministry of
Culture, the average price in 2006 was 18.40€ (17.53€ if multivolume books are not considered but only individual units),
while multimedia books will average approximately 50€; (2) according with National Institute of Statistics the average value of
the book publishing production (which only accounts 20% of
units), the average price per book in 2006 was 11.61€; (3) finally,
in accordance with data published by the Spanish Federation
of Publishers Associations, average price in 2006 was 13.21€.
As far as we are making a conservative assessment of the levy,
we found appropriate to take the average price published by
the Federation as valid one, even when an average of all above
sources (14.40€) will provide a better scenario for demonstration of the benefits of this alternative.
Spanish levies in effect since July 2008 on recordable digital
media: non-rewritable CD: 0.17€ / rewritable CD: 0.22€ / non-
ENTER - IE Business School
(iii) Books demand is considered traditionally as lowly sensitive to price increases, so it would be unlikely that
any effect will take result from such
a limited 13-15 cents increase on the
book prices.
On the contrary, when levies are applied
for example to multifunctional printing
equipment, the economic situation is
quite different:
rewritable DVD: 0.44€ / rewritable DVD: 0.60€ / USB and other
non-integrated memory cards: 0.30€.
73
Note that nothing prevents the implementation of this alternative to compensate a specific category of right-holders (for
example, book industry related right-holders), while applying
other alternative(s) for each other category of copyrighted
works right-holders (music and audiovisual).
74
Standard VAT rate has been increased from 16% to 18% in
July 2010, while no increase on the super-reduced 4% VAT
rate applicable on books is happening.
63
Compensation for private copying: an
economic analysis of alternative models
1.The inkjet multifunction product has an
average price in Spain of €73.7475; accordingly, the present levy of €7.95 represents 10.78% of the product price.
sales not included) was 437 Mio €. As
we saw before, in the year 2005, 222 Mio
€ were collectable, although only 58 Mio
€ were collected in Spain. Let’s target a
collection of 22 Mio € in terms of music levies78. A levy of 4.8% is then necessary to collect the same amount that
was collected if the demand has elasticity of -1. A 4.8% increase in the price of
a CD (from an average of 10 to an average of 10.48€79) would mean a reduction
in sales of 2.1 Mio units (4.8% of 43.7
Mio). This means that there will be a consumers’ loss of welfare of 0.5 times 0.48
€ times 2.1 Mio, i.e., a loss of 1.01 Mio
€. Producers (manufacturers) will loss
revenues for a value of 2.1 times 10, or
21, out of which, say, a 10% are welfare
losses (the rest is just costs). A total of
2.1 Mio € will be lost, which gives a total of 3.11 Euros, or means 15.6 cents
for every Euro collected (3.11 divided by
20). Notice that, with this system, fewer
copies will be sold, but more money will
go into the hands of the authors. (With
the current system, fewer ICT / CE devices will be sold, and more money will
go to authors, artists and producers in
the CD, DVD and book industries).
2.These devices are subject to VAT at
a rate of 18% (before July 2010 were
subject to 16%), which raises the levy
even more.
3.The demand for these products is
highly flexible, around -1.33, as could
be expected from products addressed
at price-conscious consumers, which
means that a price increase of 10%
for the products as a consequence
of the levy, represents a decrease in
product demand of 13,3%.
This diminished demand of ICT devices
resulting from copyright levies should
be considered also in combination with
the accumulated effect from the current
economic situation that has driven to a
36,4% decrease on demand of multifunctional printers in Spain76
• Music-industry related levies: a mere
4.8% would have sufficed to equal
amount collected under current levy
system77
If one is not satisfied with the analysis
above – because a low elasticity was
used or because only a 10% of lost revenues were imputed as a loss – another
exercise can be made. Tables 3.3 and
3.4 show, for the recorded music market, different combinations of elasticities
For the year 2005, the size of the recorded music market (ring tones and on-line
75
Source: ICT printing industry.
76
‘Information Technologies in Spain -2008 / Las Tecnologías de
la Información en España – 2008’, published by the Spanish
Ministry of Industry, Tourism and Commerce and AETIC.
77
This model is included for illustration purposes, as a reference for several Member States. Substantial fall on legitimate
sales of music in Spain within last years may question the
practicality of this alternative for music in Spain. However, it
should be noted that current situation, where author collecting societies are receiving more money from private copying
levies than from sales of original music works is not sustainable either (source: El País, May 18, 2010, article titled ‘Musicians earned by first time in 2009 more from copyright levies than from sale of music’; reference to musicians income
should be understood as income through collecting society
SGAE, because other sources of direct income could exist –
see Figure 1.1 of this Report: ‘Music Market according with
Live Nation’ –).
78
Income for copyright levies related to music has been subject to substantial changes from year to year. For example,
according with accounts from authors collecting society
SGAE its music levy income (in €) amounted 12.5 Mio in
2005, 10.5 Mio in 2006, 9.9 Mio in 2007 and 7.115 Mio in
2008 (actual amounts may vary). As far as music authors
receive 50% of music related levies it may be possible to
extrapolate data to total income for music levies of 25 Mio
in 2005, 21 Mio in 2006, 19.8 Mio in 2007 and 14.23 Mio in
2008. We have assumed for this model a target income of
22 Mio Euros which is in line with the average income for
2005-2007 period.
79
The size of the average price, 10€, is irrelevant for these computations. It is only given for presentation purposes.
ENTER - IE Business School
64
Compensation for private copying: an
economic analysis of alternative models
and percentage of lost revenues that are
estimated as losses to get the same loss
than the computed under alternatives
1-3 (31.7 cents per Euro).80
3.6.
Alternative 6
Compensation collected as indirect
taxes on digital devices
Table 3.3.
Elasticity on
recorded music
demand
% of revenues computed
as a loss to get an
inefficiency of 31.7%
Levy rate to get 22
Mio €
-0.5
59.6%
4.69%
-1
27.8%
4.80%
-1.5
17.1%
4.94%
-2
11.7%
5.10%
We observe very unrealistic combinations: either a very high proportion of
lost revenues computed as a loss, or a
very high demand elasticity. For most
realistic assumption, the inefficiency of
this policy has a lower impact than Alternatives 1 and 3 (and even lower than the
current system).
Furthermore, it should be noted that above
analysis did not include sales of music on
digital format because we consider that
downloading of those works qualify as licensed copies where the right to incorporate the downloaded music into a tangible
media (mobile phone memory, PC or any
other media) is already paid as part of the
downloading fee. A % levy lower than the
one detailed above would be required on
physical recorded music CDs if digital music is also considered for the application of
the private copying levy81.
80
Detailed computations are specified in the Appendix.
81
See Table 2.6 above for a forecast on the proportion between
physical and digital music sales worldwide.
ENTER - IE Business School
This system would imply to apply a low %
fee under the form of an indirect tax (similar to VAT) to a range of product categories
that are imported or manufactured in Europe. Depending on the product category
and their intensity of use on private copying (to be defined at a European level), the
% compensation fee could be, for example,
0.5%, 1% or 1.5% of the first importation or
manufacturing price.
The tariffs to be paid for sales completed in
the EU may be collected by a European agency (or alternatively by national tax authorities) that would then distribute the incomes
among right-holders in the various countries
in accordance with rules laid down on a European scale and the variations that may exist
for instance on the private copying definition
at a national level, and the amount of private
copying that is made from each right-holder
repertory. Alternatively, the management can
be set at the State level.
The fee would be collected using the same
infrastructure of the European-wide and wellestablished VAT system (declaration rules,
exemption rules, collection procedures, etc).
From the economic perspective, consumers’
behaviour is not different if the price rises because of an indirect tax or a levy. Thus, this
system has, in principle, the same economic
consequences as the levy system and the
proposed Alternatives 1 and 3. Thus, we can
refer reader to the same economic analysis
made in this report for those Alternative 1 and
3, which show how much could be collected
under those options and what issues of the
current system would be avoiding by apply-
65
Compensation for private copying: an
economic analysis of alternative models
ing a uniform low % levy / tariff on the price
of certain categories of devices.
It has, however, an interesting feature additional to improvements quoted for those
other options: it is collected by the State Administration, and may also be collected by
the political authorities (and not by the collecting societies) by leveraging from efficient
infrastructure already in place to collect VAT
and fight against VAT fraud. Whilst it is arguable that public resources should be dedicated in the only benefit of private parties,
this alternative reflects better the fact that the
compensation is a political decision based on
political considerations of fairness. This being the case, once compensation has been
collected, the governmental authorities must
make the decisions on how to redistribute the
collected tax, and this may be done either by
allocating to the collecting societies (at a local or European level) the responsibility of this
distribution among right-holders82, or directly
by the governmental authorities based either
on their own criteria and data or based on
data provided by collecting societies (which
may be compensated for this service).
ing made in by Norwegian and Estonian users83. Similarly, another precedent exists in
Spain for funding compensation to be paid
to right-holders for public lending of their
works (Law 10/2007, of Reading, Book and
Libraries), and it seems that the EU is accepting this system as a political choice for
its Member States84.
This fund may be financed through methods
laid down on a national level (for example a
checkbox for payment can be included on
the Income Tax Assessment form, checked
by the taxpayer when paying the tax85, or
otherwise).
This is the ideal system from an economic
point of view. It minimises the distortion on
markets, and allows for different levels of
compensation in different countries. Recall
However, there are some Collecting Societies that show higher
levels of efficiency, so this topic is highly controversial and could
be the subject of a separate research report. We refer reader to
some data and reports indicated in Section A.9 of the Appendix
for getting further insights on some research available.
83
For Norway, see the Act No. 2 Of 12 May 1961 Relating to Copyright in Literary, Scientific and Artistic Works, with Subsequent
Amendments, latest of 16 April 1999 in: http://www.wipo.int/
clea/docs_new/pdf/en/no/no062en.pdf (see Article 12).
As reported by Estonian Governmental representative at European Commission’s Public Hearing on Private Copying Levies
held in Brussels on May 27th 2008, Estonian system favours
a Governmental budget allocation in favour of authors and
publishers applies to private copies made on paper and provides an income amounting for 2008 approximately 351,500€
(5,000,000 EEN). This system is bundled with legal provisions
accepting private copying only provided that the source for
the copy is legal, and making explicit that compensation covers only copies made under the limits of the exception, not
beyond.
84
European Commission’s Background Document ‘Fair Compensation for Acts of Private Copying’ (Brussels, February 14th
2008), page 5-6: ‘The Directive is neutral as to the form of fair
compensation. Many Member States have implemented the
requirement of ‘fair compensation’ for acts of private copying
by means of a private copying levy system on recording equipment and/or blank media. But there are other means of providing for fair compensation. For example, Norway provides ‘fair
compensation’ by means of a state-run fund.’
85
This possibility was proposed, for instance, by former president of Extremadura region (Spain) Mr. Rodríguez Ibarra that
proposed replacing current levy system by an assignment from
State Budget to be funded by an allocation made by tax payers
when completing their income tax assessment form, similarly
as it is done in Spain for optional contributions from tax-payers to the Catholic Church and Non-Governmental Organisations (NGOs). See article published at Spanish newspaper El
País (January 5th, 2010) http://www.elpais.com/articulo/opinion/
Fregonas/maletas/ruedas/elpepiopi/20100105elpepiopi_4/Tes.
3.7.
Alternative 7
Payment of fair compensation through
State fund
This is the system presently used in Norway and Estonia, which allocates a specific
amount from the Governmental State budget in order to compensate for private copy82
In our view, while not foreclosing a major role to efficient collecting societies, the reported opacity of the accounts and the
lack of efficiency attributed to some Collecting Societies - including in particular the important gaps between collected and
distributed levies and the non-competitive administration fees
when compared to other markets – would drive our personal
option in favour of a direct involvement of Governmental authorities not only in such collection but also in the distribution.
ENTER - IE Business School
66
that the compensation is a political decision,
and that different Member States may have
different opinions on what is ‘fair’.
There is always some distortion as more
taxes are needed to pay for the fund. However, as it is well known in the economic literature, the distortion imposed by a general
direct tax is, in general, lower than the one
imposed by an indirect tax that collects the
same amount86. Thus, the system is even
better than system of free choice of collecting society (Alternative 4) or the imposition of
a levy on original work (Alternative 5), which
showed under our analysis as highly effective to resolve many of the issues implied in
the current levy system. The only caveat to
this system is that while it is fairer to ICT /
CE manufacturers, it imposes no particular
cost on the specific consumers of those devices (among which the private copiers will
be), but on all tax payers.
The dilemma is whether being unfair to one
collectivism considered as a whole (buyers
of ICT / CE devices), or to another collectivism (all tax-payers).
At first glance, anyone will say that there
are more tax-payers than buyers of ICT /
CE devices that do not engage in private
copying and that, in this respect, this Alternative 7 (payment of fair compensation
through State fund) is unfair to more people
than payment of levies in the original work
(Alternative 5) or free choice of licensing
collecting society within the EU (Alternative
4). But the present alternative is unfair to
each tax payer by a smaller amount. Additionally, even more importantly, this caveat
is not a problem once it is understood that
the political decision to compensate the
86
For instance, Michael Smart in ‘Reforming the Direct–Indirect
Tax Mix’ (published in International Tax and Public Finance Vol.
9:2 pp. 143-155) states: ‘On balance, a shift towards direct
taxation is desirable when inter-commodity substitution effects
are large relative to commodity–leisure substitution effects.’,
which seems a reasonable condition.
ENTER - IE Business School
Compensation for private copying: an
economic analysis of alternative models
consumers who buy ICT / CE devices for
purposes other than private copying (e.g.
even for licensed copying) is a decision to
satisfy the fairness considerations of the
society as a whole, and that, therefore, it is
the society as a whole that has to pay for it.
Furthermore, this system will not differ substantially in terms of fairness for tax-payers
from public aids that are currently provided to fund cultural or entertainment industries (mainly films and music, but also book
publishing)87, which are funded mainly via
taxes that are paid by all tax-payers without discrimination, not only by those who
consume goods and services resulting from
those subsidies.
As an example, in order to show the dimension of any such funding system in relation
with national tax revenues, we can analyse
the burden of this alternative in Spain if the
fund was financed from Spanish income
taxes. The recent Spanish Presidential Ministry Order PRE/1743/2008 published in
June 2008 estimates that harm from private
87
For instance, budget assigned by the Spanish Ministry of
Culture to the Instituto de la Cinematografía y de las Artes
Audiovisuales (ICAA - Audiovisual Arts and Cinematography
Institute) in 2008 to promote Spanish film industry amounted
76.3 Mio € (source: Ministry of Culture: http://www.mcu.es/
cine/MC/MAC/2008.html).
Additional public aids for promoting film industry were approved
by regional governments (Madrid, Catalonia, Basque Country,
etc.). Amount of public subsidies for audiovisual production
provided by Spanish regional governments in 2008 amounted
€46,075,253 (source: Annual Report 2008 of FAPAE (Spanish
Federation of Audiovisual Producers – Section 2.2: http://www.
fapae.es/archivos/Annual%20Report%20FAPAE%202008.
pdf). Combined central and regional governmental subsidies in
Spain amounted 122.37 M€. These public aids for film industry
alone, to be funded by all tax payers from State Budget, almost
exceeded the total value of copyright levies income assessed
by Spanish Government under the Presidential Ministry Order
PRE/1743/2008 for 2008 (between 110.2-117.8 Mio € for all
types of copyrighted works subject to private copying compensation, including not only audiovisual works but also music and
books). These subsidies are in addition to other financial aids
compelled by Spanish law, such as the obligation imposed on
Spanish TV broadcasters to allocate 5% of their income to production of films, which has been recently subject to a prejudicial
question of unconstitutionality referred by the Spanish Supreme
Court to the Constitutional Court in December 9th, 2009 funded
on a possible infringement of the constitutional freedom of economic activity.
67
Compensation for private copying: an
economic analysis of alternative models
copying to be compensated via copyright
levies amounts between 110.2 Mio € minimum to 117.8 Mio € maximum in Spain, the
income tax gave a total of around 72,214
Mio € in 200788. This means that a mere
0.15% - 0.16% of the income tax would
have been sufficient to collect the amount
assessed as minimum and maximum harm
resulting from private copying. To put these
numbers in perspective, note that under
Spanish Income Tax legislation, a 0.52%
of the income tax could voluntarily have
been given either to the Catholic Church or
to other non-for-profit organisations dedicated to social work (NGOs). The amount
required to compensate for private copying
would be less than one third of those voluntary tax-payer allocations (whose selection
does not impact the total amount of income
tax to be paid, but the destination of the
funds collected).
The amount of taxes collected through the
VAT in Spain in the year 2007 was 55,851
Mio €. Thus, the percentage on this tax
would be about the same order of magnitude as the percentage on the income tax
(between 0.19% - 0.21%) if the fund would
have been financed through indirect taxes.
Total collected taxes in Spain in 2007 were
200,676 Mio €. The burden to the State of
the fund to compensate for private copy according with the harm assessment made by
the Spanish Government would have been
just a marginal 0.055% - 0.059% of the total
Spanish tax revenue in 2007.
According with last statistics on global public funding of any culture-related expense
(including personnel, public aids, equipment, etc) published by Spanish Ministry
of Culture, the Spanish central government
spent 784.3 Mio €, the regional governments
spent 1,465.6 Mio € and the municipalities
spent 2,895 Mio € on those categories of
expense in 200589. It seems that funding of
compensation for private copying via State
Budget would have a marginal impact on
the overall public funding of culture-related
expenses and that caveat mentioned for this
alternative (compensation to be funded by
all tax-payers) becomes a marginal concern
when considering that this issue already exist for a much larger share of cultural activities funding.
3.8.
Alternative 8
Compensation clause in the rightholders’ labour contract
This alternative would imply the application
and negotiation of all economic intellectual
property rights (including right to receive a
fair compensation for private copying) of all
right-holders – except producers and publishers – as if they were labour rights. As
regards producers (music and audiovisual)
and publishers (books) they would establish by themselves the % of this compensation when fixing the prices of the copyrighted products that they commercialize
and exploit.
This mechanism would be very comparable to the one in place in the United States
for other uses of the protected work, as TV,
video, Internet, etc and in particular cases
in some European countries as France (%
that actors received from TV broadcasting
or re-broadcasting of their works) and would
imply including intellectual property rights in
89
88
Spanish Tax Agency: Annual Tax Income Reports. Available at
http://www.aeat.es
Source: Spanish Ministry of Culture. Details available at:
http://www.mcu.es/estadisticas/docs/capitulos_graficos/
AEC2007/c_financiacion3.pdf
ENTER - IE Business School
68
labour legislation so that they can be negotiated by and between entrepreneurs (publishers, record and audiovisual producers),
on the one hand, and, representatives of
authors or other right-holders (interpreters,
etc.), or trade unions, on the other hand. In
the individual contract signed by the author
or interpreter, the author or interpreter would
take a percentage not of his salary but of the
revenue the producer obtains for each time
the work is exploited (sale of media, cinemas, video, TV, Internet, telephone, etc.).
Some foreseen benefits for right-holders of
this system of private copying compensation90 would include:
•
90
Genuine owners would have a better
guarantee of receiving the payments (for
uses and private copying) since labour
legislation is much faster and effective
than civil legislation. Genuine owners
would receive, in any case, more money
that with the present system where some
do not receive any compensation (they
are not identified as right-holders of exploited works or they do not claim to the
collective society and, in general, after
some years – e.g. from 3 to 15 years in
Spain, varying from one collecting society to other and depending on whether
right-holder has been identified or not –
the money becomes part of the collective
society’s own funds) or they receive a low
amount as the rest goes to their commissioners (not only the collecting society
but also the manager or editor that, normally, is not other that the producer).
This option has shown as successful for other intellectual property rights (e.g. public communication), and evidencing additional benefits than those mentioned for private copying compensation. For example, users (discotheques, radio stations,
television companies, Internet enterprises, etc.) have more
guarantees after agreeing the fully legal use of the works purchased with the producer / publisher without the possibility of
any other collective claiming the right to whatsoever payment,
which does away with legal uncertainty, what would be comparable to current uncertainty of ICT / CE industry about what
devices are subject to levies and what fee has to be paid.
ENTER - IE Business School
Compensation for private copying: an
economic analysis of alternative models
•
Right-holders would not have to deal
with a large number of management
entities in multiple Member States, but
only with their producers.
This Alternative 8 eliminates the issues reported for current levies system (grey market, free-circulation issues – such as double payments / export refunds –, payment
of compensation by professional customers
and consumers not using the products for
private copying, etc.), similarly as was discussed for Alternative 5 (application of the
compensation on the original work).
This Alternative 8 translates the levy from
the market for ICT / CE devices, or the market for original works (music CDs, film DVDs
and books), to the market in which authors
and artists, on the one side, and producers
and publishers, on the other side, trade or
negotiate.
A simple clause stating that the author has
the right to more compensation will not
change the value of the equilibrium agreements as the bargaining power of the parts
has not changed. If, by law, more money
has to go to the authors under one concept,
it is reasonable to expect – from an economic point of view – that less money will
go under other concepts. For this system
to work, it is necessary that the compensation clause also gives the authors and artists more bargaining power (e.g., they are
backed by the government or by a stronger
trade union). If this is the case, this system
implies a relatively higher compensation for
authors and artists, and a relatively lower
compensation for the publisher, what probably would re-establish the equilibrium that
does not exist at present in many countries.
The supply curve in the market for authorised copies will shift upwards, and the consumer will pay a higher price for its copy, as
in the application of a levy on original work
(Alternative 5).
69
Compensation for private copying: an
economic analysis of alternative models
If that system and the compensation clause
in the labour contract are calibrated to get the
same shift in the supply curve (so that they
are easily comparable), it can be said that the
system with compensation in the labour contract provides more compensation to the authors than the application of a levy on original
work (Alternative 5), and that the economic
inefficiencies of the two systems are comparable. As with the alternative consisting on
the application of a levy on original work (Alternative 5), whether these inefficiencies are
greater or lower than those under the European harmonised levy system (Alternatives 1
and 3) is a matter of empirical analysis.
To sum up:
Table 3.4 below compares the current system and the various alternative compensation
mechanisms analysed by ENTER to provide compensation for private copying to right-holders.
Table 3.4. Alternatives to the current system
0.
Current
System
Economic Waste
Consumer
friendly
ICT / CE business
friendly
Avoids or minimises
double payments
Avoids or minimises
payments by noncopying users
Flexible to target
harmed right-holders
Avoids or minimises
litigation
Possible to combine
with other alternatives
General Economic
Assessment (1-5)(**)
1.
2.
3.
Payment at retail
European
European
payment
Harmonisation
Harmonisation
administered at
administered at
European Level
National Level
4.
Free Choice
of Collecting
Society
5.
Levy on
Original
Work
6.
Indirect
Tax
7.
National
Fund
8.
Clause in
Labour
Contract
51.2%
31.7% (*)
31.7% (*)
31.7% (*)
Not applicable
19% (*)
As low as any
indirect tax
As low as
any direct tax
Low (not
quantified)
NO
NO
NO
NO
Not applicable
Slightly
Slightly
YES
YES
NO
Slightly
Slightly
Slightly
Not applicable
YES
YES
YES
YES
NO
If combined
with 2
YES
If combined
with 2
YES
YES
YES
YES
YES
NO
If combined
with 2 or 4
Slightly
Slightly
NO
NO
YES
NO
NO
NO
NO
NO
NO
YES
YES
YES
NO
YES
If combined
with 1 or 3
YES
YES
YES
YES
YES
YES
Not
applicable
2, 4, 5
1, 3, 4, 5
2, 4, 5
1, 2, 3
1, 2, 3, 4
Not
applicable
Not
applicable
Not
applicable
1
2
3 (4 if
combined
with others)
3
3 (4 if
combined
with others)
3
4
5
Not quantified
If combined with If combined
2 or 4
with 2
(*) Economic waste will be lower if that alternative is combined with other compatible schemes (e.g. payment by retailers in a European harmonised system
administered either at a national or European level).
(**) General assessment of each option is based on their economic impact and ability to avoid current problems. Lowest punctuation is assessed as 1 and maximum
(best) punctuation is assessed as 5.
ENTER - IE Business School
Compensation for private copying: an
economic analysis of alternative models
71
Appendix
Some additional details and calculations
A.1.Calculations for section 2.2 (i) and (ii) . . . . . . . . . . . . . . . . . . . . . . . . 72
A.2.Examples for section 2.2 (ii) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 75
A.3.Data for section 2.2 (iii) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 75
A.4.Calculations for section 2.2 (iv) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 76
Case study: inkjet multifunctional printers in Germany . . . . . . . 77
A.5.Details for section 2.2 (v) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 78
A.6.Details for section 2.3 (ii) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 79
A.7.Calculations for section 3.1 (Alternative 1) . . . . . . . . . . . . . . . . . . . . 79
A.8.Calculations for section 3.5 (Alternative 5) . . . . . . . . . . . . . . . . . . . . 82
A.9.Details for section 3.6 (Alternative 6) . . . . . . . . . . . . . . . . . . . . . . . . . 82
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Compensation for private copying: an
economic analysis of alternative models
A.1.
For the rest of the products (blank media),
the approximation is no longer valid, and
a different method is used. First a demand
curve is estimated for each product in each
country (see Table A.1 below). To do that, we
use the constant-elasticity demand function,
which is of the form q=axpε, where q stands
for quantity, p for price, ε for demand elasticity, and a is an idiosyncratic term for each
market. Since we know how many units of a
specific product were sold at a given price in
a country, we can compute the value of a for
every product in every country. For instance,
in France, 259,924 units of Blank CD-R were
sold at price 0.52 and, based on the Nathan Associates report, we estimate that price
elasticity for this product is -0.4. Then equation 259,924=ax0.52-0.4 gives as a solution
a=200,100. Which means that the demand
is given by the function q=200,100xp-4. With
this function, we can estimate how many
units would have been sold at price 0.16
(0.52 minus the levy).
Calculations for sections 2.2 (i) and (ii)
[direct loss in the market (consumers)
and indirect loss in the honest market
(manufacturers / producers)]
Tables A.2 - A.5 below provide several data
regarding the levies imposed in France, Germany, Italy and Spain.
The data on products, prices without levy,
average levy, elasticities and sales with current levy are taken from the Nathan Associates report, with some minor adjustments
to make these data homogeneous with the
data on actually collected amounts91, which
will be used later.
To compute the changes in units if the levy
is removed we use two methods. For those
products with a relatively lower levy (a 10%
or less of the final price), the usual linear approximation is used. It consists on computing the area B in Figure 4.1 as if it were a
perfect triangle. This method is used for the
equipment and for the flash memory.
91
Table A.1 shows the different demand functions for the different blank media in the four
countries.
Column (7) in the tables (units w/o levy) is computed with the corresponding method (linear
approximation or constant elasticity demand).
The amount actually collected in 2005 is taken from the ‘International Survey on Private Copying Law & Practice, 17th Revision 2006’ published by the Dutch collecting society Stichting
de Thuiskopie.
Table A.1.
France
Germany
Italy
Spain
Blank CD-R
Product
q= 200,100p -4
q = 346,330p -4
q = 161,480p -4
q = 173,150p -4
Blank CD-RW
q= 17,395p -4
q = 20,949p -4
q = 10,279p -4
q = 7,040p -4
Blank DVD-R
q= 26,208p -4
q = 194,440p -4
q = 64,001p -4
q = 62,941p -4
Blank DVD-RW
q= 6,3956p -4
q = 8,291p -4
q = 3,024p -4
q = 2,785p -4
Blank DVD+R
q= 27,266p
q = 138,760p
q = 36,736p
q = 52,325p -4
Blank DVD+RW
q= 15,894p
ENTER - IE Business School
-4
-4
q = 18,190p
-4
-4
q = 6,369p
-4
-4
q = 5,925p -4
73
Compensation for private copying: an
economic analysis of alternative models
Table A.2.
Product
France
Units Sold
with Current
Levy (K)
Demand
Elasticity
Units w/o
levy (K)
Change in
Units Sold with
Removal of
Levy (K)
[4]
=[2]/[3]x 100
[5]
[6]
[7]
Price without
Levy (€)
Average
Current Levy
Rate (€ )
Price with
Current
Levy (€)
Change in
Price with
Removal of
Levy
[1]
[2]
[3]
=[1]+[2]
Collectable
Levy (K)
Lost
consumer
welfare (K)
Loss of
Producers’
revenues (K)
Sales w/o
levy (K)
[8]
[9]
=[2]x[7]
[10]
=½[8]x[2]
[11]
=[8]x[1]
[12]
=[1]x[7]
Media
Blank CD-R
0.16
0.36
0.52
-69.10%
259,924
-0.40
416,49
156,566
93,572
28,182
25,050
66,638
Blank CD-RW
1.06
0.36
1.42
-25.46%
15,076
-0.40
16,994
1,918
5,427
345
2,033
18,014
16,661
Blank DVD-R
0.47
1.27
1.74
-84.20%
21,000
-0.40
35,449
14,449
26,670
9,175
6,791
Blank DVD-RW
0.89
1.27
2.16
-73.97%
4,700
-0.40
6,700
2,000
5,969
1,270
1,780
5,963
Blank DVD+R
0.44
1.27
1.71
-85.04%
22,000
-0.40
37,865
15,865
27,940
10,074
6,981
16,661
Blank DVD+RW
0.59
1.27
1.86
-81.00%
12,400
-0.40
19,628
7,228
15,748
4,590
4,264
11,580
Flash memory
50.05
5.38
55.43
-9.70%
8,350
-1.33
9,427
1,077
44,923
2,897
53,904
471,821
Equipment
CD burners
20.66
-2.00
1,600
33,056
DVD burners
45.39
-2.00
4,500
204,255
Mobile phones with MP3
Copiers / Multifunction devices
PCs (portable and desktop)
242.33
-2.00
6,660
1,613,917
1,097.36
-1.33
2,820
3,094,555
908.4
-1.33
7,880
7,158,192
Personal video recorders
308.29
15
323.29
-4.64%
305
-2.00
333
28
4,575
210
8,632
102,660
Portable dig. audio players
100.03
10
110.03
-9.09%
5,360
-2.00
6,334
974
53,600
4,870
97,429
633,590
Printers
253.24
-1.33
2,290
579,919
88.5
-1.33
916
81,066
Scanners
Total (products with disputed or no levy are not included in calculation) - Thousand €
278,425
61,613
Table A.3.
Product
206,865
Germany
Units Sold
with Current
Levy (K)
Demand
Elasticity
Units w/o
levy (K)
Change in
Units Sold with
Removal of
Levy (K)
[4]
=[2]/[3]x 100
[5]
[6]
[7]
Price without
Levy (€)
Average
Current Levy
Rate (€ )
Price with
Current
Levy (€)
Change in
Price with
Removal of
Levy
[1]
[2]
[3]
=[1]+[2]
Collectable
Levy (K)
Lost
consumer
welfare (K)
Loss of
Producers’
revenues (K)
Sales w/o
levy (K)
[8]
[9]
=[2]x[7]
[10]
=½[8]x[2]
[11]
=[8]x[1]
[12]
=[1]x[7]
Media
Blank CD-R
0.16
0.03
0.19
-15.35%
672,961
-0.40
720,850
47,889
20,189
718
7,662
Blank CD-RW
1.06
0.03
1.09
-2.70%
20,239
-0.40
20,466
227
607
3
241
21,694
Blank DVD-R
0.47
0.17
0.64
-26.93%
231,000
-0.40
263,990
32,990
39,270
2,804
15,505
124,075
115,336
Blank DVD-RW
0.89
0.17
1.06
-16.43%
8,100
-0.40
8,686
586
1,377
50
521
7,730
Blank DVD+R
0.44
0.17
0.61
-28.22%
168,000
-0.40
192,700
24,700
28,560
2,099
10,868
84,788
Blank DVD+RW
0.59
0.17
0.76
-22.77%
20,300
-0.40
22,464
2,164
3,451
184
1,277
Flash memory
50.05
-1.33
15,570
13,254
779,278
Equipment
CD burners
20.66
6
26.66
-22.51%
2,400
-2.00
3,480
1,080
14,400
3,240
22,313
71,897
DVD burners
45.39
7.37
52.76
-13.97%
11,000
-2.00
14,073
3,073
81,070
11,324
139,483
638,773
Mobile phones with MP3
Copiers / multifunction devices
PCs (portable and desktop)
242.33
-2.00
8,065
1,954,391
1,097.36
-1.33
3,770
4,137,047
908.4
-1.33
10,257
9,317,459
Personal video recorders
308.29
12
320.29
-3.75%
100
-2.00
107
7
1,200
42
2,158
32,987
Portable dig. audio players
100.03
2.56
102.59
-2.50%
8,183
-2.00
8,591
408
20,948
522
40,812
859,358
Printers
253.24
-1.33
4,608
10.23
98.73
-10.36%
1,450
-1.33
1,650
200
14,833
1,023
17,700
225,906
22,010
258,541
Scanners
88.5
Total (products with disputed or no levy are not included in calculation) - Thousand €
1,166,930
146,025
Disputed levies
ENTER - IE Business School
74
Compensation for private copying: an
economic analysis of alternative models
Table A.4.
Product
Italy
Units Sold
with Current
Levy (K)
Demand
Elasticity
Units w/o
levy (K)
Change in
Units Sold with
Removal of
Levy (K)
[4]
=[2]/[3]x 100
[5]
[6]
[7]
Price without
Levy (€)
Average
Current Levy
Rate (€ )
Price with
Current
Levy (€)
Change in
Price with
Removal of
Levy
[1]
[2]
[3]
=[1]+[2]
Collectable
Levy (K)
Lost
consumer
welfare (K)
Loss of
Producers’
revenues (K)
Sales w/o
levy (K)
[8]
[9]
=[2]x[7]
[10]
=½[8]x[2]
[11]
=[8]x[1]
[12]
=[1]x[7]
Media
Blank CD-R
0.16
0.25
0.41
-60.75%
230,673
-0.40
336,100
105,427
57,668
13,178
16,868
53,776
Blank CD-RW
1.06
0.25
1.31
-19.12%
9,227
-0.40
10,043
816
2,307
102
865
10,645
40,686
Blank DVD-R
0.47
0.73
1.20
-60.56%
59,500
-0.40
86,567
27,067
43,435
9,879
12,721
Blank DVD-RW
0.89
0.73
1.62
-45.02%
2,500
-0.40
3,168
668
1,825
244
594
2,819
Blank DVD+R
0.44
0.73
1.17
-62.09%
34,500
-0.40
51,017
16,517
25,185
6,029
7,267
22,447
Blank DVD+RW
0.59
0.73
1.32
-55.13%
5,700
-0.40
7,866
2,166
4,161
790
1,278
Flash memory
50.05
-1.33
3,076
4,641
153,954
Equipment
CD burners
20.66
0.62
21.28
-2.91%
1,400
-2.00
1,482
82
868
25
1,694
30,618
DVD burners
45.39
1.36
46.75
-2.91%
3,000
-2.00
3,175
175
4,080
119
7,943
144,113
242.33
7.27
249.6
-2.91%
7,280
424
52,925
1,541
102,748
1,866,910
Mobile phones with MP3
Copiers / multifunction devices
PCs (portable and desktop)
-2.00
7,704
1,097.36
-1.33
1,650
908.4
-1.33
4,338
1,810,644
3,940,639
Personal video recorders
308.29
9.25
317.54
-2.91%
218
-2.00
231
13
2,016
60
4,008
71,215
Portable dig. audio players
100.03
3
103.03
-2.91%
1,600
-2.00
1,693
93
4,800
139
9,303
169,351
Printers
253.24
-1.33
2,370
600,179
88.5
-1.33
598
52,923
Scanners
Total (products with disputed or no levy are not included in calculation) - Thousand €
199,271
32,108
165,290
Table A.5.
Product
Spain
Units Sold
with Current
Levy (K)
Demand
Elasticity
Units w/o
levy (K)
Change in
Units Sold with
Removal of
Levy (K)
[4]
=[2]/[3]x 100
[5]
[6]
[7]
Price without
Levy (€)
Average
Current Levy
Rate (€ )
Price with
Current
Levy (€)
Change in
Price with
Removal of
Levy
[1]
[2]
[3]
=[1]+[2]
Collectable
Levy (K)
Lost
consumer
welfare (K)
Loss of
Producers’
revenues (K)
Sales w/o
levy (K)
[8]
[9]
=[2]x[7]
[10]
=½[8]x[2]
[11]
=[8]x[1]
[12]
=[1]x[7]
Media
Blank CD-R
0.16
0.23
0.39
-58.52%
252,341
-0.40
360,380
108,039
58,038
12,424
17,286
Blank CD-RW
1.06
0.23
1.29
-17.72%
6,359
-0.40
6,878
519
1,462
60
550
57,661
7,291
Blank DVD-R
0.47
1.4
1.87
-74.78%
49,000
-0.40
85,132
36,132
68,600
25,292
16,982
40,012
Blank DVD-RW
0.89
1.4
2.29
-61.26%
2,000
-0.40
2,918
918
2,80
643
817
2,597
Blank DVD+R
0.44
1.4
1.84
-75.98%
41,000
-0.40
72,666
31,666
57,400
22,166
13,933
31,973
Blank DVD+RW
0.59
1.4
1.99
-70.35%
4,500
-0.40
7,318
2,818
6,300
1,973
1,663
Flash memory
50.05
-1.33
5,560
CD burners
20.66
-2.00
951
19,648
DVD burners
45.39
-2.00
2,309
104,805
-2.00
5,367
-1.33
1,263
908.4
-1.33
3,605
Personal video recorders
308.29
-2.00
313
96,495
Portable dig. audio players
100.03
-2.00
2,327
232,770
Printers
253.24
-1.33
1,340
-1.33
330
4,318
278,278
Equipment
Mobile phones with MP3
Copiers / multifunction devices
PCs (portable and desktop)
Scanners
242.33
1,097.36
20.26
88.5
10
1,117.62
98.5
-1.81%
-10.15%
Total (products with disputed or no levy are not included in calculation) - Thousand €
Disputed levies
ENTER - IE Business School
1,233
291
1,300,585
30
24,980
304
32,921
1,385,966
3,274,782
339,341
39
2,910
195
3,451
222,491
63,057
87,603
29,205
75
Compensation for private copying: an
economic analysis of alternative models
A.2.
Table A.6. HP Financials Q2FY08 - Q2FY07
Examples for section 2.2 (ii)
[indirect loss in the honest market
(manufacturers / producers)]
Profit margins can be low and declining,
indeed. Data referred below corresponds to
2007-2008 under regular market conditions
before the economic crisis worldwide and in
correspondence with time-frames used in
other sections of the Report.
For example, a consumer electronics (CE)
industry representative company, Matsushita,
marketer of the Panasonic brand, reported a
41% gain in net income in fiscal year ended
March 31, 2007. That was $1.84B up from
$1.3B last year. Sounds impressive until
you look at the revenue base of $77.2B and
realize that reflects a 2.4% profit margin. See
http://www.twice.com/article/CA6439637.
html?industryid=23097
Meanwhile, for its fiscal year ended March 31
2007, Sony happily reported that operating
income for its electronics businesses was up
an astonishing 2,000%. Sony reached $1.33B,
which represents a paltry 2.6% operating
margin. For comparison’s sake, Sony’s
financial performance produced a 3.77%
return on equity according to Yahoo Finance.
A risk free investment in 30 year US treasuries
is currently yielding 4.87%. See http://www.
twice.com/article/CA6442514.html.
An ICT representative company like HewlettPackard reported also some useful reference
data about operating margins for its various
product lines in its News Releases in May
20, 2008, which compares financials for the
end of its second quarter FY07 (ended April
30, 2007) and the end of its second quarter
FY08 (ended April 30, 2008). This report
can be viewed in http://h30261.www3.
hp.com/phoenix.zhtml?c=71087&p=irolnewsArticle&ID=1148594&highlight=.
Q2 FY08
Q2 FY07
Y/Y
Net revenue (B$)
$28.3
$25.5
11%
GAAP operating margin
9.2%
8.3%
0.9 pts
$2.1
$1.8
16%
GAAP diluted EPS
$0.80
$0.65
23%
Non-GAAP operating margin
10.0%
9.0%
1.0 pts
$2.2
$1.9
16%
$0.87
$0.70
24%
GAAP net earnings (B$)
Non-GAAP net earnings (B$)
Non-GAAP diluted EPS
A.3.
Data for section 2.2 (iii).
[losses on the grey market]
Figure A.1 shows the stagnation of the market for blank DVDs in 2006 in countries with
a high levy which are not or only marginally
growing or even worse, decreasing, while the
EU market revenue as a whole still grew 31%.
Figure A.2 shows the distortion of local trade
channels for DVD-R in 2006. One can appreciate the fact that countries with no levy or with
a low levy are big net exporters in the market
ENTER - IE Business School
76
Compensation for private copying: an
economic analysis of alternative models
(Germany 24%, UK 29%, Luxembourg 57%)
while countries with a high levy (like France,
Italy and Spain) are big net importers (grey im-
ports represent around half of the entire market: France 47%, Italy 45%; Spain 46%, The
Netherlands 45% and Denmark 65%).
In Italy, the levy on CD-R/RW discs (700 MB)
changed from 0.014 to 0.25€ in 2003. Figure
A.3 shows the consequences in terms of local sales92.
NOTE: Most of these data are contained in EICTA submission to the EC Stakeholder Consultation on Copyright Levies
Reform 2008, available at http://ec.europa.eu/internal_market/copyright/levy_reform/index_en.htm
A.4.
Calculations for section 2.2 (iv)
[losses due to inefficient price policy caused
by differences in levies across countries]
Table A.7 shows the losses of distributing
the levies imposed in some countries over
all countries. Again, in this exercise, we
work with the hypotheses that all collectable
levies are actually collected. These losses
are computed the following way. First the
total collectable amount is computed. This
quantity is then divided among all units of
92
European Levy Symposium ‘Working together for common
solutions’. Milan, 27 March 2008.
Table A.7.
Four countries
Price (€)
Total units sold in
4 countries (sum of
columns [5] in
Tables A2-A5) (K €)
Total levy collectable
in 4 countries (sum of
columns [9] in
Tables A2-A5)* (€/unit)
Levy distributed
(€)
Levy distributed as a
% of price
Elasticities
Change in q
Net loss (K €)
[1]
[2]
[3]
[4]=[3]/[2]
[5]=[4]/[1]x100
[6]
[7]=[2]x[5]x[6]
[8]=-½x[4]x[7]
Flash memory
50.05
32,556
44,923
1.38
2.75
-1.33
-1,194
824
CD burners
20.66
6,3
15,268
2.42
11.73
-2
-1,478
1,791
Product
DVD burners
Mobile phones with MP3
Copiers / MFPs
PCs (portable and desktop)
45.39
20,750
85,150
4.1
9.04
-2
-3,752
7,698
242.33
26,990
52,925
1.96
0.81
-2
-437
428
1,097.36
9,163
24,980
2.73
0.25
-1.33
-30
41
908.40
25,398
-1.33
Personal video recorders
308.29
923
7,791
8.44
2.74
-2
-51
213
Portable dig. audio players
100.03
16,953
79,348
4.68
4.68
-2
-1,586
3,713
Printers
253.24
10,070
149,211
14.82
5.85
-1.33
-784
5,811
88.5
3,255
17,743
5.45
6.16
-1.33
-267
Scanners
Total
* Not including disputed or proposed levies
ENTER - IE Business School
477,342
727
21,247
77
Compensation for private copying: an
economic analysis of alternative models
the product sold in all four countries. The
percentage of this quantity on total price is
used as the increase in price in all countries
that is necessary to pay for the levies in the
countries that impose it. A finer adjustment
should have considered that changes in
quantities sold due to this policy, and would
give a slightly different price. However,
the improvement of the adjustment would
be very small. The important computation
comes now, when we compute the losses
that this higher price in some countries (and
lower in others) impose to the industry, with
respect to the situation where the restriction
to set the same price is not imposed (because there is no grey market, or other arbitrage opportunities).
It is important to realise that the policy has
costs in both types of countries (those where
the price is now higher and those where it is
lower). The reason is that, previous to the
equal price policy, the price was adjusted
efficiently, while the new price generates a
distortion in all countries. Of course, for the
firms this cost is lower than loosing part of
the market to arbitrators or grey market.
Case study: inkjet multifunctional
printers and huge levies in Germany
1. No attempt to avoid the price distortion in the
German market is made by producers
Scenario 1.1. If there is no grey market. The
direct loss caused by the levy (area B in Figure A.5) can be computed as follows. First,
demand at price P=200 is given by
Q=1.1884x109x200-1.33=1.034x106.
(I.e., demand has decrease from 2.6 million
units to just about one million). Now we can
compute area B (direct loss) as
200
1.1884x109x P-1.33dP-(200-100)x1.034x106=57.668x106€
Indirect losses are estimated as a 20% of
area C, which is given by
0.2x(200-100)x(2.6x106 -1.034x106)=31.32x106€.
Total (direct and indirect) loss in case no grey
market exist is 89 Mio € (57.668+31.32 Mio €).
Scenario 1.2. If half of the consumers are able
to buy in the grey market, the loss will be
reduced by half, and the effective direct loss
will be 28.834 Mio €.
As before we estimate indirect losses as a
20% of area C, which is, again, 31.32 Mio €.
Total loss of this price policy is, then,
28.834+31.32 Mio € = 60.154 Mio €.
Since in the case of inkjet MFPs we are
dealing with a high levy, that represents a
100% increase in the price of the device, we
can no longer use the linear approximation.
Therefore, it is necessary firstly to estimate
the demands for Germany and Europe. We
use the same methodology developed in
A.1 for the estimation of demands for blank
media. Thus we propose a constant elasticity demand (with elasticity being -1.33):
Q=AP-1.33. For Germany we know that, at
P=100, Q=2.6x106, which gives a value of
A=1.1884x109. For Europe, at the same price
Q=13x106, and this gives A=5.9421x109.
Consider now two price policies.
ENTER - IE Business School
78
Compensation for private copying: an
economic analysis of alternative models
2. Producers decide to increase the price in all
countries in the European market
We proceed as before, but for the European market. Being Germany one fifth
of the Western European market in 2005
(source:IDC), the new average price in each
European country will be 120€. Demand in
Europe goes down from 13 Mio to
Q=5.942x109x120-1.33=10.2x106.
Direct loss is then
120
5.942x109x P-1.33dP-(120-100)x10.2x106=26x106€.
No grey market is assumed here, as the increase in price occurs in all countries, and
the price increase is far lower than it would
have been under the other scenario.
While the indirect loss is
0.2x(120-100)x(13x106 -10.2x106)=56x106€.
Total loss with this policy is, then, 82 Mio €
[26 Mio + 56 Mio €].
To finish this exercise, it is interesting to note
that the collected amount of copyright levies
under the first price policy is
100x(1.034x106)/2=51.7x106€,
while, under the second price policy, the
collected amount is
20x10.2x106=204x106€,
i.e., four times higher.
Furthermore, note that without a grey market, the total loss under the first policy
(levy fully charged in Germany) would have
been 89 Mio €, and the collected amount
103.4 Mio €.
ENTER - IE Business School
A.5.
Details for section 2.2 (v)
[losses due to litigation]
ICT and CE industry in Europe paid to external
law firms 2.5 Mio € per year for copyright levies related litigation. This figure is the average
per annum amount over 2007 and 2008 as
reported by industry members. European industry had an internal cost block on in-house
lawyers and other resources involved on copyright levies disputes of 1.9 Mio € per year.
This figure is the average per annum amount
over 2007 and 2008.
Because European ICT and CE industry
could not invest this legal fund provision into
business activities, it is estimated to lose
profits between 1997 and 2010 in the range
of 450 Mio €. This is predominantly losses
of IT industry and assumes a ROCE of 15%.
On top of the accruals the European industry
has to provision between 1997 and 2010 for
interest claims on the accruals in the range
of 230 Mio €. This is predominantly losses of
ICT industry and assumes a ECB rate 5%.
The collection society VG Wort claimed in
their balance sheet to have direct expenses
for litigation in 2007 worth 200 K€. This is for
9 claims, so simplifying one can argue that
the annual cost per claim for a collecting society is on average 22 K€ (200 K€ : 9 = 22 K€).
The total number of individual court cases
in Germany was reported to be 44 (35 from
ZPÜ). So, technically speaking there would
be a total litigation costs for the Germany
collecting societies around 968 K€ per year
(44 court cases x 22 K€ = 968 K€ per year).
Now, let us assume that the German Court
case costs are around 70% of the total liti-
79
Compensation for private copying: an
economic analysis of alternative models
gation costs in the four countries93 and that
court case costs of other EMEA countries are
equal to the German cost block. In such a
case the total cost for the collecting societies
for litigation would be around 1.4 Mio € (968
K€ : 0,7 = 1.382 Mio €). Compared with the
above analysis the collecting societies have
only about 56% of the (direct) costs of the
EMEA industry (1.4 Mio € : 2.5 Mio € = 56%).
A.6.
Details for section 2.3 (iii)
[no long run effects of a compensation for
private copies in the number of music works]
In Labeaga and Félix94, the following elasticities for the supply of labour are obtained
for Spain. The data shows the elasticity for
sexes (women in the left) and rent percentiles. The decrease of the elasticity with rent
(change from Q3 to Q2, and to Q1) is clearly
seen in Table A.7.
Table A.7. Distribution of supply of labour elasticities
in Spain
Females
Q1
Q2
Males
Q3
Q1
Q2
Q3
0.3000 0.4828 0.7526
(0.5852)
0.1787 0.2692 0.3792
(0.3411)
Substitution 0.3039 0.4877 0.7623
effect
(0.5912)
0.1790 0.2700 0.3800
(0.3417)
-0.0084 -0.0054 -0.0037
(-0.006)
-0.0007 -0.0006 -0.0004
(-0.0006)
Total
effect
Rent
effect
A.7.
Calculations for section 3.1 [Alternative 1: European harmonised
compensation system administered
at national level]
Table A.8 shows the data and the calculation of a single levy rate that is applied in all95
ICT and CE products per country, with the
condition that the levy generates the same
amount that was collectable – according
with Nathan Associates Inc. – under the current system in those countries in 2005.
To this end, all the commodities with the
same price elasticities are grouped. Since
there are 3 different elasticities, 3 groups
are formed. First, total sales on each group
without a levy are computed (just adding the
corresponding sales in column (7) in tables
A.2 to A.5. Then, a uniform levy of size L%
on price is considered. This levy decreases
sales according to the elasticities of each
group of commodities. The sum of the L%
of new sales in the 3 groups has to be the
same as the collectable amounts computed
in the totals of columns (9) in tables A.2 to
A.5. This condition gives the required L.
As an example, the levy (L) for France is
computed solving the equation: [135,517(1-0.4L)
+2,587,479(1-0.2L)+11,385,554(1-1.33L)]L=27,8425
Table A.8. Average levy for all products
* Q1, Q2 y Q3 are, respectively, the first, second and third quartils. In parenthesis the
mean values of the distribution.
France
Total sale 0.4
Total sale 2
Total sale 1.33
93
Source: ICT industry.
94
José María Labeaga and José Félix Sanz; ‘Oferta de trabajo
y fiscalidad en España. Hechos recientes y tendencias tras el
nuevo IRPF’. Instituto de Estudios Fiscales. See page 31. Available at: http://www.uned.es/dpto-analisis-economico2/fichprof/labeaga/Documentos/labour.pdf.
95
Germany
Italy
Spain
135,517
366,877
135,016
143,851
2,587,479
3,557,406
2,282,207
1,754,303
11,385,554 15,546,739
6,558,338
5,307,572
Collectable
278,425
225,906
199,271
222,492
Levy (L) in %
2.03%
1.18%
2.28%
3.22%
By all products we mean all included in the first column of
tables A2-A5.
ENTER - IE Business School
80
Compensation for private copying: an
economic analysis of alternative models
Tables A.9-12 show the impact of these levies. Losses are computed as in tables A.2-5.
Table A.9.
Product
France
Price without
Levy (€)
% Levy / 100
[1]
Change in Units Sold
w/ Levy
Levy Coll (K €)
Lost Consumer’
welfare (K €)
Lost Producers’
revenues (K €)
[6]
[7]
=[2]x[4]x[6]
[8]
=([3]-[1])x([4]+[7])
[9]
=½([3]-[1])x[7]
[10]
=-[1]x[7]
Price with
Levy (€)
Units sold w/o
Levy
Demand Elasticity
[2]
[3]
=[1]x(1+[2])
[4]
Media
Blank CD-R
0.16
0.0203
0.163
416,490
-0.4
-3,382
1,342
5.5
541.1
Blank CD-RW
1.06
0.0203
1.081
16,994
-0.4
-138
363
1.5
146.3
Blank DVD-R
0.47
0.0203
0.479
35,449
-0.4
-288
335
1.4
135.3
Blank DVD-RW
0.89
0.0203
0.908
6,700
-0.4
-54
120
0.5
48.4
Blank DVD+R
0.44
0.0203
0.449
37,865
-0.4
-307
335
1.4
135.3
Blank DVD+RW
0.59
0.0203
0.602
30,309
-0.4
-246
360
1.5
145.2
Flash memory
50.05
0.0203
51
9,427
-1.33
-254
9,319
129
12,738.7
CD burners
20.66
0.0203
21
1,600
-2
-65
644
13.6
DVD burners
45.39
0.0203
46.3
4,500
-2
-182
3,978
84
1,342.1
242.33
0.0203
247
6,660
-2
-270
31,432
665
8,292.7
1,097.36
0.0203
1,119
2,820
-1.33
-76
61,123
848
65,525
908.4
0.0203
927
7,880
-1.33
-213
141,388
1,962
83,549.8
Personal video recorders
308.29
0.0203
314
333
-2
-13
1,999
42
193,264
Portable dig. audio players
100.03
0.0203
102
6,334
-2
-257
12,340
261
4,168
Printers
253.24
0.0203
258
2,290
-1.33
-62
11,454
159
25,723.7
88.5
0.0203
90.3
916
-1.33
-24.7
1,601
22.2
15,657.2
278,135
4,198
2,188.7
Equipment
Mobile phones with MP3
Copiers / Multifunction devices
PCs (portable and desktop)
Scanners
Total
Table A.10.
Product
Germany
Price without
Levy (€)
% Levy / 100
Price with
Levy (€)
Units sold w/o
Levy
Demand Elasticity
[1]
[2]
[3]
=[1]x(1+[2])
[4]
[6]
Change in Units Sold
w/ Levy
Levy Coll (K €)
Lost Consumer’
welfare (K €)
Lost Producers’
revenues (K €)
[7]
=[2]x[4]x[6]
[8]
=([3]-[1])x([4]+[7])
[9]
=½([3]-[1])x[7]
[10]
=-[1]x[7]
Media
Blank CD-R
0.16
0.0118
0.162
788,146
-0.4
-3720
1,481
3.5
595
Blank CD-RW
1.06
0.0118
1.072
22,490
-0.4
-106.1
280
0.66
112
Blank DVD-R
0.47
0.0118
0.475
287,090
-0.4
-1355
1,585
3.75
637
Blank DVD-RW
0.89
0.0118
0.900
9,496
-0.4
-44.8
99
0.23
40
Blank DVD+R
0.44
0.0118
0.445
209,500
-0.4
-988.8
1,083
2.56
435
Blank DVD+RW
0.59
0.0118
0.597
24,494
-0.4
-115.6
170
0.4
68
Flash memory
50.05
0.0118
50.64
15,570
-1.33
-244.3
9,051
72.15
12,230
CD burners
20.66
0.0118
20.9
3,480
-2
-82.1
828
10
1,697
DVD burners
45.39
0.0118
45.9
14,073
-2
-332.1
7,360
88.94
15,075
Equipment
Mobile phones with MP3
Copiers / Multifunction devices
PCs (portable and desktop)
242.33
0.0118
245.2
8,065
-2
-190.3
22,518
272.13
46,124
1097.36
0.0118
1110
3,770
-1.33
-59.2
48,051
383
64,927
146,228
908.4
0.0118
919
10,257
-1.33
-161
108,220
862.74
Personal video recorders
308.29
0.0118
312
107
-2
-2.52
380
4.59
778
Portable dig. audio players
100.03
0.0118
101
8,591
-2
-202.7
9,901
119.65
20,281
Printers
253.24
0.0118
256
4,608
-1.33
-72.3
13,554
108
18,314
88.5
0.0118
89.5
1,650
-1.33
-25.9
1,696
13.52
2,292
226,256
248
329,833
Scanners
Total
ENTER - IE Business School
81
Compensation for private copying: an
economic analysis of alternative models
Table A.11.
Product
Italy
Price without
Levy (€)
% Levy / 100
[1]
Change in Units Sold
w/ Levy
Levy Coll (K €)
Lost Consumer’
welfare (K €)
Lost Producers’
revenues (K €)
[6]
[7]
=[2]x[4]x[6]
[8]
=([3]-[1])x([4]+[7])
[9]
=½([3]-[1])x[7]
[10]
=-[1]x[7]
Price with
Levy (€)
Units sold w/o
Levy
Demand Elasticity
[2]
[3]
=[1]x(1+[2])
[4]
Media
Blank CD-R
0.16
0.0228
0.163
474,504
-0.4
-4327
1,715
7.89
692
Blank CD-RW
1.06
0.0228
1.084
15,579
-0.4
-142
373
1.71
151
Blank DVD-R
0.47
0.0228
0.48
122,267
-0.4
-1115
1,298
5.97
524
Blank DVD-RW
0.89
0.0228
0.91
4,668
-0.4
-43
94
0.43
38
Blank DVD+R
0.44
0.0228
0.45
71,717
-0.4
-654
713
3.28
288
Blank DVD+RW
0.59
0.0228
0.603
11,286
-0.4
-103
150
0.69
61
Flash memory
50.05
0.0228
51.19
3,076
-1.33
-93
3,404
53.22
4,668
CD burners
20.66
0.0228
21.13
1,482
-2
-67
666
15.91
1,396
DVD burners
45.39
0.0228
46.42
3,175
-2
-145
3,136
74.91
6,571
242.33
0.0228
248
7,704
-2
-351
40,625
970.49
85,131
1097.36
0.0228
1122
1,650
-1.33
-50
40,031
625.92
54,906
908.4
0.0228
929
4,338
-1.33
-132
87,122
1,362.25
119,496
Personal video recorders
308.29
0.0228
315
231
-2
-11
1,550
37
3,247
Portable dig. audio players
100.03
0.0228
102
1,693
-2
-77
3,685
88
7,722
Printers
253.24
0.0228
259
2,370
-1.33
-72
13,269
207.47
18,200
88.5
0.0228
90.5
598
-1.33
-18
1,170
18.29
1,605
199,001
3,474
304,697
Equipment
Mobile phones with MP3
Copiers / Multifunction devices
PCs (portable and desktop)
Scanners
Total
Table A.12.
Product
Spain
Price without
Levy (€)
% Levy / 100
[1]
Change in Units Sold
w/ Levy
Levy Coll (K €)
Lost Consumer’
welfare (K €)
Lost Producers’
revenues (K €)
[6]
[7]
=[2]x[4]x[6]
[8]
=([3]-[1])x([4]+[7])
[9]
=½([3]-[1])x[7]
[10]
=-[1]x[7]
Price with
Levy (€)
Units sold w/o
Levy
Demand Elasticity
[2]
[3]
=[1]x(1+[2])
[4]
Media
Blank CD-R
0.16
0,0322
0.165
486,550
-0.4
-6267
2,474
16.14
1,003
Blank CD-RW
1.06
0,0322
1.094
10,057
-0.4
-129
339
2.21
137
Blank DVD-R
0.47
0,0322
0.485
109,632
-0.4
-1412
1,638
10.68
664
Blank DVD-RW
0.89
0,0322
0.918
3,918
-0.4
-50
111
0.72
45
Blank DVD+R
0.44
0,0322
0.454
93,166
-0.4
-1200
1,303
8.5
528
Blank DVD+RW
0.59
0,0322
0.609
9,568
-0.4
-123
179
1.17
73
Flash memory
50.05
0,0322
51.661
5,560
-1.33
-238
8,577
191.87
11,917
CD burners
20.66
0,0322
21.325
951
-2
-61
592
20.37
1,265
DVD burners
45.39
0,0322
46.8
2,309
-2
-149
3,157
108.67
6,749
242.33
0,0322
250.1
5,367
-2
-346
39,182
1,348.5
83,758
1097.36
0,0322
1132.7
1,263
-1.33
-54
42,717
955.62
59,355
908.4
0,0322
937.6
3,605
-1.33
-154
100,932
2,257.95
140,246
Personal video recorders
308.29
0,0322
318.2
313
-2
-20
2,907
100.05
6,214
Portable dig. audio players
100.03
0,0322
103.2
2,327
-2
-150
7,012
241.34
14,990
Printers
253.24
0,0322
261.4
1,340
-1.33
-57
10,459
233.97
14,533
88.5
0,0322
91.3
330
-1.33
-14
900
20.14
1,251
222,480
5,518
342,728
Equipment
Mobile phones with MP3
Copiers / Multifunction devices
PCs (portable and desktop)
Scanners
Total
ENTER - IE Business School
82
Compensation for private copying: an
economic analysis of alternative models
A.8.
A.9.
Calculations for section 3.5 Details for section 3.6
[Alternative 5: Application of levy on original
work]
[Alternative 6: Compensation collected as indirect taxes on digital devices]
Denote the different variables as follows:
t:tax rate on the commodity (original
legal copy)
s:demand elasticity in the market for
legal copies
y:rate of loss revenues for producers
to be computed as economic loss
T:tax revenue to be collected as
compensation for private copying
L:inefficiency rate (cents wasted for
every Euro collected)
The price will be set at 10€, and the amount
of units at 65 Mio (recall that sales are estimated to be 650 Mio €). Then, equation
10t x 65(1 +st) = t
gives the combination of values for s and t
that generate a collected tax of size T. Finally, equation
(½10t+10y)x65(-s)t
T
=L
gives the necessary value of y to get the inefficiency rate of L. The different combinations
in Table 3.3. satisfy these two equations.
In Section 3.6 – and eventually some other
parts of this report – we exposed our preference tending to support a more important
role for governmental authorities in the setting, collection and distribution of private
copying compensation (whatever the form
this compensation adopts).
Our position is built up on many pieces of information (including several official reports)
released in the last years about the role,
transparency and efficiency of some collective management practices. However, note
that this is one of the most controversial issues that exist in the intellectual property
field and many conflicting interests are confronted. A reference to many pieces of information published on this topic that drove our
personal preference is included below. As
indicated, this is a very arguable debate and
anyone can find publicly available information
– sometimes contradictory – that supports either favours the role of collection societies96
or challenges the functioning of collection
societies in general or specifically for some
specific duties (e.g. distribution of levies). Additionally, it is worth to notice that while some
negative data reported for specific collecting
societies may be a sign that something might
not be working on the system, in no way this
should drive to a general attribution of similar
behaviour to collecting societies in general,
either based in the same or a different country. The list below should be just taken as a
mere list of information publicly released that,
as indicated, drove our preference in favour
96
ENTER - IE Business School
See for example GESAC’s reply to the EC Private Copying Levies Stakeholder Consultation 2008 provides data to contradict
some of the EC’s findings on distribution issues, administration fees and other matters. Available at: http://circa.europa.
eu/Public/irc/markt/markt_consultations/library?l=/copyright_
neighbouring/compensation_private/gesacpdf/_EN_1.0_&a=d
83
Compensation for private copying: an
economic analysis of alternative models
of a more active role of governmental authorities in the setting, collection and distribution
of private copying compensation.
collected the year before (assuming a long
1-year delay between collection and distribution), then the difference is still high (approximately between 16% to 25%, see Table A.15).
In our view, the issue of the collected and not
distributed money is of special relevance in
the context of this report. For instance, according with the official data97 on amounts
collected and distributed (on any basis, not
only copyright levies) by all collecting agencies in Spain in the last years summarised in
Table A.13 below, an average 25% not being distributed to the right-holders.
Table A.15. Spain: collected vs. distributed income
Incomes (Mio €)
2002
Distribution (Mio €)
Diff. (%)
312.17
2003
233.20
74.70
2003
350.57
2004
286.37
81.69
2004
403.58
2005
339.53
84.13
2005
451.14
2006
366.00
81.13
Table A.13. Spain: collected vs. distributed income
In Table A.14 we present the same information for two collecting societies, SGAE (by far
the major Spanish collecting society) and AIE.
A similar analysis of undistributed funds is
contained in report published by the Spanish National Agency for Evaluation of Public
Policies and Quality of Services (AEVAL) in
April 200998, which reveals that non-distributed rights represented 13.65% on average (for all right categories, not specifically
for private copying) and that administration
and collection fees ranged from 2.84% to
28.77% in 2007.
If we consider that collected amounts are not
usually distributed immediately and compare
amounts distributed one year with amounts
This 16%-25% gap may seem not high in
the case that Spanish copyright levies were
only considered, because the Spanish law
97
In Mio €
2002
2003
2004
2005
2006
Collected
312.17
350.57
403.58
451.14
476.38
Distributed
243.90
233.20
286.70
339.53
366.00
Difference
68.27
117.37
116.88
111.61
110.38
Source: Spanish Ministry of Culture – Available at: http://www.
mcu.es/estadisticas/docs/capitulos_graficos/AEC2007/c_
propiedad5.pdf
98
See footnote 50 and footnote inside page 44 ‘Sum up’ subsection.
Table A.14. SGAE - AIE: collected vs. distributed income
2002
2003
2004
2005
2006
252.98
265.33
291.45
309.93
336.01
Collected
Mio € [1]
SGAE
AIE
5.69
26.1
17.62
17.52
19.01
Distributed
Mio € [2]
SGAE
205.8
184.37
221.84
245.5
270.87
AIE
4.11
10.86
11.94
14.53
18.55
Not distributed
Mio € [3]=[1]-[2]
SGAE
47.17
80.95
69.6
64.43
65.14
AIE
1.59
15.24
5.69
2.98
0.46
Not distr. / collected
% [4]=100x[3]/[1]
SGAE
18.64%
30.51%
23.88%
20.79%
19.38%
AIE
27.85%
58.39%
32.21%
17.03%
2.41%
ENTER - IE Business School
84
provides for a 20% deduction by collecting societies for cultural and social funding. However, data provided above reflects
overall income, not only copyright levies,
which represent a limited income for major
collecting society SGAE99 (less than a 5.5%
in 2007), but a much bigger number (20%) of
total average income for all collecting societies100, being the second largest source of
income for collecting societies in Spain.
This issue of undistributed funds is not particular of Spain only, but is widely spread for
collecting societies across Europe101.
While AEVAL report is in general positive
about the functioning of collective management in Spain by acknowledging that ‘the
basic functions of collecting societies – collection, administration and welfare deduction, allocation of royalties and pay-out to
right-holders – are performed to a standard
of efficiency that improves over time, in step
with the societies’ increased experience’, it
also acknowledges that there is room for
various improvements.
Compensation for private copying: an
economic analysis of alternative models
European Affairs (July 2006)102 which indicates that ‘whilst nobody among the user’s
interviewed contest the benefits in efficiency gains from collective management, they
would like regulators to look at the risk of
excessive licence fee as a result of abuse of
monopoly power or of management inefficiency. They seek more transparency in particular in relation to cost allocation. They are
concerned about productive inefficiency’
and concludes that ‘the report advocates
harmonisation of legal rules in relation to
transparency, governance and accountability in rights management.’
Additional reports commissioned in last
years by official institutions of Member
States are well highlighting our concerns
and preferences:
•
Moreover, additional reports coming from
other official sources confirm our views
about efficiency of distribution mechanisms
of multiple collecting societies.
For instance, the European Parliament publishes in its website the report ‘The Collective Management of Rights in Europe – The
Quest for Efficiency’ commissioned to KEA
99
SGAE 2007 Public Accounts: Total Income: 377.2 M€ / Copyright Levies Income: 20.48 Mio €.
100
According with data provided on AEVAL report, weight of copyright levies as part of the total income of collecting societies
in Spain was: 22.33% in 2004; 21.67% in 2005; 20.67% in
2006 and 19.94% in 2007.
101
For example, it appeared that 57 Million € of copyright levy
proceeds remained undistributed in The Netherlands between
1995 and 2005. Back in 2005, Collecting Societies were given
2 years by the Government to clean up those undistributed
funds and when in 2007 still 5.6 Mio € remained not distributed, Government ordered to refund those funds (plus 2 Mio
€ interest) back to ICT industry. Collecting societies changed
distribution rules and this refund is currently under litigation.
ENTER - IE Business School
102
The first report highlighted is a study
done by the College of Copyrights Supervision on the Stichting De Thuiskopie
foundation and published in December
2005. The College of Copyrights Supervision (Het College van toezicht auteursrecht) is the body supervising collecting
societies in The Netherlands. Its supervisory rights are defined by law to prevent
collecting societies to have a monopoly
positions on the different markets (music, reprography,etc.). Stichting De Thuiskopie (STK) is a Dutch umbrella organisation responsible for redistributing the
money perceived by all Dutch collecting
societies to the rights holders. The College of Copyrights Supervision investigated the STK at the demand of the Ministry of Justice in order to get more information on complete financial justification
of the collection, management and redistribution of the copy compensations,
management of redistribution schemes
and structure of the STK board.
Available at http://www.europarl.europa.eu/meetdocs/2004_2009/documents/dv/study-collective-managementrights-/study-collective-management-rights-en.pdf
85
Compensation for private copying: an
economic analysis of alternative models
This research reported among other
findings that there were unacceptable
delays in the payment process to the
right holders and insufficient action on
the part of STK to remedy this situation,
STK was not able to provide a correct
financial overview, while the College of
Copyrights Supervision noted however
that the redistribution to right holders is
more streamlined since the introduction
of a reform in 2004. However, there are
still shortcomings in the redistribution
process, and a few questions remain
regarding the amount of total management costs of STK and the amounts redistributed to social and cultural funds
by STK.
Finally, the College of Copyrights Supervision recommended the Ministry
of Justice to request from STK financial justification and information, a
financial overview that should contain incomes, management and other
costs, amount and destination of non
distributed compensations, time between request and payment, payments
to foreign claimants, and provision to
the College of Copyrights Supervision
with a plan on how they will meet the
college recommendations and a full financial overview.
•
103
The report published by the Dutch
Parliament in 2009103 identifies several
areas of reform of collective management system, such as a ‘one-stop shop’
from the users’ point of view, establishment of an arbitration commission
to deal with disputes about tariffs and
collections, set up of an efficiently functioning complaints organisation where
both rights holders and users can subAvailable at http://docs.liigl.nl/sdu/op/kst/20090714/kst133347.
pdf. The reaction from Dutch Government to the report, supporting its main conclusions, is available at http://docs.liigl.nl/
sdu/op/kst/20091106/kst136427.pdf
mit their complaints about the operation
of the Collecting Societies offering a
guarantee for rapid, adequate and impartial treatment, and the amendment
of governance rules for collecting societies, including specifically in the financial area setting-up limits on (a) the
maximum permitted level of overheads
(costs), (b) the maximum permitted level
of pending payments, (c) the maximum
permitted level of payments for cultural
causes (as opposed to payments to the
rights holders), and (d) the undesirable
situation of Collecting Societies investing in risk-bearing capital.
Furthermore, the Dutch Parliament called
for putting in place restrictions on how
far Collecting Societies may go in the development and conception of new fees
and acknowledges that the copyright
levy system has many undesired side-effects, proposing to a levy system phaseout by mean of the gradual reduction of
levies on all recording media to zero during a 3-year period, with no extension of
levies applied to any other devices.
•
Another report analysing these issues
was published in France, where in
March 2006 the French Minister of Industry and Finances set up a Committee on the Immaterial Economy (Commission sur l’économie de l’immatériel).
One of the missions of this committee
was to examine in what regard the management of rights linked to Intellectual
or Industrial property are in line with an
economical optimum. The Committee
was asked to come up with solutions
to better balance the current system of
management of rights with the development of new technologies (in particular
with the use of Internet).
The report was presented to Thierry
Breton, the French Minister of IndusENTER - IE Business School
86
Compensation for private copying: an
economic analysis of alternative models
try and Finances in December 2006.
In its report, the Committee noted that
the Collective management of rights in
France is extremely complex and that
there is a profusion of collecting societies (there are around 30 existing ones
in France). The report called for a rationalisation of the existing collective rights
management system. It also noted that
due to the number of existing collecting societies, the French system would
in principle favour competition between
collecting societies, at the benefit of authors. In fact the SACEM (Société des
auteurs, compositeurs et éditeurs de
musique; the French collecting society
for music) receives more than 75% of
all rights collected in France, thus creating a de facto monopoly. The report
stresses that the SACEM has abused its
dominant position.
Further, the report criticizes the opacity of the French collecting societies and
their management costs. For instance,
the management costs of SACEM for
2005 were at 177 Mio €, representing
23.4% of the collected rights for that
year (they represented 23.7% in 2004).
The report stresses that if these management costs were reduced to 15% of
the perceived rights (as it is the case in
the UK, US, and Japan), this would free
additional 62 Mio € to be redistributed to
authors. If the management costs were
reduced to 10% of the perceived rights,
this would free additional 100 Mio € to
be redistributed to authors.
The report takes the example of Japan
where in 2001 the government ended
the monopoly of the Japanese collecting society JASRAC. Four strong competitors then entered the market and
JASRAC had no choice but to reduce
ENTER - IE Business School
the fees charged to align itself with the
competitors. As a result, the amounts
redistributed to artists increased. For
instance in the case of interactive diffusions the level of fees charged by
JASRAC to manage rights went down
from 18 to 11% to be in line with the
competitors’ fees set at 10%. Because of the increasing competition
on the market, JASRAC also radically
reduced their management costs as
much as 50%.
The report concludes that it is necessary to reform the current French system, which lacks transparency and is
less performing than other countries.
A more performing collective management of rights in France is expected to
bring more credibility to the system for
which economical balance and transparency are essential. To reform the
system, an intervention from the public
authorities is believed to be nevertheless imperative and indispensable.
•
Finally, on 19 January 2010 the Spanish National Competition Authority (CNC
– Comisión Nacional de Competencia)
released a strong Report on Collective
Management of Intellectual Property
Right104 where the CNC analyses pricing
problems and constraints on competition caused by the collective management of intellectual property rights and
makes recommendations for a more procompetitive model. In this document, as
reported in the 2nd issue of the ECN Brief
(a publication of the European Competition Network)105:
104
Available (in Spanish) at http://www.cncompetencia.es/Inicio/
Informes/Estudios/tabid/228/Default.aspx.
105
Available at http://ec.europa.eu/competition/ecn/brief/02_2010/
brief_02_2010_short.pdf.
87
Compensation for private copying: an
economic analysis of alternative models
‘The CNC considers that the monopoly position enjoyed by Spanish
collecting societies reduces their
incentives to operate efficiently, facilitates the establishment of inequitable and/or discriminatory fees for
use of their repertoires and hinders
the activities carried on by users
both in traditional markets and in
online markets.
The CNC believes that a more procompetitive model is possible, in
which the collecting societies face
greater competitive pressure on the
services they provide to copyright
holders and users. According to the
CNC, such a model could be organised by market mechanisms that
decide which entities should exist,
what categories of rights should be
managed and how they should be
administrated.
The CNC also considers that injecting greater competition into the system requires widening the choices
available to copyright holders and
users. For this reason, the CNC advocates a comprehensive overhaul
of the Intellectual Property Act to
ensure that it provides a clear and
predictable legal framework and to
eliminate those elements that are
currently acting as regulatory entry
barriers, with special attention to
the possibilities offered by technological progress and the growing
importance of managing rights in
the online environment. In particular, the CNC identified some entry
barriers that should be eliminated.
Nevertheless, for so long as collecting societies hold a monopoly position; the CNC’s view is that measures need to be adopted to avoid
possible abuse and inefficiencies.
Recommendations to this end are
made in the report.’
These reports and countries are not isolated
references, however the role of collecting
societies and the impact of copyright levies
have been the subject of contentious debates
between political parties and widely covered
by newspapers of several Member States.
Indeed, as this report is being finalized, the
European Commission has communicated
the Digital Agenda for Europe, one of the
seven flagship initiatives of the Europe 2020
Strategy, where it identifies that ‘the governance and transparency of collective rights
management needs to improve and adapt to
technological progress’106 and where they plan
to propose a framework Directive on collective rights management by end of 2010. This
seems a positive sign of possible rethinking of
copyright rules under parameters of efficiency
and innovation, ensuring that copyright systems evolve in tandem with the technologies
within scope.
106
European Commission Communication - ‘A Digital Agenda for
Europe’ (May 19th, 2010). http://ec.europa.eu/information_society/digital-agenda/documents/digital-agenda-communication-en.pdf
ENTER - IE Business School
About the Author
José Luis Ferreira got his PhD in Economics at Northwestern University (1991). After teaching on economics at
the University of Pennsylvania he is currently a professor at the Economics Department of Universidad Carlos III
(Madrid), where he additionally acts as Director of studies for the Master in Industrial Economics. His main areas
of interest include Industrial Organisation and Game Theory. He has published his works in some of the most
recognised journals like the Journal of Economic Theory and Games and Economic Behaviour. He has also participated in numerous research reports, debates and round tables on hot economic topics like regulation and liberalization on the Energy and Telecommunications sectors. He is a senior analyst at ENTER - IE Business School.
About ENTER
ENTER is the IE Business School centre for the analysis of telecommunications and the information society. it has
a unique positioning in Spain among centres dedicated to the analysis of the digital economy:
• Independent in its composition: combining public as well as private entities from several industries on its
board
• Multi disciplinary in its focus: encompassing all sectors affected by digital convergence and key industries
• International in its scope: developing a worldwide network with some of the most prestigious think tanks and
research centres
• Future-oriented in its analysis: including not only the current context but future scenarios
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This research study was commissioned to ENTER - IE Business School by Hewlett-Packard Europe. The
study does not, however, express Hewlett-Packard Europe’s official views. The views expressed and all
recommendations made are those of the author.