IP’s online market – the economic forces at play

December 2010


Photo: H.R. Varian

Hal R. Varian is the Chief Economist at Google, where he started as a consultant in 2002. He has been involved in many aspects of the company’s activities, including auction design, econometrics, finance, corporate strategy and public policy.

He is emeritus professor at the University of California, Berkeley – at the School of Information, the Haas School of Business and the Department of Economics. He has published numerous papers on economic theory, econometrics, industrial organization, public finance, and the economics of information technology. Professor Varian has written two bestselling textbooks entitled Intermediate Microeconomics and Microeconomic Analysis. Ranked by Accenture as one of the top 10 business gurus in 2002, he is co-author of Information Rules: a Strategic Guide to the Network Economy.

In 2010, WIPO launched a Seminar Series on the Economics of Intellectual Property (IP) to explore the interface between the two areas. At the September seminar, Professor Hal Varian examined the economic forces at play in the online market for IP. He focused on how to encourage legitimate transactions of online content by reducing the costs associated with identifying IP right owners.

Digital technologies have fuelled an “information explosion” and transformed copyright’s operating landscape, blurring traditional relationships and creating new ones as new online services appear almost daily. While facilitating the dissemination of creative content – an original tenet of copyright law - this rapidly evolving landscape presents many copyright challenges, particularly in terms of returning value to authors and harnessing the economic benefits of online content – the other principle underpinning copyright law.

The costs1 of securing and managing legitimate transactions of protected material – transaction costs - have soared recently, largely because of difficulties in identifying copyright owners. “There are many valuable transactions between buyers and sellers… that don’t take place because of the transaction costs of identifying the appropriate owner,” Professor Varian explained. He said, “as economists we look at value in transactions… and transaction costs are like sand in the gears; [they] slow them down or prevent things from happening. So it’s important from an economic perspective to try to minimize transaction costs.”

Information explosion
In the digital era, the costs of reproducing, storing and disseminating creative content have fallen dramatically. Computation costs are estimated to have fallen by 1 to 5 trillion times in the last 100 years,2 Professor Varian explained. This has spurred unprecedented growth in the information available, with striking increases in professional content and user-created content as well as that produced or accessed illicitly - pirated content. “This dramatic reduction in cost has led to an equally dramatic increase in output,” he noted, citing a recent study3 that put per capita consumption of information in the industrialized world in 2009 at around 34 gigabytes per day.4 While tracing works pre-dating the digital age is difficult, identifying owners of “digitally born” works promises to be less so as these works are now typically recorded when they appear on digital networks.


Orphan works

Under copyright law, there is no requirement to register a creative work; protection is immediate and automatic. According to the Professor, this, coupled with an extended term of copyright protection5, has increased search costs and fuelled an orphan works problem. An “orphan work” is unavailable for commercial use or digitization because the right owner cannot be identified or located. Sometimes it is obvious who the owner is, but often it is not - rights may be transferred for a variety of reasons and the identity of the original creator or subsequent right owner may be unknown. Professor Varian noted that identifying the legitimate right owner and securing the relevant rights can prove a difficult, time-consuming and costly affair. This puts a brake on transactions and, even when they do occur, the associated high search costs “limit the value that is inherent in the copyrighted work,” he said. This issue is of particular concern to Google, he explained, given its endeavor to “make every book ever written available to every person on the earth,” under the Google Books Project. “We are at this critical juncture where we have to figure out some way to deal with the past,” he added.

Professor Varian discussed options for ensuring that buyers and sellers share the search cost burden in the IP market, to encourage economic transactions. He noted that economic wisdom dictated that “the party with the lowest search cost should end up doing most of the search.” He reflected on the merits of YouTube’s voluntary content identification system that allows right holders to monetize, track or block the content they upload onto YouTube. Professor Varian believes this partnership very successfully connects content providers and users - it currently governs billions of pieces of online content. By tracking content, additional “marketing and monetization” opportunities are created as providers monitor usage of their content. Though an ad hoc solution, Professor Varian noted “it gives an idea of what could be done.”

Possible solutions

If a protected work could only be used upon explicit identification of the owner, and that owner is impossible or difficult to find, “no one would be able to make use of that particular piece of IP,” he said. Citing proposals by the U.S. Copyright Office, he suggested a requirement to perform a “reasonably diligent search” to locate a right holder presents an economically efficient compromise. If, after a “diligent search”, the right holder cannot be identified then a work may be used by a licensee without prejudice. Should the right holder subsequently be found, then he or she would qualify for “reasonable compensation” along the lines of what might have been negotiated prior to the use of the work. Such a solution ensures that buyers receive some benefit in being able to use the IP if a search fails; if it succeeds, they can negotiate use of the IP. Failure to conduct a search would result in infringement costs. If sellers are easy to find, they benefit by concluding a transaction; if they are hard to find, they bear the cost of the fact that no transaction is likely to occur and lose the right to apply for an injunction or collect damages.

Professor Varian said that a liberal “safe harbor” provision to address instances of ambiguity in ownership6 was desirable to encourage owners to come forward. “After all, the value is in making the transactions happen,” he noted. “Unlimited liability would essentially result in no transaction taking place whatsoever,” he explained. High damage awards might discourage “legitimate uses due to ambiguities in ownership,” and risk creating an incentive “to seek to be injured.” This, he underlined, called for “a balancing of… interests in the construction of costs of infringement.”

Registries and copyright clearinghouses, he said, were useful in connecting buyers and sellers, reducing transactions costs and facilitating IP-related business deals.

Registries versus copyright clearinghouses

Registries facilitate the identification of right owners and open the possibility for negotiations to occur. This, however, might push prices up “because, once you have located a potential transaction, the cost of finding another seller… could be prohibitive.”

Copyright clearinghouses were more economically advantageous, he argued, as they identify owners and “enable transactions to actually take place” by clearing rights. By indicating the prices involved they “generally lead to a more competitive market” and also allow for more efficient pricing, e.g. bundling or quantity pricing - and increased transactions.

The Professor favored a voluntary industry-standardized system for content recognition to help reduce “frictions” in the commercial exchange of legitimate content. “There is a great advantage to standardization,” he noted. Its downside, however, is that “a single standardized system presents a fixed target for hackers.” For the moment, he pragmatically advocated experimenting with “different solutions”.

1  Transaction costs - expenses associated with making an economic exchange - the time, money and energy involved in concluding a deal.
4  An average web page (including graphics) is about 50 kilobytes - so 1 gigabyte is roughly the equivalent of 20,000 web pages.
5  The international minimum under the Berne Convention for the Protection of Literary and Artistic Works is 50 years after the death of the author, but in many jurisdictions it is now 70 plus years.
6 Erroneously asserting ownership over a work and licensing it to a user.

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