October 27, 2004  ·  William Fisher

From the last set of interesting reactions to my proposal for an Alternative Compensation System, I�ve culled a few especially sharp-edged objections. After trying to address them, I turn to the difficult question of what sort of regime is likely to emerge in the entertainment industry if we don�t move toward an ACS.

Valuation Problems Excellent question by Cory, echoed by Erik: �It doesn�t seem that this system addresses variation of value to the consumer. The Economist, for example, can charge a significantly higher yearly subscription fee than Entertainment Weekly, because its relative value to its (I suspect) smaller subscriber base is much higher. How does this system support niche items of high value to their niche?� It�s quite right that my proposal contains a mechanism for incorporating only one of the many variables that give rise to differences among recordings in terms of their value to consumers � namely, duration. (Click here for the relevant portion of Chapter 6.) But that seems to me acceptable with respect to music and film, where differences in value are not very great � as reflected in the fact that, in the current, market-based system, CDs and DVDs of all types sell for very similar prices, and the cost of admission to theatres varies little with the content of what�s shown on the screen. The same cannot be said (as Cory�s example notes) for print media, software, or games � which partly explains why I haven�t proposed incorporating such materials in my plan.

Why not rely on voluntary contributions? Ian�s post, and the FairShare proposal to which he directs our attention, presents this common argument in a novel and unusually attractive form. My response: Your efforts to reinforce, by creating opportunities to invest in promising artists, the willingness of music consumers to donate money to their favorite musicians is commendable, but I see two problems. The first is the notorious reluctance of consumers to make voluntary contributions to creators. People tip waiters partly because it�s a well-established social custom and partly because they are in face-to-face contact with the waiters and would feel ashamed to snub them. Neither constraint operates on the Internet. The unfortunate result is the failure of PayPal etc. to generate significant revenues for artists. The second worry is that, if current trends continue, it will be less and less feasible for musicians to make money through sales of their recordings. (Some observers � including, for example, Jens in her thoughtful post � celebrate or at least accept that outcome; others lament it. But it seems hard to deny.) The result is that, in the absence of an ACS or some other substantial reform initiative [more on this below], over time fewer and fewer investors in your system will recover any money, which will make it resemble ever more closely a pure busking regime, which hasn�t worked thus far.

Big Government Several posts emphasize the hazards of letting a government set up and run such a system. I agree that the dangers are serious � and are discussed in some detail in Chapter 6. Awareness of those risks partly underlies the proposal made at the end of the chapter for a voluntary Entertainment Coop, which would resemble a government-run ACS, but would rely upon subscriptions, rather than taxes. (If you�re curious concerning how such a system might be constructed and what might prompt people to sign up for it, check out this summary.) But, as by now should be apparent, I am less despairing concerning the ability of a responsible government agency to manage such a regime than are several people who have participated in this last round of discussion. Government-run collecting societies in Europe and judicially supervised private collecting organizations in the U.S. (ASCAP and BMI) are far from perfect, but they are not disastrous either. Certainly, composers are better off in their presence that they would be in their absence. I�ve tried, in my book, to identify their defects and suggest ways in which they could be corrected. In the end, I find efforts of that sort more promising than any of the alternatives.

Other Options Speaking of alternatives, if we don�t move toward an ACS or an Entertainment Coop, what is likely to happen? Most likely, one of three things:

1. Unauthorized copying continues to increase, and consumers increasingly rely up materials obtained (free) online for their entertainment needs. The film industry, in its current form, collapses � perhaps replaced by small, independent studios, financed by donations from corporations, foundations, and government agencies. Musicians continue to make recordings (inexpensively, using the rapidly improving digital recording technologies) but don�t earn any money from them, treating them instead as advertising for their performances.

2. The record companies and film studios, dismayed by the prospect of #1, persuade Congress to reinforce the copyright system substantially � for example, by adopting the INDUCE Act and sharply increasing criminal penalties for unauthorized reproduction of digital recordings. We see a protracted �war on piracy� very similar to the longstanding �war on drugs.�

3. Alternatively, the record companies and film studios persuade Congress to adopt some version of the Consumer Broadband and Digital Television Promotion Act � which requires the manufacturers of all consumer electronic equipment to embed in their products technology that recognizes and respects watermarks, and to remove from their devices all analog ports.

I�ve already explained in prior posts why I think #1 is an unattractive outcome � though plainly I have not persuaded everyone. That said, #1 is the least probable of the scenarios. The record and film industries are sufficiently powerful, and the majority of Congressmen are sufficiently sympathetic to them, that, if the fundamental transformation contemplated by #1 seems imminent, we will see legislation of type #2 or type #3. The merits and demerits of those routes are explored in Chapter 4 of my book. Before addressing them, I�d be curious concerning whether anyone has a different forecast.

  • http://locut.us/~ian/blog/ Ian

    Thanks for responding to my FairShare proposal. To your first point, your assertion that people only tip waiters due to social pressure, rather than out of a desire to reward them, is open to debate. There are many examples where people reward others financially even when the person they are rewarding is extremely unlikely to notice the individual reward. Either way, the distinguishing characteristic of FairShare is that it doesn’t rely on such generosity alone.

    To your second point, I fear that you have misunderstood the proposal. A comsumer’s investment in an artist is not recouped from sales of that artist’s CDs, but from subsequent investments in the artist through the FairShare system. Because of this is does not revert to a pure voluntary model just because CD sales have dried up.

    I think the simplicity of setting up a system like FairShare relative to the technical, and legal complexity of your ACS proposal could well make it a more realistic alternative.

  • http://b-dog.blogspot.com Brian Hunt

    On Big Government: One considerable problem inherent to a centralized system of valuation is that it is subject to corruption, and indeed, encourages it. In contrast, a capitalist model actually gives an incentive to produce, rather than corrupt. You can only sell so many CD’s.

    If an ACS isn’t adopted, and Congress doesn’t give the music and film industries the legislative power to hang themselves, I suspect that the market will adequately compensate for changes.

    Most probably is that digital distribution methods will become prevalent, for consumers and theatres alike. Indeed, there is nothing to say that consumers currently pirating would not otherwise pay for media, were it available in a suitable format at a reasonable price.

    Alternatively, more pessimistically, and less likely, is that the major industry players will be unable to adopt a sustainable source of revenue to support their big-budget productions. This is very unlikely, but it could lead to a distributed, folk based model, that distributes money more evenly to local centers as the demand for entertainment remains steady, but the big-budget supply dries up. Local entertainment has been known to compensate for a lack of centralized entertainment. Europe, being separated by languages, is a prime example of this.

    Let us not forget that the marketplace compensates. It is also unpredictable; DVD sales now outweigh theatre sales for productions of all sizes and budgets. Nevertheless, the industry was vehemently opposed to the idea from inception. The shortsightedness of the entertainment industry (excluding the pornographic branch) is astounding, having opposed every technological revolution that has consistently filled their coffers.

    There is, and arguably will always be, a solid demand for entertainment, though the digital supply in adequate formats at appropriate prices has not yet taken hold. Given time, it will. The future will allow people to watch TV and movie productions on demand, downloaded from the internet on a whim, and with appropriate compensation to the authors. The incentive must be there, though, for the entertainment industry to acknowledge and adopt this model of revenue.

    One interesting benefit to an ACS, however, where users choose how to compensate is that the producers are subject to zero-sum valuation. Rather than being able to dictate how much to charge for their copyright monopoly, and have users choose to buy or not, they are given an incentive to have users value their works as compared to other users. This makes for an excellent incentive to create valuable works.

  • Erik Trickel

    I am not sure that the music industry has seen their imminent demise because they still have outs as noted with #2 and #3. The industry will continue to seek #2 and #3 until they have found a viable alternative. I am willing to bet industry executives believe they can �win the war� through DRM and legal regulation. That means we most likely can�t implement the perfect ACS solution out of the box. An ACS will most like need the support of the music industry which would mean it will have to benefit them as much and most likely more than the current system. This ACS is a good starting point for negotiations.

    I think there might be a #4 which partially follows in line with Mr. Hunt. We start to see a significant decline of CD sales and an increase in online sales. The music industry keeps pushing congress for reforms to restrict consumer rights via #2 and #3. Though the type of distribution method is changing drastically the revenue numbers don�t show an overall decline in revenues making it difficult for legislators and the public to sympathize. Once this transformation hits critical mass, it will be too late for them to turn the tide. We will have a highly effective and inexpensive distribution mechanism for artists not trapped by a contract. This will give way to a slow decline of the monopoly and provide the right timing for an alternative solution.

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  • Rolo Timassie

    There’s a fourth option not covered by Prof. Fisher, which is that media companies begin protecting their content using content protection systems. DVDs are an example of this (btw, DVDs were not opposed by the studios, they were enthusiastically *promoted* by the studios, starting with Warner Brothers). With the legal protections for content protection contained in Section 1201, this will obviate the need (hopefully) for more extreme remedies. The market will determine, as it has with DVDs, whether and in what form protection is optimal.