PROMISES

TO

KEEP

Technology, Law,

and the

Future of Entertainment

William W. Fisher lll

STANFORD LAW AND POLITICS

An imprint of Stanford University Press

Stanford, California
 Online Entertainment as a Regulated Industry

Private property rights, as we saw in Chapter 4, are always qualified

with exceptions and limitations designed to protect the public interest. Like-
wise, all industries are to some extent controlled by governments-in the
sensethat firms participating in them must abide by myriad rules designed
to protect the environment, shield their workers from injury, afford those
workers fair opportunities to organize, ensure the viability of their pension
plans, and so on. That said, some industries are subject to qualitatively dif-
ferentlevels of supervision. In those fields-conventionally known as "reg-
ulated industries"the government typically controls much more exten-
sively who enters the business, what goods or services they provide, and
what prices they charge.!
As we saw in Chapters 2 and 3, the entertainment industry for many
decadeshas been influenced powerfully by a detailed system of copyright
laws-and, during the past fourteen years, the complexity of those rules has
increased. Nevertheless, some observers think that the industry is not yet
regulated enough--that the major players have excessive economic and cul-
tural power and too often abuse it. Adoption of the reforms outlined in
Chapter 4, by further strengthening the entitlements of copyright owners,
would amplify the critics' concerns and strengthen the case for intensified
governmental involvement.
This chapter takes the tack the critics suggest. It asks: What would a
more heavily regulated entertainment industry look like? What would be its
merits and demerits?
 Promisesto Keep
174
Background
In thesecondand third quarters of
of the
the nineteenth
n: century.railroa
spreadovertheUnitedStates, rapidly becoming the primary
porting both people and goods long distanc As the indust oftrans
matu
however,it wasincreasingly characterized by
Americansto beabusive. On segments where there
only onerailroad
(rvoicallyshort-haul,intrastate "spur" lines), prices were often perceivedto
beexorbitantlyhigh. On segments where two
nore railroadscompeted
forcustomers(typicallylong--haul, interstate "trunk" lines betweenmaior
cities),priceswerelower but varied sharply among types of customers
cifically,large-vo
-volume shippers commonly receieived heavy "disco Spe-
and
shiopersoflow-valueg00ds (ke coal or lumber) typically
ers ofhigh-valuegoods (like clothing). In the mid-ninereer
ctaterailroadcommissions were established in hopes of cen-
these
ices.but theireffectivenesswas limited by (among other thingetheir
lbck of iurisdiction over interstate shipments. In T887, Congress souobe
to
remedythisgap(and perhaps to protect the railroads from overly aggressi
statecommissions)by establishing the Interstate Commerce Comnm
Aseriesofsubsequent federal statutes stcadily expanded the power of the
commissiontoensure that railroad rates and practices (first interstate and
eventuallyeven intrastate) were just, reasonable, and nondiscriminatory.
Duringthe early twentieth century, the regulatory strategy pioneered by the
railroadcommissionswas extended to other sectors of the transportation in-
dustry(oceanshipping, trucking, and finally aviation), the communications
industry(telegraphsand telephones), and public utilities (electricity andnat-
ural gas).?
Untlapproximately1975, cach of these fields conformed to whatJoseph
KearneyandThomas Merrill have helpfully described as the traditional reg
ulatorymodel.Each industry sector was "managed" by a single federal ad-
ministrativeagency(sometimes working in concert with analogous stare
agencies).
Thetypicalagency wielded its power in four ways. First, it
qureanrmnsto offer customers standardized packages of services and tor
badethemtodiscriminate among similarly situated customers in the pricis
ofthose
packages.Forexample, the early state railroad comi
Ppers just de-
the forms of discrimination among types of shipPers
Scribed.Later,theFederal Communications Commission (FCC) e
itegrated combi-
Onecompaniesto offer customers, for a flat fee, an and
nationofservices--includinglocal access, wiring inside their homes,
telephone
equipment--andto forbid them to obtain any
combination
elsewhere.Second,the typical agency regulated the pricesthat
nline Entertainr
ainment as a R
gulated Industry
175
firmswithin the industry could charge-
ually through periodic,massive
nistrative proceedings that evaluated firms"
past investmer
rentcosts and then reviewe their proposed tariffs to ensure that and cur-
the frn
wereable to earn a treasonable" irms
rate of return but could not make exces-
sive"prohts. Third,
Third. th
the agency regulated the entry of new firms into the in.
dustry.In wielding that power, the agency usually did not seek to maximize
competition;on the contrary.
on the contrary, the preservation of either a monopoly or
oligopolywas often thought ar
rely consistent with the publicinterest.
New *rertificates" permitting entry wer ordinarily granted only if the ex-
isting
Cne were not providing the public "adequate" service.Fou
nally,the agency permitted, even required, fhrms to use cross-subsidies" to
ensu that all groups of potenti customers could afford the service
in
kn For example, telephone companies and public utilities were en-
question.
couraged obarge urban customers substantially more than the cost of pro-
them service, in order to offset the higher costsassociated with rural
ers, and for similar reasons to charge businesses more than residen-
tial customers.3
lo the last quarter of the twentieth century, this traditional regulatory
dol fell into disfavor. A few of the industries that had been managed on
thisbasis (most notoriously, aviation) were truly “deregulated"-in the
sensethat the relevant administrative agency was abolished, and virtually all
oftheconstraints on the behavior of participating firms were lifted. More
commonly,however, an industry remained regulated, but according to new
principles.Now firms were encouraged to develop novel packages of serv-
icesandto price them at different levels for different types of customers. (In
afew sectors, such as telecommunications regulation, a vestige of the tradi-
tionalcommitment to universal service" survived, but now that goal was
sWposedto be achieved not through cross-subsidies latent in uniform prices
butthroughthe imposition of more visible and uniform “fees" on most cus-
lomersin order to reduce the prices paid by favored groups.) Similarly, price
egulationwas curtailed. The rates charged by firms that enjoyed so-called
Tatural" monopolies in particular areas or aspects (for example, suppliers
oflocal telephone service and carriers of natural gas and electricity) re-
Manedtightly regulated. But outside those zones, the agencies sought to
tp pricesdown not through regulation but throughgreatercomperition,
cn theysought to stimulate in three ways. First, the agenciesabandoned
traditional restrictions on entry into the industries and thus increased
the
numbe of competitors. Second, they required firms enjoying strategıc
eT to "unbundle" the packages of services they offered their customers
order to foster competition in sectors of the industry upstream" or
176 Promises to Keep
"downstream" of the bottlenecks they controlled. For example, local al.
phonecompanieswere required by the FCC to permit their customers to.ob.
tain long-distance telephone service or "customer premises equipm ment
(phones,answering machines, and so on) from unaffiliated firms. Simila. ilarly,
largenatural-gas suppliers were required by the Federal Energy Regulatr
atory
Commissionto unbundle the gas itself, the service of transporting it throuh
pipelines,and the service of storing it, thus fostering competition in eachof
thoseareas. Third, irms with strategic power were sometimes required to
provide "interconnection" services to competitors. For example, electric
transmissioncompanieswere obligated “to permit third parties to transmir
electricity over the companies' lines (a practice known as 'wheeling'), and to
do so under terms and conditions no less favorable than those offered to the
transmitters own generating affliates." In extreme cases, firms in key posi.
tions were forbidden to enter closely related markets and even required to
providetheirproducts orservices "at cost" to rivals, which could then re.
sell" them to customers.+
Kearneyand Merrill summarize as follows the spirit of this new model:
"Under the new paradigm, the regulator plays a far more limited role. In-
stead ofcomprehensivelyoverseeing an industry in order to protect the end-
user,its principal function is to maximize competition among rival providers,
in theexpectation that competition will provide all the protection necessary
forend-users. ... In effect, the agency becomes a limited-jurisdiction en-
forcer of antitrust principles, applying a version of the 'essential facilities'
doctrine in a single industry."s
Our fnal example of a "regulated industry" is quite different in charac-
ter. In the United States, the relations between landlords and residential ten-
ants have never been managed by a single administrative agency. However,
during the past quarter century, they have been subjected to a level of gov-
ernmentalcontroleven greater than that found in the fields of transporta-
tion,telecommunications,and public utilities. The most sweeping of the
constraintsis the so-called "implied warranty of habitability." Residential
tenantsaredeemed entitled to a decent place to live. What does "decent"
mean in this context? Roughly spcaking, a place that conforms to the local
housingcode. If a landlord fails to keep an apartment up to this standard, a
tenanthasa variety of remedies. In most jurisdictions, he can withhold rent
payments,repair the defective condition himself and deduct the cost from
his rentalpayments, or collect damages from the landlord. These rights are
typically said to be "nonwaivable." In other words, even an explicit agree-
ment by the tenant in the lease that he will be satisfied with an apartment
that does not meet the pertinent standards of habitability, or he will be re-
Online Entertainment as a Regulated Industry 177
ohle for making the repairs necessary to keep the place habitable, will
nored by the courts.
srons Finally, a landlord may not retaliate against the
or forassertingthese rightstor example, by evicting him orrefusingto
onewhis lease.
Awarietyof other rules supplement this central obligation on the part of
Jlords, For example, in many cities, rent-control ordinances limit the
nd
ountsthat landlords may charge tenants-or, less harshly, limit the rates
.which landlords may increase rents. "Condo-conversion" statutes fre-
ntly forbid landlords to oust tenants in their buildings in order to sell off
eapartmentsas condominiums. Last but not least, landlords are forbid-
den take into account, when selecting tenants or providing them benefts,
widevariety of "suspect" criteria-race, gender, ethnicity, religion, handi-
apstatus, and so on.
Thehistorical forces that prompted these particular industries to be sub-
oedtoespecially high levels of governmental control and that subsequently
rshapedthe regulatory regimes imposed on them are extremely complex.
Amongthe factors were the shifting interests (or perceived interests) of the
imswithin each industry, their customers, and their suppliers-as well as
teriseand fall during the past ıso years of various economic and political
teories.But stepping back, as we must, from the details of the story, we can
kscernfve related concerns that help account for the special status of these
Relds andthat continue to color the legal systems under which they operate.
Thefirst and most obvious is the proposition that, unless constrained, the
koldersof market power will use it to make more money than they deserve
tneed.As the previous chapter suggested, the term market power is con-
ventionallydefined as the ability of either a buyer or a seller within a given
marketto exert significant influence over either the quantity of goods or
srvicestraded in that market or the prices at which they are exchanged. In
1competitivemarket, no individual seller or buyer enjoys such power. At the
opositeextreme is a monopoly, in which one firm controls the production
ordistribution of a good or service for which there are no substitutes (such
stheholder of the patent on a drug uniquely capable of curing a particular
ttaldisease)--andthus enjoys complete freedom in determining how much
othegoodor service will be made available and the price at which it will be
9old.Most real-world situations involve more moderate amounts of market
fOWer-suchas where there are decent but not perfect substitutes for the
goodorservice controlled by a particular firm, or where the production and
dstributionofa good or service is controlled not by a single firm but by a
malsetof frms (oligopoly). For centuries, it has been understood that a
ESOnor company enjoying market power will be inclined to wield it so as
178 Promises to Keep
Online Entertainment as a Regulated Industry 179
tocarnunusuallylarge profits, and it has been widely thought that
(wi oter of constitutional lawW-greater than usual governmental control over
somecxceptionswe will consider in the next chapter) such conduct isb
sb
economicallyinefficient and socially undesirable. theconduct of private enterprises.8
The third of the five impulses that have caused these particular industries
Thoseconvictions go far to explain why the industries surveyed in %.
mberegulated especially tightly is a worry that they are especially prone to
sectionhavebeensingled out. Most of them are characterized by conc
aniousforms of "discrimination." The kinds of discrimination at stake--
trations of market power. The traditional way in which government
od thusthe foci of the enhanced regulations--have varied. In the context of
spondedtosucha concentration was to limit the prices that the particina
odlord-tenant relations, the activity that government has sought to prevent
inghrmscould charge. More recently, as we've seen, regulators have Com
ComE
isdifferential treatment of members of historically disadvantaged groups
to rely,wherepossible, on a different strategy: forcing the firms in the i.
blacks,women, handicapped persons, and so on. By contrast, the early rail-
dustrytobehavein ways that facilitate the entry into the business ofrivalk
o2dcommisions sought to curb "discrimination" of a very different sort-
andthusbetterapproximate the condition of perfect competition.
inwhich small-scale or local shippers were charged rates much higher than
Thesecondfactor is that, since the late nineteenth century, American lay.
large-scaleor long-distance shippers. In the field of telecommunications, the
makershavetaken the view that certain industries, though privately owned.
concernhas been that customers would be charged sharply different rates for
are"affectedwith a public interest" and thus are properly subject to greate
2cessto the network; even if those differences were justified by variations in
thanusuallevelsof public control. The criteria that determine whether a pa:.
thecost of providing them service, they were thought to be socially perni-
ticularindustryfalls into this basket have never been entirely clear, but the lst
ious.Underlying these divergent conceptions of "discrimination" are differ-
suplied in1923 by Chief Justice Taft is probably as good as any. entversions of the notoriously ambiguous ideal of "equality." Some are
Businesses
said to be clothed with a public interest justifying some public rooted in modern Liberalism. Some are more closely connected to late-
regulationmay be divided into three classes: nineteenth-centuryPopulism. Some echo concerns prominent in the eigh-
(1) Thosewhich are carried on under the authority of a public grant of teenthcentury that residents of rural areas enjoy rights and opportunities
privilegeswhicheitherexpressly or impliedly imposes the affirmative duty of equalto city dwellers. The theme common to all is the notion that, in certain
renderinga publicservice demanded by any member of the public. Such are felds, it is both especially likely and especially troublesome that people
therailroads,other common carriers and public utilities. wouldnot enjoy equal access to an important good or service.
(2) Certainoccupations, regarded as exceptional, the public interest The fourth factor is more technical. In certain markets, it has been
atachingtowhich,recognized from earliest times, has survived the period
feared,some players have disproportionate "bargaining power" and thus
ofarbitrarylawsby Parliament or Colonial legislatures for regulating all
areable to take advantage of others. Sometimes, by *bargaining power"
tradesandcallings.Suchare those of the keepers of inns, cabs and grist mills.
peoplemean "market powerin which case this factor is just a restate-
(3)Businesseswhich though not public at their inception may be fairly
saidtohaverisen to be such and have become subject in consequence to some
mentof the first one. But another, equally important meaning of “bargain-
governmentregulation.... In nearly all the businesses included under [this ingpower" is disproportionate access to information or the capacity to
thirdheading,the thing which gave the public interest was the indispensable processit effectively. In addition to the industries we have already surveyed,
natureoftheserviceand the exorbitant charges and arbitrary control to which examplesof markets that are widely thought to be characterized by such in-
thepublic might be subjected without regulation.? equalityare home mortgages and insurance. In both, a large number of rel-
ativelyunsophisticated consumers confronts a small number of highly so-
Inclass#1,businessesowe their existence to some special governmental
phisticatedsuppliers. In the absence of governmental intervention, the
act-suchasthe grant of an exclusive right to operate a bridge at a particu-
lormerwould frequently get duped--and would not realize it until too late.
larlocation.Inclass #3, Taft seems to be saying, the good or service sup-
Insomesetings, this "informational asymmetry" can be remedied simply
pliedbythe industry is a necessity rather than a luxury, and thus the public
byconditioningthe enforceability of deals upon full disclosure of all rele-
atlargehasanespecially strong interest in its continued availability at rea-
Vantdata. Thus, for example, we require mortgagors, before we permit
sonableprices.(Class #2 seems purely historical in character.) Either cir-
themto enter into binding contracts, to read and sign many documents
Cumstance,it hasbeen thought, warrants-as a matter of policy and as a
alertingthem to just how much they will be paying over the course of their
180 Promises to Keep Online Entertainment as a Regulated Industry 181
loansandhowseverewould be the penalties for default. But sometimes.his : and flms are not "products" or "services"; they are forms of art.
thatmusic an
mandatory-disclosurestrategy is impracticable-cither because che innfor- iodthelast thing anyone wants is governmental control over art.
mationinquestion is too voluminous or comnplex, or because cognitive k: Theseobjections will be difhcult to overcome. In the end, they may carry
asesofvarioussorts impede the ability of the vulnerable parties to proc Asday, But, just as I asked you in Chapter 4 to suspend temporarily your
thatinformationproperly. In the context of residential housing, forexam keoticism concerning the analogy betwecn copyright and real property
ple,wefear that tenants will be willing to sign unwise leases no matter how abrs. here I will ask you to suspend temporarily your unease concerning
fullytheironerousterms are explained. The same goes for high-interest er. theprospectof increascd regulation of entertainment-to test fairly the hy-
ondarymortgagesand forfeiture clauses in credit sales of consumer goode othesis that the lessons we have learned from Iso years of managing the
Insuchcontexts,the only option is to regulate the content of the bargains transportation, communications, and energy industries might help us solve
that people may strike. 10 thecurrent crisis involving digital music and the looming crisis involving
The last and most controversial of the impulses that have defined and dieitalmovies. We'll begin by reviewing the five concerns, discussed in the
shapedthis field is sometimes referred to as "paternalism." With respect to evioussection, that have defined and shaped the traditional "regulated in-
somegoodsor services, lawmakers believe that they know better what is in dustries"and asking which are relevant to entertainment.
thelong-runbest interest of consumers than do the consumers themselves. The first of the circumstances that has traditionally triggered high levels
Again, the residential housing market provides the best illustration. The ofgovernment regulation has been a concentration of market power. In both
nonwaivablecharacter of the implied warranty of habitability is justified at themusicand the flm industries, this condition can readily be found. Five
least in part on the ground that, although some tenants may think they recordcompanies currently produce and distribute 83 percent of the re-
wouldbebetter off spending their meager incomes on food, cars, or enter- cordedmusic sold in the United States. If mergers currently proposed or
tainmentthanondecent apartments, lawmakers know better. The harshnes pendingare approved and completed, the number of dominant firms may
ofsucha judgment can be mitigated by rephrasing it in the philosophic lan- soonshrink to three. Similarly, the largest four film distributors control 66
guageof "future selves": when, many years later, the tenants forbidden to percentof the North American market, while the largest seven control 9o
acceptlousyapartments discover the many benefits to themselves and their percentof the market. In both fields, economies of scale (particularly with
childrenofhabitablelivingspaces, they will thank “us"just as will middle- respectto distribution) create high barriers to entry. In both, the dominant
agedsurvivorsof motorcycle crashes who were forced by the government to frmshave often collaborated in developing marketing strategies and setting
wearhelmets in their youths. But such analytical maneuvers are often thin prices.In the music industry, “tacit coordination" by the “majors" has cre-
disguisesfor a blunter posture: people frequently don't know what's good ateda situation in which the wholesale prices of CDs and singles rarely vary
forthem,and government must then limit their (contractual) freedom for bymore than a few cents across companies. In the film industry, since the
their own good.!" 1930s,the relationship among the "majors" has ranged from "tacit collu-
sion"to a full-blown cartel. Periodic efforts to use the antitrust laws to sep-
aratethe players have had only modest long-term effects. Moments of gen-
Applications to Entertainment
uineprice competition stand out because they are exceptional. For instance,
Manypeoplereact with dismay or derision to the suggestion that govern- incarlySeptember of 20o3, Universal (the largest of the record companies)
mentshouldregulatemusic and movies the same way it regulates natural gas. suddenlyannounced that it would slash the prices of its CDs by 25 to 3o
In part, thisresponsederives from a general suspicion, common these days, of percent.Commentators asked reasonably, if Universal were capable of mak-
governmentregulation of any sort. It may also be connccted to the fact that Ingsuch a dramatic cut and still earning a profit, why hadn't competition
the most visible ways in which government officials recently have sought amongthe record companies forced prices down before? In sum, both in-
greatercontrol over the entertainment industry have entailed efforts to tame dustriesare fairly characterized as "oligopolies."12
its content-to reduce the levels of violence in films, to purge rap music of What about the second of the factors that traditionally have prompted
misogynistlyrics,and so on--efforts that to many observers seem threatening governmentalintervention? Would it be appropriate to describe enter tain-
tofreedomofexpression. Most broadly, the response draws upon the view mentas an industry “affected with a public interest"? At first glance, it
182 Promises to Keep
Online Entertainment as a Regulated Industry 183
appearstohavelittle in common with the traditional members of thatclas Decontrast, the third factor-the prevalence of noxious discrimina-
-grainelevators,railroads, and the like. On reflection, however, both of th on--until very recently had little relevance to the entertainment industry.
criteriahighlightedby ChiefJustice Taft's definition of the class doinde
eed
ochasersofsound recordings traditionally have faced none of the types of
semtobepresent.First, the production and distribution of music and il scrimination discussed above. Purchasers of all races and both genders
isheavilydependenton a prior grant of a "special privilege" by the govern. ld buyrecordingsat thesameprice. Except perhaps for the members of
ment-aamely,copyright. In most other industries, competitors are freetto *recordclubs," no one obtained quantity discounts. And no variations in
copyoneanother'sproducts. In the world of entertainment, such competi. thecost of providing people access to recordings disadvantaged subsets of
tion isdeliberatelysuppressed. In other words, people and organizatione rchasers. To be sure, some amount of discrimination among consumers
pu
thatcreatesongsand films for which, in the minds of consumers, there are ould be found in the flm industry. As explained in Chapter 2, the studios
nogoodsubstitutesare granted, by the government, artificial monopolies in bavelongpracticed temporal price discrimination in the marketing of their
theirreproductionand distribution--precisely the circumstance that Tafr moducts-firstreleasing flms at high prices in theatres, later at lower prices
suggested
warrantedgreater than usual governmental control over private invideostores, later at still lower "prices" on television. But this practice
enterprises. as not generally seen as abusive. Buyers of tickets at theatres rarely com-
Theothercriterion is more slippery. Can recorded entertainment be fairly olainedthat it was unfair to charge them so much more than the consumers
characterizedas a "necessity"? It's surely not as essential to a decent life as who,a few months later, rented the same movie at Blockbuster.
housing,heat,and electricity. Many people have long done without it. It Soon,however, this situation will change. For the reasons outlined in the
wouldthus sem the paradigmatic case of a "luxury." Remember, however. previouschapter, the combination of sophisticated digital-rights-management
ourdiscussionin Chapter 1 of the cultural significance of music and film. Systems,legal prohibitions on the circumvention of those systems, and the
Recordings
permeateour lives. In 2004, Americans will spend, on average, increasedavailability of data concerning the ability and willingness of spe-
roughly8ç2hourswatching broadcast television, 82r hours watching cable cihcconsumersto pay for entertainment will make possible the implemen-
andsatelitetelevision,74 hours watching videotapes and DVDS at home, 12 tationof highly refined price-discrimination schemes. The seller of an audio
hourswatchingfilms in movie theatres, 995 hours listening to the radio, and orvideorecording will know a great deal about you-the artists you most
24 hourslistening to recorded music in other formats. That's a total of like,theamount of your "disposable income," your patience for and skill at
2,998 hours-or approximately 8 hours a day, 365 days a year. (By way of hagglingor bargain-hunting--and the price at which the seller offers the
contrast,during2004,Americans will spend, on average, roughly 145 hours recordingto you will reflect that knowledge. As suggested in Chapter 4,
24minutesperday]reading newspapers, 10I hours (17 minutes per day] many observersreact to this prospect with fear and loathing. In short, in the
reading
magazines,86 hours [14 minutes per day] reading books, and roj nearfuture, the apparent need for government regulation to curb undesir-
hours[17minutesper day] playing video games.) Not surprisingly, songs ableforms of "unequal treatment" in the entertainment industry will surge.
andflmscolorourconversations and our self-images. The increasing spread Thefactor with the relevance to the entertainment industry easiest to see
ofdigitaltechnology,by making it even easier to gain access to recordings, isinformation asymmetry. As early as r942, Judge Jerome Frank could re-
willonlyenhancetheirculrural power. Critics of the amount of attention be- mark,when arguing for a statutory interpretation that would protect song-
ingdevotedthesedays by both the news media and politicians to the record writersfrom their own shortsighted decisions, "We need only take judicial
business
sometimespoint out that, compared to most other industries (say,
noticeof that which every schoolboy knows--that usually, with a few no-
textilesorbiotechnology),it's tiny- generating a mere $I2 billion indomes table
exceptions.. authors are hopelessly inept in business transactions
ticsales.Trueenough, but its cultural importance vastly exceeds its eco andthat lyricists . .. often sell their songs for a song."" Countless anecdotes
nomicclout.Thebottom line: for many Americans today--and increasingly
Hromthe recording industry make clear that performers, typically, are just as
lorpeoplein other cultures--recorded entertainment has come to seem just
Unintormedand inept as composers. Stories of young soloists or groups en-
simportantasfood and heat. It is thus plausible for a second, independent
eninginto long-term recording contracts from which they make little or no
noneyare legion. More is involved here than the superior skill and experi-
Itasontotreattheproceses by which audio and video recordings are get
thceof the record companies in negotiating deals; the vulnerability of the
cratedanddistributedas an industry "affected with a public interest.")
 Online Entertainment as a Regulated Industry 185
184 Promises to Keep
artists is reinforced by the fact that, as we saw in Chapter 2, the typicl orcourts. The
The fees
fees that
that the owners of copyrights in musical compositions
recordingcontractprovides that the performer's income will be subjectto cllect from noncommercial public broadcasting stations or the opera-
myriad"deductions,"the calculation of which is left to the record compa. nkeboxes are determincd (in the absence of voluntary agreements) by
nics'accountants.In making those calculations, the accountants often shoy Aitrationpancls. The rates and contractual terms that ASCAP and BMI
rbi
extraordinarycreativity. The informational disadvantages of artists arenog .demandfrom organizations that wish to "perform" compositions within
may
quitesoseverein the flm industry. As we saw in Chapter 2, the most promj. heircollectionsare subject to supervision by a "rate court." The fees that
nentactorsand directors, often represented by shrewd agents or lawyers,. ofdcompanicsmust pay composers and music publishers when they make
haveconsiderablebargaining power. And most second-tier players are rep. oddistributre "mechanical" copies of compositions are set through an ad-
resentedby unions. But it is still widely and accurately believed that, when inistrativeproceeding. The amounts that cable and satellite systems must
cutingdeals,theproducers and studios usually have the upper hand.!4 to theowners of the copyrights in the audio and video programming
The fnal factor, as mentioned above, is the most controversial. Some anmitted through their systems are heavily regulated. And, as we saw in
readerswill find entirely unacceptable the proposition that increased regu- Chapter3, the amounts that noninteractive Webcasters must pay to the
lation of agiven industry is justified by the fact that consumers of the prod- ONDersof copyrights in sound recordings are now periodically reset by arbi-
uct or service in question are not as good as government officials in deter- ration panels,!5s
miningtheirown bestinterests. But let's assume, for the time being, that the But it is not just the prices that copyright owners may charge that the
criterion is legitimate. Is it applicable to entertainment? The argument of sOvernment oversees; it also limits in various ways the contractual freedom
ChapterIsuggestsyes. As noted there, among the many benefits of the new ofparticipantsin the industry. For example, the authors of most types of
technologiesfor creating and distributing recordings is the potential for a copyrightedmaterials (including songs and motion pictures) after certain pe-
dramaticincreasein semiotic democracy-the ability of "consumers" to re- riodsof time may "terminate" any previous assignments of their rights to
shapeculruralartifacts and thus to participate more actively in the creation otherparties.This power is nonwaivable. In other words, the courts will ig-
ofthecloud of cultural meanings through which they move. In the context norecontractual provisions purporting to surrender it. The avowed purpose
ofcollaborative,interactive computer games, many consumers are already ofthesetermination rights (like that of the renewal rights they replaced) is
beginningtorecognizeand exploit those opportunities. Thus far, however, toprotectauthors to some degree against their own folly. One of the few
veryfewconsumersof music or flm have seen the possibilities for engage- typesof copyrighted works to which the termination right does not apply
ment in the creative process. If, as Chapter argued, such engagement would teworks for hire. However, as we saw in Chapter 2, the same concern that
begoodfor them-would enable them to live richer lives--then it may be musicianswill foolishly sign away their rights in perpetuity prompted Con-
necessaryfor the law (that is, the government) to regulate the entertainment gresstodeny work-for-hire status to sound recordings. (A few years ago, the
industry in ways that keep such opportunities alive. ecordingindustry quietly secured an amendment of the copyright statute
Insum, all five of the concerns that have traditionally been invoked to eversingthat rule. The ensuing torrent of criticism prompted Congress to
justify
greater-than-usuallevels of governmental involvement in the struc- changethe rule back quickly.) 16
tureoroperation of an industry are already applicable to the entertainment Finally,copyright law on occasion dictates how revenue streams of par-
businessor wil soon be. Not all of these concerns will seem compelling to ticularsorts are to be distributed. The only provision of this sort in the
allreaders.(Thelast, in particular, is likely to leave some readers cold.) But, Americancopyright statute is section II4(g), which specifies that, of the
incombination,they make a strong case for treating the production of au- moneypaid by noninteractive Webcasters for the right to broadcast sound
dio and video recordings as a regulated industry. Tcordingsover the Internet, 45 percent must be paid to featured artists,
Additionalsupport for this proposal may be found in the fact that, al- 5percentto nonfeatured musicians, 2.5 percent to nonfeatured vocalists,
thoughmostobserversare unaware of it, the entertainment industry is al- andgopercent to the companies holding the sound-recording copyrights.
readyregulatedin many respects. For example, as we saw in Chapter 2, the butsimilar provisions may be found in the copyright laws of other coun-
fs thatcopyrightownersmay collect from many types of consumers of hs.Forexample, a Greek statute provides that the pertinent portion of the
theirproductsare controlled to varying degrees by administrative agencies tevenues
collected through a tax on recording equipment and blank tapes
86 Promisesto Keep Online Entertainment as a Regulated Industry 187
mustbedividedamong the various contributors to audio or video record distribi of recorded entertainment. For example, many observers fear
ingsas follows: $5 percent to the authors, 25 percent to the performers. hatifnonpermissivehle sharing were suppressed, and authorized download
and
20percentto theproducers. What's the point of these provisions? Why not servic suchas iTunes flourished, the range of musical recordings available
letthevariousparties sort out among themselves their respective shares? Im. mconsumerswould shrink. Why? Because the major record companies,
plicit insuchstatutesis the (plausible) belief that, left to their own devices ing to maximize their revenues, would insist that the new sites carry
the mostvulnerable groups of artists would end up with little. Conse. onlrmaterial from the companies themselves. (An alternative route to the
quently,the government intervenes on their behalf. 17 ameundesirable situation supposes that the authorized services gain suff-
Inshort,entertainment is already regulated in significant respects--bụt ientmarketpower themselves that they, like Walmart and Best Buy today,
notasthoroughlyas the industries reviewed in the first section of this chap- aeableto charge large fees for virtual "shelf space"-fees that only the ma-
ter.Theincreasingrelevance of all five of the factors that traditionally have iotrecordcompanies could afford.) To prevent this outcome, we could com-
justifhed
heightenedgovernmental involvement in a field of private enterprise l alldownloadservicesto carry in their catalogueseverysoundrecording
suggeststhat we should consider tightening the controls on music and film. thatany copyright owner submits to them, and forbid them to discriminate
Theargumentfor moving in this direction would be especially strong if we amongsuppliers either in the prices they charge to consumers for different
adoptedtheset of reforms discussed in Chapter 4, most of which were de- songsor the percentage of the purchase price turned over to the copyright
signedtostrengthen the rights of copyright owners. Why? Because, as our oMner.(To illustrate, if iTunes offers consumers a four-minute Grateful Dead
analysisof those reforms showed, their beneficial effects (facilitating the recordingfor $I and, for each download, pays Warner Bros. so cents, it must
emergenceof a "legitimate" online market in audio and video recordings) oferconsumersmy four-minute ballad for $I and, for each download, pay
would beoffset at least in part by some serious dangers of abuse. The most mefocents.) The same principle would be applied to Websites offering films
naturalway of preventing copyright owners from abusing their newly en- for download. l8
hancedentitlements would be, of course, by forbidding them to exercise Adoptionof this strategy would have two related benefits. First, it would
them in particular ways. fostergreater competition among potential creators of recorded entertain-
ment.Second, it would promnote diversity in the forms of entertainment
Components of a Regulatory Scheme
availableto consumers-one of the long-standing goals, you will recall, of
governmentregulation in the closely related field of telecommunications
Theprevioussection argued for the presumptive desirability of a regula- regulation.
toryregime for recorded entertainment, but did not indicate what such a For similar reasons, we could forbid the record companies to leverage
regimewould look like. Now's the time to get down to details. In con- theirpower in the market for sound recordings into control over the market
structinga list of possible regulations, we should keep two things in mind: forinteractive Webcasting. Currently, the record companies are required to
theset of probable misuses of enhanced copyright entitlements identified at maketheir recordings available to noninteractive Webcasters for govern-
theend of Chapter 4, and the kinds of restrictions that have proven effective mentallydetermined fees. But they are free to demand whatever fees they
incurbinganalogouspractices in other industries. That methodology points Wshfrom Webcasters who want to stream music to consumers "on de-
toward fivezones of possible regulatory action. mand."Some observers think that the companies are abusing this power. A
relativelynonintrusive solution to the problem would be to impose on the
recordcompanies the equivalent of a “most-favored-nation" duty. In other
Opening Bottlenecks
Words,they must offer to all interactive Webcasters deals as generous as the
Recallthat one of the central strategies of the style of regulation that has dealsthey offer to their most favored commercial partners. Again, the result
come to dominate in the United States during the past quarter century is to Wouldbe both to foster competition among Webcasters and to enrich the ar-
preventfirms with strategic power from wielding it in ways that inhibit tayof material available to the public.!9
competition in sectors of the industry "upstream" or downstream" of In the future, the general principle that underlies these two examples
them. That strategy would have many potential applications to the onlim couldbe extended to other aspects of the industry. Whenever one or a few
188 Promises to Keep 189
Online Entertainment as a Regulated Industry
firmsacquirestrategicpower over a particular aspect of the creation or Aliated with the major networks to broadcast more than three hours of
tributionprocess,wewould compel it or them to behave in ways that n. nework-produced programming during the four-hour prime-time slot, in
serveorincrease competition in adjacent aspects. hopesof providing a "healthy impetus to the development of independent
orogramsources, with concomitant benefits in an increased supply of pro-
sramsfor independent (and, indeed, affiliated) stations." Third, also in hopes
Resisting "ntegration"
ofpreservingthe viability of independent stations, the commission adopted
Theapproachjust ourlined has a potential flaw, however. Suppose- called “Fin/Syn" rules, forbidding the television networks to syndicate
returntotheWebcasting example--that all five record companies respondei network-produced programs on independent stations or to purchase syndi-
to the "most-favored-nation" rule by refusing to license their catalogues to cationrights to programs that they had obtained from outside producers,20
anyindependentinteractiveWebcasters, instead setting up their own In recent years, the dramatic expansion of the range of programming
house"on-demandstreaming services. (If they acted in concert, they might causedby the spread of cable and satellite services, combined with growing
runafoulofexistingantitrust laws. But if each set up its own service-orif hostility toward government management of the media and increased recep-
theydivided into two clumps as they did when establishing MusicNet and ivity to the need to promote greater efficiency in the broadcast industry (sen-
Pressplay-theycould avoid that particular hazard.) Plainly, both competi. timentsmanifested most clearly in the Telecommunications Act of r996), has
tion and diversity would suffer. promptedthe commission to reduce sharply the stringency of these controls.
Onepossibleretort is that musicians unaffiliated with the major record TheFin/Syn rules were first softened and then, in 1993, repealed altogether.
companiescouldrespond to such a lockout by setting up their own interac. ThePTARS were repealed in r995. And the media-concentration rules have
tiveWebcastingservices--and thus make their own material available to the beensteadily softened. To be sure, the government has not abandoned its pur-
worldovertheInternet. True enough, but consumers, when deciding which suitof "diversity" altogether. For example, it continues to forbid a merger
on-demand
streamingsystem(s) to sign up for naturally gravitate toward the amongthe top four television networks and to ban any one network from ac-
sitesofferingthelargestpercentages of the material they want to listen to. quiringso many stations that it could reach more than 45 percent of the na-
Thatinclinationwould make it very hard for nonaffiliated interactive serv- tionaltelevision audience. And, the most recent move by the commission to
ices to compete effectively.
weakeneven further the Local Ownership Rules provoked a backlash in the
Forguidanceindealing with this danger -and similar risks in analogous Congress.But the modern trend has plainly been toward deregulation.?1
contexts--wemight look to the history of telecommunications regulation.
Theemergent market for the distribution of audio and video recordings
Sincethe r930s, the Federal Communications Commission has sought to in-
overthe Internet, however, differs from television and radio broadcasting
creasethediversity of both radio and television programming available to
inacrucial respect. Most of the FCC's recent deregulatory initiatives have
American
consumers.The commission's conception of diversity has included,
beenpowered by its finding that the market for the production of broad-
castprogramming is no longer concentrated--and, indeed, is becoming in-
amongotherthings, variety among the viewpoints represented in broadcast
programsandthecontinued availability of shows attentive to local news and creasinglycompetitive. By contrast, in recent years, the markets for the
concerns.Thecommissionhas used three different tools in trying to achieve
productionand distribution of audio and video recordings have become
increasinglyconcentrated--and, for the reasons outlined previously, the
thisend.First, it has forbidden any one company to own or control an exces-
sivenumberofmedia outlets. For example, the National Television Owner-
strengtheningof the copyrights of the dominant firms is likely to accelerate
thattrend.Thus diversity-enhancing rules of the sort pioneered by the FCC,
shipRuleshave limited the number of stations that a single company may
thoughless and less appropriate in the context of television and radio
ownnationwide,theLocal Ownership Rules have limited the number of tele-
visionstations within a given local market that may be commonly owned,
broadcasting,may be just what we need to foster competition and diversity
in recorded entertainment.
andtheCrossOwnershipRules have limited the number of outlets of differ-
entsorts(television stations, radio stations, and newspapers) that may be
Following are some possible examples. An extreme (but effective) re-
sponseto the evasive maneuver described at the outset of this subsection
commonlyowned within a given market. Second, the commission adopted
so-calledPrime-TimeAccessRules (PTARS), forbidding television stations af-
Wouldbe to forbid record companies to own or operate interactive or non-
 Online Entertainment as a Regulated Industry 191
omposers of the recordings; I7 percent to the music pub-
Promisesto Keep
190
rule (modeled on the media- I7percentto the
rhe copyrights to the compositions; 30 percent to the musi-
interactiveWebcastingservices. A less seve
the record companies to own lishersholding thethe recordings; 2 percent to the nonfeaturedmusicians: 2
concentration
regulations)would forbid the
of interactive or noninteractive ciansfeatured red vocalists; and 32 percent to the companies hold-
operatemorethan 5o percent of interactive principle discuss
most-favored-nation" percentto the nonfeat
above, the ethesound-recordingcopyrights.
njunction with the "most-favor
cheavailability to consumers of unaffiliated Web- Applieation of the same principle to the hlm industry would be both
latterrulewouldensurethe availability to con
lections of recordings because to ser cult and less imperative. As Chapter 2 showed, a much more com-
up
therecordcompanies would have to offer
castersoffering comprehensive favor- more eav of people participate in the creation of the typical movie than par-
plexarr
theirownsystems,the record companies would ha companies. Simila
endent ermining a formula that fairly
rules icipatein the creation of the typical song.
ablelicensesto an equal number of independent co
en the major film studios and services of. into account their relative contributions would be very hard. In addi-
wouldgovern the relations berween
took
tion,"star"actors and directors plainly already have sufficient bargaining
feringon-demandaccess to movies.
on this theme would draw inspiration fron
Themostdraconianvariation on this theme would drau powee anddo not need the aid of a mandatory distribution scheme.Against
PTARS.Noninteractive Webcasters (the che Internet equivalent
Internet hockdrop, regulation of the allocation of shares of the revenuesgener-
thenow-defunctPT
ofradiostations)mightberequired to include in their n
amming a certain this rheonlinedistribution of films, if appropriate at all, wouldhave to
produced by musicians unafhliated with the maior ted detailed than the scheme applicable to music. For example, one might
eless
percentageofrecordingsproduced would be to force the virtual disk macinea rule specitying the minimum percentage that goes to all contribu-
record companies.Theresult, of course, would be to force the
dra- nrsto theventure other than the producer, director, and lead actors.
iockeysto bemore imaginative in their Programming and to incre2se
maricallytheability of independent musicians to reach large audiences. A. Ảnincidentaladvantage of systems of this sort is that, if made public,
hap- cheymight help reduce the complacency with which consumers currently en-
thispoint,however,such a dramatic move is probably unnecessarv, As Ch.
Ishowed,therangeofmaterial available on independent Webcastingneed gag in unauthorized downloading of recordings. Nowadays, most con-
rionsisalreadyextraordinary. For the foreseeable future, all we would sumerspay little heed to solemn statements from the RIAA and MPAA that
unauthorizeddownloads hurt their favorite artists-in large part, because
todo in order topreservethe diversity of recordings available to the public is
toensurethat theindependent stations can survive and flourish. The less in- theythink that very little of the money that record companies and studios
trusiveregulationsoutlined above should be sufficient to do the job. collectthrough legitimate distribution channels actually ends up in artists
pockets.(In 2003, public-service announcements interspersed among the
previewsshown in American movie theatres depicted set designers and other
MandatoryDistribution ofRevenues minorparticipants in the filmmaking industry pleading with the audience to
stopdownloading films. In most theatres, such ads elicited laughter from the
Supposethat,likeJeromeFrank, we were persuaded that most of the pri-
audience.Why? Because most moviegoers simply don't believe that a reduc-
marycreators of recorded entertainment-composers, performers, and ac-
tionin downloading would redound to the benefit of set designers.) If con-
tors--lackedtheknowledge,experience, or skill necessary to defend their in-
Sumersknew that if they paid a modest sum to obtain online a copy of a
terestseffectivelywhen negotiating with the primary intermediaries. Suppose,
Songor hlm, the true creators of it would earn a specified share of that sum,
turther,thatweconcluded that no amount of mandatory disclosure (docu-
mentstellingthemprecisely how biased are the contracts they are asked to theymight be more willing to do so.
SIgn)wouldpreventthem from behaving foolishly. What might we do
Oneresponse, suggestedby section II4(g) of the current copyright star
cificuses Prohibit Price Discrimination
ure,wouldbe to dictatethe shares of the revenues generated by specinutors-
Chapter4 showed how and why, in the new informational environment,
ofcopyrighted
recordingsthat must go to specific groups of contribuFor ex-
Panies holding the copyrights in movies or songs for which there are no
andthenforbidtherelevant parties to alter those shares by contract. eractive
Web- suostitutes are likely, especially if we reinforce their legal and techno-
ample,looselytracking the regime currently applicable to no
povers, to engage in more aggressive forms of price discrimination. In
Webcastingwemightrequire that the moncy paid out by on-demand
castingserVicesor authorized download services be distributed as follows:
 Online Entertainment as a Regulated Industry 19
192 Promises to Keep
observers find noxious--for example, charging
otherwords,they will gather information concerning the ability and willino inthepractices that many
mers who watched "The Fellowship of the Ring" two or more times
nessofspeciñcconsumers(or groups of consumers) to pay tor access to their consum
works,and will ary their prices accordingly. Consumers who live in good higherprices for access to "The Return of the King" than consumers less en-
nejghborhoods,have litle leisure time, have shown themselves to be price. amore of Tolkien and Peter Jackson.
insensitivein thepast, or love recorded entertainment will pay substantially
morethanconsumerswho dont fht into these categories. And each purchas.
Price Regulation
ingdecisionwill alter a consumer's profle--and thus change the prices that
areofered to him or her in the future. Chapter 4 also concluded, at least pro- All ofthe forms of governmental intervention considered up to this point
visionall, hat thispractice, although it has some substantial economic and rouldfairly be considered supplements to the set of reforms proposed in the
socialadvantages,on balance is culturally corrosive and should be prevented. oreviouschapter. In other words, they could all be understood as devices to
Inselectingamechanism for meeting this danger, we should pay heed to ensurethat copyright owners do not exercise their enhanced entitlements in
thehistoryof theRobinson-Patman Act, the primary vehicle by which anti- N2YSinconsistentwith the public interest. By contrast, the fifth and last of
trust law has sought in the past to limit price discrimination. Enacted in hepossibleregulations we will examine cannot be considered supplemen-
1936,thatstatuteostensibly forbids sellers “either directly or indirectly, to anyinthesamesense; rather, it runs directly counter to the spirit of Chap-
discriminatein pricebetween different purchasers of commodities of like t 4.Oneof the main proposals set forth in that chapter was that we jetti-
gradeand quality,." That sweeping prohibition, however, is qualified by sonthe "liability rules" currently applicable to many of the interests enjoyed
manyadditionalrequirementsand exceptions. For example, price discrimi- by theowners of copyrights in audio and video recordings, replacing them
nationisforbidden only where the effect thereof "may be substantially to wih"property rules." The practical implication of such a shift would be
lessencompetitionor tend to create a monopoly in any line of commerce, or thatthegovernment would cease regulating the prices that copyright owners
toinjure,destroy,or prevent competition with any person who either grants couldchargefor access to their works. We now consider the opposite possi-
orknowinglyreceivesthe benefit of such discrimination, or with customers Hlereform:instead of eliminating the zones of copyright law currently coy-
ofeitherof them." Discrimination is allowed when justified by differences eredby compulsory licenses, expand them. Specifically, extend price regula-
in thecosts of manufacturing or delivering commodities to different cus- tiontocover all methods of distributing digital recordings over the Internet.
tomersor by the "imminent deterioration of perishable goods." And so Forthe reasons outlined in Chapter 4, such a move would be risky. As
forth.Thesesupplementary provisions, in combination, make the statute RobertMerges has shown, administrative agencies have trouble acquiring
notoriouslycomplexand unpredictable. Partly as a result, the two agencies cheinformationnecessary to engage in sensible price regulation, often fail to
chargedwithenforcingthe statute-the Federal Trade Commission and the
spondappropriately to changes in market conditions, and stimulate so-
DepartmentofJustice--have over the years shown less and less interest in
Gially
wasteful rent-seeking" behavior by both the firms they regulate and
detectingandpunishing instances of price discrimination. Currently, the
theconsumerson whose behalf they purport to act. So why venture down
statute is virtually a dead letter.2
thiswell-trodden but thorny path? Chapter 4 also identified the main reason
If wewish to avoid the fate of the Robinson-Patman Act, we will need a
weshouldconsider doing so: at least for a few years, until recording artists
narrowerandsimplerrule. The following might do the job: "It shall be un-
ndflmmakersare able (by capitalizing on newly available methods for dis-
lawful at thesametime to offer different prices to two or more potential
tibutingtheir works directly to consumers over the Internet) to break free
purchasersofidenticalcopies of an audio or video recording, or identical
othemajorrecord companies and studios, the latter organizations will con-
performancesthereof." Such a rule would permit sellers and streamers of
tinueto enjoy substantial market power. The structural devices outlined in
recordingstoraise or lower their prices, so long as such changes affected all
thischaptermay not be sufficient to prevent them from using that power to
customers.It would also permit them to offer customers different versions
tasepricesto exorbitant levels. Thus, the only way of preventing them from
ofthesamerecordingat different pricesfor example, a copy of "The Re-
tangrossing all of the large potential economic gains made possible by the
turn ofthe King" that expires in a week for Ss and a copy of the same film
nWtechnologymay be to fall back upon the oldest technique in the regula-
thatexpiresin a month for Sro. But it would prevent them from engaging
toryhandbook: limiting what they can charge.23
 Promises to Keep Online Entertainme
194 as a
ulated Industry 195
Thequestion immediately arises: bow
how should
should the maximum pri
hr this intermediate rule at leastseemssensible, identifying
set?Guidancein answering that question may be obtained from prices be
tors that, in the course of this chapter, we havesuggested
mostof the facto.
the ways in which compulsory-licensing provisions previously survey of
be advanced by a system of government regulation. (Not all of rhe
framed.
been
A goodexample of a system to avoid
whose activities are governed by this standard are happy
oid is the original version of section
is the i-but that, of course, is to be expected.)
IIS,which(you will recall)governs the fee that the owners of copyrig n oonsiderations suggest that that system of price regulation, if
musicalcompositionsmay charge firms (typically record compani
ies)1978.
that adopted,anght
ought not be permanent. First, increased competition in the mu-
make"mechanicalcopies" of those compositions. Between I909 and
thefeewassetbyCongress. Not surprisingly, it did not change-reremaining icandGlm industries may soon iminate the need for price controls. Sec-
Professor Merges observes, once in place, such regulatory regimes
song percopy tor most compositions. Virtually all
ofn0,
areveryavd to dislodge-even after they have plainly outlived their use-
agreethat, by the r970s, that hgure was far too low 24
lness. Thus, a "sunset proVIS1On--Perhaps of three years-would seem
Ar theoppositeextremeis the standard employed in section II4(f\2)(B) to
to be in order.27
governthefeesthat must be paid to the record companies bv no
Webcasters.The Copyright Arbitration Royalty Panels charged active
oes areinstructed "to establish rates and terms that most clearl. cting Institutional Design
eatesand terms that would have been negotiated in the marker rep-
placeberweena willing buyer and a willing seller." As we saw in ch
So far. we have left vague the identity of the arm of government that
pter 3, wouldbe charged with setting and adjusting these regulations. Various
ect naneltointerpretthat statutory standard attempted to approxit
ximate
the amount that the record companies would have charged hranchesmight be assigned the job. Congress could specify the pertinent reg-
stersin alarionsitself-as it did, for example, in the Robinson-Patman Act. Another
theabsenceof any statutory control-thereby forfeiting most of the eco.
nossibilitywould be to give the courts more regulatory authority. As men-
nomicand cultural benefits of a compulsory royalty. The net result. asone
rionedabove, a court already has supervisory responsibility, pursuant to a
mightexpect, was a rate that was too high–torcing many Webcasters our
consentdecree, over the “blanket-license" fees charged by ASCAP. That re-
ofbusinessand prompting the Librarian of Congress and ultimately Con-
gress itself to override the panel's ruling.25 sponsibilityconceivably might be extended to the license fees charged by
copyrightowners of all sorts for all kinds of reproductions and performances
Inberweenthese two poles lies the standard set forth in section 8o1(b),
ofaudioor video recordings over the Internet. But neither of these options is
whichgovernsthecurrent version of the section IIs “cover" license, the fees
especiallyattractive. Congress, as noted above, cannot be expected to amend
paidbyjukeboxoperators, and the rates paid by certain “preexisting" serv-
rulesfrequently to respond to changes in technologies and market condi-
icesfor the right to make digital audio transmissions of sound recordings.
tions.And the courts lack the expertise, time, and information-gathering ca-
Arbitrationpanelsgoverned by this provision are instructed to select rates pacitiesto do the job responsibly.
that willachievethe following objectives:
OnceCongress and the courts have been eliminated, the only plausible
(A) Tomaximizethe availability of creative works to the public; remainingcandidate for the job (at least within the American system of gov-
(B) lo afford the copyright owner a fair return for his creative work and the ernment)is an administrative agency. Congress might define with broad
copyrıghtusera fair income under existing economic conditions; strokesthe kinds of regulations it wished to impose on the entertainment
(C) Toreflectthe relative roles of the copyright owner and the copyright user
Industry,delegating to the agency the task of filling in (and periodically
in theproductmade available to the public with respect to relative creative
moditying)the details. Alternatively, Congress might give the agency broad
contribution,technological contribution, capital investment, cost, risk, and
authority--forexample, responsibility to manage the business of online dis-
Contributionto the opening of new markets for creative expressio and
media for their communication; bution of recorded entertainment so as to promote "public convenience,
Interest,or necessity.2
(D) 1ominimizeany disruptive impact on the structure of the indus
ustries
involvedand on generally prevailing industry practices. 26
Either of these approaches, but especially the latter, carries risks of its
 Online Entertainment as a Regulated Industry 197
196 Promises to Keep
own.Administrativeagencies, particularly when given expansive powers. Summing Up
canset off on regulatory larks, imposing rules that would not have been
Whenassessing its merits and demerits, the set of legal reforms consid-
approvedbytheelected representatives of the pcople. Even more seriously
eredin this chapter is best viewed alongside the set considered in the last
administrative
agenciesare vulnerable to "capture" by the industries they
chapter.The two arguments ft together as follows:
aresupposedto be regulating. There exists no single, reliable vaccine to ei.
n Chapter 4, pursuit of the analogy between copyrights and real prop-
therdisease,but over the course of the twentieth century, we have devel.
ertyrights suggested several ways in which the entitlements currently en-
opedaseries of mechanisms designcd to reduce the incidence and severity
iovcdby the owners of copyrights in audio and video recordings might be
oftheinfections.Agenciescan be required to consult broadly before adopt-
nhanced (as well as a few ways in which they might be curtailed). The
ingregulationsand to provide rational responses to critics of their initia-
adoptionof that package of recommendations would make possible an im-
tives.Theycan be structured to remain as "independent" as possible, both
ortant set of new business models, which, in turn, would improve in sev-
ofthepolitical party currently in control of the cxecutive branch and of the
eralrespectsthe manner in which recorded entertainment is created and dis-
privateirms theyaresupposed to be supervising. And their rules and deci-
tributed.Speciically, the availability of clean, authorized copies of audio
sionscanbesubject to pcriodic review by the courts, to cnsurc that they are
andvideo recordings would increase dramatically; many more musicians
foundedondefensiblefindings of fact and fall within the agencies statu-
wouldbe able to make their music available irectly to the public; and pri-
tory authority.>
vatecollective-rights societies, more efficient and flexible than the extant
Oneagencythat,becausc of its expansive powvers and important portfo-
governmentagencies, would assume responsibility for processing the myr-
lio,hasbeensubjectedover the years to espccially close scrutiny and super-
iadlicensing transactions between copyright owners and the people who
visionis theFederal Communications Commission. Rather than construct a
wantedaccess to their works. But these benefits would be accompanied by
newadministrativeagency to handle the entertainment industry, we might
severalunfortunate effects: at least initially, the dominant intermediaries
simplyaddrecorded entertainment to the topics already managed by the
woulduse their enhanced powers to drive out potential competitors and to
FCC.Alternatively,we might restructure the current Copyright Office so as
linetheir pockets, creative and critical uses of audio and video recordings
tomorecloselyresemblethe current version of the FCC, and then add to its
wouldbe curtailed, and copyright owners would employ socially undesir-
existingporfolio theresponsibilities outlincd in this chapter. That would re-
ableforms of price discrimination. The most radical of the initiatives con-
quire,amongother things, replacing (or complementing) the Register of
sideredin Chapter 4-mandatory inclusion of copyright-protection systems
Copyrightswith a group of five commissioners, serving staggered five-year
inelectronic devices-would also threaten the "end-to-cnd" design princi-
Ierms,appointedby the president and confirmed by the Senate. The result
pleupon which the Internet was founded.
wouldbeboth toincreasethe autonomy of the office and to enhance its ca-
In this chapter, we first explored some general considerations suggesting
pacityand inclination to engage in the delicate task of formulating an ap-
thatit would be plausilble to treat the entertainment industry as a “regulated
propriatebody of regulations, 9
industry," and then examined a list of specific ways in which the already
Selectingthe right administrative agency to handle the task, structuring
substantiallegal constraints on copyright owners' freedom might be tight-
iappropriatcly,andsubjectingit to a sensible level of judicial review would
enedfurther. The primary purpose of those regulations would be to curb the
helpagooddeal in reducing the dangers created by giving any governmen-
ikelyabusesby copyright owners of the enhanced entitlements that Chap-
talbodythismuchpower. But institutional precautions of this sort can only
tr 4would provide them--using tools already developed (typically through
gosofar. In the end, much would hinge on the qualifications and commit-
painfulprocessesof trial and error) in other regulated industries.
mentsofthepeoplewho were appointed to run the agency. If conscientious,
In view of the way the two inquiries were conducted, it should come as
inlormed,
nonpartisan,and uninterested in currying favor with potential fu-
nosurprise that an entertainment industry built upon a combination of
tureemployersin the private sector, they could use the tools canvassed
Chapters4 and s would be even better than an entertainment industry built
abovetogreat cfect. lf they lacked those traits, they might do more harm
than good.
uponChapter 4 alone. Specifically, it would be characterized by more com-
petitionin more sectors of both the music and film markets, by greater di-
Promisesto kep
versityin the products and services made available to the public. bylo
Io wer
prices,bylessprice discrimination, and by greater fairncss in the distrib.
tion of therevenuesgenerated by the industry among the many people who AnAlternativeCompensationSystem
contributeto it.However,serious problems would remain. None of the
reg
ulationsconsideredhere would alleviate the dampening effect of effo ive
encryptionsystemson critical and transtormative uses of audio and vid
video
recordingsor the regretable erosion of the end-to-end principle. Finally, the
transactioncostsassociated with running such a complex regulatory regime
addedto the already substantial costs of ensuring compliance with theen
hancedentitlementsprescribed in Chapter 4, would be dauntingly high.
Can we do better? Chapter 6 makes one more run at the problem.
Imagine that I own a rocky promontory on the coast of Maine. A sub-
mergcdreef extends from my land a half mile seaward. Mariners have trou-
bleseeingthe reef, especially at night or when it's foggy. As a result, ships
havebeen running aground on the reef for centuries. Even today, small
pleasurecraft lacking sophisticated electronic navigation equipment fre-
quentlyhit it in the summer months. Some are seriously damaged, and a few
are wrecked.
Oneevening, after I've helped to extricate yet another smashed sailboat
fromthe rocks, a friend suggests to me, You know, you ought to build a
lighthouseon the point. A bright light would warn boats to steer clear. If
eachboater paid you even a fraction of the benefit of the signal to him, you
couldmake a tidy proft." We discuss the possibility for a bit. All aspects of
theplan make sense, except one: we can't figure out how I could charge the
beneficiaries of the lighthouse. My friend suggests making a deal with a
nearbycharter company, which rents boats to sailors unfamiliar with the lo-
cal waters--who in turn run aground especially often. But such a contract
wouldcover only a portion of the cost of the lighthouse. And once I made
thelight available to the company's customers, I couldn't prevent all other
sailorsfrom making use of it for free. In short, we can't envision a profitable
businessmodel. Stymied, we abandon the idea.
Thisparable, familiar to economists, illustrates what they refer to as the
problemof "public goods." They point out that a small number of socially
valuableproducts and services have the following two related characteris-
tics:First, they are "nonrivalrous." In other words, enjoyment of them by
oneperson does not prevent enjoyment of them by other persons. Second,