The latest round of this fight features two small software firms, Grokster and Streamcast, vs. the entertainment giants, led by MGM and other studios, recording labels and artists' groups. In a case just argued before the Supreme Court, the entertainment firms say that Grokster and Streamcast, which help individuals copy movie as well as music files, must be shut down. The future of creativity is in jeopardy, they say. How will artists live if they don't receive copyright royalties? The technology industry, some of which holds its nose at Grokster and Streamcast's failure to obtain licenses for copying recorded materials, has united to defend their principal arguments in court. The high-tech industry says the future of innovation is at stake. How can engineers prosper if they're constantly looking over their shoulders for approval from Hollywood?
(fake paragraphing removed for clarity) Neither of the "questions" put forth actually reflects the way that the respective industries operate. Hollywood doesn't pay royalties. Sure, a few stars have "gross points" agreements, but as a general rule the actual creative people don't participate in blockbusters beyond their up-front payments, both on a contractual basis and on the basis of the dubious accounting that "proves" that the films aren't making a profit to be shared. The dubious accounting continues over to the music industry, which would have state-of-the-art music recording studios in every town over 30,000 population in America, staffed by fully trained professionals, if the "studio rental fees" charged to recording artists reflected real costs. Similarly, for all be a few artists—probably less than 200—the money up front is all the money there will be. The publishing industry, of late, has gravitated more and more toward accounting that essentially denies royalties to authors, largely through abuse of reserves against returns. Then, on the other hand, there's the whole tech-industry culture of "innovate first; we'll have the lawyers make it legal later." And, of course, looming over all of this is the work-for-hire doctrine that makes the only creativity in much of what gets passed around on the Internet the creative financing structures used to turn free-market artistry into a de facto system of patronage.
Michael Geist offers some interesting comments on Canada's consideration of revisions to its copyright law to cover the "threat" and "opportunity" of P2P and other file-sharing. He also concentrates on "royalties" as a major issue, while missing the patronage issue entirely.
Although royalty rates vary between artists, the consensus estimate is that the combined royalties earned by both the performer and the songwriter stand at approximately 12 percent. In fact, Sanderson Taylor, a leading Canadian music law firm, maintains that the actual royalty earned by the artists is typically even lower, since the producerÂ’s royalty is taken from the artistsÂ’ compensation and many contracts do not provide for a full royalty for CD sales.
Assuming artists receive the full 12 percent royalty, the annual royalty loss attributable to music downloading in Canada is about C$655,000 (12 percent of C$5.5 million). For those that claim that the full industry loss should be counted, the annual lost royalty for Canadian artists stands at C$2 million.
Some in the industry argue that this understates the impact since CRIA’s financial data reflects wholesale shipments and revenues, rather than the somewhat higher revenues generated at the retail level. According to CRIA’s president Graham Henderson, the artists’ royalty may be as high as twenty percent of the wholesale CD pricing. Even with the higher royalty figure, the annual lost royalty for Canadian artists could only increase to C$1.1 million for lost sales due to file–sharing or C$3.3 million for all decreased sales.
"Piercing the Peer-to-Peer Myths: An Examination of the Canadian Experience" (footnotes omitted). The actual numbers are rather misleading. Not only do they neglect US-based sales from Canadian subsidiaries that, for accounting purposes, are subsumed within US sales (which is, in fact, the default condition for book publishing), but they encourage one to use an arithmetic mean as a representation of the "average artist"'s position. The skew in the Canadian market is just as pronounced in the US; of that C$655,000, probably C$350,000 is borne by only a handful recording artists; and conversely, that handful also earns over half the royalties. Making policy based on such a skewed sample is not very wise, no matter what that policy might be.
Last, but far from least, the Japanese legal system is marching toward a rational result that we would do well to emulate. The Japanese recognize that intellectual property is "special," but that there's not really a principled distinction within intellectual property that justifies differing judicial paths. The new IP High Court "will handle a broad range of disputes involving IP rights, including patent rights, utility model rights, trademark rights and copyrights." Although I don't think that consolidating all IP appeals in the Federal Circuit would be a panacaea for all of the problems that IP faces (and causes), I do think that the consistency afforded by not having circuit splits on copyright and federal trademark issues would at least allow a clearer policy-level debate. For example, there is a somewhat hidden, but growing, split between the Second and Ninth Circuits on how one defines a parody for examination under § 107. Thus far, most of the circuits have stayed on the sideline; surprisingly enough—or, at least, surprisingly enough to those of us who deal with the inevitable backlash—the clearest explanation of standards is out of the Eleventh Circuit, which is not a big source of copyright law. Except, perhaps, for its circuit split with the Second Circuit on National Geographic… in which, once again, the Eleventh Circuit got it right and the Second Circuit didn't. In what is essentially the same case.