VERIZON'S SOLUTION IN THE NAPSTER DEBATE -
Mandated Sharing For A Fixed Price

By ANUPAM CHANDER
Thursday, May. 30, 2002

Last week, a new voice unexpectedly entered the Napster debate. We had become accustomed to the teenager chanting the new mantra "Rip, Mix, Burn," and the recording industry howling, "Stop, thief!" Now the telecommunications giant Verizon has emerged to offer an intermediate position between the two.

Between the extremes of free music and absolute publisher control, there is the possibility of mandated sharing for a fixed price. Verizon proposed that Congress should pass a law to make music and movies available on the Internet for a flat fee. The fee would go to the owners of the music and movies--the recording companies, the Hollywood studios, and the artists.

Right now, the law permits the studios to establish the rules for accessing music and movies online--and, most worryingly, even to refuse to release music and movies online at all. Verizon suggests that Congress needs to act to ensure that music and movies be made available online, for a reasonable, pre-set price.

Verizon Proposes a "Compulsory License" for Internet Music and Movies

The scheme Verizon proposes is known as "compulsory licensing." A compulsory license forces a copyright (or patent) owner to permit someone else to use the work for a predetermined fee. Accordingly, it precludes the owner of the copyright (or patent) from refusing to license her work to other people in certain, specified circumstances.

Meanwhile, as video transmissions over the Internet improve, we would download movies as well--from Casablanca to Crouching Tiger, Hidden Dragon.

We would all pay a price for these privileges--a royalty set by a national tribunal.

Why Is Verizon Interested in Music and Movie-Sharing?

The interesting aspect of the proposal is not the proposal itself--others have offered similar suggestions in the past, including prominent cyberlaw scholars such as Stanford's Larry Lessig and Harvard's William Fisher.

The interesting thing is who is offering the proposal. The proposal comes from a well-established, traditional corporation, not from a professor or a file-sharing company such as Napster or KaZaA.

Why is such a well-respected corporation risking its political capital on song-and movie-sharing? The answer is that Verizon's interest here is in a robust Internet, one that supplies what consumers want.

The financial math is simple: The more valuable the Internet is to consumers, the more valuable, in turn, are Verizon's Internet services - including DSL - to those consumers. Verizon understands that it has much to gain from the increasing use of the Internet as a source for entertainment and education.

Compulsory Licensing: Ridiculous or Useful? Socialist or Capitalist?

"Ridiculous," sniffs recording industry representative Hilary Rosen in response to the Verizon suggestion. And the President of the Recording Industry Association of America, Cary Sherman, explains that compulsory licensing "basically means substituting government regulation for the marketplace."

Record companies themselves have been beneficiaries of a compulsory license since 1909. This license allows the companies to use new performers to record someone else's composition without needing the permission of the owner of the composition. The user must simply give notice of the new recording and then pay a preset royalty to the composition owner.

Jukebox owners and cable companies, too, have compulsory licenses allowing them to play music or broadcast television programs without needing permission of the copyright owner. Rather than forcing them to seek permission every single time a song is played or a program broadcast, the law permits them to distribute copyrighted works by paying a preset royalty.

Without a compulsory license, the jukebox and cable industries would have had a far more difficult time establishing themselves. Imagine if cable companies had to receive permission from television broadcast companies before distributing television programs. The broadcast television companies would have demanded the lion's share of the profits--or perhaps even refused permission entirely, to better control distribution of their work.

Intellectual property, it must be remembered, creates monopolies. The law gives to the creators of a work exclusive ownership over that work--the owner of the work becomes its monopoly supplier. Economists have long recognized the need for government vigilance in the face of monopoly power. Far from being a socialist device, compulsory licensing is one method of tempering the exclusive rights of the copyright owner granted by the law.

It seems overwhelmingly likely that as time passes, entertainment will increasingly be delivered over Internet-type networks. In a future world where the Internet is a major conduit for movies and music, it is easy to see how copyright owners might seek to exploit their monopoly power. In essence, they will seek to control online distribution of their work--eliminating intermediary retailers entirely.

To some extent, this is a positive development, likely to drive prices down by eliminating the middleman. But to some extent, the Web-ification of music and movies may also have a negative side. Rights owners may unreasonably constrict the media by which entertainment is distributed, and unreasonably limit distribution, in order to protect their own monopolies.

How Would a Compulsory Licensing Scheme Work?

A compulsory licensing scheme presents a number of questions: Who would collect the royalties? Who would pay the royalties? How much should the royalties be?

How would the royalties be divided among music and film studios and artists?

Consider some possible answers: The royalties could perhaps be collected by file-sharing companies. The royalties might be paid by all Internet users as part of their Internet connection fee, or, perhaps more fairly, only by those Internet users who download songs and movies. The royalties could be decided by some sort of copyright royalties tribunal, with representatives from industry, government, and consumers.

Royalties that are collected might be divided, as Harvard's William Fisher has recently suggested, based on how often the work is downloaded (with monitoring to discover fraudulent downloads). The more popular the work, the higher that artist's/studio's share of the royalties. The more the work is shared, the more the music and movie studios get paid. KaZaA and Napster would suddenly become Hollywood's best friends.

An Important Turn for Corporate Involvement in Intellectual Property

Verizon's entry represents an important turn in the larger debates about intellectual property that have been prompted in part by the rise of the Internet. The basic assumption that the Internet is anti-corporate when it comes to intellectual property - because it can connect artists and listeners, or indie filmmakers and movie watchers - may be in error. Verizon's position (like Bertelsmann's vis-a-vis Napster) suggests that some companies may believe that Internet intellectual property distribution can actually benefit, not harm, them.

Until now, we have generally thought of corporations as benefiting from ever-increasing strengthening of intellectual property rights--in patents, trademarks, and copyright. Indeed, recent corporate involvement in intellectual property debates has been mostly one-sided. Corporations have sought to expand intellectual property rights--for example, preventing "dilution" of trademarks, lengthening the term of patent protection, and lengthening the term of copyright.

This gradual expansion of intellectual property rights is not entirely a recent phenomenon. During the last two hundred years, the term of copyright has gone from 14 years (renewable for another 14) to today's life of the author plus 70 years. Stanford's Larry Lessig quips that the copyright term has been extended mysteriously whenever Disney's rights in Mickey Mouse were about to expire.

Verizon's proposal demonstrates that there are corporate interests that are harmed by ever-stronger intellectual property rights. While many rightly observe that too little intellectual property protection would discourage innovation, it is equally true that too-strong intellectual property rights add friction to the working of the economy, taxing businesses, both old and new, and dampening the possibility of innovation.

Indeed, there are many who have benefited silently from Napster and its progeny. Computer hardware companies, for example, benefit from the large hard drives and computer processing capacity needed to manipulate enormous files of music and video. Apple's slogan "Rip, Mix, Burn" seems to acknowledge this interest. And many other hardware companies, such as Dell and Compaq, who have not previously touted the business advantage to them of rampant downloading, nevertheless stand to gain as well.

But many companies that stand to benefit from increased sharing of music and film also stand to lose from such sharing. Companies like AOL Time Warner and Sony, which have both Internet infrastructure and entertainment content divisions, are in an awkward position in the Napster debate. They have competing interests on both sides: their Internet divisions will profit from Napster-like behavior, but (absent mandatory licensing, and assuming free downloads) their entertainment content divisions may be hurt.

Recently, I moderated a panel at the University of California, Davis on the question "Is Business Patentable?" A prominent Sacramento patent lawyer on the panel presented statistics showing that the Sacramento region had obtained only a handful of patents on business methods, while the rest of the country had received thousands. He urged the audience of Sacramento businesspeople to assert their rights and file more patents so that we did not lose the patent race.

I wondered aloud if this was the right response. Perhaps instead of seeking new patents, we should seek to reduce the patentability of business methods. After all, Sacramento businesses will ultimately pay more in royalties to other patent holders on business concepts than we receive back in royalties on the patents we hold on such concepts.

The answer I received was that the war was already lost--it is too late to turn back the juggernaut of intellectual property, that to step in front of the chariot was to be crushed. But perhaps it is not too late, especially with the help of corporate visionaries.

Verizon's name suggests "seeing the horizon" or "true horizon." Rather than leaving the name as the meaningless invention of some well-paid marketing consultant, Verizon executives seem to be taking it as a mandate to look to the future. The company seems to be starting to see how Internet movie and music distribution can help, not harm, its business.

We now need a burst of corporate activism--not on the side of ever-increasing property rights, but on the side of protecting the public domain. Perhaps others will follow Verizon's lead in creating a new horizon for the distribution of music and video.

Perhaps compulsory licensing will prove unnecessary, as recording companies and film studios, as well as individual artists, voluntarily decide to release their works online at a reasonable price and in a form that people will desire. But this has not happened yet, and does not seem likely any time soon. If it does not happen naturally, perhaps it should be forced - as monopolies have been forced to face competition throughout American history.

In the end, compulsory licensing may not be the ideal answer in the Napster dispute, but it is well worth exploring. It offers a reasonable split-the-difference solution that allows both downloading and payment, and thus gives both sides what they want (and neither everything it wants). It is a workable compromise in a debate that has been marked more by stalling and litigation than vision and response to consumer demand.

The dream of the cosmic jukebox in the ether, full of the world's music, may yet remain alive.


Anupam Chander is an Acting Professor of Law at the University of California, Davis, School of Law. A graduate of Yale Law School, he specializes in cyberlaw and international law.

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