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Intellectual Property 4:1 - 1(87) Entertainment and Media: Markets and Economics Professor William Greene.

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Presentation on theme: "Intellectual Property 4:1 - 1(87) Entertainment and Media: Markets and Economics Professor William Greene."— Presentation transcript:

1 Intellectual Property 4:1 - 1(87) Entertainment and Media: Markets and Economics Professor William Greene

2 Intellectual Property 4:1 - 2(87) Entertainment and Media: Markets and Economics Property Rights Intellectual Property

3 4:1 - 3(87) Agenda  Intellectual property: Definition, types  Economic foundation for valuation  Fair and unfair use  Royalties  A chain of value – book publishing  Copyrights – the entertainment business  Trademarks – more entertainment  Patents

4 Intellectual Property 4:1 - 4(87) Property  Tangible property: Usually dealing with natural resources  Intellectual property: Output of creative activity  Copyright: Writing  Patents: Invention and design  Trademark: Marketing symbols  Secrecy and contract: “Know how” (e.g., Coca Cola, KFC seasoning formula, business secrets)

5 Intellectual Property 4:1 - 5(87) Property Right  Property: After transformation, a stream of rents  Right  Ownership of the stream of rents generated by the property  Control over usage  Note: “Rent” is important. No “rent,” no need for a right; it would not be contested.  Establisment of property rights  Foundational function of a government  Provision of a court system in which to defend property rights

6 Intellectual Property 4:1 - 6(87) Pursuing Rent for Creative Works  Through Time  Nonperishable, e.g., sculpture  Works of art – resale  Across Space  Different markets – U.S. & Int’l films  Spinoffs and licensing The Lion King  Hybrids:  Wyeth’s Helga paintings;  Resale of the paintings, catalog,  Museum exhibition  Jackson Pollock’s paintings: Which ones are fakes?

7 Intellectual Property 4:1 - 7(87) Tangible Property Rights  Tangible property  Exhaustible resources  Consumption is private and exclusionary  Motivation  Conserve and manage resources  Avoid the tragedy of the commons (e.g., American vs. Australian lobster industry)  Creates a social good: Conservation

8 Intellectual Property 4:1 - 8(87) Intellectual Property Rights  Intellectual property  Consumption is nonexclusionary (public good)  Production is often input to further innovation  Motivation:  Reward producers and ensure others access  Incentivize creative, beneficial activity

9 Intellectual Property 4:1 - 9(87) Two Views of Intellectual Property  Creates a social bad: Monopoly  Social point of view – monopoly  Private: Strategy? Coca Cola and KFC. Patent does not pass cost benefit test.  Merely establishes a property right to a piece of capital (like real estate)  Conflicts:  Applications of copyrights  The Sonny Bono law – did nothing to spur creative activity; merely extended the life of a stream of rents.

10 Intellectual Property 4:1 - 10(87) Economic Motivation for IP Rights (Lesser, mainly for patents) Exchange for Secrecy: Reduction of costs that results from reinvention or rediscovery. (Greater) Profit incentive: Profit motive calls forth desirable innovation that might not occur otherwise. (Not everyone believes this.)

11 Intellectual Property 4:1 - 11(87) Monopoly in Intellectual Property Price, MR, MC Demand MR MC P = Deadweight loss = Consumer surplus = Producer surplus The counterpoint is the competitive form of the same market with P=MC and no deadweight loss. Compared to no market, the monopoly is unambiguously better.

12 Intellectual Property 4:1 - 12(87) Ownership and Valuation Property right = ownership claim to the stream of rents. Long lived stream of benefits Copyright: 95 years (Mickey Mouse’s new law) Patent: 20 years (17 previously) Trademark: As long as the trademark continues to be both used and productive (PTO classifies as “DEAD or ALIVE”) Year1 Year 2 Year 3 Year 4 Year 5 Life of the right

13 Intellectual Property 4:1 - 13(87) Property Valuation General Result

14 Intellectual Property 4:1 - 14(87) Prozac (Eli Lilly): Scheduled to expire 2003 Generic by Barr Labs – successful patent challenge – due out in 2000. Lilly stock fell from 109 to 76 the day of the ruling.

15 Intellectual Property 4:1 - 15(87) Valuing Happy Birthday  By the time its copyright runs out in 2030, Happy Birthday should have made nearly 55 million pounds.  American sisters Patty and Mildred Hill wrote the lyrics in 1893 It is now among the top three most popular songs in the English language, along with Auld Lang Syne and For He's A Jolly Good Fellow.  The lyrics were copyrighted in 1935, 11 years before Patty's death, and the ownership has swapped hands in multi-million pound deals ever since.  The song generates royalties of 625,000 pounds per year for the current owners Warner Communications, who bought the rights to the simple tune for more than 15 million pounds ($28,000,000) in 1989  Currently owned by Summy-Birchard Music (AOL-TW). Current royalties about $2,000,000/year.

16 Intellectual Property 4:1 - 16(87) A Market for Property Rights

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22 Intellectual Property 4:1 - 22(87) Copyright Lifetimes Pre Bono: Life of the author + 50 years or 75 years for a work for hire Post Bono: Life of the author + 70 years or 120 years for a work for hire. Works made for hire from 1923 to 1998 (such as Mickey Mouse) do not enter the public domain until 2019 (instead of 1999).

23 Intellectual Property 4:1 - 23(87) Advances Against Royalties: Retain Rights A Bank Conventional banks don’t like the uncertainty (risk) and don’t understand the workings of the market. Accepts risk Advance will discount against the uncertain royalty stream.

24 Intellectual Property 4:1 - 24(87) Property Valuation, Uncertainty and Technological Change  AA Milne-Winnie the Pooh  Shirley Slesinger Lasswell held then sold the rights in the 1930s  Disney, 1961, rights for merchandising (more lucrative than the mouse)  Videocassettes? DVDs? Could not have been foreseen in the 1930s. Who’s entitled,Shirley or Walt? Value? Rights? Court case (Dismissed after 13 years, 3/29/04. Walt Disney wins.)

25 Intellectual Property 4:1 - 25(87) Fair Use  The concept of fair use  Relevance: Commercial value of posted videos to YouTube even if not to the person who posts the material

26 Intellectual Property 4:1 - 26(87) Fair use by Professor William Greene (1) Change of form (2) Not using in an attempt to earn money

27 Intellectual Property 4:1 - 27(87) Not Fair Use

28 Intellectual Property 4:1 - 28(87) The Pirate Bay has been involved in a number of lawsuits, both as the plaintiff and as the defendant. On April 17, 2009 Peter Sunde, Fredrik Neig, Gottfrid Svartholm and Carl Lundstrom were found guilty of assistance to copyright infringement and sentenced to one year in prison and payment of a fine of 30 million SEK (app. 3,620,000 USD; 2,385,000 GBP; or 2,684,000 euro), after a trial of nine days. After appeal, the verdict was upheld. The entire operation was disbanded in 2010. It has reformed (zombie like). Exists now in the Seychelles. Proxy servers exist worldwide.

29 Intellectual Property 4:1 - 29(87) The Anti-Pirate Bay

30 Intellectual Property 4:1 - 30(87) Renmin University of China All 827 pages Definitely Not Fair Use

31 Intellectual Property 4:1 - 31(87) Called into question what was meant by fair use

32 Intellectual Property 4:1 - 32(87) Application: Who Owns Fame?  The Right of Publicity  Who owns the value of a public figure? The public figure who is famous? The public who make them famous? The paparazzi as agents of the public?

33 Intellectual Property 4:1 - 33(87) Alison Chang vs. Virgin Mobile USA (Diss in Australia)

34 Intellectual Property 4:1 - 34(87) Alison v. Flickr and Virgin Alison Chang, a 16-year-old Texan teen girl, sued Virgin Mobile phone company for stealing her photo which was taken by her youth counselor Justin Ho-Wee Wong during a Christian camp in Australia. Chang's family filed a lawsuit late Wednesday (September 19, 2007) in state district court in Dallas against Virgin Mobile USA LLC, its Australian counterpart, and Creative Commons Corp., a Massachusetts nonprofit that licenses sharing of Flickr photos. The case vs. Creative Commons was dropped in November, 2007. The case against Virgin was dismissed for lack of jurisdiction in 2009.

35 Intellectual Property 4:1 - 35(87) Ryan Hart vs. Electronic Arts Ryan Hart is one of the most famous quarterbacks in the recent history of Rutgers football. He led the 2005 Scarlet Knights to the Insight Bowl, the first bowl game that Rutgers had played in decades. Four years later, Hart took on another leading role, this time as the named plaintiff in a class action lawsuit against Electronic Arts. Hart's legal team claims that EA has infringed Hart's "right of publicity". Hart also claims EA infringed the rights of other college players by including their information and statistics in EA's college football games without authorization. Specifically, Hart's complaint is about a nameless quarterback that appears on the Rutgers team in EA's 2004, 2005, and 2006 games. The player wears jersey number 13, is six feet and two inches tall, weighs 197 pounds, wears a wristband on his left wrist, and hails from Florida. Not coincidentally, that is all true of Ryan Hart. Since the EA games additionally have allowed players to fill in names on team rosters, many people play the nameless Ryan Hart under the name Ryan Hart. Downloadable and accurate rosters of all the featured college teams are currently shared online. Last fall, a federal district court dismissed Hart's case, explaining that the free speech rights of Electronic Arts trumped Hart's right of publicity claims. Hart appealed and now is arguing his case before a federal appellate court in Philadelphia. Hart won his appeal before a 3 judge panel of the Federal Appeals Court in Philadelphia (May, 2013) Right of Publicity vs. First Amendment Right of Free Speech. Right of Publicity wins … so far.

36 Intellectual Property 4:1 - 36(87) Fantasy Baseball Is (Definitely Not) a Game Who owns the numbers the day after the game?

37 Intellectual Property 4:1 - 37(87) Yahoo Fantasy Baseball Provider

38 Intellectual Property 4:1 - 38(87) The Market 300+ Operators of fantasy sports leagues Subscriptions Prizes NFL, MLB, NBA At least $1.5 billion Input data source: Yesterday’s newspapers Content Purchase: License arrangements with Major League Baseball E.g., CBC Distributing and Marketing (St. Louis) – 9% of gross = royalty paid to MLB.

39 Intellectual Property 4:1 - 39(87) The Economic Issues Ownership of the personna. Not a copyright issue; Statistics are public domain (1997 case against NBA) First Amendment? Ostensibly The issue is control of a valuable resource – the fame of the players in their role as sports figures Who owns the “right” to exploit that fame?

40 Intellectual Property 4:1 - 40(87) The Scrum  The “Right of Publicity” was created in a 1953 baseball card case  1996: Several 1940s/1950s players sued MLB asserting the right. They lost on other grounds.  2005 MLB paid $50M to the players’ union for the rights to internet and wireless use of their personna.  2005 CBC application for license renewal is denied. MLB wants to (greatly) restrict the number of licenses. (The foreclosure) CBC sues, claiming it doesn’t need a license The case began in court September 5.

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42 Intellectual Property 4:1 - 42(87) Right of Publicity? BOSTON (AP) – A Red Sox fan angry that Johnny Damon defected to the New York Yankees has fought off an attempt by his high-powered agent to stop her from selling baby bibs with a very grown-up insult.– Tucked among the "I Love My Mommy" bibs and "Pregnant Princess" maternity clothes, Ann Sylvia also offers bibs and onesies adorned with the ballpark epithet "Damon Sucks." Last month, eBay pulled the listings after the Scott Boras Corp. complained that they violated Damon's right of publicity, a legal claim that allows celebrities to control the products they endorse. (hmmm… is this the “right?”) On the “Right of Publicity:”

43 Intellectual Property 4:1 - 43(87) (The end of that story…) Sylvia hadn't sold any of the Damon items at the time, but the complaint threatened to blemish her eBay rating and jeopardize her PowerSeller status. "I'm just a stay-at-home mom. I just want to raise my children, sell my stuff," said Sylvia, who works part-time at The Standard-Times of New Bedford, which first reported on her struggle. "It's all a little nerve-wracking, a little scary." If so, she didn't show it in her negotiations with Boras' staff. During an hourlong phone call, she pointed out to attorney Ryan Lubner that there are other baseball players named "Damon"; how did he know, after all, that she wasn't the world's biggest critic of Tampa Bay's Damon Hollins? "Then I knew I had him," she gloated. "So I said, 'Let's make a compromise."' Lubner agreed to lift his objection -- and clear her eBay record -- if Sylvia agreed not to use "Johnny," "Boston," "Red Sox," "New York," or "Yankees" in the listing.

44 Intellectual Property 4:1 - 44(87) Royalties  Royalty rate per “use” is the monopoly price.  Marginal cost = 0, so revenue maximization.  Applications  Patented technologies, drugs, mathematical techniques  Authors  Actors – reruns and syndications  Music  Others?  Outright sale price = DPV of stream of royalties

45 Intellectual Property 4:1 - 45(87) Royalties  Book Royalties: Simple  Music Royalties: Amazingly Complicated

46 Intellectual Property 4:1 - 46(87) Book Royalties “In consideration of the author’s performance… the publisher will pay to the author the following royalties based on the publisher’s net cash receipts: On copies of the work sold in the United States … 15%. However, if in any year, sales exceed 4500 copies, then … 18%” (Econometric Analysis/Prentice Hall)

47 Intellectual Property 4:1 - 47(87) Kindle edition, $147.63

48 Intellectual Property 4:1 - 48(87) Making Sense of Music Royalties  You do not trigger or incur a royalty by listening to music.  You justify a royalty to the owner of the music when you use music to make money Music is a factor of production Royalties are the rental paid to use that factor.  There are many different uses of music and many different kinds of royalties

49 Intellectual Property 4:1 - 49(87) A Chain of Value (Added)? Music  A chain of value added Composer creates the musical work Publisher develops the work and brings it to the public Performer interprets the work and provides the musical experience Aggregators package (mix?) music for further use  Where are the claims to the value of the musical work?

50 Intellectual Property 4:1 - 50(87) Music Royalties – Where they Go  Writers/Composers Sales of music in fixed form (CDs) Public performances  Publishers  Recording Artists NONE from public performance (radio, TV, bars, etc.) Digital arena if not interactive and the listener is a subscriber. (From the DPRSRA)

51 Intellectual Property 4:1 - 51(87) The Property Rights  Claims to the stream(s) of rent  The property rights are (nearly all) Mechanical Rights (reproduction) Performance Rights (bars, concerts, internet, etc.) Synchronization Rights (TV Ads, etc.) Print Rights (sales of print music)  Additional rights attach to music videos

52 Intellectual Property 4:1 - 52(87) Mechanical Rights Juliet is “innocent” YouTube is not. (Or, are they a safe harbor.)

53 Intellectual Property 4:1 - 53(87) CD Costs: Mechanical Royalties

54 Intellectual Property 4:1 - 54(87) Commodity Pricing Exceeds MC MC to Apple is not really zero. Royalty = 66 cents per tune. Resource cost net of royalty is close to zero. A Highly Successful Business Model Priced as “downloads” Experience is reproducible. Technology is restricted (to iPods, iPhones, computer, etc.)

55 Intellectual Property 4:1 - 55(87) Claimants to the Stream of Rent  Authors/Composers  Publishers  Performers  Recording Companies (“Labels”, SoundExchange on their behalf (monopoly))  Performing Rights Organization (ASCAP, BMI, SESAC)  Mechanical Rights Agency (Harry Fox Agency, (monopoly)) What value added is produced by each player? What is the basis of the claim in each case?

56 Intellectual Property 4:1 - 56(87) Music Videos Have Additional Value Produced and owned by the record labels: EMI-Universal, Sony (BMG), Warner Once free: Distributed free as advertising to VH1 and MTV Free no more – millions in royalties paid by users. (1) The music (2) The video (3) The composition of the music with the video

57 Intellectual Property 4:1 - 57(87) Royalties for Performers  The Digital Performance Rights in Sound Recordings Act (DPRSRA) created a right in sound recordings to perform the copyrighted work publicly by means of a digital audio transmission, as well as established a compulsory licensing scheme.  (Compulsory license = the owner cannot deny the request. Disagreements on terms must be litigated.)

58 Intellectual Property 4:1 - 58(87) Royalties for Performers From:

59 Intellectual Property 4:1 - 59(87) Mechanical Royalty from Sales of Recorded Music  Label  Publisher  Composer (50/50) Statutory rate: $.091/song 5 minutes or less or $.0175/minute in 2014  Recording Artist: 8% - 25% of retail price Less 25% of retail for packaging Less other expenses (promotion, tour, music video, manager, producer, band) Net, frequently close to $0 (There is no net?).  Note: Controlled Composition when Composer is the Recording Artist. A separate category – e.g. Paul McCartney (

60 Intellectual Property 4:1 - 60(87) Copyright Office Proposal for Webcasting and Rebroadcasting Webcasting (,, Retroactive to 1998 Webcasting: 0.14 cents per listener per song Rebroadcasting of AM or FM 0.07 cents per song Noncommercial broadcaster 0.02 cents for radio rebroadcasts 0.05 cents for Internet only programming What do these numbers mean. Where do they come from? Who gets the royalty income?????

61 Intellectual Property 4:1 - 61(87) CRB Outcome in March 2007  Internet Radio  Minimum $500  A single collection agent: SoundExchange (monopoly?)  Per play rates became impossibly unwieldy

62 Intellectual Property 4:1 - 62(87) Amended CRB Ruling Royalty is per song play or based on average listening hours.

63 Intellectual Property 4:1 - 63(87) New CRB Rates: 2010  Paid to SoundExchange. Now, how does SoundExchange resistribute these to the multiple record labels and other claimants?

64 Intellectual Property 4:1 - 64(87) Satellite Radio (Sirius-XM) Royalty Rates: Optimal Tax. There is no meter

65 Intellectual Property 4:1 - 65(87) Understanding CRB’s Rates The law requires rates to be based on the price that would be set by a marketplace of willing sellers and willing buyers. Much of the discussion centered around deciding issues like who would be the willing sellers. The Board decided that an individual record company was the basic unit of a "willing seller". This is an impossible construction. There can be no such market outcome. See Capital Cities, page 7

66 Intellectual Property 4:1 - 66(87) On Economic Viability An issue that smaller webcasters raised was the desire to be assured that their fees would not exceed their revenue. The Board rejected this reasoning in their final decision because the ability of smaller stations to generate revenue from their operations has little or no bearing on the market value of the rights held by the copyright holders. (Protecting competitors vs. protecting competition)

67 Intellectual Property 4:1 - 67(87) Mechanical and Performance Royalties Variations on 66 cents/tune – paid to SoundExchange If you listen to the music while you download it, is that a performance that triggers a royalty obligation to ASCAP? (No.) If you listen to music on the site (sample it before buying it) does that trigger a performance royalty? (Yes)

68 Intellectual Property 4:1 - 68(87) Performance Royalties  Song is added to PRO data base (“collection”)  PRO tracks the royalty trail (TV, Radio, Concerts, Restaurants, Elevators, etc.)  Revenue (minus fees) is distributed Source of profit: Low (zero) marginal cost, economies of scale.  Usage is estimated using statistical sampling

69 Intellectual Property 4:1 - 69(87) The Users

70 Intellectual Property 4:1 - 70(87) Performance Royalties Market  Internet Radio  Television and Terrestrial Radio  Bars and Lounges  Elevators  Department Stores  How big? $ Several billion

71 Intellectual Property 4:1 - 71(87) The Gatekeepers

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74 Intellectual Property 4:1 - 74(87) Capital Cities, 1993 From the opinionQuoting prior cases:

75 Intellectual Property 4:1 - 75(87) 14 Million!

76 Intellectual Property 4:1 - 76(87) Spotify is customizable internet radio. Blanket licenses

77 Intellectual Property 4:1 - 77(87) You “share” the playlist. Spotify plays the music.

78 Intellectual Property 4:1 - 78(87) New Economy Performances  Internet Radio: Spotify AOL, Yahoo  Internet Subscriptions: Rhapsody, RealNetworks  YouTube – videos, music videos, musically scored videos

79 Intellectual Property 4:1 - 79(87) Royalty Rate Determination: Questions  Why do we need the Copyright Royalty Board?  Why do we have the special court for determining performance royalties (ASCAP, BMI, SESAC)?  What economics motivates these?  Is making Sound Exchange a monopoly a good idea?

80 Intellectual Property 4:1 - 80(87) Free users trigger performance royalties Premium users who customize their own playlists trigger mechanical royalties

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84 Intellectual Property 4:1 - 84(87) U.S. vs. ASCAP, 2008  How to tax the internet users of music  An optimal tax based on public finance principles: Zero marginal charge Flat percentage of total advertising revenue. (More or less)  ASCAP won.

85 Intellectual Property 4:1 - 85(87) A Threat to ASCAP and BMI Business Model 1. DMX licenses all 5,000,000 ASCAP titles and pays $40/location for the right to use all the music 2. DMX separately obtains a license from SONY to use SONY music in its locations. $25/store 3. DMX requests that ASCAP reduce the $40 by proportion p of the total ASCAP music they use that is SONY music. Reduced fee to about $15. Under AFJ2 and compulsory licensing, BMI and ASCAP both said no. DMX sued in rate court. DMX won both cases.

86 Intellectual Property 4:1 - 86(87) DMX Case: Analysis  DMX purchased from SONY a license it already had from ASCAP  SONY did not sell anything to DMX – SONY could not prevent DMX from using SONY music even if it wanted to.  DMXs deal would be a total loss if they lost the rate cases.  Under AFJ2 ASCAP and BMI are not able to sell separate licenses for SONY and others.  DMX won both cases.  Where do they go from here? … stay tuned.

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88 Intellectual Property 4:1 - 88(87) March 14 Decision (This can and probably will be appealed)

89 Intellectual Property 4:1 - 89(87) Entertainment and Media: Markets and Economics Pricing intellectual property Royalties

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