Beyond Copyright Industries: Publishing and Digital Futures Symposium, 21 September, QUT

1. Beyond Copyright Industries: Publishing and digital futures 21st Sept, QUT

2. evolutionary economics of copyrightmonopoly rents vs. business model adaptation Economics of IP (incentive, not asset) Why many economists are against IP - static & dynamic arguments Innovation, uncertainty and experimentation Jason Potts, CCI

3. Economic growth caused by new ideas but… fixed costs, free copying = no incentive so… Need IP to deal with this market failure LEGISLATIVE SOLUTION MARKET SOLUTION maybe the competitive process will work ok… …or

4. from the economic perspective What is copyright/IP for? Incentive for novelty Temporary monopoly Fixed costs All else is rent Not to create an asset

5. IP is not a form of property IP is closer to a form of market protectionism That’s why economists don’t like it so much. They are not fooled by the word ‘property’

6. IP is not intended to create property But it does create long-lived rents

7. Who likes IP & why? Creators & companies like it, as an asset (property income) IP lawyers like it (service revenue) Consumers, Librarians, etc don’t (cost) But economists understand IP as an institutional incentive artificial monopoly (rent) as a mechanism to achieve an end institutional configurations are ‘technologies’ competes with other ‘institutional technologies’ they like it or not depending upon whether it works as an incentive

8. What is this really all about? novelty under competition Some say it can’t exist Others say it can

9. either there is, or there is not, market failure in the incentive and appropriation mechanism for the production of new ideas that drives economic growth … a testable proposition most evidence is that ‘there is not…’

10. Testable how? Validation: strong IP & growth Falsification: weak IP & growth Can we find weak IP regimes where new ideas drive economic growth? 19C Switzerland (B&L 2006) Fashion industry (R&S 2006) China music (M&P 2009) German music (Handke 2009) Open source (Benkler 2006)

11. Hirshleifer J (1971) ‘The Private and Social Value of Information and the Reward to Inventive Activity’ American Economic Review 61: 561-574. Liebowitz, S (1985) ‘Copying and Indirect Appropriability: Photocopying of Journals.’ Journal of Political Economy,95(5): 945-57. Klein B, A Lerner, K Murphy (2002) ‘Intellectual property: Do we need it? The economics of copyright fair use in a networked world’ American Economic Review, 92(2) 205-8. Romer P (2002) ‘When should we use intellectual property rights?’ American Economic Review, 92(2) 213-6. Boldrin M, Levine K (2002) ‘The case against intellectual property’ American Economic Review: Papers & Proceedings, 92(2) 209-12. Boldrin, M. Levine K (2005) “The Economics of Ideas and Intellectual Property”, Proceedings of the National Academy of Sciences 102, 1252-56. http://c4sif.org/ Centre for the study of innovative freedom

12. 19C Switzerland Fashion industry China music German music Open source Novels in 19C US Software (most network) Drugs (!) Design … What do these strong IP ‘counterfactuals’ have in common? all outcomes of intense innovation-driven competition First to market New business models Reputation/branding effects i.e. ‘other’ appropriation mechanisms

13. But without IP, won’t people just copy the successful ideas/businesses/works?

14. But without IP, won’t people just copy the successful ideas/businesses/works?

15. How do you know what’s successful? Because they’ve already… Sold lots of copies Been widely adopted Made lots of money Garnered reputation So … explain why we need copyright again?

16. Strength of IP laws high low then now

17. timeline Boldrin & Levine 2008 Landes & Posner 1989 Plant 1934 Hurt & Schuchman 1966 Benkler, Boyle, et al 2002 Leibowitz 1985 IP skepticism (pre-internet age) IP abolitionism (post-internet age) Copying by professionals Copying by amateurs Protectionism ends Globalization begins

18. Real cost of copying high low then now

19. IP skepticism (pre-internet age) IP abolitionism (post-internet age) …either the copyright system adapts to the natural advantage that has evolved [digital technology & internet] or it will perish Francis Gurry, WIPO

21. Two lines of economics against IP Neoclassical not property, but monopoly rents Evolutionary/Austrian not effective appropriation mechanism; other mechanisms far more important, e.g. business models

22. The economic issue Analysis of dynamic gains (incentive to innovate) vs. static losses (monopoly pricing) Posner (2003) Proponents of IP must argue that: dynamic gains > static losses Yet many economists think: the dynamic gains are mostly rents Vaidhyanathan 2001, Klein, Lerner & Murphy 2002, Jaffe & Lerner 2006, Boldrin & Levine 2008 (2) there are even more losses Landes & Posner 1989, Bessen & Raskind 1991, Wu 2006

23. Innovation & evolutionary economists think IP laws are broken tooNo evidence IP works as an effective appropriation mechanism Dynamic competition Dynamic competence Costly routines Complementary assets Absorbtive capacity These factors explain incentive to innovate IPR relatively unimportant

24. Novelty incentive & appropriation IPR a weak solution Effects of uncertainty IPR can compound the problem due to new technology…

25. creative industries markets are characterized byuncertaintyexplains therole of discovery & experimentationon the producer and consumer side problem solution

26. (1) Uncertainty in supply evolving new business models strategy: three examples…

27. Tim Wu (2006) The problem with strong IP is that because it creates monopoly it also centralizes industry structure & thus decision making That’s not good for experimentation

28. Potts & Montgomery (2010)on Chinese music industry (weak IP enforcement) business model adaptation works Same finding for German music industry (Handke 2009) That is good for experimentation

29. Joe Karaganis, SSRC 3 year, 6 country multipartner study on causes of piracy “Our explanation is very simple: high prices for media goods, low incomes, and cheap digital technologies are the main ingredients of global media piracy. If piracy is ubiquitous in most parts of the world, it is because these conditions are ubiquitous.” This is what happens when single business models are applied globally

30. (2) Uncertainty in demand Social network markets When choice demands on choices of others Novelty bundling markets When multiple novelty is better than single

31. So… strong IP can stymie business model adaptation & innovation, and also social learning in context of uncertainty This is… an unintended consequence that harms industry evolution