Copyright grants to creators exclusive rights over their original works. After a copyright expires, the creative work enters the public domain and may be used freely. Copyright law is thus characterized by the balance it seeks to achieve between private incentives to engage in creative activity and the social benefits deriving from the widespread use of creative works.

In recent years, that balance has been severely challenged. The digitization of creative content and the rapid pace of technological advances that enable the ready distribution and widespread use of that content are exerting pressure on U.S. copyright law. To support Congressional consideration of potential changes to copyright law, this paper examines the following:

• the distinguishing features of the current copyright debate;



• the economic significance of industries that are likely to be affected, both directly and indirectly, by changes to copyright law;



• the main features of copyright law;



• the continuing evolution of copyright law in response to the increasing availability of creative content in digital form;



• the economic motivation for copyright law and how it contributes to efficiency in markets for creative works; and



• the implications of proposed legislative remedies for economic efficiency and equity.

Technological progress is placing new strains on copyright law today. Indeed, revising current copyright law is more difficult now than in the past for four key reasons. First, the rapid advance of digital technology is creating new conflicts between copyright owners and consumers over the control of legally acquired creative works in digital form. Second, technological progress is posing unprecedented obstacles to copyright enforcement both domestically and internationally. Third, technological advances affect a much wider variety of creative works than in years past, when copyright disputes were more focused. Fourth, advances in digital technology affect many sectors of the economy beyond those directly concerned with copyright; consequently, revisions in copyright law that have an impact on the development or application of that technology are likely to influence innovation and the economy overall.
 

Disputed Control of Copyrighted Works

Technological progress has exacerbated conflicts over control of copyrighted works. The allocation of rights between copyright owners and consumers over subsequent uses of creative works, always a relatively indeterminate area of copyright law, has become even more unsettled as a result of digital technology. Advances in digital technology have increased the potential gains that either copyright owners or consumers might realize from exercising control over subsequent uses of legally acquired copyrighted works in digital form. As a result, the allocation of those gains is highly contested.

The options available for consuming creative works today are considerable. Digital media products such as MP3 players give individuals new alternatives for making, storing, and listening to copies of music that they have purchased. TiVo and related digital recording devices allow individuals to personalize their television viewing, thereby freeing them from network scheduling of television broadcasts as well as advertisements. Finally, products that allow consumers to remove objectionable material during the replay of a movie are becoming widely available.⁽¹⁾

While the digitization of creative works has expanded the options for consuming copyrighted material, copyright owners have begun to exploit similar technological developments to control those options. As a result, activities to which consumers of creative works have become accustomed--for example, making copies of digital music files or television broadcasts for personal use--may in the future require the copyright owner's approval and, in particular, payment of an additional fee to obtain that authorization. Any attempt to resolve digital copyright conflicts may be caught between copyright owners' desire to maintain control over their intellectual property and the ethics and expectations of consumers who have become accustomed to making relatively unfettered use of creative works in digital form.
 

New Obstacles to Copyright Enforcement

Copyright owners confront two primary obstacles to enforcement that appear potentially more important today than during earlier copyright disputes. Increasingly, copyright infringement is an issue both at the individual level and in the international arena.

Infringement by Individuals

The digitization of creative content is lowering the cost of copyright infringement by individual consumers. Greater computer processing power and storage capacity, as well as the proliferation of file-sharing on peer-to-peer networks, have facilitated the unauthorized use of creative works. As a consequence, private individuals, rather than commercial entities, are increasingly the targets of copyright-enforcement efforts.⁽²⁾

Infringement at the International Level

The ease of replication and redistribution of creative works in digital form facilitates the instantaneous, global availability of copyright-infringing works. Consequently, the effectiveness of any nation's efforts to protect the rights of its copyright owners depends increasingly on international coordination of enforcement efforts and the harmonization of copyright law across countries.

International copyright issues are particularly urgent for the United States, whose copyright owners earn considerable revenues from licensed distribution of their works abroad. The U.S. movie industry, for example, earns roughly the same amount of box office receipts abroad as it does domestically. The major sources of revenue for the movie industry today, however, are movie sales and rentals in digital videodisc (DVD) format.⁽³⁾ Because movie DVDs are particularly vulnerable to copyright infringement by illicit manufacturing operations abroad, the U.S. motion picture industry increasingly views international harmonization and enforcement of copyright law as a key factor in its future revenue growth. The sound recording and software industries, whose music and software compact discs are similarly vulnerable to copyright infringement abroad, share the concerns and views of the U.S. movie industry.
 

Potential Impact of Copyright Law Revisions on Innovation and Economic Growth

More than in the past, revisions to copyright law today may quickly become enmeshed with developments in industries not directly concerned with copyright. Technological progress continues at a rapid pace in the hardware and telecommunications products that enable the processing and distribution of creative content in digital form. As a result, those industries are making important contributions to productivity in the overall economy. Any government-imposed mandate that a particular technology--an encryption or copy-control program, for example--be used to thwart copyright infringement should weigh the implications of that mandate for future innovation.

The popular new wireless technology known as Wi-Fi provides a good illustration of the vigor of technological advance. The continuing expansion of Wi-Fi networks may enable inexpensive high-speed Internet access for many users of mobile computing devices. The emergence of those networks, however, has been facilitated by technological and commercial experimentation. Both technology standards and the business models through which Internet access is available over Wi-Fi networks continue to evolve. Depending on a mobile user's location, Wi-Fi access may be available free of charge, often paid for by a commercial establishment that the user frequents, or it may be available only to subscribers.

The technological and commercial development of Wi-Fi networks would have been significantly more difficult under a property rights regime that required those networks to authenticate the identity of all users able to access the Internet through that network--a requirement that could enable the tracking of copyright infringers, for example. That is not to argue that technological regulation is always ill-advised or that operators of Wi-Fi networks should not be held accountable for what transpires on them. Rather, it is important to recognize that the development of a new technology is often a precarious process that premature regulation can potentially threaten.

Copyright law affects different sectors of the economy to varying degrees. At first approximation, "core" copyright industries can be distinguished from "copyright-related" industries.⁽⁴⁾ Comparisons of the economic and social importance of industries with a stake in the outcome of current copyright conflicts are not straightforward.

The computer hardware and telecommunications industries, for example, provide goods and services that do not, as a rule, benefit directly from copyright protection. Yet those copyright-related industries, which could be affected by a technology mandate aiming to protect copyrighted works in digital form, have greater economic weight (in terms of gross revenues) than do the core music and movie industries currently at the heart of the debate over digital copyright law. Innovation in computer hardware and telecommunications has played a key role in the economy's recent growth and, according to all indications, will continue to do so in the future. Hence, deliberations about modifying digital copyright law to address the concerns of a particular industry must consider the consequences for economically important, related industries. At the same time, it is important to keep in mind the fact that innovation in those copyright-related industries also benefits, through patent protection, from laws that protect intellectual property.

Core Copyright Industries

Core copyright industries are those whose revenues depend directly on the production or dissemination of copyrighted works. They have traditionally been in the news and entertainment sector--journalism; literature; sound recordings and movies; and radio, television, and cable broadcasting. More recently, computer software has become an important core copyright industry.

The gross revenues of the core copyright industries totaled $441.4 billion in 2002 and were distributed as shown in Figure 1-1. Nearly a third of that total ($143.4 billion) came from the newspaper, periodical, and book publishing industries. The music industry, which generated $13.9 billion in gross revenues in 2002, is the smallest segment. (See Box 1-1 for details on the interpretation of data on gross revenues.)

Figure 1-1.

Source: U.S. Census Bureau, 2002 Service Annual Survey.

Note: Two data limitations deserve mention. First, the data do not reflect the value to society of copyrighted works that are pirated, that is, copied and distributed without a license. Second, the data reflect some double-counting in that receipts from licensed broadcasts of music and movies are included in the revenues of those producing industries as well as the radio, television, and cable broadcasting industries. Employer firms reported that in 2002, for example, broadcast rights and music license fees in the radio and television broadcasting industry were $12.8 billion, while program and production costs (which include more than license fees) for the cable broadcasting industry were $24.4 billion.

In deliberations over copyright law, it is important to keep in mind the diversity of industries that are directly affected. For example, the production and distribution of works of journalism traditionally differ from those used for music or movies. News organizations typically produce and distribute content on a more frequent or regular basis than do music and motion picture enterprises. Because journalism and news operations provide value in part through the timeliness of their efforts, they may have more options for appropriating revenues from their copyrighted works (for example, newspaper subscriptions and advertising) than do other core copyright industries. As a consequence, the importance of the rigorous application of digital copyright law may differ by industry.

Copyright-Related Industries

Copyright-related industries produce goods used in conjunction with copyrighted materials. Examples include the computer hardware and consumer electronics industries and, increasingly, telecommunications and the Internet.⁽⁵⁾

Computer Hardware and Consumer Electronics. According to the U.S. Census Bureau's 2001 Annual Survey of Manufactures, $78.7 billion of computers and peripheral hardware were manufactured in the United States in 2001, along with $8.3 billion of radio, television, and stereo equipment. Those industries have considerable weight in the economy relative to many of the core copyright industries, and their past performance and future prospects indicate rapid rates of technological advance.

As a result of sustained progress in manufacturing techniques, which manifests itself in continuing quality improvement coupled with stable or even declining unit sales prices, real final sales of computer and peripheral hardware displayed double-digit growth rates each year from 1990 to 2003, rising at a compound annual rate of 32.6 percent.⁽⁶⁾ Technological advances in semiconductor and computer manufacturing are widely expected to continue well into the future. Because the use of those products is so pervasive, technological progress in those industries constitutes one of the few reliable contributors to the future growth of productivity and output in the overall economy. Realizing the full potential of that progress, however, may well depend upon finding a resolution to current digital copyright disputes.

Take the changing nature of computer demand, for example. Consumer purchases are increasingly moving away from the personal computer (PC) platform to media devices that incorporate hardware and software elements traditionally found in computers. Digital video recorders (DVRs), which permit the recording and replay of television programs, may come with hard drives of 160 gigabytes, while the typical home PC has a 40-gigabyte hard drive. Some hard disk manufacturers report that demand from consumer electronics is growing roughly seven times faster than demand from traditional computer-related markets and could eventually account for half of their business. As demand for consumer electronics grows, the requirements of processing and displaying video in digital format are claiming processor and terminal production that would otherwise have been allocated to PCs. Purchasers of consumer electronics and PCs, meanwhile, are enjoying the same technological advances.⁽⁷⁾

Some observers suggest that, partly as a result of the convergence of personal computing and consumer electronics, consumer purchases may claim a greater share of total demand for computing products than business investment, which has in the past been by far the largest source of demand for computer hardware and peripherals.⁽⁸⁾ However, owners and distributors of creative works such as literature, music, and movies are unwilling to make copyrighted material widely available in digital format unless they are sure that they can adequately protect that material from piracy.

The outcome of the current copyright debate is one of many factors, including the level of research and development, important to the future growth of information technology industries. Consequently, continued growth in consumer purchases of digital processing equipment--and, by extension, the continued enjoyment of technological progress and productivity gains from the manufacture of that equipment--is linked to the satisfactory resolution of digital copyright disputes.

Telecommunications. Goods and services from the telecommunications industry are frequently used in conjunction with copyrighted materials. Networks that transmit voice calls also carry Internet traffic, which increasingly includes copyrighted material in both licensed and pirated form. Equipment for digital networking in the home, which enables computing and digital entertainment devices to exchange data, is enjoying fast-growing popularity among consumers. Wi-Fi, the underlying technology, is considered a relatively inexpensive way of providing wireless, broadband Internet access. As part of the convergence of computing and consumer electronics, other telecommunications products, such as wireless phones, are acquiring the capacity of traditional computing devices to receive and process voice, video, and audio content.⁽⁹⁾

Business investment in telecommunications equipment totaled $90.6 billion in 2001, which is roughly equal to the value of domestic sales of telecommunications equipment that year. (Many consumer telecommunications products, such as cell phones, are imported.) Like innovation in computer and peripheral hardware, innovation in telecommunications equipment is robust, although not always captured by official economic statistics.⁽¹⁰⁾

The rapid growth in telecommunications investment in the late 1990s, which contributed significantly to overall economic growth during that period, was spurred by the economic potential seen in the Internet. Accordingly, continued investment in the telecommunications sector depends in part on the demand for high-speed Internet service, which in turn depends upon the availability of high-quality content that can be accessed via those networks. Again, copyright owners claim that they are reluctant to make their creative works available until their concerns about copyright infringement are satisfied.

Gross revenues of telecommunications services totaled $367.2 billion in 2001. Over $78 billion of those revenues came from cellular and other wireless communications services, the value of which more than doubled, in nominal terms, after 1998 and accounted for over half of the increase in the value of telecommunications services between 1998 and 2001.

Continuing growth in cellular communications services hinges on the availability of additional wireless frequency bands, which in turn depends upon the willingness of television broadcasters to shift from the frequency bands in which they currently transmit to smaller frequency bands suitable for digital broadcasts. The speed of that transition, television broadcasters say, is contingent on the availability in digital form of copyrighted creative content, such as movies and sports programs, which copyright owners are reluctant to provide without satisfactory safeguards against infringement.

What constitutes copyright infringement and the challenges to copyright law from advances in digital technology are examined in the next chapter.