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DRM is doubleplus good for business, Congress advised

The Budget Office and the case of the disappearing public interest

A report by the Congressional Budget Office has recommended that no changes to the United States copyright framework are necessary and lauds DRM as an exciting market opportunity for copyright holders. Allowing copyright holders to charge more for lost rights will provide an incentive for these copyright holders to make more works available, the report suggests. On the other hand, the report has decided that a flat fee model may lead to "economic inefficiencies".

As we discovered this week in conversations with CBO staff, that's only part of a much more interesting story: how US citizens' political representatives came to be so advised. In its own way, it is a minor American tragedy. It's strangely emblematic of the sterility of the copyright debate, at least in the United States, which has been driven down a cul de sac. For the phalanxes of economists and lawyers who engage in this, human creativity does appear to be a very distant and remote planet. And the CBO report illustrates this.

The report, entitled Copyright Issues In Digital Media is intended as background reading for our politicians. It is more nuanced than the takeaway suggests. However it is remarkable in its own way. The authors acknowledge, in the first sentence that, "Historically, U.S. copyright law has sought to balance private incentives to engage in creative activity with the social benefits [our emphasis] that arise from the widespread use of creative works." But from then on, the elusive animal called "social benefits" fails to make another appearance. The remainder of the 50 page report is concerned with maximizing economic goals. Was this by accident or design?

"One of our more obscure functions is that we do private sector mandate estimates, calculating the impact of legislation on the private sector," a staff source told us. Indeed that's very apparent. But what about the public cost?

"We don't do that. It's not part of our responsibility. That's a much more subjective analysis," said our source.

We turned to another CBO staffer familiar with the production of the report for enlightenment. But before we do we'll summarize the main points. Very few people appear to have read it, we guess, as it has received next to no coverage in the mainstream press, the trade press or the weblog echo chamber.

The price is right

The CBO can't be faulted for recognizing that advances in reproduction technology have affected the relationship between public and rights holders. Here, at least, the report is on firm ground. This is a historical process that has been taking place for many years, which digital enthusiasts often overlook.

"To encourage creative works, copyright law has traditionally allowed for licensing rights that enable pricing above marginal cost, while placing a limit on the scope and duration of copyright protection to ensure that creative works eventually become widely available," notes the report.

"Copyright law therefore accepts some static inefficiency (copyrighted works are typically not distributed as widely as is economically feasible) in the interests of beneficial dynamic effects (getting those works created in the first place)."

And so we come to the crunch:

"DRM technology has the potential to enable copyright owners to engage in differential pricing - that is, to charge a price for their creative work that varies on the basis of the particular use(s) made of that work."

Differential pricing excites the copyright holders enormously. One-time party CDs, or CDs that only play on your birthday, or stop playing after a week, or higher prices for higher bitrates are variations on the same theme. All are touted as packaging innovations to allow, for example, the music industry to repeat the vinyl to CD shift.

"While DRM technology can increase copyright holders' ability to profit from their works, it can also expand consumers' access to copyrighted material by lowering the minimum price that creators and distributors of copyrighted works must charge to recoup their investment."

So DRM makes being in the business of cultural production more attractive.

"Under a differential pricing scheme, consumers who have a low valuation of a particular usage pay a lower price. Without differential pricing, those consumers may be priced out of the market for that music service."

A CBO staff member familiar with the production of the report was happy to add some shade to these stark conclusions.

"The report does acknowledge that creative people are driven by attributes other than price," said our source.

As for the relationship between differential pricing and more culture, that isn't as clear cut as the quote suggests, stressed our source.

"DRM allows differential pricing but it could be cancelled out by enforcement costs - these could outweigh the benefits."

"If creators were allowed to differentiate then presumably production would go up," said our source. The presumption? Our source suggested DVDs as an example. This is a DRM-protected technology in which the DRM has been circumvented, but too much disruption to either the producers or the market.

Classical free market economics underpins much of the logic of the CBO report.

Flat fee models get short shrift. Rather unfortunately the authors have decided there is only one flavor of flat fee, one that mandates a static pricing model.

"Setting a fixed price for some types of copyrighted material, however, may be less efficient than using a differential pricing scheme. Under a compulsory licensing arrangement, the price of using copyright material would be the same for all consumers and for all works covered by the license," claims the report. "A single, flat-rate fee is unlikely to be 'just right' from the standpoint of economic efficiency. Administratively, the price-setting process could also be costly and protracted, leading to delays in the emergence of markets for the corresponding creative works."

That's quite an assumption. As flat-fee proponent Jim Griffin remarked earlier here this year, "I don't think the government should set [the price], and nor should there be one price set by Steve Jobs."

It's hard not to feel a little sympathy with the authors, given their constraints. If the CBO could only gauge private sector costs, it's no wonder that the public's concerns were neglected. We could easily devise a model where the citizens could be placed in medieval stocks, and allowed only a limited exposure to copyrighted works: but perhaps even the Recording Ass. Of America might pause before suggesting this was in the public good.

And in addition, if free market economics was used as both the logical framework and desired destination, when both production and consumption of these goods defies traditional economics, it's no wonder that the report reaches such other-worldly conclusions. Mistaking means for ends mirrors is a common feature of US-centric discourse, where abstractions become goals, and this explains why there's so much muddled thinking about the Internet, too.

The case of the disappearing public interest

Handed this ideological straitjacket, it's difficult to see how the CBO could come to any other conclusion. But who wove this straitjacket, and who insisted it be worn? While politicians are answerable to their sponsors, Congressional staff are public servants, and so you would expect the public interest to be paramount. The view that the ultimate goal is a market is to say the least, at least highly contentious. Many record labels cheerfully agree that much of their cultural product isn't commercial. The consequential creation of a celebrity system is used to justification this assumption.

Another CBO staff source was able to help us here. Why couldn't the CBO, we asked, include the public interest and produce a range of subjective choices, each reflecting a different set of values, and lay them out before Congressmen? The answer was intriguing.

"I think it's because Americans are obsessed with money. They just want the figures."

Remarkable. But from the horse's mouth, there you have it. ®


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