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C OPYRIGHT IN THE DIGITAL ERA Building Evidence for Policy Committee on the Impact of Copyright Policy on Innovation in the Digital Era Board on Science, Technology, and Economic Policy Policy and Global Affairs Stephen A. Merrill and William J. Raduchel, Editors

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THE NATIONAL ACADEMIES PRESS  500 Fifth Street, NW  Washington, DC 20001 NOTICE: The project that is the subject of this report was approved by the Gov- erning Board of the National Research Council, whose members are drawn from the councils of the National Academy of Sciences, the National Academy of Engi- neering, and the Institute of Medicine. The members of the committee responsible for the report were chosen for their special competences and with regard for appropriate balance. This study was supported by Contract/Grant No. 2009-10-15 between the National Academy of Sciences and the Alfred P. Sloan Foundation; Contract/ Grant No. ll05-0789 between the National Academy of Sciences and the Ford Foundation; Contract/Grant No. LG-00-10-0247 between the National Academy of Sciences and the Institute of Museum and Library Sciences; and Contract/Grant No. SMA-l014801 between the National Academy of Sciences and the National Science Foundation. Additional funding provided by the American Chemical Society; the Business Software Alliance; the Entertainment Software Association; Google Inc.-Tides Foundation; Intel; Microsoft; the Motion Picture Association; and Pamela Samuelson and Robert J. Gulshko. Any opinions, findings, conclu- sions, or recommendations expressed in this publication are those of the authors and do not necessarily reflect the views of the organizations or agencies that provided support for the project. International Standard Book Number 13:  978-0-309-27895-9 International Standard Book Number 10:  0-309-27895-3 Limited copies are available from Board on Science, Technology, and Economic Policy, National Research Council, 500 Fifth Street, NW, W547, Washington, DC 20001; 202-334-2200. Additional copies of this report are available for sale from the National Academies Press, 500 Fifth Street, NW, Keck 360, Washington, DC 20001; (800) 624-6242 or (202) 334-3313; http://www.nap.edu/. Copyright 2013 by the National Academy of Sciences. All rights reserved. Printed in the United States of America

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The National Academy of Sciences is a private, nonprofit, self-perpetuating society of distinguished scholars engaged in scientific and engineering research, dedicated to the furtherance of science and technology and to their use for the general welfare. Upon the authority of the charter granted to it by the Congress in 1863, the Academy has a mandate that requires it to advise the federal govern- ment on scientific and technical matters. Dr. Ralph J. Cicerone is president of the National Academy of Sciences. The National Academy of Engineering was established in 1964, under the charter of the National Academy of Sciences, as a parallel organization of outstanding engineers. It is autonomous in its administration and in the selection of its mem- bers, sharing with the National Academy of Sciences the responsibility for advis- ing the federal government. The National Academy of Engineering also sponsors engineering programs aimed at meeting national needs, encourages education and research, and recognizes the superior achievements of engineers. Dr. Charles M. Vest is president of the National Academy of Engineering. The Institute of Medicine was established in 1970 by the National Academy of Sciences to secure the services of eminent members of appropriate professions in the examination of policy matters pertaining to the health of the public. The Institute acts under the responsibility given to the National Academy of Sciences by its congressional charter to be an adviser to the federal government and, upon its own initiative, to identify issues of medical care, research, and education. Dr. Harvey V. Fineberg is president of the Institute of Medicine. The National Research Council was organized by the National Academy of Sciences in 1916 to associate the broad community of science and technology with the Academy’s purposes of furthering knowledge and advising the fed- eral government. Functioning in accordance with general policies determined by the Academy, the Council has become the principal operating agency of both the National Academy of Sciences and the National Academy of Engineering in providing services to the government, the public, and the scientific and engineer- ing communities. The Council is administered jointly by both Academies and the Institute of Medicine. Dr. Ralph J. Cicerone and Dr. Charles M. Vest are chair and vice chair, respectively, of the National Research Council. www.national-academies.org

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COMMITTEE ON THE IMPACT OF COPYRIGHT POLICY ON INNOVATION IN THE DIGITAL ERA William J. Raduchel, Chair, Independent Director and Investor Peter S. Menell, Vice Chair, Robert L. Bridges Professor of Law and Director, Berkeley Center for Law and Technology University of California at Berkeley, School of Law Michael A. Keller, Ida M. Green University Librarian and Director of Academic Information Resources, Stanford University Christopher M. Kelly, Independent Consultant Ruth Okediji, William L. Prosser Professor of Law, University of Minnesota, Minneapolis Marilyn Hall Patel, Judge (retired), U.S. District Court for the Northern District of California Mitch Singer, Chief Digital Strategy Officer, Executive Vice President, New Media and Technology, Sony Pictures Entertainment, Inc. Christopher Sprigman, Class of 1963 Research Professor in Honor of Graham C. Lilly and Peter W. Low, University of Virginia School of Law Scott Stern, Professor of Technological Innovation, Entrepreneurship, and Strategic Management, Sloan School of Management, Massachusetts Institute of Technology Molly S. Van Houweling, Professor of Law and Faculty Director, Berkeley Center for Law and Technology, University of California at Berkeley, School of Law Paul Vidich, Independent Director and Consultant Joel Waldfogel, Frederick R. Kappel Chair in Applied Economics, Carlston School of Management, University of Minnesota Project Staff Stephen A. Merrill, Study Director Aqila Coulthurst, Program Coordinator Cynthia Getner, Financial Officer Daniel Mullins, Program Associate (through 2011) v

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BOARD ON SCIENCE, TECHNOLOGY, AND ECONOMIC POLICY (STEP) For the National Research Council (NRC), this project was overseen by the Board on Science, Technology, and Economic Policy (STEP), a standing board of the NRC established by the National Academies of Sciences and Engineering and the Institute of Medicine in 1991. The man- date of the STEP Board is to advise federal, state, and local governments and inform the public about economic and related public policies to promote the creation, diffusion, and application of new scientific and technical knowledge to enhance the productivity and competitiveness of the U.S. economy and foster economic prosperity for all Americans. The STEP Board and its committees marshal research and the expertise of scholars, industrial managers, investors, and former public officials in a wide range of policy areas that affect the speed and direction of scientific and technological change and their contributions to the growth of the U.S. and global economies. Results are communicated through reports, conferences, workshops, briefings, and electronic media subject to the procedures of the National Academies to ensure their authoritativeness, independence, and objectivity. The members of the STEP Board and the NRC staff are listed below: Paul Joskow, Chair, President, Alfred P. Sloan Foundation Ernst Berndt, Louis E. Seley Professor in Applied Economics, Massachusetts Institute of Technology Ralph J. Cicerone (ex-officio), President, National Academy of Sciences John Donovan, Senior Executive Vice President, AT&T Inc. Harvey V. Fineberg (ex-officio), President, Institute of Medicine Alan Garber, Provost, Harvard University Ralph Gomory, Research Professor, Stern School of Business, New York University William H. Janeway, Partner, Warburg Pincus Richard Lester, Japan Steel Industry Professor, Department of Nuclear Science and Engineering, Massachusetts Institute of Technology David Morgenthaler, Founding Partner, Morgenthaler Ventures Luis M. Proenza, President and Chief Executive Officer, University of Akron William J. Raduchel, Independent Director and Investor Kathryn L. Shaw, Ernest C. Arbuckle Professor of Economics, Graduate School of Business, Stanford University Laura D’Andrea Tyson, S.K. and Angela Chan Professor of Global Management, Haas School of Business, University of California at Berkeley Hal Varian, Chief Economist, Google, Inc. vi

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Charles M. Vest (ex-officio), President, National Academy of Engineering Alan Wm. Wolff, Senior Counsel, McKenna, Long & Aldridge LLP Staff Stephen A. Merrill, Executive Director Charles W. Wessner, Program Director Sujai Shivakumar, Senior Program Officer David Dierksheide, Program Officer McAlister Clabaugh, Program Officer Paul Beaton, Program Officer Aqila Coulthurst, Program Coordinator David Dawson, Senior Program Assistant Cynthia Getner, Financial Associate vii

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Preface After 10 years studying the economic and research impacts of the pat- ent system, it was apparent to members of the National Academies’ Board on Science, Technology, and Economic Policy (STEP) that another intel- lectual property regime, copyright, exhibited similar characteristics. Over the course of several decades, copyright protection has been extended and strengthened through legislative changes occasioned by national and international developments. The domestic industries reliant on copyright and its exceptions, and in some cases balancing the two, have become more important economically as sources of growth, high-paying jobs, and exports. And these industries have undergone a technological revolu- tion that raises questions about the feasibility of some types of copyright protection, how incentives for content creation, distribution, and use are changing, and the copyright system’s impact on technological innovation. Unlike the patent system, however, copyright has not historically attracted the same level of research interest and effort that helps inform public policy choices. As a result, copyright debates are poorly informed by objective data and empirical research. The STEP Board concluded that in these circumstances a useful step would be to develop an agenda for empirical research on copyright in the digital era, explore its feasibility primarily in terms of data requirements, and encourage public and pri- vate research funders to pursue it. The STEP Board is not the first Academy committee to recognize the need for empirical research on the effects of copyright. In its 2000 report, ix

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x PREFACE The Digital Dilemma: Intellectual Property in the Information Age, the Com- puter Science and Telecommunications Board recommended that: Research should be conducted to characterize the economic impacts of copyright. Such research might consider, among other things, the impact of network effects in information industries and how digital networks are changing transaction costs. And further, Research should be initiated to better assess the social and economic im- pacts of illegal commercial copying and how they interact with private noncommercial copying for personal use. Despite this call, in the intervening 13 years, only very modest progress has been made. The Academies sought diverse and balanced public and private fund- ing for the project. Two federal government agencies, two philanthropic institutions, a scientific society publisher, three industry trade associa- tions, three corporations, and two individuals responded generously. The Academies are grateful for support from the following: National Science Foundation Institute of Museum and Library Services Alfred P. Sloan Foundation Ford Foundation American Chemical Society Business Software Alliance Entertainment Software Association Motion Picture Association of America Google Inc.-Tides Foundation Intel Microsoft Pamela Samuelson and Robert J. Glushko The Chairman of the National Research Council appointed a commit- tee including economists, legal scholars, individuals with expertise in the film, music, publishing, software, and social networking industries, an author, a university librarian and publisher, and a Federal District Court judge. The Research Council’s Governing Board Executive Committee presented the committee with the following charge: An ad hoc committee under the auspices of the National Academies’ Board on Science, Technology, and Economic Policy (STEP) will evalu- ate and propose how to expand and improve research on the impacts of copyright policy, particularly on innovation in the digital environment.

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PREFACE xi First, the organizing committee will identify key issues for and methods of investigation and the experts best able to address them. The commit- tee will also commission a small number of background papers. Second, the committee will convene a multi-disciplinary workshop with experts in the field. Third, following the workshop, additional experts will be invited to comment on the ideas and proposals discussed at the work- shop via the project’s public website. Fourth, the committee will prepare a final report assessing the current state of the research field, identifying policy-relevant research questions that need attention, suggesting how to approach these topic and recommending how public agencies and private institutions might support such work. In the course of preparing this report, the committee met three times. At two of these meetings, presentations were made by individuals from government and the private sector. The committee commissioned four original background papers that are summarized in this report. These papers were discussed in an online forum and with invited participants in a public workshop in Washington, DC, on June 8, 2011, at which the newly appointed Register of Copyrights, Maria Pallente, made opening remarks. The June 2011 workshop consisted of two parts: a facilitated discussion with approximately forty invited legal scholars, economists, government officials, and representatives of content owners and civil soci- ety organizations; and a more unstructured discussion with a larger group of respondents to a public announcement. The first part of the workshop was instrumental in helping to formulate the framework of research ques- tions and data needs described in this report, both of which were further elaborated in the broader exchange and in the committee’s deliberations. For logistical reasons the online discussion preceded rather than followed the workshop and focused entirely on the commissioned paper drafts. One other observation about the committee’s statement of work is in order. In addition to suggesting research topics and methods, we offer research funding organizations guidance about coordinating their efforts, consulting with investigators on data priorities, and assisting in data acquisition. We make no recommendations about the process of awarding research grants nor about the scale of investment needed. The papers listed below were commissioned by the committee and are available on the Academy website at http://sites.nationalacademies. org/PGA/step/copyrightpolicy/index.htm#papers: “The Impact of Digitization on Business Models in Copyright-Driven Industries: A Review of the Economic Issues” by Lisa Cameron and Coleman Bazelon, The Brattle Group “Economic Effect of Copyright: The Empirical Evidence So Far” by Christian Handke, Erasmus University, The Netherlands

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xii PREFACE “Online Access and the Scientific Journal Market: An Economist’s Perspective” by Mark J. McCabe, University of Michigan “Copyright-Protected Assets in the National Accounts” by Rachel Soloveichik and David Wasshausen, Bureau of Economic Analy- sis, U.S. Department of Commerce A fifth paper, by committee member Joel Waldfogel, University of Min- nesota, was not commissioned by the committee but was presented and discussed along with the four papers listed above and is available on the website: “Bye, Bye Miss American Pie? The Supply of New Recorded Music Since Napster” The committee is grateful to these authors, whose backgrounds are described in Appendix B, and their supportive organizations for greatly contributing to our understanding of the copyright system, its economic and technological context and effects, and the limits of our knowledge about these phenomena. The committee discussed its conclusions and prepared its recom- mendations at a final meeting hosted by the Berkeley Center for Law and Technology. We appreciate the assistance of the Center’s executive direc- tor, Robert Barr, and staff. This report has been reviewed in draft form by individuals chosen for their diverse perspectives and technical expertise, in accordance with procedures approved by the National Academies’ Report Review Com- mittee. The purpose of this independent review is to provide candid and critical comments that will assist the institution in making its published report as sound as possible and to ensure that the report meets institu- tional standards for objectivity, evidence, and responsiveness to the study charge. The review comments and draft manuscript remain confidential to protect the integrity of the process. We wish to thank the following individuals for their review of this report: Jonathan Band, Georgetown University; Rob Chandhok, Qualcomm; Carol Corrado, The Conference Board; Peter DiCola, North- western University; Daniel Edelstein, IBM; Joan Feigenbaum, Yale Uni- versity; Shane Greenstein, Northwestern University; Christian Handke, Erasmus University, Rotterdam; Ian Hargreaves, Cardiff University, Wales; Joe Karaganis, American Assembly of Columbia University; Stan Liebowitz, University of Texas-Dallas; Michael Nelson, Georgetown Uni- versity; Marybeth Peters, Oblon, Spivak, McClelland, Maier & Neustadt, L.L.P.; Charles Phelps, University of Rochester; Dan Rubinfeld, University

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PREFACE xiii of California, Berkeley; Scott Teissler, Turner Networks, Inc.; Don Waters, The Andrew W. Mellon Foundation. Although the reviewers listed above have provided many construc- tive comments and suggestions, they were not asked to endorse the con- clusions or recommendations, nor did they see the final draft of the report before its release. The review of this report was overseen by Joe Cecil, Federal Judicial Center, and William Press, University of Texas at Austin. Appointed by the National Academies, they were responsible for making certain that an independent examination of this report was carried out in accordance with institutional procedures and that all review comments were carefully considered. Responsibility for the final content of this report rests entirely with the authoring committee and the institution.

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Contents Summary 1 1 Introduction 7 Research in Public Discourse on Intellectual Property, 7 International Context, 10 Copyright Research Questions, 10 The Overriding Need for Data, 13 2 Copyright Law and Economics in the Digital Era 15 Copyright Law’s Accommodation to Digital Technology, 15 The Economic Value of Copyright-Affected Industries and Copyrighted Works, 18 The Impact of Digital Technologies on Content Creation, Distribution, and Use in Selected Industries, 21 The Limits of Our Knowledge about the Economics of Copyright, 31 Conclusion, 33 3 Research Directions 35 Changing Incentives, 36 Enablers of and Impediments to Voluntary Transactions, 38 Enforcement Costs and Benefits, 40 Exceptions, Limitations, and Balanced Copyright Design, 42 Principles to Guide Research, 43 xv

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xvi CONTENTS 4 Data Infrastructure for an Empirical Approach to Copyright Policy Research 45 Opportunities and Challenges Arising From Digital Technology, 47 What Data Are Needed and Available or Accessible?, 52 Closing the Gap References 63 Appendixes A A Copyright Primer 65 B Commissioned Paper Authors 73 C Committee Members and Staff 77