Electronic Commerce

Economic Aspect of Copyright Protection

Dilemma

The need to protect the intellectual properties to the extent that we abandon the competitive market mechanism because the creative ideas will be easily copied without incurring additional time and effort.

Dissemination of idea is necessary and desirable for the prosperity of a society.

Economic history of copyright

A by-product of mass printing A market incentive for profits Traditionally, the book trading industry

emphasized the property aspect over the intellectual perspective.

Electronic/digital communication is fundamentally different from paper media in printing and distribution.

The economic impact of quick and wide-range diffusion of idea

The property aspect of copyright

The property—the physical and tangible “expression” of idea rather than the intangible idea itself, such as a book, a picture, a composition, etc.

The owner—the author The Internet hacker stole the online treasure or

unauthorized coping which is not of physical good. Mistakenly applied the statute of Interstate

transportation of stolen property before A stolen book vs. a pirated book

What the owner/publisher interested: the right of publishing business rather than the right of selling book

The impact of pirating idea The farmer A invented a plow for earth

plowing. Case 1: B stole A’s new plow at the expense of A’s

possible crop gains. Case 2: B pirated A’s plow design and imitated a

personal plow without reducing A’s gains. Case 3: In the present modern times, B pirated A’s

plow design and open a plow store to sell imitated plows. Many framers bought this efficient plow and got an abundant harvest. Eventually, the crop price decreased dramatically. B is the only winner.

The criticality of pirating depends on the technology of imitation or reproduction

The mass printing technology on the emergence of copyright

Hermodorus copied Plato's speeches and sold them overseas. Was this a crime?

The primary utility of these literary works was to communicate ideas to readers. Disseminating ideas through hard-working monks was more important than any profit consideration of the authors.

In 15th century, Gutenberg’s printing press technology The enormous impact of piracy occurred

In 1557, the Royal Charter granted a monopoly right of publishing to a London-based stationer company.

In 1710, the England’s Statute of Anne laid down the first terms of copyright in order to rescue the impoverished authors during the Enlightenment Age.

Further advances in modern copyright

First, the intrinsic rights of authors have become increasingly recognized.

Second, the recognition that foreign market piracy is a substantial economic issue has resulted in international copyright agreements.

Third, since knowledge became the most important economic asset during the Industrial Revolution.

Berne Convention For the Protection of Literary and Artistic

Works An international agreement about copyright,

which was first adopted in Berne, Switzerland in 1886.

It was developed at the instigation of Victor Hugo, and was thus influenced by the French “right of the author”, which has only been concerned with economic protection

WIPO (World Intellectual Property Organization)

Paris Convention of 1883 Created a framework for international protecti

on for the other kinds of intellectual property: patents, trademarks and industrial designs

Paris Convention became BIRPI in 1893 the United International Bureaux for the Prote

ction of Intellectual Property BIRPI became WIPO 1967 and integrated in

to United Nations.

Timeline in the development of copyright

The authorship aspect of copyright

How the right of manuscripts of speech should be delineated?

In the law of traditional copyright, the protected property is the “expression”.

Focused on the trade regulation of goods. A speech promoted nothing tangible for trading. So the copyright belongs to the transcriber/listener. Ridiculous!

Damage awards for copyright theft could be based on actual and potential market loss

Benefit inflicted by the new expression, e.g., translation The author should also be rewarded not just “protecting the market” but “creating incentives.”

The technology of publishing and expression change quickly. The potential benefit of original idea would be diluted by many followers.

So, the authorship of a creative idea take more significance than before.

Public interests of copyright

U.S. Constitution's mandate to "promote the progress of science and useful arts“ the basis of granting exclusive rights to inventors

and authors attempt to act as incentive mechanisms that

balance private and social interests. As an incentive mechanism

No original authorship are not protected. A fair use is not a copyright infringement.

Who can claim a copyright?

Anyone who creates a work covered by copyright law and fixes it on a substantially permanent medium automatically possesses the copyright.

Unlike patents, authors don’t need to claim their copyright, register, publish, or give copyright notices on their work.

Copyright is acknowledged internationally as well, while patents have to be filed individually for each country.

The right belongs to the actual author unless a specific contract of transferring is drawn up.

For a full-time employment, known as "work for hire," the employers may own the copyright for the material created.

For commissioned works for hire, a written and signed agreement is required.

Your thesis’ copyright belongs to you or the adviser?

Objects covered by copyright

Literary works including books, magazines, news articles, manuals, catalogs, advertising words, computer software, and compilations such as directories and databases;

Musical works including accompanying words; Dramatic works including accompanying music; Pantomimes and choreographic works; Pictorial, graphic, and sculptural works including

maps and fine arts; Motion pictures and other audiovisual works; Sound recordings; Architectural works

Work that can not be copyrighted

Works are not protected if they are not "fixed" on a sufficiently permanent medium.

Only original works are protected. When works incorporate pre-existing material, only

the original portion is covered by the copyright. E.g., the citation in a research paper must be excluded.

Facts cannot be copyrighted. E.g., the numeric and alphabetic words

Works in the public domain are not protected. E.g., Works can enter the public domain when their copyright expires, such as proverb and folk song.

If a work is created by governments, it is automatically in the public domain since government works cannot be copyrighted

Specific rights granted to the author

Reproduction right to copy, duplicate, transcribe, or imitate the work in fixed form;

Adaptive right to modify and create derivative works; Distribution right to distribute the work by sale,

rental, lease or lending; Performance right to perform the work in public or to

transmit to the public; Display right to show a copy of work in public; Paternity right to claim (or disclaim) authorship; and Integrity right to prevent distorting or destroying

one's work.

Fair use doctrine For nonprofit educational purposes If a work is more factual than artistic, its

use is more likely to be judged as a fair use. Unpublished works The small amount and little substantiality of

the portion used in relation to the original works

The light effect of the use upon the potential, not an actual, market

Other intellectual property protection law

Patent law deals with inventions that have useful functions; Differences between patent and copyright

“science/technology” vs. “useful arts” “inventors” vs. “authors”

Trademark law gives a monopoly right to any word, name, symbol, or device used to identify and distinguish one's product or service;

Trade secret law protects methods, processes, formula, and any information that are maintained as a secret.

Copyright protection and digital products

Reproduction, transmutability and indestructibility (the nature of digital products)

Reproductions on the Internet reproduction technology available to consumers will erode the market to the detriment of content owners

unauthorized reproduction by consumers is a complicated issue

Confusion over a fixable, temporary and permanent medium

RAM or screen copies/ Deleted but not-erased copies/ Copies in transition/ Web cache copies

Economic implications of reproduction Other uses more than distribution (virtual reference rather than physical publishing)

Resale and distribution Making copies is irrelevant to an

infringement on owner’s exclusion right of distribution The criticality: an impact on the author's market Can an Internet transmission be considered a

distribution "to the public" and whether it constitutes a "transfer of ownership“

Emailing/ posting/ forwarding What concerns us is the erosion of the owner's

market due to unauthorized distribution of a copyrighted work.

Resale and the first sale doctrine

The first sale doctrine the buyer who has purchased a copy of a copyrighted work

could sell, give away or lend it to other people. (the disposal right) One digital product can be re-sold an infinite number of times

within a short time without quality decay under the umbrella of first sale doctrine, completely destroying the market for the seller.

An alternative licensing contracts instead of sales destroy the original copy before forwarding or reselling it to

another person Substantial resale impact on market value

time-independent, single-use products Change into time-dependent and multi-use products

Resale prevention and pricing

Resale arbitrage is encouraged by price discrimination and facilitated by the

technology of quick distribution. Uniform pricing and resale restriction

The prohibitive cost of monitoring and enforcement

The lost consumer welfare of preservation of leveraging purchased goods

Tradeoff

Content control Reorganizing and modifying a digital file is

much easier than before and non-digital goods, Preserving the integrity of a digital product becomes

harder cryptographic technologies

Copying and downloading of web document is done only a portion of a work–insufficient to infringement as an author is to exploit the nature of digital

products by changing the contents into several derivatives for different demands rather than by maintaining contents

Market protection through business strategy

Tight control is not always most efficient Turning their vulnerability of easy modification into a means to increase

profit through product differentiation Consider the uniqueness of products and consumer usage

some need more protection than others Interactive service provision/ time-dependent products/ Personal, situation-

specific Protection by patenting

E.g., computer software Original novelty more than copyright (license fee vs. permission & fair use) Licensing agreement rather than sale

Is it important for a firm to broaden the market share? A dominant firm has its own disadvantages.

E.g., a market leader can be leapfrogged by a new firm with an innovative product

Copyright and antitrust concerns

Creative Incentive Coalition of 1996 favors extending copyright protection to electronic commerce

any electronic copy of copyrighted material an infringement and also restricted the applicability of the fair use rule in the case of digital products

Opposition! The currently perceived as shortcomings are the very advantages it affords to the sellers

A de facto standard/ a dominant firm still protected by copyright will have unrestricted market power.

Alternatively, governments may require a kind of compulsory licensing to competitors or developers of related products.

To promote/collude industry-wide standardization eliminating copyrights, Members have to denounce any

copyright claim as a condition of participation

Dilemma of Exploitation of Innovation

Open for diffusion Quick spread, more adopters, As a pioneer, to be as a leader, Nourishing many imitators to encroach the innovator’s

domain Close for appropriability

High margins for innovation Too few adopters to be a leader Too narrow niche to influence industrial evolution

It is better to be a quick follower and then to penetrate total marketplace rather than to be a pioneering innovator losing its market power after its generous spill-over.

The demand to openness Complementary assets for the whole product,

which are usually unavailable within the firm’s boundary Complementary technologies, manufacturing

capacity, marketing channel, supporting service, financial capital, et al.

The relative bargaining power Generic vs. specific innovation (specific to me or

specific to others) Co-specialized assets

Openness to establish standards Value of compatible standards

Openness vs. control

Total value added to industry

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The property right of information products

Copyright or patent? Look & feel vs. precise delineation of black-box

Applications of logics & natural laws? Software Patent flourishing appropriability as

an incentive or deterrence for further development?

Nature of virtuality Valuation of virtual property Vulnerability of openness & fragility of visibility The rate of technological changes

Embedded module/subsystem

The core of algorithm is mathematics and logic!

The economic impacts of copying

Direct impacts (-)non-excludability, (+)exposure effect

Indirect impacts Implicit indirect appropriability charging hig

her prices for the originals from which the unauthorized copies are made

Explicit indirect appropriability set up the copyright clearance center (CCC) to collect the license fees when copying is ubiquitous and similar

Promotion and diffusion

Indirect taxing a tariff from the copy center/machine

Historical cases of technological copying

Photocopying machine Indirect impact implicit higher subscription fee for

librariesVCR

Time-shifting watching of recorded TV programs The court conclusion: no server harm, post reviews

limited by the expense of watching current broadcasting shows

The huge damage resulted from pirated movies tapes lower down the selling & renting prices of pre-recorded tapes to compete the pirated versions and then to compensate the loss of theatrical performance

Historical cases of technological copying (cont.)

Digital Audiotape (DAT) by Philips Gradually decayed qualities prevent the analog

audio tapes from server loss DAT keeps the pirated version high quality

continuously Audio home recording act of 1992 allows personal

copying but not series copying. The recording device vendors must include the system function to prevent “series copying” and pay a tariff to the media

Too strong regime for DAT to penetrate In contrast, CD had fast diffused in accompanying

with PC CD-writer.

Digitalized networked copying: the lessons from Napster

The possibility of indirect appropriability According to the Act of preventing “series copying”, the swappi

ng site must purchase original versions or upload by purchased customers in the compensation for downloading more free songs uploaded by others.

The key: the MP3 recording software must include the only-one-generation-copy mechanism, but it is enforceable?

Licensing by the frequency of review, browse, listening and downloading

The key: the precise detection of web flow and series copying Blanket license: a single flat fee mechanism supported by ASCAP & BMI

The exposure effect for promotion of customized collections Manipulate the bound-and-unbundling strategy As an inducement for online/offline physical CD purchases

The changing patterns of CD market

D1: CD demanders under the previous storesD2: CD buyers under

the peer-to-peer system quantity

price

S1: the traditional CD vendors

S2: the peer-to-peer based CD vendors

Strong digital rights management (DRM) claims

DRM: technologies/legislations that promise to prevent unauthorized copies of copyrighted materials from being made DMCA: Digital Millennium Copyright Act requires Intern

et Service Providers to block access when notified that users are serving up copyright material using the ISP’s facilities

esp., protection against the Gnutella protocols or some variations of decentralized peer-to-peer network

The IT facilitated Micro-payment system for IPR appropriability

Strong digital rights management (DRM) claims (cont.)

Con-argument—fair use: a legal defense against claims of copyright infringement The purpose of character of the use The nature of copyrighted work The amount and substantiality of the

portion used in relation to the copyrighted work as a whole

The effect of the use upon the potential market of copyrighted work

Does DRM cause inefficiency?

Two premises of inefficiencyToo great TC to allow even worthwhile copying reduce the consumption of copyrighted goods (Lessig of Stanford, Gorden of Boston)

Impossibility of moving micro-payment toward perfect price discrimination? Extracting much of consumer surplus by willingness, is it unfair? IPR is not th

e public goods!Increased appropriability based on old works brought forth fewer new works, that is shirking effect (Landes & Posner of Chicago)

Impossibility of cracking the originals, invention around, and derivative extension beyond 20 years by competitive forces?

DRM will not be a permanent copyright protection!

Open Source Agenda Free software foundation, founded Richard Stallman, the

winner of McArthur “genius award”, in 1984 for GNU project, a project of seeking UNIX compatible software

The essence of free software—freedom Open Source Revolution was published and Open Source

Initiative was formed since 1998 Open is not Free! Consumer can become designers Open by charging for autonomy and flexibility (what is the

price for autonomy?) Despite money is necessary, reputation and ideology

are more important motivations for world-wide hackers.

Open Source Licensing Models

Three general categories Free: freely modified and redistributed copy-left: the owner gives up intellectual property and

private licensing compatible GPL—offspring always obeying GPL

General Public License (GPL)—software and its derivatives must be free & copy-left

Lesser GPL(LGPL)—permit to add proprietary modules on GPL, partial copy-left e.g., GNU C library

Berkeley software distribution (BSD)—proprietary derivatives under the necessary different term & credit, neither copy-left nor compatible GPL, e.g., Apache OS

Open Source Licensing Models

Mozilla public license(MPL)—derivatives losing patent rights but still enjoy private licensing, neither copy-left nor compatible GPL, e.g., Mozilla

Netscape Public License—MPL extension, permits to add licensed code to proprietary program, neither copy-left nor compatible GPL, e.g., Communicator version

Qt Public License—modification only when permission, neither copy-left nor compatible GPL

Artistic License—GPL but only used internally, neither free nor copy-left, compatible GPL, e.g., Perl

Open Source Business Models

Support sellers—custom development and consulting, e.g., Red Hat, Caldera Systems

Loss leader—heavy discount for sale, e.g., Sendmail Hardware add—developing open-source software for dr

ivers, e.g., Corel, VA Linux Accessories—e.g., O’Reilly & Associates, focused on op

en-source software education, books, and CD-ROM Service enabler—re-distributing open-source software,

e.g., Netscape Brand Licensing—licensing brand name to other open-s

ource software, e.g., Netscape Sell it, free it—e.g., Netscape Software franchising—e.g., sourceXchange, Cosource

New Faces of Linux (I)

In 1991, Linus Torvalds, a 21-year-old computer science student at Helsinki, developed a new open OS, Linux, from UNIX kernel

The attractiveness of Linux Relatively low licensing fee Reliable performance Recommendation of technical staff Widely available development tools Wanted alternative of Windows(syndrome of ABBB) Easy to modify for corporate needs Fast software bug fixing

New Faces of Linux (II) The chasm of Linux diffusion

No enough compatible applications Too many versions—balkanization No sufficient trained personnel & outside

technical support No support from Microsoft

New Faces of Linux (III) The adopters of Linux—focus on the niche of

low-end servers Web or intranet server Application development Database E-mail or message host Network files and print System management Network management E-commerce Servers Thin Servers

New Faces of Linux Key distributors

Red Hat (the most successful vendor) Caldera Linux-Mandrake Slackware Debian SuSE (the most successful European Linux vend

or and recently acquired by Novell which is one of IBM investment portfolio)

Why open source may stifle innovation?

Retard innovation and balkanize the software market

Those who rebel against commercial software are becoming politically interested in open source, and they aren’t likely to leave its fate to market forces.

Reduce private incentives to invest in software development

GPL software cannot be integrated into proprietary software

The “viral” quality of GPL software may be intentional

Why open source may stifle innovation? (cont.)

Lessen the winner-take-most successful outcomes Government-led open source could undermine

the network economies that have driven software market niches penetrated by the small innovators.

The GPL analogy to other intensive intellectual industry E.g., quick diffusion of medicine technology

with GPL terms enforced by government maximize social welfare, but is it workable?

Will the investment in drug and genetic engineering still burst in the last 10 years?