Digital Copyright & The Alternatives An Interdisciplinary Inquiry Peter Daniel Eckersley April 2011, revised January 2012 Submitted in total fulfillment of the requirements of the degree of Doctor of Philosophy Department of Computer Science & Software Engineering and Intellectual Property Research Institute of Australia The University of Melbourne 2 Abstract This thesis compares the existing institution of digital copyright to possible alterna- tives. Four policy regimes are considered: (1) the status quo ‘weak copyright’ regime, in which exclusive rights and piracy exist in parallel and are both economically sig- nificant; (2) a ‘strong copyright’ regime, in which Digital Rights Management (DRM) technologies and other forms of enforcement prevent piracy from being economically significant; (3) an ‘information anarchy’ regime, in which copyright is not a mean- ingful restraint on non-commercial copying and sharing of works; and (4) a ‘virtual market’ regime, in which file sharing is legalised, and public funding is used to pay artists and authors, based on decentralised measures of the the popularity and value produced by each copyright work (download counts, usage measurements, or voting). These regimes are studied for their technical feasibility, and compared for ethical and economic desirability. Different regimes may prevail at different times, and in different places and industry sectors, even if copyright law is the same. All of the regimes are feasible in at least some cases, but their practicality and relative merit turns out to vary surprisingly across copyright-based industries. The normative criteria that are applied include the levels of artificial scarcity that the regimes impose on information goods; the financial incentives they offer to infor- mation producers; the kinds of transaction costs they involve; the price of their tech- nological and non-technological infrastructure; and, in the case of the virtual market, the taxation overheads that it would imply. Artificial scarcity costs are found to be very high, especially in the music industry: the social value of music would rise by 55–98% if copyright law were abolished, and 18–32% would be lost if present laws were fully enforced. But copyright does serve an important purpose in providing incentives and fair reward to authors, and this appears to probably outweigh the arguments for information anarchy. However it is shown that virtual markets could probably perform this function better than exclusive rights- based copyright. Such public funding proposals do have overhead costs associated with taxation, however, and those are quantified. It is found that there is a strong case for experimenting with virtual markets in some copyright industries, particularly for music, books, and websites. It is also concluded that the international trend towards the ‘harmonisation’ of copyright laws has been a mistake: the best answer to disruptive and transformative technologies is to experiment with a broad range of regulatory responses, but international treaties on copyright have harmed this type of regulatory biodiversity. 3 Declaration This thesis is entirely my own work, except of course where I quote, cite and/or review the work of other authors. A summary of original contributions may be found in Section 1.5. The thesis is 99,776 words long, excluding the Glossary and Bibliography. Signed: 4 Acknowledgements Looking back, I am indebted to a great many people for discussions, feedback and suggestions over the course of this lengthy research project. I will not compile a list because I fear it would simultaneously be too long and too incomplete. Particular thanks go to my supervisors, and to those of you who reviewed chapters as they were completed. Contents Table of Acronyms . 9 Glossary . 11 I Introduction 19 1 Introduction 21 1.1 The Research Question . 21 1.1.1 The means to an answer . 22 1.1.2 The public good problem . 23 1.1.3 Aside: An impractical question? . 25 1.2 Motivation . 26 1.2.1 Copyright in Crisis . 26 1.2.2 What is at stake? . 28 1.3 Requirements For A Satisfactory Theory Of Digital Copyright . 30 1.3.1 The Law of Copyright and Legal Scholarship . 31 1.3.2 Computer Science . 32 1.3.3 Economics . 33 1.3.4 Absent and under-represented disciplines . 35 1.4 Methodology . 36 1.4.1 Policy regimes . 37 1.4.2 Which kinds of copyright will be studied? . 39 1.4.3 Comparing Regimes . 39 1.5 Summary of Original Contributions . 40 1.5.1 Timeliness . 42 II Information Feudalism and Information Anarchy 43 2 Digital Rights Management: Locks and Chains in Cyberspace 45 2.1 DRM Technologies . 47 2.1.1 Access and Copy Controls . 47 2.1.2 DRM in Hardware . 48 2.1.3 “Trusted” Computing . 49 2.1.4 Watermarks . 51 2.1.5 Other Tracing Methods . 54 2.2 Complementary Regulation . 55 2.2.1 Anti-circumvention Laws . 56 2.2.2 The Prohibition of File Sharing . 57 2.3 Categorising DRM Regimes . 59 2.3.1 Feudalism . 61 6 2.3.2 Pragmatism . 63 2.3.3 The Issue of Permissive DRM . 64 2.4 Conclusion . 66 3 Information Anarchy? 69 3.1 Characterising Anarchy . 70 3.1.1 A definition . 71 3.1.2 Anarchy by choice and happenstance . 72 3.1.3 In private or in public? . 73 3.2 Getting Paid by Anarchists . 76 3.2.1 Advertising . 76 3.2.2 Tip jars and patronage . 77 3.2.3 “Street performer” protocols . 79 3.3 The Case for Anarchy . 84 3.4 Conclusion . 85 III Virtual Markets for Virtual Goods 87 4 The History and Literature of Public Funding for Information Production 93 4.1 Prizes and other Rewards for Invention . 94 4.2 Rewards for Copyright Subject Matter . 98 4.2.1 Public Lending Rights . 99 4.2.2 Private copying schemes . 100 4.2.3 Going Further . 103 5 Decentralised Compensation Systems: Designing “Virtual Markets” 105 5.1 Mercatus ex machina . 106 5.2 Technical Design Considerations . 109 5.2.1 Recognising files . 110 5.2.2 Secure Measurement and Voting . 114 5.2.3 Human Security . 127 5.2.4 Conclusion: A Specific Proposal . 130 5.3 Funding Virtual Markets . 131 5.3.1 Where should the burden fall? . 131 5.3.2 How much to raise? . 132 5.3.3 One dollar, one vote? . 134 5.4 Which Information Markets Could Be Made ‘Virtual’? . 135 5.4.1 Derivative, ‘Monolithic’ and composite works . 135 5.4.2 Commercial and Non-commercial use . 139 5.4.3 Conclusions on Scope . 140 5.5 Conclusion . 142 IV Economic and Normative Analysis 143 6 The Cost of Artificial Scarcity 147 6.1 Deadweight Loss, Competition and Monopoly . 148 6.2 Mitigation By Price Discrimination . 151 6.3 Estimating deadweight loss under Copyright . 154 6.3.1 Deadweight loss under strong DRM compared to the status quo . 154 6.3.2 Status quo deadweight loss . 161 7 CONTENTS 6.4 The Compounding Effect of Inequality . 163 6.5 Summary . 165 7 Paying the Piper: Information and the Incentives for Cultural Production 167 7.1 Information, Incentives, and Calculation . 169 7.2 What is ‘Valuable’ Cultural Production? . 171 7.3 How Much Do Copyright Incentives Matter? . 174 7.3.1 Intrinsic and non-monetary incentives . 174 7.3.2 Co-incidental financial incentives . 177 7.3.3 An industry-dependent answer? . 178 7.3.4 Models to compare anarchy vs. the other regimes . 180 7.3.5 Virtual vs copyright markets . 184 7.3.6 Weak vs Strong Copyright . 186 7.3.7 A pragmatic conclusion on the necessity of copyright-like incentives . 186 7.4 Some Relevant Theoretical Results . 187 7.4.1 A microeconomic model of prizes under asymmetrical information . 188 7.4.2 Demand revelation/resource allocation mechanisms . 190 7.5 Incentive-generating information in real and virtual markets . 197 7.5.1 The most basic information: how much are individual works (or entire markets) worth? . ..