Is weak copyright good copyright?

A couple of months ago, I was at the NBER Innovation Policy and the Economy seminar. One of the presentations was by Felix Oberholzer-Gee on copyright. His paper, File-Sharing and Copyright, co-authored with Koleman Strumpf, is now available. The paper attempts to answer the question of whether reduced copyright protection (in the form of free filing sharing) has reduced production. To answer this, they set up a series of questions.
First, does file-sharing reduce the sale of copyrighted materials? There have been a number of studies apparently both ways on this question. But the authors answer is, after comparing the data across the studies and examining the methodologies, that file sharing is unrelated to changes in sales.
Second, how important are complementary sources of income, such as concerts? I’ve noted in earlier postings that to survive the business model in music must shift toward live performances as the major source of income. It looks like that is happening. Artists are touring more now and concert ticket prices have risen faster than inflation. Therefore “income from the sale of complements can more than compensate artists for any harm that file sharing might do to their primary activity.” For example, Paul McCartney earned an estimated $65 million from concerts in 2002 and only $4.4 million from recordings and publishing. For The Rolling Stones, the figures were $40 million from concerts and around $3 million from recordings and publishing. With only a couple of rare exceptions, the top 35 earners in 2002 all made more from concerts than recordings and publishing.
Finally, does file-sharing undermine artistic production? Apparently not. They cite figures which show the number of music albums created more than doubled between 2000 and 2007. “Even if file sharing were the reason that sales have fallen, the new technology does not appear to have exacted a toll on the quantity of music produced.” Their conclusion is that “this makes it difficult to argue that weaker copyright protection has had a negative impact on artists’ incentives to be creative.”
As one would expect, the discussion at the meeting provoked a strong defense of strong copyright. One questioner took issue with the Paul McCartney example – stating that he had become wealthy because of the ownership of the rights to his songs, like Yesterday. Thus, they complained that weaker copyright would prevent new bands from following in the Beatles footsteps – young musician would not be able to make a living with music, as the Beatles did in the beginning by playing in clubs in Hamburg.
This response underscores the emotional attachment to the issue – in disregard of both the data presented and other facts. For example, in the McCartney case, he does not own the rights to his own songs – like Yesterday. He has invested in the right to many songs. But Michael Jackson bought the Beatles portfolio years ago. Thus his income from much of the music portfolio McCartney owns comes from his role as an investor, not as a creator.
The reference to the Beatles day’s in Hamburg was especially amusing and completely off target. It displayed a complete lack of understanding on the music business and of what the paper presented. In fact, it makes the author’s point: most musicians when they are starting out make their money by playing live gigs, not through recordings. The Beatles were able to get started by playing live clubs (Hamburg and Liverpool) – not because they had any royalty income from songs, which in some cases they haven’t even written yet. In fact, the Beatles early live gigs were comprised other people’s song as well as some of their own material. Without these “cover” these songs, the Beatles would not have had enough material to play at the clubs and refine their talent. So, in fact, it can be said that the early Beatles – like every other start up band – only survive on other people’s music.
I highlight this one response to make a point. Oberholzer-Gee is trying to pull off a very difficult task: to change the terms of the debate. Rather than focus on copyright as fixed property, he is looking at it as a mechanism to increase consumer choice by stimulating artistic production. And he has come up with a conclusion in the music case, at least, that does not fit with those who argue for ever stricter protection.
Such a conclusion might not hold for all areas of copyright. For example, few authors can make a living through live performances, unlike musicians. And we all understand the problem facing the news business in generating enough revenue to paying people for content.
Nonetheless, I wish Professor Oberholzer-Gee luck in trying to re-frame the debate. After all, he is simply trying to return the copyright (and patent) debate to its original purpose, as expressed in Article I, section 8 of the Constitution: “To promote the Progress of Science and useful Arts.”
(For more of Professor Oberholzer-Gee papers see his website.)

Future economic growth

Yesterday, the head of the CBO, Doug Elmendorf, testifed on state of the economy. That assessment was generally somber

In the Congressional Budget Office’s (CBO’s) judgment, the economy will stop contracting and resume growing during the second half of this year, but the hardships caused by the recession will persist for some time. The growth in output later this year and next year is likely to be sufficiently weak that the unemployment rate will probably continue to rise into the second half of next year and peak above 10 percent. Economic growth over time will ultimately bring the unemployment rate back down to the neighborhood of 5 percent seen before this downturn began, but that process is likely to take several years.

As the Wall Street Journal noted:

The CBO’s most recent forecast shows that the economy’s output gap — the difference between its actual and potential output — will average 7% of gross domestic product (about $1 trillion) this year and next year. And that output gap will not close until 2013.

The concept of an output gap is a standard macroeconomic notion. It is how fast the economy can grow, given a certain level of increased capital and labor inputs (more machines & more people) and increased productivity (working smarter). In an earlier posting last November I discussed the fact that an underlying premise of the Obama economic stimulus package was transformation. Given that, I’m not sure what the longer term potential economic output really is. Rather than highlight the gap, let’s focus on the actual output levels – and think more about what a transformed economy means in terms raising that actual level of output.

Good financial innovation

In this time of financial melt down and lock up, it is only natural to think of the bad side of financial innovation. We are so concerned with the downside right now that policy makers are seriously considering a financial consumer product safety organization (see my earlier posting and a recent story in the Washington Post).
But Melinda Gates, writing in Newsweek – Helping the Poor Save Money, highlights some good financial innovation:

The success of microloans has opened new opportunities for many poor people and has been a crucial factor in reducing poverty. But loans are not enough. Savings accounts could help people in the developing world weather unexpected events, accumulate money to invest in education, increase their productivity and income, and build their financial security. Fortunately, this is a moment of opportunity. Innovation and new policy ideas are uniting in ways that will lower the cost of savings and bring safe financial services to the doorsteps of the poor.

She goes on to specifically cite agent banking and mobile phone cash-transfer services.
We need to keep this in mind as we think about innovation — of all kinds. Remember, innovation is neither good nor bad – nor is it neutral.

Buying the brand – not the concept

I’ve posted a number of entries calling on someone to buy the Saturn franchise as part of a deal to save GM. It looks like that may occur — but in a manner that undercuts the brands strongest intangible assets. According to a story in today’s Washington Post, A Foreign Buyer Could Put Saturn’s Image Into Orbit:

A few potential buyers are considering tapping Saturn’s strong dealer network to distribute vehicles made by foreign manufacturers into the United States. Such a move would transform a brand that was designed to reinvent how Americans built and sold cars.

This is apparently based on the analysis that the dealer network is Saturn’s most important intangible asset. However, that analysis overlooks the tight interconnection between intangible assets. As the Post story goes on to note:

Thomas A. Kochan, an MIT professor who wrote a book about Saturn, said a foreign partnership faces tall hurdles.
“They’re kidding themselves if they think dealers themselves can sustain the brand,” he said. “This was a tightly integrated model. People related to Saturn because of the aura of the company as an American company.”
. . .
For a while Saturn successfully competed with Japanese rivals. Thanks to its unique dealer arrangement, it introduced “no haggle, no hassle” car buying, in which people paid the posted sticker price.
The company prided itself on a collaborative culture, where dealers and workers regularly gave input into the products. The union relaxed work rules that had pigeonholed workers into one kind of job. Instead of pensions, employees got 401(k)s. Raises were based on performance, not negotiations.
“The sad part is that they didn’t learn very much from it,” Kochan said. “They didn’t stay committed to the organization once initial champions retired.”

That lack of commitment is what helped turn Saturn from a pioneer in reviving American competitiveness to just another brand (and one that everyone is telling GM to ditch).
The new buyers need to understand that Saturn will only survive as a complete concept. Unless the package is revived, the enterprise will simply continue its downward slide. As my friend Nir Kossovsky likes to say, “intangibles are like the stones of a Roman arch where the loss of any one stone could cause catastrophic collapse.”
Unfortunately, it looks like the potential buyers are attempting to buy a couple of the stones – and are running the risk of collapsing what is left of the arch. Isn’t there any body out there interested in rebuilding the structure?

Asking the right economic questions

Yesterday, the Senate Commerce Committee held a hearing several nominations. The transportation folks were focused on J. Randolph Babbitt, nominated to be FAA Administrator and John Porcari, nominated to be DOT Deputy Secretary. Techies wanted to hear from Aneesh Chopra, nominated to be Chief Technology Officer and Associate Director for Technology at OSTP and Larry Strickling, nominated to head NTIA. But also in that mix was Rebecca Blank to be Commerce Under Secretary for Economic Affairs. This is an important and often overlooked position – one that is critical to our innovation and intangibles agenda. The previous Under Secretary, Cynthia Glassman, was instrumental in pushing for better understanding of intangibles (see her remarks at our December 2007 conference).
Thus, it is important that the Under Secretary ask the right questions. In her testimony before the Committee, Dr. Blank got it right:

Particularly in the current economic environment, as we deal with the worst recession in the past 60 years, good economic analysis is in high demand. I look forward to taking on some questions that are particularly relevant to the Department of Commerce and its interests; questions such as “How is the current recession leading to restructuring in manufacturing industries in the U.S. and abroad and what are the implications for jobs, productivity, and profits among U.S. manufacturers?” “Is the U.S. as competitive as it should be? Which industries are leading in productivity, innovation, and competitiveness in the U.S., as we come out of the current recession?” or “What would rapid growth in environmentally-focused products mean in terms of industry and job expansion?”

That sounds like a good start. As the head of our economics statistical system, I hope she continues the work of her predecessor – with the focus innovation and intangibles.

Building intangibles – block at a time

Mary Adams has a great presentation that shows the interrelations between various types of intangible assets (human capital, structural capital, relationship capital) and how it can be build block at a time. Check it out: