Big beneficiaries of the Ofcom’s proposed infringement measures? UK postal services and overseas call centres

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Will the UK music industry pay more to send out infringement letters than it makes per UK music buyer? Who will be the biggest beneficiaries of the dollars spent? These are some questions worth asking.

Short version:

My back of the napkin calculations? (Meaning: feel free to check my work, as this was done on a napkin).

At the end of the day, ignoring the fixed (aka sunk) costs, Ofcom estimates an effective variable cost per Copyright Infringement Report (CIR) of £0.80. Roughly 25.9% of that effective cost would go to the UK Post Royal Mail in the form of postage on notification letters sent First Class mail. 62.1% will go to call centre operators worldwide, in order to handle subscriber questions, concerns, and complaints. Copyright owners will pay 75% of bill for these costs.

A single-letter notification will cost copyright owners around £26.89, if 100,000 CIRs are issued per month. This value takes into account: (a) only 45% of CIRs are expected to lead to a real notification letter, (b) both fixed and variables costs, (c) but not the cost of appeals. The average price of an album in the UK now at £7.55, according to a UK Music report (page 10).

A three-letter notification process might cost copyright holders, in total, £80.67 (= £26.89 * 3). The average spend on recorded music for a UK consumer is around £42 (my estimate). This cost estimate does not include some portion of the £20 an ISP subscriber might pay to appeal a notification letter.

That said, the total price for the program for copyright holders, given a rate of 100,000 CIRs per month, is only £14.65 million: an amount that likely seems quite reasonable given the bump in revenues these parties might be assuming will occur in the wake of this program.

The big questions would be: Will this policy in fact lead to an upward bump in music or movie revenues? Is an uptick already occurring in these revenues, at least on the music side —2012 first quarter revenues were up 2.7% over 2011 according to the BPI. Will this policy reduce willingness to pay for high-bandwith connections? Could any benefits gained from this policy have been earned through other means?

Long version:

Today, OFCOM announced its proposed “New measures to protect online copyright and inform consumers.” According to  the language of Ofcom’s announcement, the program will work (generally) as follows:

The draft code requires ISPs to send letters to customers, at least a month apart, informing them when their account is connected to reports of suspected online copyright infringement.

If a customer receives three letters or more within a 12-month period, anonymous information may be provided on request to copyright owners showing them which infringement reports are linked to that customer’s account. The copyright owner may then seek a court order requiring the ISP to reveal the identity of the customer, with a view to taking legal action for infringement under the Copyright Designs and Patent Act 1988.

Copyright owners can already seek such court orders under existing law, but the Code is designed to enable them to focus legal action on the most persistent alleged infringers.

Important details that are not contained in the press release include those related to the costs of this notification program.  These details are included, however, in Ofcom’s report. Copyright owners will bear 75% of the cost of the program (loosely summarized).  So how much might the program cost, per notification letter, or copyright infringement report (CIR)?

Ofcom performed its own analysis to estimate the “effective” cost per CIR for copyright owners. Those estimates are in the table below:

These effective costs per CIR are a function of all sorts of inputs and likelihoods.  The inputs include the raw technical fixed costs (e.g., infrastructure to monitor networks) as well as variable costs (e.g., printing letters, postage, cost of complaint calls). Ofcom reports these costs as follows:

In terms of the raw cost of sending a letter, the inputs breakdown as follows:

The purely technical costs of 17p.
First class postage for the CIR letters of 46p.
Total cost = 63p for sending the letters.

Beyond these costs, there are the costs of managing the process. These included the costs for quality checks of the process, handling calls to the call centres, and handling formal complaints.

Since not every CIR lead to a notification letter, and not every notification letter leads to a complaint call, and not every CIR and/or letter requires a quality check (for effectiveness/appropriateness), assumptions are made regarding the likelihood of each of the costs, such that at final “effective” cost can emerge. The likelihoods relate to matters such as the proportion of infringement claims that convert to a CIR sent, or the proportion of letter that result in a call to an ISP call centre (whether to complain or to understand the letter). Ofcom lists there estimates of the likelihoods as follows:

And presents their model using these inputs as follows:

These estimates of costs and likelihoods would lead to the following weighted estimates of the cost calculations:

£0.28 = (0.64 x 45%) =  raw cost of letter
£0.025 = (12.56 x 0.2%) = cost of checking quality
£0.43 = (6.39 x 45% x 15%) = cost of handling customer service calls
£0.065 = (36.18 x 45% x 0.4%) = cost of handling complaints

And so, estimated postage on a notification letter would be 46p (present price plus an inflation adjustment). But since only 45% of CIRs might lead to a letter, the weighted estimate of postage costs = £0.207 (.46 x 45%).

You can calculate the proportions of total cost from there.

At £12.1 per CIR as the total price for copyright owners, and only 45% of CIRs leading to a notification letter, that’s £26.89 as the effective price per letter.