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

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.

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Innovation at the edge: An investigation of music licensing efforts and the process of opportunity development

I have been finishing up a rather lengthy working paper, “Innovation at the edge: Making sense of opportunity at the boundary of technology and copyright.” I reckoned the raw findings from the work were better suited for a summary brief, however, in the form of a two-pager PDF and the post below. The academic working paper is, well, rather academic — making it not the easiest sort of thing for everyone (including myself) to digest.

Essentially, in an effort to understand the process of opportunity development — the academic interest — I investigated the music licensing efforts of interactive music services — the policy and practitioner interest. Many thanks to my university (Washington and Lee) for supporting this work, and to the many people who provided their time and insights through interviews yet shall remain anonymous.

Here goes:

The purpose of this research was to understand the process of innovation and opportunity development at the edge of two industries. The specific edge upon which the investigation focused was that at the intersection of copyright and technology, while the process of innovation and opportunity development under study manifested in the licensing discussions and negotiations undergone for new music services. Importantly, technology and copyright meet at a complex intersection, one that has confounded technologists, copyright holders, and scholars.

A combination of publicly available and privately obtained data for interactive music services launched or attempted to be launched in the United States were employed for analyses.  Published news stories and company statements were inputs for those data obtained through publicly available sources. For privately obtained data, semi-structured interviews were conducted with individuals who had been directly involved in music service licensing efforts.

In all, relevant data for greater than twenty music services were collected, resulting in a representative sample of firms whose lifecycles spanned more than a decade of licensing efforts and include: (a) services that launched and still operate, (b) services that launched yet have since closed down, and (c) services that failed to ever launch. The result of these efforts were a set of comparable case studies — comprised of core data types such as licensing timelines, process maps, and logics — that could be analyzed to gain insights into the process of innovation and opportunity production.

What I find is the following:

  • This licensing process unfolds as it does for reasons far more complex than one party “gets it” while another party does not — where it is the internet, innovation, copyright, or creativity. Instead, this process plays out at a nexus of frames of law, mind, and practice.

  • At the median, the directly-negotiated licensing activities of interactive music services have required roughly eighteen months of effort. About ⅚ of licensing time is spent completing deals with major record companies who are also major publishers, while the remaining ⅙ of time is spent completing deals with rights aggregators and collectives.

  • Between ten and fifteen sound recording deals, across major owners and aggregators of these rights, are believed to be necessary to offer upwards of 10-12 million recordings.

  • The time it takes to obtain direct and voluntary licenses from the set of sound recording copyright owners considered crucial for service launch has decreased only slightly over the last decade, a decrease on the order of approximately 3 months.

  • Blanket licenses and rates from the appropriate collectives covering the right of public performance have been obtained, in many cases, in less than 45 days if not less than a few weeks — substantial outliers do exist, however.  When services are not similarly situated to previously licensed services or service characteristics do not match those defined for statutory terms, these negotiations (or proceedings) have extended for years.

  • The amount of time it has taken to obtain a sufficient collection of licenses covering the use of musical works has decreased over the last decade — from years to less than 90 days in some cases — as long as that use fits within the categories outlined by the 2008 compulsory mechanical licensing agreement negotiated among the NMPA/RIAA/DiMA, and the service chooses to license via the notice of intent under section 115 process.

  • Estimates of the number of points of contact for licensing musical (work) copyrights vary substantially: From as few as 500, to as many as 6000, to a higher estimate of 30,000 points. This variety depends upon how these rights holders are aggregated and how licenses are pursued — via direct negotiation (low numbers) or NOI (high numbers).

  • As the size of the licensed catalog increases, each additional deal leads to a less reliable link between the effort required to license that additional catalog, user demand for that increase in available tracks, and the increase in legal certainty.

  • At any point in time, it appears that no greater than 2-3 law firms, or individual lawyers and their staff, are most central in brokering directly negotiated licensing transactions.

  • While new services face an expectation to be novel, variation in service characteristics among competing services after launch seems homologous. The service characteristics that arrive at the table to be licensed are, more often than not, at least somewhat different from those service characteristics that leave the table as licensed.

  • The pathway through which innovation unfolds is largely similar across the services studied. Whether there is a right way or a wrong way to travel through the licensing pipeline there is little variation in the way in which services make this trip.

We need a far better understanding of not only how opportunity unfolds at the intersection of two or more industries, but also how technology firms and copyright holders navigate the intersection at which these two parties meet, why the navigation plays out as it does, and how the intersection might be better designed so as to allow the value of this traffic of ideas-given-form to flow as effectively and fairly as possible.

Most of the conversation around the costs of licensing has centered upon the specifics of royalty rates and the dollar value of advances. Significant costs to these negotiations also exist, however, in the time, effort, and resources expended negotiating these deals, considering both real and opportunity costs for all parties involved — rights holders or service providers.

Without considering more broadly the frames — of law, of mind, and of practice — within which negotiated innovation takes place we lack a full understanding of whether and how any changes in copyright law might translate to changes in licensing processes or outcomes.

Disclosures:

This work was funded by a Lenfest Grant from Washington and Lee University and by myself.  Over the years, however, I have worked on various projects for entities on both so-called “sides” of the licensing challenge — that means copyright holders/representatives and technology firms.

At no time while collecting data did I request or was I provided with access to legal contracts or private conversations/emails. I will only speak of personally collected data in aggregate and without attribution.  Any data discussed in this paper that are directly attributed to any service were accessible and obtained from public sources. The direct mention within this paper of any service does not imply that anyone affiliated with that service provided private data for this project.