Assessing the Economic Impacts of Copyright Reform on Internet Service Providers
Executive Summary
This report examines the economic impact of four alternative approaches to dealing with the Copyright Act as it relates to the issue of copyright liability for Internet service providers (ISPs).
The report begins by identifying the alternatives under consideration and the relevant stakeholders, and then proceeds to profile the Canadian ISP industry. The ISP industry is found to be serving consumer and business subscribers well, in terms of providing broad access to both dial-up and broadband Internet access services at prices that are among the lowest in the world.
The challenges facing content producing industries as a result of the Internet are very briefly considered, with the primary threat being the free digital distribution of copyright content over the Internet through peer-to-peer (P2P) networks. The number of digitally encoded music files (MP3) distributed is estimated in the billions per year; though it is not clear to what extent these downloads cannibalize sales, it is likely that the net effect of digital music downloads on CD sales is negative.
The economic impact of each of the proposed copyright amendment alternatives is examined in turn. The first alternative, the status quo, involves significant legal uncertainty and economic cost as a result of laws that are outdated and ambiguous with respect to the Internet. The absence of relevant case law requires ISPs to bear both the risk of being found liable for copyright infringement (and associated copyright liability insurance costs) as well as the legal costs of seeking resolution of that uncertainty. These costs and risks extend to organizations that are not businesses yet supply ISP-like services, for example libraries and universities. Because these costs benefit neither industry participants nor consumers, the status quo is considered unsatisfactory.
The other three proposals all have the benefit of clarifying the legal issues and providing ISPs with explicit conditions under which they may exempt themselves from copyright liability. Two of the proposals, the "Notice and Takedown" and the "Notice and Notice" approaches would provide guidelines for ISPs to work with content providers after receiving "notice" of copyright infringement. These approaches differ in where they place the burden of proof, and whether they require ISPs to remove allegedly infringing material after receiving a "notice" from a copyright holder or upon receiving a court order obtained by the copyright holder. Despite their operational differences, both approaches are economically beneficial for ISPs and other stakeholders in that economic uncertainty is removed. However, both ISPs and their customers would prefer the notice and notice approach, in that it provides alleged copyright infringers the benefit of due process and judicial oversight before material is removed; likewise, the notice and notice approach removes from ISPs the burden (and associated administrative and legal costs) of acting in a "quasi-judicial" role to determine whether a notice from a copyright holder conforms to the required standards.
The impact of the fourth proposal, levying a "compulsory licensing" tariff on ISPs, depends on the magnitude of the tariff and its implementation. Technological feasibility constrains some approaches to implementing a tariff; for example, it would be nearly impossible to impose a tariff on only infringing materials. Although there is some uncertainty given as to how ISPs would react, if a compulsory licensing tariff were set at an economically meaningful level, it would likely result in higher prices for both dial-up and broadband Internet access. Given the own and cross-price elasticities of demand, these price increases will likely result in a shift of some subscribers from broadband to dial-up access, a process which may jeopardize the margins and financial viability of ISPs, especially smaller ones. Consumers may object to such levies, as they may find themselves paying copyright fees for both non-infringing uses as well as paying multiple copyright fees for the same content, for example with legally obtained digital content. Additionally, licensing tariffs would reduce the incentive for ISPs to expand access or service, and may result in a "chill" in terms of investment in firms that develop or depend on Internet technologies in Canada.
Thus, it is recommended that the Copyright Act be amended to provide explicit limitations of ISP copyright liability for transmission, reproduction, linking, and caching of copyrighted content using either the Notice and Notice or Notice and Takedown approach.
Acknowledgement: Thank you to Dorit Nevo for competent and timely research assistance.
