Assessing the Economic Impact of Copyright Reform in the Area of Technology– Enhanced Learning
5. Extending Current Exceptions to Distance Education
Sections 29.4 to 29.9 of the Copyright Act contain exceptions permitting non–profit educational institutions to undertake certain activities “on their premises”. While some of these “exceptions” are more in the nature of compulsory licensing requirements that allow certain activities subject to the payment of royalties established by the Copyright Board, Sections 29.4 to 29.6(1) allow some works to be copied and some works to be performed, for classroom purposes, free of charge. This section looks at the economic impact of broadening these latter exceptions so they also apply to distance education. Such a change would involve extending the definition of the classroom in the Act beyond “the premises of an educational institution” and creating exceptions to the bundle of “electronic rights” over which copyright owners have control, including those pertaining to reproduction and communication to the public by telecommunication.
In addition, the author was asked to examine a second option that would involve creating an exception in the Act until a blanket licence pertaining to the relevant activities and materials was available. Under this option, the exception in the Act would serve as incentive for Access Copyright and COPIBEC to expand their repertoires and broaden the works and activities covered by their blanket licensing agreements with schools and universities. If suitable blanket licences could not be arranged, the exception would remain in effect and there would be no difference between this and the first option.
The alternative to both these options is, of course, the status quo. In examining each of these proposed reforms, the focus is on the additional benefits and costs relative to the situation that exists under the current Act. The purpose of the inquiry is to determine, first, whether, compared to the “do–nothing option”, proposed reforms are likely to result in net economic gains and, second, which of the possible reforms is likely to yield the largest net benefits for Canadians.
Most of the exceptions in Sections 29.4 to 29.6(1) refer to intermittent activities that are likely to occur with little advance planning. They allow instructors to take advantage of opportunities that present themselves for illustrating or elaborating on points or testing students’ knowledge. This applies to Sections 29.4 of the Act, which allows reproduction of certain types (handwritten material onto a dry erase–board or flip chart, copies for use in a overhead projector) or for specified purposes (tests or examinations); Section 29.5(c), which permits radio and television programs to be played at the time they are aired: and Section 29.6(1), which allows a single copy of news program or news commentary to be made for showing in the class later over the year. The impact of extending these exceptions to distance education is discussed below. Section 29.5(b) of the Act, pertaining to the playing of sound recordings, raises some distinct issues and will be examined later.
The discussion bellow follows the framework outlined in Section 2 of the report. While information gathered from the literature and from consultations does not allow numbers to be put to the benefits and costs identified in Section 2, it does point to certain conclusions about their likely size and significance. The next two subsections examine the impact of extending existing exceptions in the Act to distance education while the final subsection considers the alternative of a “conditional exception” that would be removed when and if a suitable blanket licence becomes available.
Benefits of Extending the Exceptions to Distance Education
(1) The Reduction in the Costs of Creating New Works
Broadening the educational exceptions is unlikely to affect the costs of creating new works. While the changes could encourage the production of some intellectual works by students, it will not result in an expansion of the public domain and make it easier for creators to acquire the raw materials needed for the development of new works.
(2) The Reduction in the Payments to Foreigners
The gain, here as well, is likely to be trivial. Under the current law, educational institutions engaged in the activities specified in 29.4 are not excepted from copyright requirements if a suitable work is commercially available. Therefore, institutions delivering distance education courses would need to continue to make payments where the images and other display material they require can be licensed. By extending the law to allow live performances and taped newscasts and news commentaries to be played in distance education classes, royalty payments to non–Canadians could conceivably be reduced; but the saving would be very small. Distance educators scarcely ever license such material and so extending the relevant provisions to distance education is unlikely to dent the $1 billion Canada pays annually for film/broadcasting service imports.31
(3) Savings in Transactions Costs
The savings in transactions costs are also likely to be insignificant. Although the costs of tracking down copyright owners and negotiating licences for the individual activities covered under Sections 29.4 to 29.6 can be significant, overall expenditures by distance educators on these reproduction and performance rights appears to be trifling.
(4) Increase in Consumer Surplus
The main benefit would come from the elimination of the social loss that occurs when goods or services are priced above marginal costs, thereby denying access to some consumers who are prepared to more than cover the costs of provision. Distant educators might reasonably be expected to have a downward sloping demand curve for the materials covered under Sections 29.4 to 29.6, so that, as licensing requirements are eased and the cost of using these materials declines, consumption will increase. The use of learning materials that are largely ignored by distant educators under the current regime would result in a growth in consumer surplus — representing the difference between what distant educators are prepared to pay for educational materials and the costs of meeting this demand — and an increase in economic welfare.
In discussions, it was reported that classroom instructors value the flexibility they gained from the educational exceptions in the Copyright Act. Sections 29.4, 29.5(c) and 29.6(1), in particular, pertain to activities that are very difficult to plan in advance. With the easing of licensing requirements in 1997, classroom educators were encouraged to look for materials they could adopt “on the fly” to supplement and enrich standard course content. This suggests that the impact of extending these educational exceptions to distance education is likely to be greater than one would expect from looking only at the savings to institutions in royalty fess and transactions costs.
In addition, it is likely that the demand of distance educators for the materials covered in these Sections of the Act is fairly elastic. Elasticity is a measure of the responsiveness of the quantity demanded to a change in price. Demand tends to be more elastic for items that are less essential and for which reasonable substitutes are available. Sections 29.4, 29.5(c), and 29.6(1) pertain to supplementary rather than core course material and they largely represent alternative means to help demonstrate and reinforce particular content. As well, the provisions largely relate to topical materials that would be used in a single lecture. Licensing costs are a larger portion of course delivery costs and a more important consideration when the material is only to be used once.
Costs of Extending the Exceptions to Distance Education
As discussed in Section 2, the costs of reducing copyright protection come from the impact of the reduced revenues on incentives for the production of creative works. A reduction in payments for intellectual works may not impact significantly on creative activity; the result depends on how the returns for creative work are affected and how responsive authors, composers and other creators are to the reduced returns. However, a decline in copyright protection that does not result in lower revenues, will not affect the production of creative works. Since current payments by distance educators for the activities covered under Sections 29.4, 29.5(c) and 29.6(1) are close to zero, a change in legislation would not noticeably affect returns to producers of the relevant learning materials.
Comparative Impact of Conditional Exception
There are a number of difficult issues that must be addressed before a “conditional exception” could be introduced. As noted above, such an exception would be intended to induce collectives to incorporate the relevant activities and materials in their blanket licence agreements with educational institutions. To create a significant incentive for collectives to develop a blanket licence covering an expanded repertoire, however, it would probably be necessary for the conditional exception to apply to classroom as well as distance education activities. Therefore, while the intent of the reform is to take account of distance education, such a measure would also have implications for those activities on the premises of educational institutions that are covered by the current exceptions in Section 29.4, 29.5(c), and 29.6(1) of the Act.
This option requires that criteria be established to determine whether suitable blanket licences have been made available and the removal of the conditional exception is justified. Given the broad and vague nature of the items covered by the relevant provisions of the Act, it would be difficult to establish the standards that must be met by the blanket licences offered by collectives. Moreover, whether a blanket licence is suitable or adequate depends on its costs as well as its coverage and the assessment of licensing costs is an extremely complex and potentially controversial task.
The broad and vague nature of the items covered by the relevant provisions has no doubt been one of the factors discouraging the development of blanket licences in the past. (i.e. before 1997 when the exceptions were introduced into the Act). Another problem has been that the broadcast works addressed under Sections 29.5(c) and 29.6(1) are not among the type of materials licensed by Access Copyright and COPIBEC, the main collectives serving the licensing requirements of educational institutions. The latter would continue to complicate the development of suitable blanket licences if a conditional exception were to be introduced in the Act.
Due, in part, to these sorts of complications, a conditional exception is inferior to the previous option of extending the existing provisions in the Act to distance education. If a conditional exception was introduced and the conditions for removal of the exception were not satisfied, the only difference from the first options is that the government would incur somewhat increased costs because of the need to establish and administer the apparatus for adjudicating blanket licensing proposals. If the enactment of a conditional exception did lead to the development of a suitable blanket licence, distance educators, who would have ready access to an expanded range of supplementary materials, would be somewhat better off than they are now, and classroom instructors, who currently enjoy free access to these materials, would be marginally worse off. Accordingly, the benefits arising from the increase in consumer surplus would be less than under the previous option. In addition, government administrative costs would be higher because of the additional resources required for planning and administration. As under the first option, incentives for creative activity are likely to be unaffected.
Therefore, a provision conditionally excepting educational institutions from the requirement to clear certain rights until a blanket licence is available is not the most attractive option. Such a reform would be difficult to properly design and implement. If these difficulties could be satisfactorily addressed, the net benefits would still be less than those resulting from the alternative option of extending the exceptions under Sections 29.4, 29.5(c) and 29.6(1) to distance education activities.
Benefits of Extending the Exception to Distance Education
Educators also regard section 29.5(b), which allows the playing sound recordings in classroom instruction, as an important addition to the Act. In this case, much of the benefit has arisen from the ability of instructors to draw from a wider variety of recorded works. While sound recordings are used in drama, English and other courses, they are especially important component of music classes. One music instructor reported that before the exception was introduced, she often had to include works that were not representative in her classes or find an alternative (and inferior) ways of presentation, such as doing a reduction at the piano. With the addition of Section 29.5(b), difficulties in tracking down rights holders and the limited amounts allocated in departmental budgets for royalty payments are no longer constraints.
In distance education, the complex licensing requirements described in Section 4 have discouraged the “public performance” of sound recordings. Few music courses are offered through distance education and, in those courses that are available, the usual delivery mode is audiocassette, audio tape, video cassette or CD–Rom. Generally, the cassettes or tapes are included in the package of material the institutions sends to registered students. Universities that televise their courses or deliver them online have been reluctant to offer music courses. Representatives of these latter institutions have indicated that the complexities and costs of obtaining rights were a key factor in their decision not to offer music course or to do so only where lecture material would suffice.
It is presumed that if Section 29.5(b) were to be amended to apply to distance education, the new exception would cover not only performance rights, but also reproduction, telecommunication to the public, and other rights that may be necessary to allow the noninfringing use of sound recordings in online courses. Extending the application of Section 29.5(b) in this way would significantly facilitate the use of sound recordings in televised and online courses and would encourage institutions using these delivery modes to introduce new offerings. Distance education music courses would become more attractive to institutions such as Carleton that uses instructional television and the University of Ottawa that employs audio and videoconferencing.
As with the exceptions discussed above, the benefits from lower creative costs, reduced royalty payments to foreigners and transactions costs savings would be small. The potential gains in these areas are limited because of the little licensing there currently is for performance of recorded music in distance education classes. Extending Section 29.5(b) to distance education, however, would provide benefits to instructors who have avoided the use of recorded works in their courses and to students whose choices have been restricted because courses that depend on sound recordings are not offered in some distance education programs. In the first case, the gain in economic welfare would result from the increase in consumer surplus as the cost of performing sound recordings falls and their use in online and televised courses increases. In the second case, the gain consists of the net benefits to those distance education students who could now take their preferred courses or who would now able to take music courses at the institution they prefer.
Costs of Extending the Exception to Distance Education
As with the exceptions discussed in Section 5.1, extending the measure to apply to distant education activities would have very little impact on producer revenues and be unlikely to have any noticeable effect on creative incentives. Even if the revenue effects of a broader exception were significant, this would not necessarily affect creative incentives because royalties from the sale of music and from performance and mechanical rights for songwriting and composing tend not to be an important source of income for artists.32 But the revenue losses of a broader exception would clearly be trivial. The revenues from the Canadian distance education market are, at most, a tiny fraction of the overal income the recording industry generates from international sales of music and various music rights. And actual revenues from royalty payments by Canadian schools, colleges and universities are well below potential revenues because, as discussed above, most institutions deliberately avoid the use of recorded music in their distance education courses.33 While the proposed measure is likely to lead some schools that are now purchasing tapes and cassettes to shift to online or broadcast distribution, there is no reason for concern about the impact of this very marginal decline in recording sales on incentives.
Comparative Impact of Conditional Exception
Instead of extending the existing exception in the Act to distance education, the government could, as discussed above, create an exception until a suitable blanket licence is available. For sound recordings, blanket licences would need to issued by each of the collectives representing copyright holders or a consolidated licence would need to be created that included permissions to the variety of rights required by schools and universities. While the Copyright Board has established blanket licences to govern the arrangements between specific collectives, such as SOCAN, and users of recorded music, there is no precedent for the creation of a consolidated licence. It is not clear that collectives would find it in their interests to create blanket licences for educational institutions. In SOCAN’s current tariff schedule, educational institutions are not even recognized as a distinct user group justifying a separate licence rate. For such a proposal to generate possible interest, however, it would need to apply to all uses of recorded music by schools and universities. Therefore, under this option, a conditional exception would replace the current classroom exception in Section 29.5(b) of the Act.
The economic impacts are likely to be similar to the impacts of the conditional exceptions discussed in Section 5.1 above. Conditions for removal of the exception may not be satisfied, in which case the net benefits are approximately the same as those that would result from extending the existing exception in the Act to distance education activities. The only difference is that, under this option, some resources may be wasted in attempting to develop, or preparing for the expected introduction of, blanket licences. If, as a result of this legislation, blanket licences come into effect, as compared to the current situation, distant educators would potentially benefit, while classroom educators would face some new licensing costs. Incentives for creative activity would be largely unaffected. Given the higher costs for the playing of recorded music in classrooms, it is not clear that there would be an overall improvement under a blanket–licensing regime.
Therefore based on a consideration of likely economic impacts, a conditional exception is not the preferred option. If it resulted in significant new costs for the classroom playing of music use, this option could indeed be inferior to the status quo. The alternative of extending the current exception in the Act to encompass recorded music used in distance education is more likely to result in significant economic gains for Canadians.
31 According to Statistics Canada, royalty payments for imports of film/broadcasting services amounted to $986.9 million in 1998.
32 This is discussed in Ku (2002). He observes that since record companies deduct the costs of production, marketing, promotion and other expenses from the musician’s royalties, the vast majority of artists do not earn any income in the form of royalties from the sale of music. For most musicians, live performances are the principal source of income.
33 SOCAN could not provide information on the revenues derived from royalty payments by the educational sector, but, in the “general” category to which the educational sector belongs, revenue totaled $10.5 million in 2001. Canadian writers in the relevant SOCAN pool (“radio and general”) received just under $500 on average in 2001. Even if the distant educational sector accounted for 5% of pool revenues — and the actual percentage is likely to be far below this — based on 2001 data, the impact of a broader educational exception on the annual income of the average writer member would only be $25.