Internet Service Providers Report

Conclusions

The economic impact of the voluntary Notice and Notice Regime followed by the majority of Canadian ISPs varies considerably from firm to firm. In most small firms, the overall impact to date is not significant. In large firms, however, the economic impact is currently significant and is growing over time. Nevertheless, an order of magnitude difference exists in these costs on a per-subscriber basis even among large firms, in part due to differences in internal information architecture and in part due to unexplained differences in the number of copyright infringement notices received per subscriber.

Based on the responses to the survey, an estimate of the total cost of notice and notice to the Canadian ISP industry can be calculated. The survey estimated the average cost of processing a notice at $11.76 for large ISPs and $5.20 for small ISPs (Table 9). On average, large ISPs indicated that they receive, on average, 4,426 notices per month as of January 2005; the equivalent figure for small ISPs is 18 notices per month (Table 3). In the universe of Canadian ISPs, there are a total of 8 large ISPs and 472 small ISPs (Table 1, CAIP 2003). Combining these figures reveals that the overall cost of following the NN practice in Canada is approximately $460,000 per month, with the vast majority of this being borne by large ISPs (90.4%).¹⁸

If some form of Notice and Notice Regime were made mandatory through a revision of the Copyright Act, there would be a number of financial impacts. First, some measure of fixed costs would be incurred in all ISPs, both small and large, as a result of putting the information systems, business processes, and tracking and reporting mechanisms in place that would be required to conform to the new standards. In particular, some ISPs would need to move from the version of NN currently practiced to a version that explicitly includes an acknowledgement back to the rights holder that the notice has been forwarded to the subscriber. This version is sometimes referred to as "Notice and Notice and Notice" to reflect the third version of the (acknowledgement of the) notice sent back to the rights holders. Because a significant proportion of small ISPs (42%) and even large ISPs (25%) do not currently practice NN, these firms will have to make significant investment in getting "up to speed" with any NN practice (Table 2).

Second, in describing their current costs, respondents indicated that operational costs are highly sensitive to the details of the mandated Notice and Notice Regime, along such dimensions as the format of notices, response requirements and timeframes, accuracy requirements, statute of limitations (how long notices and associated records must be stored), and many others.¹⁹ If a mandated NN regime required conformance to high standards of accuracy, then some firms would choose to invest in increasing the accuracy and reliability of their systems and methods for linking IP addresses to individual subscribers.

Third, within large firms, a mandatory Notice and Notice Regime may require considerable systems development or systems integration costs, although these costs will vary significantly across firms depending on their existing architectures.²⁰ Further, some large firms indicated that they would have to roll out multiple versions of such systems for different regions or provinces. While these development efforts could automate portions of the notice and notice process, thereby reducing variable labour costs, they would introduce a new class of capital costs that would have to be amortized across the total volume of notices processed in the lifetime of the system and hardware comprising that system. The net impact on total costs per notice for large ISPs is therefore not obvious, except to note that economic rationality should prevent large ISPs from engaging in automation if it were, on net, expected to raise their total costs.

The most critical driver of the economic impact of a mandatory Notice and Notice Regime would be the volume of notices that ISPs would receive under this Regime. Large ISPs already process a significant volume of notices (hundreds per day in peak periods) and have made investments in supporting and automating this process; however, the cost of processing each notice remains at approximately $11.76. None of the large ISPs anticipated being able to significantly lower this cost.²¹

Not only is the number of notices a direct driver of costs within both large and small ISPs, but it may also be a significant factor in determining where the greatest economic burden falls (measured on a per-subscriber basis). If the volume of notices continues to increase, it would be expected that the large ISPs would, to the extent possible, continue to automate their notice and notice process. However, even a significant increase in the volume of notices would not make it financially viable for small ISPs to automate their notice and notice process. This difference in the "transaction volume" of notices may result in a lower variable and average cost per notice for large ISPs than for small ISPs. This situation would be analogous to an economy of scale in copyright infringement notice processing, and thus may result in a competitiveness disadvantage for small ISPs.

This competitive implication has played itself out in many information technologies that enabled firms to reduce variable costs at the expense of significant fixed costs of systems development or integration. Electronic Data Interchange (EDI) is one long term example of such a technology: the adoption rate of EDI within Fortune 1000 firms (i.e., very large firms) is more than 95%, but among all other US firms, the adoption rate is less than 2%. Small firms simply do not have sufficient transaction volume to defray the fixed costs, and are thus unable to justify adoption of the technology. Depending on the volume of copyright notices, small Canadian ISPs may find themselves in a similar position with respect to their efficiency of processing copyright infringement notices.

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18 Calculations based on figures from Tables 1 (number of firms), 3 (number of notices), and 9 (costs):
Total Large ISP cost = 8 ISPs * 4426 notices per month * $ 11.76 per notice = $ 416,398.08
Total Small ISP cost = 472 ISPs * 18 notices per month * $ 5.20 per notice = $ 44,179.20
Total ISP cost = $416,398.08 + $44,179.20 = $460,577.28
% Large ISP cost = $416,398.08 / $460,577.28 = 90.4%

19 From responses to the ISP Questionnaire, Question 3, especially section g.

20 From responses to the ISP Questionnaire, Question 3, especially section k.

21 From the responses to the ISP Questionnaire, Section 3 questions d, g, h, and i.