Intellectual Property Policy

Economic Impact of Options for Reforming the Private Copying Regime

Executive summary

Sections 79 to 88 of the Copyright Act provide for the imposition of a levy on blank audio recording media to compensate authors, performers and makers who own copyright in the sound recordings being copied. It is almost 10 years since the private copying provisions of the Act were introduced and in that period technological developments have led to dramatic changes in the nature of private copying. The relevance of the Act has also been affected by court decisions that have limited the scope of the private copying provisions. In addition, Canada has yet to ratify the 1996 WIPO Performances and Phonograms Treaty (WPPT). If this occurs, it may be necessary to amend the legislation to provide for compensation to performers and producers from WPPT countries. This report examines the impact of a number of possible options aimed at addressing these issues.

In setting rates, the Copyright Board is primarily guided by a "valuation model" that uses the royalties on pre-recorded CDs as a benchmark for calculating the appropriate compensation payments on blank recording media. In the report, this model is used to determine how possible reforms could affect private copying tariffs. The impact of the calculated tariffs on retail revenues and royalties was initially assessed by drawing on available data from the 2003-2004 hearings of the Copyright Board. Along with the resulting baseline model, an alternative growth model was constructed to look at how impacts might differ when account is taken of the changes underway in private copying, including the growth in downloading, the increasing importance of legal downloading and the growing popularity of iPods and other digital audio recording devices.

One of the most significant recent developments affecting the private copying system was a Federal Court of Appeal ruling in December 2004 that the Board does not have jurisdiction to impose a levy on memory permanently embedded in digital audio recorders. In 2005, the Supreme Court denied the application of the Canadian Private Copying Collective (CPCC) for leave to appeal the Federal Court's decision. These decisions leave a major gap in the coverage of the private copying regime. The private copying system will impact on stakeholders quite differently in coming years depending on whether or not the government introduces an amendment to bring digital audio recording devices (DARs) under the Act. Therefore, in addition to examining impacts of possible options using the baseline and growth models, the study considers how impacts would differ in regimes that include and exclude DARs.

In both the baseline and growth models and in both regimes including and excluding DARs, certain of the scenarios lead to higher tariffs and royalties while others result in rates and royalty payments below those under the current system. An adjustment to take account of the expanded repertoire of eligible rights holders if national treatment were granted to performers and makers from WPPT countries leads to an approximate doubling in tariffs. Under a number of the possible scenarios, the positive impact of these higher rates on royalty payments would be only slightly offset by the additional tariff adjustments that are required. This is the case when the expansion of the eligible repertoire of rights holders is combined with a provision restricting the regime to media "primarily" used for recording music and the latter is interpreted to exclude CD-RWs. Royalty payments are also much higher when the granting of national treatment is combined with a reform involving the codification of CPCC's zero-rating program and it is assumed that the Board would adjust rates (as it has done in the past) to compensate rights holders for the losses from zero-rating.

Impacts are quite different with other scenarios in which: the application of the regime is limited to copying from authorized sources; the expansion of the eligible repertoire is combined with an amendment limiting the application of the regime to media "primarily" used for recording music and the latter is now interpreted to apply to both CD-Rs and CD-RWs; and a rate-setting formula is established similar to the ad valorem tariff used by the U.S. In all these cases, royalties would be substantially lower than under the current system. But while rights holders would receive less, wholesalers and retailers of music recording products would experience a small gain in net revenue (i.e. revenues net of royalty payments).

Although some of the scenarios would result in higher royalty payments, under all of the scenarios, the royalties available for distribution to Canadian rights holders would be less than under the present system. In those scenarios in which tariffs are adjusted upwards to take account of the expansion of the eligible repertoire, about half of all royalties would represent additional obligations to foreign rights holders. Meanwhile, offsetting inflows to Canadian rights holders from private copying levies in other WPPT countries would likely be minimal.

While these general findings are consistent across all the models, when possible options are accompanied by an amendment to bring DARs under the private copying system, royalties are higher and grow more rapidly. When DARs are excluded from the private copying regime, royalty payments do not keep pace with the growth in private copying activity. On the other hand, in regimes that include DARs, under all the scenarios, royalty payments are substantially higher in the growth than in the baseline model.

The net royalty payments available for distribution after the CPCC and other collectives have deducted their expenses are significantly less than the gross royalty payments. In the case of a number of the options that would involve tariffs very much below their level under the regime, overall administrative and transactions costs, including costs incurred by collectives, manufacturers, importers, retailers and the Copyright Board, are likely to amount to a substantial share of royalties.

A different concern arises in the case of those scenarios that include DARs and are generating high royalties due, in part, to the growth in music downloading. If, as assumed in the report, paid downloading is growing in importance, then a significant share of the royalties under these scenarios may come from individuals who have already paid for the right to private copy. In scenarios that exclude MP3s, since much of the legal downloading would involve the use of recording devices that have not been levied, such double payments are less of an issue.

In addition to affecting private copying royalties, the scenarios could also affect rights holders' earnings by promoting changes in private copying behaviour. While individuals may slightly adjust their copying in response to the projected tariff changes, the most significant impact of possible changes could well come from the increased force they would give to other legislative and social developments discouraging copying from unauthorized sources. Rights holders will benefit to the extent consumers substitute paid for unpaid downloading or increase their purchases of pre-recorded CDs. However, possible reforms could also contribute to an overall reduction in downloading, which will not hurt makers of recordings but could affect those artists who are particularly dependent on the Internet for the distribution and marketing of their music.

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