Economic Impact of Options for Reforming the Private Copying Regime
3. Study Approach
This report examines how different stakeholder groups could be impacted by a number of specified changes in the private copying provisions of the Act. The specified options relate to features of the Act discussed in the previous section and include:
- limiting the regime to copying from authorized sources;
- providing national treatment to performers and producers from WPPT countries;
- codifying CPCC's zero-rating program;
- limiting the application of the regime to media used "primarily" for recording music;
- requiring that the levy be calculated through a formula based on the transfer or retail price of the recording medium.
- The report examines the impact of these possible options if they were introduced individually or in various combinations (scenarios).
The report examines the impact of these possible options if they were introduced individually or in various combinations (scenarios).
In addition, there is an examination of the impact of revising the Act to include recording devices with non-removable memory. Since the benchmark system for this study is the one that existed at the time of the 2003-2004 Copyright Board decision, the benchmark regime covers digital audio recording devices with non-removable memory (DARs). This system, which represented the status quo prior to December 2004, is then compared with various alternative systems excluding DARs. Because of the potentially significant impact of legislation in this area, all scenarios are examined with and without the inclusion of DARs.
Estimating Private Copying Payments
The main focus of the study is on understanding how those who bear the costs of private copying levies and those who benefit from the generated revenues would be affected by possible changes in the administration of the regime. A number of sources of uncertainty complicate this analysis.
First, there are uncertainties about how the Board would interpret and respond to various changes. It is reasonable to expect that, for most of the specified options, the Board would turn to the valuation model for guidance on how to adjust rates, but the 2003-2004 decision indicates that other considerations may take precedence.Footnote 6 In addition, some of the specified options are open to different interpretations, leading to different calculated results using the valuation model.
Second, there is little published data that can be applied to assess how the specified options would affect the market for blank recording media and how the new rates would impact on consumers and rights holders. Most of the available data on private copying in Canada come from hearings of the Board, and these data have been the subject of disputes.
Third, given the rapid changes that are occurring in the opportunities for copying music, evidence drawn from the last major hearing of the Board may not provide a reliable basis for assessing the impact of any possible legislative changes that might be introduced at some point in the future. A proper assessment should allow for the dynamism in the private copying market, but attempting to project market developments opens the analysis to a range of additional uncertainties.
To deal with these uncertainties, a reasonable baseline estimate of the impact of each of the possible changes was first developed using the most accepted of the available data from the 2003-2004 hearings, and then the influence of various alternative assumptions was investigated. The analysis was undertaken using two models:
- a baseline model, which explores impacts using available data from the 2003-2004 Board hearing;
- a growth model, which takes account of changes underway in the nature of private copying and the market for recording media and devices.
The main trends in private copying include:
- increases in copying in general and music downloading, in particular;
- increases in downloading from legal sites;
- increases in the use of digital recording devices with embedded memory.
Survey data published by the International Federation of the Phonographic Industry (IFPI) show a strong growth in paid downloads in the U.S. and Europe. While Canada appears to be lagging behind these countries, legal music sites in Canada are growing in number and popularity and new private copying legislation might be expected to reinforce the shift from peer-to-peer to commercial online services. The growth model examines the impact of possible reforms in an environment characterized by greater copying of recorded music, heavy use of iPods and similar recording devices, and the increased importance of authorized music sites. The aim is not to project royalty payments, but to get some sense of how various scenarios compare with each other and with the benchmark results, in circumstances that are very different from those that existed at the time of the Board's 2003-2004 hearing.
The report investigates how different assumptions affect the comparative results obtained from each of these models. In examining the first option involving limiting the regime to "authorized sources", for example, the growth model was adjusted to consider the impact of more rapid growth in private copying and changes in the extent of copying from authorized, as opposed to unauthorized, sources.
As mentioned above, it was believed to be important to examine each option under regimes that include and exclude DARs, although this complicates the analysis. For each possible scenario, four impact measures are provided:
- impacts under a baseline model in a regime with DARs;
- impacts under a baseline model in a regime excluding DARs;
- impacts under a growth model in a system covering DARs;
- impacts under a growth model in a system not covering DARs.
For some of the specified options, there is uncertainty about how the Board might interpret the changes. In these cases, the impact of different interpretations is considered. So, for example, given the uncertainty about how the Board would apply an option to extend national treatment to performers and makers from WPPT countries to digital recording devices, two different DAR tariffs are examined.
Other Impacts of Options in the Private Copying Provisions
The specified options could impact on rights holders in other ways besides affecting the revenues they derive from private copying. Royalties would be affected, for example, if the changes encouraged music downloaders to switch from file sharing to legal music sites or to increase purchases of pre-recorded music. While a lack of information makes it difficult to shed much light on these developments, the possibility of such indirect impacts merits consideration.
referrer 6 The Board did not apply the model to update rates in its 2003-2004 decision because of uncertainties about available data and its desire to ensure the prescribed levy was fair and equitable. Disputes over data, however, have been a major part of all private copying hearings and it is not clear that data uncertainties were greater in December 2003 than in December 2000 and December 1999. Vice-Chairman Stephen Callary did not believe that this was the case and, in an Appendix to the 2003-2004 decision, he shows how reasonable numbers could be drawn from the evidence to update the valuation model. Moreover, while the burden of increased levies was a major consideration in 2003, it was not a factor in 2000 when the Board more than quadrupled the levy on CD-Rs and CD-RWs (raising the rate from 5.2 to 21 cents). This lack of consistency complicates efforts to predict how the Board would react to various changes.