Economic Impact of Options for Reforming the Private Copying Regime
8. Potential impact on non-regime royalties
Besides their direct impact on stakeholders, possible changes to the private copying regime could have an indirect impact to the extent they influence consumers' music purchasing or listening behaviour. While a full examination of these other potential impacts is beyond the scope of this report, it is useful to recognize some of the other consequences that could follow from implementation of the possible options. The royalty changes resulting from possible reforms to the administration of the regime could be amplified or offset by changes in three other areas.
1. Legal Downloading Royalties
Royalties would be affected if private copying reforms were to influence the extent of legal downloading. A recent study based on U.S. data suggests that of the 99 cents consumers typically pay for a digital download, 8 cents goes towards the mechanical royalty, 3 cents to the producer and 7 cents to the artist.Footnote 33 With the expected growth in legal downloading, these payments should become a more significant source of revenue for rights holders.
Private copying reforms may affect legal downloading in two ways. First, private copying levies will affect the price of legal as well as illegal downloading. Price impacts are likely to be very small, however, given that the elasticity of demand for recording media is (with the possible exception of DARs) quite low and that changes in blank media purchases do not lead to corresponding changes in private copying. Second, a law limiting the regime to authorized sources only would support other reforms intended to discourage unauthorized file sharing and could help encourage a shift from copying from unauthorized to authorized sources. This may be more important, but it would be difficult to separate the potential contribution of private copying reforms from the impact of other social and legal changes, including other amendments to the Act, that underlie the growth over time in legal downloading.
2. Royalties from Pre-recorded Music Sales
There has been much debate about whether and to what extent file sharing reduces sales of pre-recorded music.Footnote 34 If file sharing is indeed hurting music sales, then reforms that include both stringent laws to discourage illegal downloading and higher copying levies might be expected to help music sales. But, at most, such reform could only be expected to result in a marginal change in downloading behaviour (as discussed above), and to make a still more modest contribution to the royalties rights holders derive from pre-recorded music sales.
3. Performers' Reputation and Earnings' Prospects
For most performers, royalties from the playing of their recordings are not the only, and generally not the most important source of income. A 1993 examination of the Canadian recording industry found that because deductions to recoup production and related costs are so high, up to 80 percent of artists never recoup royalties.Footnote 35 For many artists, the main benefit from distribution of their recordings is that it helps build their reputation and thereby contributes to their ability to generate future earnings through club and concert appearances and more favourable recording contracts. An artist's "reputational capital", which is a key determinant of his or her earnings' prospects, depends on music distribution in all forms, through broadcasts, CD sales, legal downloads and illegal downloads.
Even if file sharing has hurt pre-recorded music sales, since, at most, it is only a partial substitute, it could be expected to have a positive influence on the overall consumption of music. Available data supports this: the IFPI has found that between 1997 and 2002 total music consumption, including music sales and downloading, grew 30% in five major world markets, including Canada. As a result, reforms to the private copying regime that discourage downloading could negatively affect overall music consumption and thereby hinder artists' efforts to increase their reputational capital. This helps explain why in a recent Pew survey of musicians, more of the artists responded that free music downloading online has helped them rather than hurt them.Footnote 36 P2P networks are likely to be of primary benefit to lesser known artists who do not have access to the traditional channels for promoting and marketing their music.
As observed above, it is difficult to isolate the impact of possible private copying reforms from other factors affecting private copying behaviour. If these reforms do indeed discourage music consumption, however, the royalty estimates in Section 7 may somewhat underestimate the negative impact of the possible reforms on the income of Canadian recording artists.
referrer 33 FAD Research (2004).
referrer 34 Oberholzer and Strumpf (2004) provide evidence supporting the view that net effect of file sharing is insignificant. Support for the contrary position, that file sharing is responsible for most of the recent decline in music sales, is provided in Liebowitz (2005).
referrer 35 Task Force of the Future of the Canadian Music Industry (1995).
referrer 36 Madden (2004).