Entertainment and Media: Markets and Economics

1. Entertainment and Media: Markets and Economics Professor William Greene

4. What�s Missing?

5. The Pirate Bay has been involved in a number of lawsuits, both as the plaintiff and as the defendant. On April 17, 2009 Peter Sunde, Fredrik Neij, Gottfrid Svartholm and Carl Lundstr�m were found guilty of assistance to copyright infringement and sentenced to one year in prison and payment of a fine of 30 million SEK (app. 3,620,000 USD; 2,385,000 GBP; or 2,684,000 euro), after a trial of nine days. The defendants will appeal against the verdict, and the website has been unaffected.

6. Agenda Intellectual property: Definition, types Economic foundation for valuation Royalties A chain of value � book publishing Copyrights � the entertainment business Trademarks � more entertainment Patents

7. Property Tangible property: Usually dealing with natural resources Intellectual property: Output of creative activity Copyright: Writing Patents: Invention and design Trademark: Marketing symbols Secrecy and contract: �Know how� (e.g., Coca Cola, KFC seasoning formula, business secrets)

8. Property Right Property: After transformation, a stream of rents Right Control over usage Ownership of the stream of rents generated by the property Note: �Rent� is important. No �rent,� no need for a right; it would not be contested.

9. Application: Who Owns Fame? The Right of Publicity Who owns the value of a public figure? The public figure who is famous? The public who make them famous?

11. Alison v. Flickr and Virgin

12. Fantasy Baseball Is (Definitely Not) a Game

13. Fantasy Baseball Provider

14. The Market 300+ Operators of fantasy sports leagues Subscriptions Prizes NFL, MLB, NBA $1.5 billion Input data source: Yesterday�s newspapers Content Purchase: License arrangements with Major League Baseball E.g., CBC Distributing and Marketing (St. Louis) � 9% of gross royalty paid to MLB.

15. The Economic Issue Ownership of the personna. Not a copyright issue; Statistics are public domain (1997 case against NBA) First Amendment? Ostensibly The issue is control of a valuable resource Who owns the �right?�

16. The Scrum The �Right of Publicity� was created in a 1953 baseball card case 1996: Several 1940s/1950s players sued MLB asserting the right. They lost on other grounds. 2005 MLB paid $50M to the players� union for the rights to internet and wireless ??? 2005 CBC application for license renewal is denied. MLB wants to (greatly) restrict the number of licenses. (The foreclosure) CBC sues, claiming it doesn�t need a license The case began in court September 5.

18. Economic Questions What is the $50 million MLB paid to the players� union in 2005? How would that figure be determined? What does it represent? What concepts and arguments would enter the negotiation?

19. Right of Publicity?

20. (The end of that story�)

21. Entertainment and Media: Markets and Economics Property Rights

22. Tangible Property Rights Tangible property Exhaustible resources Consumption is private and exclusionary Motivation Conserve and manage resources Avoid the tragedy of the commons (e.g., American vs. Australian lobster industry) Creates a social good: Conservation

23. Intellectual Property Rights Intellectual property Consumption is nonexclusionary (public good) Production is often input to further innovation Motivation: Reward producers and ensure others access

24. Two Views of Intellectual Property Creates a social bad: Monopoly Social point of view � monopoly Private: Strategy? Coca Cola and KFC. Patent does not pass cost benefit test. Merely establishes a property right to a piece of capital (like real estate) Conflicts: Applications of copyrights (the Sonny Bono law)

25. Motivations for Property Rights Natural rights � a moral argument about the creator�s right to the output of their efforts Quality control � the right provides the ability to control dilution of quality. Prospecting � concentration of expertise reduces search costs. (Of interest to the patent system. Note: Recent defensive release of information to the public domain � prior art.)

26. Economic Motivation (Lesser, mainly for patents) Exchange for Secrecy: Reduction of costs that results from reinvention or rediscovery. (Greater) Profit incentive: Profit motive calls forth desirable innovation that would not otherwise occur. (Does this model work? MIT Media Lab conference, 2/18/01)

27. Monopoly in Intellectual Property

28. Ownership and Valuation Property right = ownership claim to the stream of rents.

29. Property Valuation General Result Prozac (Eli Lilly): Scheduled to expire 2003 Generic by Barr Labs � successful patent challenge � due out in 2000. Lilly stock fell from 109 to 76 the day of the ruling.

30. Valuing Happy Birthday By the time its copyright runs out in 2030, Happy Birthday should have made nearly 55 million pounds. American sisters Patty and Mildred Hill wrote the lyrics in 1893 It is now among the top three most popular songs in the English language, along with Auld Lang Syne and For He's A Jolly Good Fellow. The lyrics were copyrighted in 1935, 11 years before Patty's death, and the ownership has swapped hands in multi-million pound deals ever since. The song generates royalties of 625,000 pounds per year for the current owners Warner Communications, who bought the rights to the simple tune for more than 15 million pounds ($28,000,000) in 1989 Currently owned by Summy-Birchard Music (AOL-TW). Current royalties about $2,000,000/year.

31. Property Valuation, Uncertainty and Technological Change AA Milne ? Shirley Slesinger Lasswell: rights sold in 1930s Disney, 1961, rights for merchandising (more lucrative than the mouse) Videocassettes? DVDs? Could not have been foreseen in the 1930s. Who�s entitled? Value? Rights? Court case (dismissed after 13 years, 3/29/04)

32. Pursuing Rent for Creative Works Through Time Nonperishable, e.g., sculpture Works of art � resale Across Space Different markets � U.S. & Int�l films Spinoffs and licensing The Lion King Hybrids: Wyeth�s Helga paintings; Resale of the paintings, catalog, Museum exhibition

33. Royalties Royalty rate per �use� is the monopoly price. Marginal cost = 0, so revenue maximization. Applications Patented technologies, drugs, mathematical techniques Authors Actors � reruns and syndications Music Others? Outright sale price = DPV of stream of royalties

34. Royalties Book Royalties: Simple Music Royalties: Amazingly Complicated

35. Book Royalties �In consideration of the author�s performance� the publisher will pay to the author the following royalties based on the publisher�s net cash receipts: On copies of the work sold in the United States � 15%. However, if in any year, sales exceed 4500 copies, then � 18%� (Econometric Analysis/Prentice Hall) Does this capture the entire rent? Transaction costs Production costs Bargaining strength between publisher and author (??)

36. A Chain of Value (Added)? Music A chain of value added Composer creates the musical work Publisher develops the work and brings it to the public Performer interprets the work and provides the musical experience Where are the claims to the value of the musical work?

37. Music Royalties � Where they Go Writers/Composers Sales of music in fixed form (CDs) Public performances Publishers Recording Artists NONE from public performance (radio, TV, bars, etc.) Digital arena if not interactive and the listener is a subscriber. (From the DPRSRA)

38. Mechanical Royalties

39. Issues Fair Use Commercial value to YouTube even if not to the person who posts the material

40. Royalties for Performers The Digital Performance Rights in Sound Recordings Act (DPRSRA) created a right in sound recordings to perform the copyrighted work publicly by means of a digital audio transmission, as well as established a compulsory licensing scheme.

41. Royalties for Performers

42. The Property Rights Claims to the stream(s) of rent The property rights Mechanical Rights (reproduction) Performance Rights (bars, concerts, etc.) Synchronization Rights (TV Ads, etc.) Print Rights (sales of print music)

43. Claimants to the Stream of Rent Writers/Composers Publishers Performers Recording Companies (�Labels�, SoundExchange on their behalf (monopoly)) Performing Rights Organization (ASCAP) Mechanical Rights Agency (Harry Fox Agency, (monopoly)) What value added is produced by each player? What is the basis of the claim in each case?

44. Mechanical Royalty from Sales of Recorded Music Label ? Publisher ? Composer (50/50) Statutory rate: $.08/song or $.0155/minute Recording Artist: 8% - 25% of retail price Less 25% of retail for packaging Less other expenses (promotion, tour, music video, manager, producer, band) Net, frequently close to $0 (There is no net?). See Courtney Love, Janis Ian, etc. Note: Controlled Composition when Composer is the Recording Artist. A separate category

45. CD Costs

46. CRB Outcome in March 2007 Internet Radio Minimum $500 $.0008 (2006) --? $.0019 (2010) A single collection agent: SoundExchange (monopoly?)

47. Copyright Office Proposal Webcasting (Musicmatch.com, RealNetworks.com, Beethoven.com) Retroactive to 1998 Webcasting: 0.14 cents per listener per song Rebroadcasting of AM or FM 0.07 cents per song Noncommercial broadcaster 0.02 cents for radio rebroadcasts 0.05 cents for Internet only programming What do these numbers mean. Where do they come from? Who gets the royalty income?????

48. Amended CRB Ruling

49. The Gatekeepers

50. Performance Royalties Song is added to PRO data base (�collection�) PRO tracks the royalty trail (TV, Radio, Concerts, Restaurants, Elevators, etc.) Revenue (minus fees) is distributed Source of profit: Low (zero) marginal cost, economies of scale. Usage is estimated using statistical sampling

51. The Users

52. Phoenix

53. Performance Royalties Market Television and Radio Bars and Lounges Elevators Department Stores How big? $ Several billion

54. New Economy Performances Internet Radio: AOL, Yahoo Internet Subscriptions: RealNetworks YouTube � videos, music videos, musically scored videos Is a download a performance?

55. Royalty Rate Determination: Questions Why do we need the Copyright Royalty Board? Why do we have the special court for determining performance royalties (ASCAP, MBI, SESAC)? What economics motivates these? Is making Sound Exchange a monopoly a good idea?

56. Dueling Market Powers?

57. Pricing The Music An Application of Microeconomics Price Theory Welfare Economics Equilibrium Theory Basic Principles of Public Finance

58. U.S. vs. ASCAP, 2008 How to tax the internet users of music An optimal tax based on public finance principles: Zero marginal charge Flat percentage of total advertising revenue. (More or less) ASCAP won.

59. The Next Frontier?

60. Entertainment and Media: Markets and Economics End Class 4 � Part 1