A Grand War for A Small Payment

A willingness to pay to use a copyrighted material creates a potential for copyright holder to reap financial benefits. The payments, however, sometimes could be so insignificant (de minimis), that the cost of collecting them dwarfs the payments themselves. Copyright holders have long relinquished such de minimis payments. However, as I will document in the first part of the blog, technology has enabled copyright holders to collect such de minimis payments with lower or negligible cost. In the second part of the blog, I will explain the apparent paradox that copyright holders are willing to wage a grand war for de minimis payments.

De Minimis is obsolete

One source of missing de minimis payments is small scale “infringement”. Some infringements, like distributing a chapter from a book for classroom usage, are allowed under fair use. Additionally, as a practical matter, copyright holders will not choose to pursue de minimis infringement, even if it is illegal---“the recovery might be de minimis, so that no one have any incentive to sue.”[1] Even if a user is willing to pursue a license, there is not enough money for the licensing agent to manage such requests.[2] Technology has made collection of such de minimis payments cheaper. Consider the case of YouTube, where Content ID automatically detects matching between User Generated Content (“UGC”) and copyrighted material, insignificant the copying might be. In the past, copyright holders will never discover small infringements, or even when they do discover, they would not go after such small infringements; now technology has allowed them to monetize, or block such de minimis infringement. (The fact that YouTube is able to take a large share of monetized value is a separate issue: it concerns Google’s unfair monopolistic behavior.)

Another source of missing de minimis payments is the limited commercial life of copyrighted material. Most books, for example, have a very limited commercial life. Though they are still in copyright 60 years after publication, it is most likely that they are out of print. Though there are still sporadic demands for such books, authors were never able to reap such benefits due to the high fixed cost of printing---it is economically infeasible to print a book for a small number of copies. Now consider the settlement of Author’s Guild vs. Google. Books that has reached its end of commercial life, are now infused with a new commercial life: readers can purchase digital access to out-of-print books; institutions can buy access to Databases containing out-of-print books; and advertisers can pay to place ads on Google Book Search. All these payments will be split between Google, publishers, and authors, with the majority (70% of net profit) goes to publishers and authors. In summary, technology has enabled publishers and authors to monetize in ways that were not possible in the past.

Why Fight a War over De Minimis 

It is revealing to note how much effort publishers and Authors’ Guild (AG) put into collecting such de minimis payments, every penny of it. First, the whole negotiation took two and a half years. Second, the ultimate settlement went into great lengths to insure that publishers and AG get every penny out of it: From the determination of optimal prices, to running “Google Tests” to choose the best preview modes. The goal is simply to maximize “sales and revenues”. They did leave some consumer surplus on the table, but this is not inconsistent with monopolistic profit maximizing behavior (except in the case of first degree price discrimination, which is only a theoretical curiosity, profit maximizing monopolies will not be able to extract all consumer surplus).

It is misleading to call such payments de minimis. It is not de minimis for big publishers and AG, who will benefit from a huge collection of books: though payment on each individual books is small, it adds up. However, it is de minimis for individual authors. How many digital access can an author of an out-of-print book realistically sell each year? When the advertising fee, after publishers and AG take a cut, is divided among so many copyrighted material, how many cents can an author realistically expect? This potential income is de minimis in another sense: from an ex ante point of view (before the author writes the book), such incomes, arriving so many years later, will be heavily discounted. Assuming a 5% discount rate, payment after 28 years (original term of copyright) will be discounted by 76.3% (one dollar is valued at 0.23). Thus, strengthening copyright protection to enable such de minimis payments to be extracted serves little to ex ante incentivize authors.

This mismatch between the insignificant ex ante incentivization and the whopping eagerness to extract the payments is not unprecedented. It was present when Congress extended the term of the copyright. Time inconsistency played a key role: Revenue from copyrighted material 70 years later might be a negligible 0.01% of the present value of a copyrighted material ex ante; from the perspective of 70 years later, it is a gigantic 100%. Owners of expiring copyrighted material have every incentive to extend their monopoly. Here in Google Book Search case, there is an additional problem. The key players shaping the policy, publishers and AG, not only fail to discount the revenue due to time inconsistency, but also benefit from aggregating de minimis payments. It is wealth from a thousand cuts.

---

[1] Goldstein, P. (1994). Copyright's highway: From Gutenberg to the celestial jukebox. Stanford: Stanford Law and Politics. P96

[2] http://zoekeating.tumblr.com/post/108898194009/what-should-i-do-about-youtube

The case against google

Tim Wu of Columbia has recently published a study with Micheal Luca of HBS on how Google is violating antitrust rules. (See new coverage here and here). While one can debate about the shortcomings of the study, some critics of the study obviously failed to understand both the law and the study. After all, on internet times, not everyone would leisurely read through such a "long" study. I hope to summarize the findings here.

What is the central claim?

The claim is Google has downgraded its search result in local searches to consumers' harm in its attempt to extend its monopoly power from general search to more specialized search.

Backgrounds

Just as Google's general search displaced directory services (as provided by portals like Yahoo), it began to face challenges from specialized search, that is search engines that aims to provide information on a specific category of information. For example, Yelp specialized information on restaurants and Kayak on flights. To deal with such challenges, after some failures to clone such specialized searches, Google leveraged its dominant position in general search to exclude its competitors from its search results. The tool for this tactic is called "universal search": once Google detects that a natural search returns a specialized competitor like Yelp as a leading result, it automatically turns on OneBox (see Figure 1), which exclusively shows results from its own specialized search services.

Figure 1: Google search results displays sponsored ads as the first result, followed by its OneBox, which is powered by both Google+ and Zagat (acquired by Google)

The authors showed that by extending OneBox's source to include its competitors like Yelp and ZocDoc, and ranking the results using Google's own algorithm, consumers experienced an improved product (as measured by click-through rate). The design shows that Google has the capacity to improve its product (its own algorithm works) and could easily improve its product by abandoning exclusivity. Yet, it insists on exclusivity at the cost to consumers.

 Why should we be concerned?

It is Google's page, so it should be able to do whatever it wants right? Usually the answer is yes. But "no" in this case. The rational is the following: Google has achieved a monopoly in general search. Fine, this is because it has delivered an excellent product and this monopoly is likely to perpetuate because this industry is a natural monopoly. However, it is unlawful for Google to extend its market power from general search to specialized search. An analogy here. Microsoft has achieved its monopoly power in operating system because of its innovation. However, it violated antitrust laws when it tried to use its market power to get rid of Netscape, an internet browser. Yes, it is on Microsoft's operating system, but it cannot just do what it wants. Note that, many times in technology sector, innovation takes place by creating new markets or changing the paradigm--Google created the market for general search, so did specialized search engines. If we allow such thins to happen, then a company that happened to achieve monopoly in one market can essentially block innovation in emerging adjacent market.

What are the actual laws?

In cases arising under Section 2 of Sherman Antitrust Act, the so called "Rule of Reason" shall be applied: The law acknowledges that sometimes for efficiency reasons, exclusion might benefit consumers.  It is necessary to examine intent and motives and assess its overall impact on the market.  Courts have have isolated several cases where exclusion violates the law.

Naked Exclusion

 "Exclusion of competitors is not justified by any real efficiencies or benefits for consumers". The authors claim that in local search the specific implementation of OneBox  (exclusively drawing from Google's specialized searches not its competitors) is naked exclusion.

Neglect of less restrictive alternatives

 "A dominant firm forgoes  an obvious, less restrictive alternative course of conduct that would be equally, or more effective in serving the pro-competitive goals articulated". That is even if the exclusion could be justified on efficiency grounds, there is an obvious way to achieve the same efficiency, but being less exclusionary. In here, Google might justify the need of OneBox on the grounds that univeral search that returns information directly rather than returning links to the information is a useful innovation. Nevertheless, this could be done in a less exclusive way.

sacrifice of product quality

"The sacrifice of profit or product quality so as to damage competitors".  The authors demonstrated that consumers preferred a universal search that is inclusive. 

Final thoughts

Google obviously can argue that this study has flaws---the experiment participants might not match the actual users of Google. Click-survey might not tell the whole story. Nevertheless, I deem this study as  a proof of concept---that Google's claim that its exclusionary behaviour is efficient, can be scrutinized. Such A/B testing could be carried out on Google, and used as evidence in antitrust trials. Even short of that, this study, or more accurately the plug-in tool the study used--Focus on the User Local, demonstrated that there is less restrictive way to implement OneBox.

Am I fully convinced by the study? I am convinced of what it claims, but beyond that, I could still believe that there is some efficiency reasons for exclusion. One might wonder, is it really efficient to have that many specialized search engines owned by different companies? Maybe as the internet evolves, one company owning both general search and specialized search could make bigger innovations possible. After all, there is multiple equilibria problem in markets with network effects, and for review website that relies on user-generated content, network effect is huge. Such an exclusion by Google simply moves the equilibria--in the interim, there might be some efficiency loss, as users readjust, but once they readjust, they might reach an equally efficient equilibrium. With all search engines owned by one firm, there might potentially be synergies.

Admittedly, I am too much an idealist and central planner in writing the previous paragraph. Without punishing such exclusion, innovation will be stymied. Without innovation putting on a competitive pressure, incumbents will have no incentive to innovate. Despite all the great potentials for synergy, innovation will not happen. Alternatively, even if we believe in the very best of incumbents that wish to innovate, it simply might not be innovate quickly enough. The literature of crowd-sourcing demonstrated the power of the crowd vs. the established elites. With more brains trying to innovate, it is more likely that there will be some entrepreneurs that come up with a better plan. Without laws to protect them from being ostracized by exclusionary behaviours of the incumbent, they will not innovate, leaving us with a slow-moving incumbent behemoth.