Yesterday, Doug Lichtman asked the question “how should we decide when a copyright holder is entitled to earn revenue from a new technology.” He said that he didn’t have an answer yet, and I don’t either, but I do think that we need to talk about fair use and how it can operate as an inefficient bundling of rights.
Consider this set up. We have a book published on paper. All consumers value the paper copy of the book at $8. Some consumers are happy as clams with just paper. Other consumers would love to have a digital, searchable copy of the book to go along with the paper copy. Those consumers would value bundle of a paper copy and a digital copy at $12.
If the copyright owner didn’t fear copying—either of the physical book or a digital copy—what would she do?
The answer is straightforward: sell physical copies of the book for $8 and digital copies for $4 (or for the proverbial epsilon less than that if you like). Old-school consumers would just buy the physical copies, newbies would buy both. We would sell to all consumers, and, on this setup, the copyright holder would capture all of the value associated with the work. We would also not leave any social value sitting on table. No transactions that we would like to see take place will have been missed.
Now consider a possible fair use doctrine. Suppose that we announced a doctrine that said that any consumer was entitled to the work in any medium, once the work was purchased in some medium. The proposed Digital Consumer’s Bill of Rights would seem to do just that. I suspect that there are some who believe that current fair use doctrine suffices for this result.
A digital copy is produced—perhaps through an online open source-type process where individuals contribute chunks of typed text. Consumers who wanted the digital copy would no longer need to pay $4 to get it. Where would this put our copyright holder?
Before the copyright holder could sell different products to different consumers. The sensible approach was to sell just paper copies to the dinosaurs and sell paper and digital copies to the younger consumers. Now the rights regime makes it such that the copyright holder can sell only one product, but some of those consumers will value the product at $8, while other consumers will value the product at $12 (knowing that once they have the paper product, they can get a digital product they will value at $4 for free).
What will the copyright holder do? She can sell the paper copy for $8 or the paper copy for $12, but she can no longer sell any digital copies for a positive price. What she will do depends on the numbers (and to simplify matters, treat the costs of making physical and digital copies as being 0). If the copyright holder sets a price of $8 for the physical book, she receives revenues of 8*(O + N), where O is the number of old-school consumers and N is the number of digerati. If instead she sets a price of 12, her revenues are 12*N.
Try an example. Set N = 10 and O = 4. Total revenues from selling at $8 are then $112, from selling at $12, $120. In the face of free digital copies—whether from the open-source text collective or from Google Print—the copyright holder will jack up the price of the physical book. She can no longer treat the two customer types differently.
Note that the copyright hold is much worse off than before. Without the free digital copies, on these numbers, the copyright holder sold to everyone and took in revenues of $152. But, and this is the important point, society is much worse off too. All consumers were served before. Now the increased price for the physical book—caused by the inability to charge separately for the physical book and the digital book—has priced some consumers out of the market.
I don’t begin to think for a second that this captures the full complexities posed by Google Print, and you shouldn’t either. We are going to have to describe the relevant markets in ways that are richer than this, but that said, this kind of effect is clearly a piece of it.
Fair use is a form of bundling: one right necessarily comes with some other right. Not all consumers will want the “extra” bundled rights. Copyright holders will take into account in their initial pricing decisions for a work the full uses being conveyed, including those conveyed as a result of fair use.
Google Print makes it much less likely that consumers will buy digital copies from, say, Amazon. The Amazon Upgrade program (see my post on this) is exactly buy paper, get a digital searchable version, and it is hard to see how you sell the digital copies if they are freely available on Google Print. Sure, sometimes free can compete with fee, but it is odd to think that there aren’t spillovers of exactly the sort that we see in this example.