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July 17, 2006


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Bruce Boyden

"The technology will allow us to allow A, B and C or X, Y and Z, and we are not just choosing B or Z." This is the point missed by a lot of people, such as the L.A. Times editorial board recently.

One possible solution here is, ironically, even *more* content protection. That is, if devices had some way of distinguishing between DVDs you rent or borrow and DVDs you own, the substantive objections to Kaleidescape might go away. (Of course, the CSS license would still be there, and it might not be the easiest thing in the world to change.) But that would require some way of either tracking what consumers own, e.g. by registering DVDs, or some sort of code on the DVD itself that would distinguish rentals from owned copies. But that would lead to problems concerning how you force rental companies to rent "rental" DVDs, for example.

This issue may be worked out for the next generation. Providers of AACS-encrypted high-def disks will, under the final license, be required to offer consumers the ability to make at least one copy of the disk. I suspect that copy will be associated somehow with the particular disk or download, to eliminate Rent Rip & Return, but the details on how the "Managed Copy" is actually supposed to work are sparse at this point.

Randy Picker

Yes, I agree. I have a paper in which I discuss the role for identity-based digital rights management, something that we see with online content. The paper is at:


Doug Lay

"Institutional Engineering?" Sounds like centralized economic planning to me. That's got a great reputation. And - suprise, surprise - where considerations of institutional engineering hold sway, we find freedoms being squeezed out of existence - in this case fair use rights and the freedom to tinker (freedom to reverse engineer, if you prefer).

Randy Picker

On fair use, all section 107 does is pull certain uses out of the general infringement regime created by copyright law, meaning that if you do one of those uses, you can't be held liable for copyright infringement. Section 107 doesn't create an independent right of access to works and doesn't limit the ability of a copyright holder to condition access to the work. Limits on those conditions will have to be found elsewhere, if anywhere. DRM is just one example of a way to condition access to the work and is not dealt with by Section 107. So while the phrase "fair use rights" is widely used, I think that is only partially informative if that.

On institutional engineering, I actually think that is what non-litigator lawyers do. We build frameworks--institutions--in which activities take place. So in other parts of my life, I have helped draft statutes for secured transactions and bankruptcy. In both cases, large volumes of transactions take place in the regimes that those statutes create. Institutional engineering?

And the world loves engineers but alternates between hating lawyers and treating us as a necessary evil.


"I don’t know that we could sustain in the music market fee/sale; fee/rental; and illegal." I believe we do, at some level, with services like Napster-to-go, which has ~600,000 subscribers. It was also "cracked" within days of its release by means of the "analog hole".

The "analog hole", or analog reconversion problem, creates an inevitable weak link in copyright protection, an extremely weak link at that. The conversion from analog to digital is a relatively basic action and it is extremely unlikely that it will ever be "plugged".

Any action taken to encrypt or otherwise thwart the capture of the signal will ultimately fail unless the MPAA contracts with the NSA to encrypt their DVD's.

It is my belief that, in the light of these facts, we are left to create not the fool proof system that the MPAA would like, but rather a moderate system that allows easy, unencumbered access to the content that consumers would purchase. Essentially a system that does little more than keep the honest people honest. Efforts to police those who wish to crack digital media will in the end be for naught.

Doug Lay

I gather by your use of the term "Section 107" for what us lay folk would call "Fair Use" that you don't have a lot of use for the term. Oh well, one effective way to remove freedom is to argue that it never existed in the first place. How about this, as a paraphrase of the last paragraph of your post:

"Where there was once an ambiguously-defined space within which consumers and tinkerers could legally exercise free will, now there is nothing."

Nice work. High-fives all around.

I don't care for the engineering metaphor for what lawyers or politicians do. Too teleological, too top-down, too little room for independent agency on the part of the engineered subjects.

José Pacheco

But Doug, you forget that in a copyright issue the "full rights" are the copyright holder's. Due to the copyright laws or by contract, different spaces are created for users, such as fair use. Indeed, they're giving the user some freedom that he shouldn't necessarily have in the first place. The Law, or the holders, by contract, may give you fair use rights, and refuse tinkering (or allow, it depends on the holder).

In a copyright-less environment, rules would be different, but so far we are not dealing with that.

Doug Lay


Fair use isn't something granted or withheld by the copyright holders, or at least it wasn't until the DMCA came along. Again, my congratulations to those who never liked the concept in the first place for an evisceration well done.

José Pacheco

Still... unfortunately that's a matter of policy. Are we discussing proper policies, or how the current policy works? If it's the former, I would go for weaker and narrower copyrights, going slowly towards the end of economic rights on the subject, but preserving so called moral rights.
The policy, as it is, implies limits, whether they come from the Law or from contracts.

Doug Lay


Reading through the original post above, it seems it's about proper policy. Picker talks about choices and "engineering the enforcement of legal rights." He's talking about creating a framework. I disagree, quite strongly, with what appear to be his conclusions.

Regarding "moral rights" of the content creator, my (admittedly limited) understanding is that they are a creature of European legal systems and have historically, for better or worse, not been recognized in the American legal system. In another post, Picker states that DRM is a mechanism by which moral rights can be snuck into the American legal system. Here I question: whatever the merits of moral rights, why is it proper to sneak them into the legal system under another guise?

José Pacheco

Th whole thing with moral rights is to completely separate the "autorship" from the economic exploitation. Hence, a copyright in Europe usually has both components: moral and economic. Moral is who is the author, the economic is who can exploit.
That serves two purposes: no matter who has the economic rights, the author will remain the same; and it's the best way to go for advocates of a copyright free world, because it preserves the moral component (i.e. who did it), recognising the author while leaving the economic part free for all.

Going back... the proper policy? Is the end of the copyright world as we know it. Techonlogy is far ahead. Encrypt, we'll decrypt. Protect, we'll break it. Authors should embrace the ease of transfer that we have now, and view it as an advertising tool. In the end, if you can't distribute it for free on a peer to peer, how would you think you'll be able to sell it?
It's time to change it, and it implies liberalising it. Some people are already doing it, and it seems to work.


what I learend from professor Picker in law school:

1. In conditions of ideal competition, price of commodities should approach their marginal costs. What does that translate into with regard to movies? that movie companies don't really compete.

2. Monopolies are the most efficient forms of distribution in the absense of monopoly profiteering. Size breeds efficiency, which is good, but it also breeds the ability to exact monopoly profits, which is bad. Therefore we should encourage efficiency that comes with size and ecomomies of scale, and regulate pricing.

José Pacheco

qw, about your remarks:

Your silogism is false. You start with "in conditions of ideal competition". Ideal competition doesn't exist. Is a model for understanding the market. It tells us how firms must behave in order to survive.
I don't know if these firms compete, but I can assure you they don't compete in ideal conditions, because that's imposible.

Besides, you need data about how the investment in producing a movie translates into average costs. The low marginal cost you wrote about has to do with the replication of a DVD, but you need to incorporate the part of the average cost that relates to the production of the movie. Hence, the marginal cost might not be so low as you think.

I'm under the impression that you should only regulate prices when there are 2 kinds of condition:

i) industries that tend to be monopolic and whose consumers can't (or shouldn't) wait for a new competitor to contest the monopolist (e.g. usually, transmission of electric energy). Not necessarily natural monopolies, but sometimes they could be so.

ii) there are barriers to entry, but the real ones, such as government intervention, irrational requirements, restrictions due to techonlogy issues (e.g. limits of radio spectrum), etc.

Both are well explained into a regulated market, where it's not likely that competition will flourish. Where there's competition, prices are only signals of the relationship between supply and demand, and we should not tinker with them.

Under Verizon vs. Trinko, I hope people start to realise that monopoly profits aren't "bad", as you said. They're part of the cost of the efficiency gained in distribution. Inefficient monopolies will perish, efficient ones should be encouraged without restricting their monopoly profits. They're the price we pay.

Doug Lay


regarding your point #2:

Isn't there an argument to be made that open standards (such as TCP/IP and HTML for instance) can provide the same sort of economies of scale that monopolies provide, without the predatory pricing problems? Does Picker's theoretical framework predate the Internet? Is it being rendered obsolete by the Internet?

José Pacheco

Predatory pricing doesn't exist. It only works on a model with high entry costs, low exit costs and a financial market that doesn't reach the predated firm. The best that can happen to you is to be predated. It'll doom the big firm and give you a cheap monopoly.



You say, "The low marginal cost you wrote about has to do with the replication of a DVD, but you need to incorporate the part of the average cost that relates to the production of the movie. Hence, the marginal cost might not be so low as you think."

No, actually that is not the theory. Those are the fixed costs, the costs of making the movie. The marginal costs are the costs of reproduction and distribution of the movie, and the theory goes the fixed costs will be made up for eventully because price only approaches marginal cost but never actually reaches it.

It is also good to regulate price when there are external costs of the transaction not borne by either the supply or the demand.

"I hope people start to realise that monopoly profits aren't "bad", as you said. They're part of the cost of the efficiency gained in distribution. "

Er no, they are always bad and result in dead weight loss. they are not part of the cost of creating the efficiecy. That is the whole point. Whatever cost savings that can be passed down due to efficieny of the monopoly no longer need to be because they have no competition. Otherwise they wouldn't be monopoly profits, just profits.

José Pacheco

About marginal cost: it might be useful to compare the sunk costs and the fixed costs. The problem is you assume reality resembles the model. The "eventuality" of recouping the fixed costs is what the model needs, but in real life firms must add the fixed price to the average cost. Marginal costs can be the average marginal cost, the variable marginal cost, etc.

Monpolies are not always bad. They might be bad. They might provoke deade weight loss. Monopoly theory only shows how they could behave, but there's no guarantee about it.
Since Baumol et al, the theory of contestable markets shows that some monopolists might even act closer to competition, and under Bork we have that the more efficient the monopolist, the lower its costs. That increases output -to get a bigger profit- and decreases price.

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