By Assoc Prof. David Brennan
A recent Australian Copyright Tribunal determination (the Gyms Case) has garnered broad media attention. An order was made by the Tribunal determining a new licence scheme for the public performance of PPCA sound recordings (the PPCA is the collecting society for the Australian record industry) for use in fitness classes. The new rates were considerably higher than the existing rates. Importantly, the determination did not relate to the exercise of the public performance right in any musical works or lyrics that might have been included in the PPCA sound recordings. (Another collecting society, APRA, controls the lion’s share of those public performance rights.) When the Tribunal hearing commenced, the rate under the existing PPCA scheme was just under $1 per class; the new rate determined by the Tribunal was $15 per class. The increase created a firestorm of public criticism from the fitness industry.
How to determine reasonable prices?
A Tribunal determining reasonable or equitable prices for a copyright exploitation can utilize two basic approaches to estimate value. One is the mysterious black box of ‘judicial estimation’ which is, notwithstanding repeated claims to the contrary, number-plucking. The second method is to hypothesise about the outcome of a fair bargain occurring prior to the use. This could occur in a number of ways, but at the core of the assessment is to work out:
- the value that the copyright exploitation is adding to the user’s business, and then,
- the proportion of that added value which should be allocated to the copyright owner.
However the assessment at (i) – the value of the particular use of copyright in the hands of the copyright user – is easier said than done. This is because a copyright exploitation such as playing a CD for an aerobics class has public good characteristics; it is incapable of using-up the resource and is difficult for the copyright owner to prevent.
As the Nobel Prize winning economist Paul Samuelson wrote in 1954 apropos the free-rider problem associated with public goods, ‘it is in the selfish interest of each person to give false signals, to pretend to have less interest in a given collective consumption activity than he really has’. Thus in the Gyms Case it is unlikely that fitness centres have strong incentives to be candid about how valuable or integral playing PPCA sound recordings in classes are to their businesses.
To overcome this problem, in the Gyms Case the PPCA surveyed the fitness centres’ customers about how much they valued the use of music in the classes. This was undertaken on the rational basis that the value of the exercise of copyright by a fitness centre is a direct function of the value of that exercise to its customers (i.e. fitness class attendees) listening to the PPCA recordings. Indeed the Gyms Case is the third of a line of cases in which the party representing the interests of copyright owners relied upon evidence of the value copyright adds to the business of the copyright user by surveying the preferences of the business user’s customers. Economists refer to this as ‘stated preference’ data. (I should add that through my doctoral research, and in my capacity as a copyright consultant to Screenrights, I had a role in introducing the approach to the Tribunal.)
In the first of those cases in 2006 (the Foxtel Case), a Screenrights-commissioned survey asked (face-to-face) 2,373 Foxtel customers what they would be willing to pay to continue to receive from Foxtel the retransmission of free-to-air broadcast programming as part of their pay television service. The stated preference methodology employed in the Foxtel Case was contingent valuation. In the second case from 2007 (the Nightclubs Case) the PPCA-commissioned survey asked (via the Internet) 813 late night venue patrons a series of questions to elicit their preferences. For example, they were asked to indicate a preference for either a nightclub with music or a bar with no music. In the Gyms Case case, 72 gym patrons were surveyed (face-to-face) and asked which of two hypothetical fitness centres they preferred, where each centre had different attributes including the use of music in fitness classes. The stated preference methodology employed in both the Nightclubs Case and the Gyms Case was choice modelling.
Survey evidence was accepted in the Nightclubs Case and the Gyms Case as the starting point to assess the value of the copyright exploitation, but not in the Foxtel Case where the survey evidence was totally rejected in favour of judicial estimation. The reasons for this selective acceptance of stated preference evidence is simply not that easy to explain. In the Nightclubs Case and the Gyms Case an economist sat on the Tribunal. Also, in those cases (and unlike the Foxtel Case) the particular surveys relied upon by the Tribunal were not specifically challenged by expert-evidence put on behalf of the respondents. In the Nightclubs Case the respondents’ appeared to engage no expert evidence to challenge the survey evidence relied upon by PPCA.
In the Gyms Case the Tribunal did not rely on the main survey evidence put by PPCA involving 453 participants who were surveyed over the Internet. That evidence was hotly contested by experts on behalf of the fitness centres. The survey that was ultimately relied upon by the Tribunal was a pilot survey (described above) commissioned by the PPCA involving the 72 participants. Paradoxically this pilot survey was not relied upon as a central aspect of the PPCA case and, unlike the main survey in the Gyms Case, was therefore not attacked by respondent expert evidence.
While much criticism has been levelled at the large price increase that the decision in the Gyms Case represents, and similar criticism was levelled at outcome in the Nightclubs Case, there are fundamental questions of economic valuation that critics of these cases must confront. Added value for many industries is generated by the highly subjective preferences of consumers, and experience has shown that people who are asked in surveys their preferences for goods or services generally give honest responses. It is for these reasons that the market research industry exists to guide product and pricing decision by suppliers. If valuation evidence gathered from a properly conducted survey is relied upon by a rights holder, particularly where the respondent is given an opportunity to provide input into the survey design prior to its conduct, why should it not be preferred over the murkiness of judicial estimation?
In the Foxtel Case, such survey evidence suggested an average willingness-to-pay of $2.50 per subscriber per month (pspm) to receive the retransmission of free-to-air broadcast programming from Foxtel. Screenrights based its claim to equitable remuneration for rights holders of $1 pspm on the basis of that evidence. The Tribunal having completely rejected the survey evidence substituted its view of what was equitable remuneration in a way not clearly explained by economic evidence. It determined equitable remuneration to be 22.5 cents pspm.
Moreover, if the result of an evidence-based approach leads to the emergence for the first time of market prices in these determinations, it should not be surprising to witness market-behaviour in reaction to those prices. Hence many fitness centres have moved to the consumption of non-PPCA ‘sound alike’ recordings. This will trigger competition between those fitness centres who provide (and pay for) PPCA recordings for their fitness classes and those that do not. Whether the survey evidence of the value of the PPCA repertoire was correct might now be now tested by revealed behaviour of fitness centre consumers.
David Brennan – Associate Professor at the Melbourne Law School and a copyright consultant to Screenrights