The Copyright Office Doesn’t Understand Economics

Last week, the Copyright Office weighed in on the Federal Communications Commission’s ongoing proceeding to open up video programming set-top boxes to third-party manufacturers. The Copyright Office’s letter, which expressed concern about the set-top box proposal, has been widely panned by consumer and technology groups alike. These criticisms ultimately get at what is the Copyright Office’s fundamental mistake in understanding the set-top box proposal and even copyright law generally: The Office misunderstands basic economics and the proper role of law in the economy.

The Copyright Office’s position boils down to a “principal reservation” that opening up set-top boxes “could interfere with copyright owners’ rights to license their works as provided by copyright law, and restrict their ability to impose reasonable conditions on the use of those works through…private negotiations.” Essentially, the Office says, copyright owners negotiate with distribution services (“multichannel video programming distributors,” or “MVPDs”) over rights to distribute content like television channels, and as part of those negotiations the distributors agree to things like channel presentation or to promote certain programming in their user interfaces. But third-party set-top boxes would be bound by a set of default rules, rather than individually negotiated contracts, and so they break the copyright owners’ “exclusive right to license,” according to the Office.

Freedom of contract is certainly important to capitalist markets, so it’s not hard to see how this interest influenced the Copyright Office’s views. But the Office’s position would have been much less weak if it had just remembered one word from any Economics 101 textbook: externality.

Negotiations over set-top boxes do not only concern copyright owners and content distributors: they also concern the consumers who watch television and movies but who play no part in those negotiations. When contractual relations impact a non-negotiating third party, that impact is called an externality. Classic examples of externalities include friends agreeing to host a loud party, annoying the neighbors; and power companies that buy and burn coal for electricity, polluting the air.

The whole point of laws is to combat the problem of externalities. Contracts are allowed in the ordinary course, but when contracts threaten to injure the people at large, then the people, through their elected representatives, enact laws to override that default contract position. Economists call this “internalizing the externality”: If the parties to a contract engage in behavior that harms the public, then the law demands those parties to pay the price of the harm or to desist from causing it. For example, municipal ordinances ban loud late-night music, and Congress creates agencies to oversee and restrict pollution.

So in calling for the FCC to refrain from “encroachment on the exclusive right to license” held by copyright owners, the Copyright Office totally ignores the very raison d’être of government in an economic society: to protect against externalities. The FCC itself recognizes that proper role: Its set-top box proceeding is entitled “expanding consumers’ video navigation choices,” a recognition that the current state of things—based on contracts between copyright owners and distributors—imposes externalities on consumers in the form of lack of choice and competition. To say that freedom of contract should take primacy is fundamentally to ignore that basic lesson of economics.

Nowhere is this clearer than in the Copyright Office’s discussion of fair use. The Copyright Office believes that fair use—the statutory right that allows for recording TV shows for later viewing, for example—is complicated and unpredictable, and therefore copyright owners and distributors can and should “contract around fair use questions to avoid uncertainty.” That could not miss the point more. Fair use, as a right of all people, is emphatically an exception to the general rule that access to copyrighted works is governed by licensing contracts, intended to guarantee to all people the freedom to engage in certain desirable activities like TV show recording. To allow copyright owners and distributors to “contract around fair use questions,” as the Copyright Office would do, can deny the citizenry the ability to engage in those desirable activities, without giving the citizenry a voice in the negotiations that deny them that right. That is a direct negative externality upon the people whom fair use was intended to protect, an externality that could possibly be avoided by the FCC’s proposal, and yet an externality that the Copyright Office seems bent on encouraging.

The mere existence of a copyright owner’s right to negotiate contracts does not mean that regulators need to get out of the business of regulating on behalf of the public. By failing to understand basic economics, the Copyright Office fails to understand this.

Charles Duan is a staff attorney at Public Knowledge.