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Behavioral economics may explain royalty rate impasse

Posted on: 02/21/2008

In this week’s issue of The New Yorker, Elizabeth Kolbert reviews a new book called “Predictably Irrational: The Hidden Forces That Shape Our Decisions“ (Harper; $25.95) by M.I.T. professor Dan Ariely. The book, on the subject of behavioral economics, may explain why the Internet radio royalty process has been so beset by problems.

Specifically, although Congress legislated that the CRB judges are supposed to set a royalty rate that a “willing buyer” and “willing seller” would agree on, this book reveals why there may be no such rate.

Kolbert writes that a “challenge to standard economic thinking arises from what has become known as the ‘endowment effect.’ To probe this effect, Ariely, who earned one of his two Ph.D.s at Duke, exploited the school’s passion for basketball. Blue Devils fans who had just won tickets to a big game through a lottery were asked the minimum amount that they would accept in exchange for them. Fans who had failed to win tickets through the same lottery were asked the maximum amount that they would be willing to offer for them.

From a rational perspective, both the ticket holders and the non-ticket holders should have thought of the game in exactly the same way,” Ariely observes. Thus, one might have expected that there would be opportunities for some of the lucky and some of the unlucky to strike deals.

But whether or not a lottery entrant had been “endowed” with a ticket turned out to powerfully affect his or her sense of its value. One of the winners Ariely contacted, identified only as Joseph, said that he wouldn’t sell his ticket for any price. “Everyone has a price,” Ariely claims to have told him. O.K., Joseph responded, how about three grand?

On average, the amount that winners were willing to accept for their tickets was twenty-four hundred dollars. On average, the amount that losers were willing to offer was only a hundred and seventy-five dollars. Out of a hundred fans, Ariely reports, not a single ticket holder would sell for a price that a non-ticket holder would pay.

See my point? Within that group of a hundred fans, there was no “willing buyer/willing seller” price.

It’s certainly not impossible that lawyers at large record labels have a similar attitude of endowment toward their copyrights. Thus, in the DMCA, by imposing the “willing buyer/willing seller” standard, Congress may have given the CRB judges a impossible task.

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  1. Not being an attorney, I hesitate sharing my thoughts about this. And because I’m not a lawyer, no one should regard my comments as anything other than opinions expressed by a layperson.

    Still, whether one agreed with the decision the Copyright Royalty Board rendered last year,
    in my view, the CRB was able to rely upon the exceptions Congress created when it crafted the DMCA.

    Unfortunately for those of us involved in Internet radio, as we know, the DMCA imposed the “willing buyer and willing seller” standard on Internet radio.

    Before the DMCA was enacted, the standards for determining royalty rates that applied to Internet radio were those that were contained in the provisions of 801(b)(1), whose criteria attempted to balance the interests of the copyright holders with those of the copyright users and with the interests of the general public.

    Once Congress substituted the “willing buyer and willing seller” standard for the fairer 801(b)(1) provision, the Boards charged with setting royalty rates for the broadcasting of recorded material over the Internet were given leave to impose comparatively higher royalty fees for Internet-only radio stations. As the “willing buyer and willing seller” standard is more oriented to “market conditions” rather than an attempt to balance the interests of the copyright holders with the interests of others, it seems to follow that the CRB would act accordingly.

    Regardless of how one feels about the CRB’s judgment in this matter, the genesis of the difficulties suffered by those in Internet radio has to do with the way the DMCA was worded and some of the provisions that were contained therein.

    I know I’m stating the obvious, but long term solutions are more likely to be found in amending the DMCA itself, nullifying the “the willing buyer and willing seller” standard in favor of the older and fairer 801(b)(1) provision.

    Alternatively, enacting the Internet Radio Equality Act, or some variation of it, is necessary.

    I don’t know whether this applies, but I remember reading that, in general, distinctions created in law or different classes specified in statutes need to have a reasonable basis. That is, the creation of different classes should not be based on arbitrary distinctions.

    Late last year, where satellite radio was concerned, the CRB imposed royalty rates less than those requested by SoundExchange, and the latter’s appeal of the CRB’s decision was denied. For me, it seems logical to argue that the “willing buyer and willing seller” standard included in the provisions of the DMCA made for an unreasonable and arbitrary distinction, given the CRB’s ruling a year ago affecting Internet radio and the CRB’s more recent decision relating to satellite radio.

    As technologies converge and as satellite radio and Internet radio digitally broadcast recordings, I find it difficult to discern any other interpretation.

    I hope Congress or the courts examine these points.

    Thank you the opportunity to express my opinions.

    This is a helpful reference: http://textpattern.kurthanson.com/crb/53/copyright-law-and-the-crb-what-went-wrong


    Charlie · Feb 21, 12:06 PM · #

  2. The terminology used for the whole royalty-determination process involves not one, but two inaccurate uses of the word “willing”.

    “Grudging buyer/greedy seller” is far closer to the truth.

    Art Marriott · Feb 26, 08:39 AM · #

  3. The problem may not exactly be with the willing buyer/willing standard itself, but with the CARP’s and now the CRB’s interpretation and application of the standard. On its face, an arm’s length standard like the WBWS standard does not appear to mandate one industry-wide, one-size fits all rate. Similar standards are used in other areas of law and do not necessarily result in industry-wide rates. Instead, common sense seems to suggest that such a standard would produce multiple rates based on evidence produced by different webcasters about what rates they (on an individual basis) would have agreed to in the market.

    If it’s true that the WBWS standard does not mandate an industry-wide rate, the real failure in the determination process may be evidentiary in nature. In other words, the CRB’s failure to consider as probative evidence from multiple webcasters concerning appropriate rates would be a failure in the CRB’s application of the WBWS standard, not an inherent failure in the standard itself.

    Even so, the question of how to remedy the problem for future determinations persists. Amendment back to the 801(b)(1) standard is definitely a popular option. Another solution may be for Congress to clarify the application of the WBWS standard in such a way that the CRB would feel free to take into account the unique circumstances of individual types of webcasters. This of course would require the CRB or Congress to define the different types of webcasters…but hey, isn’t that what they do on a daily basis anyway? While there surely is not be one willing buyer/willing seller representative of an entire industry, there certainly may be a way to capture the many different willing buyer and sellers…

    Brian Flavin · Mar 20, 07:49 AM · #

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