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November 01, 2006

Blog 8 - Youtube's Copyright Mess: An Economic Analysis

Admit it – many of us have downloaded copyrighted files illegally online. Here’s a surprise – you might get charged for it. Businessweek, on October 27th, reported that a Peer-to-Peer file sharing administrator, Gary Stanley was sentenced to 5 months in prison for copyright violations. Technological advances have brought commercial success for businesses. However, internet has also opened a venue where law is harder to enforce. Internet created a huge black market for music, which dramatically cut down on CD sales, upsetting RIAA and recording artists. In recent weeks, video-sharing site Youtube received center attention on that issue. We will perform an economic and social cost-benefit analysis of sharing copyrighted materials online.

Youtube is a litigation landmine, according to a NY Times columnist. Why? Youtube’s enormous popularity is based on its innovative service of allowing its users to upload, view, and share video files. The precise ingredient that allowed it to secure its popularity (and profitability) is haunting them back, as they face litigations from numerous groups. One of them is The Japan Society for Rights of Authors, Composers and Publishers (JASRAC), who has started by requesting 30,000 copyrighted video from being removed from its website. You can read that article here. Youtube has also settled a deal with three of the four major music companies — Vivendi's Universal Music Group, Sony and Bertelsmann’s jointly owned Sony BMG Music Entertainment, and the Warner Music Group. The entailed, among others, Youtube coughing up $50 million in exchange for legally using the copyrighted materials. You can read that article here. The Google acquisition of Youtube has exacerbated the “landmine” problem, as lawsuits against Youtube is piling up. What’s the dilemma here for Youtube?

Such benefits and costs are ones that should be taken into, when Youtube decides to restructure its business. It is, however, much more interesting to look at the societal benefits and costs of sharing copyrighted materials. Here’s an economic analysis: Giving copyrights to the producers of the material (e.g. a music industry) is de facto granting them monopoly power. What do we know about monopoly power?

Monopoly Welfare Effect
Figure – The Economic Model illustrates how monopoly results in a “social lost,” colored in Gray.

If you don’t read Economics, just know that the gray area in the graph illustrates the “welfare loss” to the society. So why does law provide copyright? Many believe that the large profit that monopolies derive will lead to innovation. For example, Rod Stewart will not be producing the quality of music he produces if he earns $20,000 per album. In that prospective, Youtube’s video sharing effort hinders upon innovation. Yet, we need to consider the societal benefit from allowing the copyrighted materials to be shared: it will benefit the consumers. For example, an urban teen, who cannot afford a TV, can be inspired to become a lawyer after streaming Law and Order on Youtube. These are what economists like to call “externalities.” In the end, it is impossible to measure the exact ramifications of Youtube’s technology.

On that note, we still need to consider the law. Internet has increasingly been an arena where the rule of law has been ignored by many. This point is illustrated by the number of identity theft industries, which is a clear violation of the law. In the end, Youtube’s illegal practices violate the law, and that threatens the moral fabric of our society. We believe that such is such an important point that should force youtube to abandon its’ illegal business.

Are we advocating that Youtube should shut down? Hardly. Its video sharing technology can be used for a good cause. According to a news article, “prominent and not-so-prominent political campaigns are taking advantage of YouTube’s free video hosting to disseminate messages too expensive or too controversial for broadcast television.” (Click here to read the article). Exposure to a large segment of the population, in effect, is an opportunity for businesses, politicians, and individuals. This "spread of information" effect at a global stage could enhance welfare for many citizens. So before blaming technology, why not look for better ways to utilize it? (By the way, Youtube’s business line is “Broadcast Yourself” – not “share your illegal video here.”)

Posted by willmoon at November 1, 2006 01:02 AM

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