A Copyright Exception For Monetizing File-Sharing: A Proposal For Balancing User Freedom And Author Remuneration In The Brazilian Copyright Law Reform
// Volker Grassmuck / Apr 19, 2012

I. a new social contract

Copyright law was the core element in the social contract between authors and audiences that was negotiated in the 18th and 19th centuries. It worked well in regulating the relationship between commercial parties in the culture industry. The digital revolution has fundamentally changed the media — technological basis of the production, distribution and consumption of cultural goods. Private persons, whose actions have until recently been outside the scope of copyright law, can now be producers and global distributors of creative works. Therefore a new social contract concerning culture has to be negotiated.

The overall goals of this contract remain the same: to ensure the possibility of all citizens to have access to and participate in the knowledge society and their freedom of expression, to ensure the freedom of a diversity of authors and artists to create and their right to an equitable remuneration for the use of their works, and to ensure the freedom of technologists to innovate, in particular the freedom of the Internet that has brought us a wealth of novel ways to communicate, cooperate, and do business.

Also the two core elements of this contract remain: the willingness of authors and artists to create works and the willingness of audiences to pay them for doing so. This payment will continue in a range of ways, from market transactions, donations, corporate sponsorship to forms of collective redistribution like public funding and collective rights management.

For a large number of uses by a large number of individuals of a large diversity of works the conventional response of copyright law is collective management. When in the 19th century composers were unable to individually collect a remuneration from each cafe house and bar that performed their music, they joined hands and formed the first collecting societies that since then collectively collect the money for the community of music authors. When in the 1950s audio tape recorders became available for private use, enabling people to make non-commercial reproductions in their homes, in response the private copying exception was invented in 1965. Neither could the technology or their use for making reproductions be prohibited, nor could authors or even their collectives go after each individual owner of a tape recorder to collect their fair remuneration. Therefore the German legislature decided to permit private copying and required the producers and importers of tape recorders to add a copyright levy to the price of their devices. The music collecting society collects this levy and redistributes it to its members. This private copying exception was quickly adopted throughout Europe and other droit d’ateur countries. The levy was later extended to other recording devices like photocopying machines and video recorders and to recordable media.

Collective rights management organizations (CMOs) thus developed as crucial institutions in the social contract between authors and audiences, ensuring authors a fair remuneration for mass-scale secondary and tertiary uses of their works and ensuring audiences the informational freedom of private copying. Because of their special status, CMOs are subject to legal regulation and public approval and oversight. Internally they are membership organizations with democratic decision-making. Currently in Germany there are 13 CMOs for different work categories (music works, music recordings, text works, images, movies and other audio-visual works). Peer-to-peer (P2P) file sharing is a mass-phenomenon comparable to private copying, practiced by about half the Internet population. The adequate response is again a collectively remunerated copyright exception.

II. repression does not work

Today there is a discrepancy between copyright law and the widespread practice of file sharing. So far attempts to resolve this discrepancy were directed at repressive measures in order to make cultural practices conform to the law: in the form of technology (Digital Restrictions Management (DRM)), deterrent campaigns à la “Pirates are Criminals,” and mass-scale civil and criminal proceedings. None of these have had any measurable impact on file sharing. But instead of recognizing the failure and changing the approach, the same logic is bringing forth evermore extremist forms of repression. Excluding infringing citizens from the Internet for up to one year was pioneered in France and is now being called for by culture industries in many countries, including Brazil. The secretly negotiated multi-lateral Anti-Counterfeiting Trade Agreement (ACTA) is intended to introduce this digital death sentence globally. Deep Packet Inspection (DPI) for filtering file sharing out of the Internet is now being tested by UK Internet Service Provider (ISP) Virgin Media and others.

All this is done under the unproven assumption that repression will improve sales opportunities for copyrighted products and with the proclaimed but equally unproven intention to increase revenues of authors and artists. A much more likely and, indeed, observable result of repression is not a decrease of file sharing but an increase of trackerless P2P networks encrypted and anonymous P2P file sharing, of closed trackers, file-hosting, sharing on Usenet, offshore hosting, and hard disk-copying. Repression predictably calls in the next round of the technological arms race. As U.S. law scholar Lawrence Lessig explains, the criminalization of the whole generation of our children “can’t stop these activities, it can only drive them underground.” He points out one dramatic effect it does have: the erosion of the trust in the legal system. If cultural reality cannot be made to conform to copyright law, then copyright law has to be adapted to reality by legalizing what can not be prevented anyway and at the same time ensuring an equitable remuneration to authors.

III. the file sharing exception

The model has been discussed under different names: “alternative compensation system” (William Fisher), “noncommercial use levy” (Neil Netanel), “licence globale” (Alliance Public Artistes), “culture flat-rate” ( and, “contribution créative” (Philippe Aigrain). Variations of its details are, of course, being discussed, but the contours of the general model have emerged by now. Following the precedent of the private copying exception, the goal is:

a legal permission for private online sharing of published copyright protected works for non-commercial purposes subject to a collectively managed levy.

The permission refers to private, natural persons, thus excluding companies and other legal institutions. It refers to published works, ensuring the right of first publication to the author. Secondary and tertiary uses are already regularly collectively managed. It refers to non-commercial uses: anybody earning money from the use of another’s work will continue to be required to obtain a license. “Sharing” refers to both up- and downloading. While downloading is already covered by the private copying exception in some countries, permitting uploading requires an exception to the exclusive right of making available. “Online” refers to networks using the Internet protocol, both wire-based and wireless. “Levy” refers to a fixed sum to be paid by the beneficiaries of the permission and allocated by CMOs to authors based on the measured popularity of their works. Finally the permission should be implemented in copyright law in order to achieve legal certainty for authors, performers, exploiters and Internet users alike.

A. the culture flat-rate in copyright law

Three models for implementing such a file-sharing permission in copyright law have been suggested.

Mandatory collective management of the exclusive making-available right
This was first implemented by Hungary. Silke von Lewinski from the Max Planck Institute for Intellectual Property in Munich analyzed the Hungarian provision and found it in accordance with international and European copyright law. 18 The French Alliance Public-Artistes commissioned a legal study from France’s most renowned copyright scholar André Lucas who also found mandatory collective management compliant with French, European, and international law. This model was supported by French Members of Parliament from both the socialists and the conservative parties who passed it into law in December 2005. Alas, the decision was reversed soon after.

Extended collective licensing
This instrument has been widely used in Nordic European countries since the early 1960s for broadcasting and cable retransmission and has recently been applied to the reproduction of works for educational purposes and the digitization of works in libraries, museums, and archives. 20 It extends a license concluded between a CMO and a group of users of certain rights to authors, performers and exploiters who are not a member of the CMO. These non-members usually have the right to opt-out of such an agreement. With respect to file sharing, this model has been discussed particularly in Italy, leading to two bills introduced in parliament in July 2007 and in April 2008.

Copyright exception
A third option is to model a file-sharing exception on the time-tested private copying exception. This has been tested by Alexander Roßnagel and his team at the Institute of European Media Law (EML) on commission from the German and European Parliament factions of the Green Party. Their study has shown that such an exception is feasible within the framework of existing German and European law, even though it requires changes in both. They conclude that “[t] he introduction by law of a culture flat-rate therefore requires amendments to both national and European law, yet it remains nothing less than the logical consequence of the technological revolution ushered in by the internet.”

It seems that by subjecting the complete scope of the making-available right to mandatory collective management, the first model is going too far, while the second model is not going far enough. Permitting exceptions to the exception would still require policing the boundary between licensed works and those that have been opted-out of the agreement. Therefore a clearly defined copyright exception is the best option to achieve legal certainty for all parties involved.

B. which works to include?

Empirical research shows that nearly all categories of copyright protected works are being shared to varying degrees depending on the characteristics of the different P2P protocols. Therefore the permission should extend to all categories that are also covered by the private copying exception. Whether computer software and games that have been exempted from the private copying permission and thus also from receiving a share from the levy should be included is up for discussion with the respective industries. 

C. who should pay?

The beneficiaries of the permission, i.e., the individual private Internet users, owe the creators of the works they share. Internet Service Providers (ISPs) do not download music or movies, just as the makers and operators of photocopying machines, audio recorders, and MP3 players do not copy. The argument of a “contributory liability” is not convincing: by the same token the providers of electricity, search engines, computer monitors, chairs, etc., would contribute to file sharing. Conversely, no Internet users would cancel her broadband subscription if P2P were to disappear.

However, for practical reasons, one cannot expect consumers who acquire these devices, media and services to pay the copyright levy in a separate transaction. Therefore legislatures in many countries have tasked the producers and importers of devices and media with collecting the private copying levy. For reasons of transparency and fairness, German copyright law since its 2008 reform requires that end-consumer bills separately indicate the copyright levy included in the price for these products. Likewise, ISPs and mobile phone companies that provide Internet access to private homes are the logical parties to add the file-sharing levy to their monthly customer bills and transfer the money to the CMOs. LAN houses provide a large number of Brazilians who cannot afford broadband at home with access to the Internet. Assuming that their clients actually use file-sharing applications for up- and downloading copyrightprotected works (this needs to be empirically assessed), LAN houses, like ISPs, should add a copyright levy to the price they charge. The rate, however, cannot be so high as to exclude a significant portion of the population from Internet access altogether. Just as with the current plans for establishing a national broadband service, public policy has to balance the interest of society to include all citizen in the opportunities of the digital age with the interests of authors and publishers as well as those of ISPs and LAN houses.

D. are they willing to pay?

The Swedish music collecting society STIM in a survey published in February 2009 found that 86.2% of responding Internet users are willing to pay a monthly copyright levy entitling them to file sharing. 26 This willingness has also been shown when bands like Nine Inch Nails and Radiohead released albums for free download and received significant amounts of voluntary payments from their fans. The online indie label releases all its albums under a Creative Commons license expressly permitting file sharing, which effectively makes payment voluntary. Magnatune also allows its customers to pay a price of their own choice on a scale from 4-14 Euros. Rather than paying the lowest possible price, the average payment is between 8 and 9 Euros, clearly indicating that listeners are willing to pay creators a price they deem fair.

The same willingness was shown for computer games when in October 2009 the developer 2DBoy offered its game “World of Goo” on a pay-what-you-like basis. Remarkably, it found the average price paid higher for GNU/Linux users than for Windows users and, mapping average payment per country onto per capita GDP, it found the “generosity factor” to be exceptionally high in Brazil. 27 Quite the opposite from industry claims that what is gratis is considered worthless, one can conclude that people acculturated in free and sharing culture are more aware that creators need to be remunerated and more willing to behave accordingly.

E. but I don't share

The copyright levy should be mandatory for all Internet users. Just like permitting opt-out for individual works, making payment optional would require policing the boundary between those who pay and those who do not, which would largely defeat the public policy purpose of the file-sharing exception.

An objection often raised against a levy mandatory for all Internet users is: “I don’t file-share. Why should I pay?” This should be alleviated by differentiating the rate by access speed. Email-only dial-up access should be exempt. Given that half of all Internet users file-share already and nearly 90 percent are ready to pay for legalized P2P, one can expect the number of people to whom this objection applies to shrink even further once a file-sharing exception is introduced. Also non-file-sharers benefit from decriminalization and wider access by gaining a richer cultural sphere.

Cross-subsidizing is already common in many cases. Taxes of citizens without children are used for funding schools. Someone who buys a detergent in a supermarket pays for the advertising-funded movie on “Free TV” that she is not watching. The private copying levy on a recordable DVD is due even if the buyer uses it for a back-up copy of her own data. Finally, if 86.2% of the Internet population are willing to pay for the right to file-share, may the other 13.8% stop it? If so, by the same logic we would not have public broadcasting, opera, health care, police or national defense.

F. how much?

Objectively, it is impossible to determine the positive impact due to its “discovery effect” versus the “damage” of file sharing that a levy might compensate. Subjectively, the pay-what-you-like models give an indication as to how much certain works are worth to certain people. In actuality, rate setting in collective management is a very difficult procedure. In case of the private copying levy, rates are negotiated between CMOs and the associations of device and media producers. For the file-sharing levy, negotiations would include not only ISPs but also artists and Internet users who are paying in the end. Also public mediation by the newly proposed Instituto Brasileiro de Direito Autoral (IBDA) would be helpful, if not even essential, for successfully concluding an agreement in the public interest.

Ever-since Fisher calculated the fair amount to be roughly US$5 per month, five has been the magic number in the debate, varying between dollars, pounds, euros, reais, etc. For a Brazilian household that can afford broadband Internet access, five reais per month is not a prohibitive amount. Assuming 6.6 million households with broadband Internet access in Brazil, R$5 per month yields an annual amount of R$396 million.

Revenues for music CDs and DVDs reportedly decreased by 31.2% (or R$141.7 million) to R$312.5 million in 2007, while in 2009 ECAD (Escritório Central de Arrecadação e Distribuição ) was able to distribute 17.06% (or R$46.34 million) more revenues from collective management of music rights to its members than in the previous year. Movies generated revenues of R$966 million in 2008 at the box office, which was an increase of a full 25% over the previous year. Movie DVDs reportedly saw a drop by 10.83% from 27.2 million units sold in 2007 to 24.7 million in 2008. Conservatively assuming a sales price of R$40.00 this amounts to a decrease by R$120 million. The Brazilian book market showed a slight annual increase as well, by 6.03% to R$2.286 billion in 2007. The increases in cinema and book revenues occurred in spite of widespread file sharing, and there are reasons to assume that also the decrease for recorded music and movie DVDs are unrelated to it. But even if one assumed that file sharing is the single cause for the decline of the market for music and movie discs (by approximately R$261.7 million) and that the levy would have to compensate for it, the levy proceeds of R$396 million would be more than sufficient to do so.

A realistic approach, of course, cannot start from such a simplistic and flawed assumption. It will have to take into account the complex dynamics in each of the sectors and include the whole range of revenue channels for creative works like live performances, cinema screenings, commissioned works, merchandizing, etc., that have been shown to be positively impacted by file sharing.

For the music industry it has been shown that the revenues from 2000 to 2008 remained stable, with the decrease in recorded music made up for by increased revenues from live music and collective management. Recorded music sales are shifting rapidly from CDs to digital distribution. Commercial download services, by ensuring quality, speed and freedom from malware, will be able to compete with legalized P2P, which, being open networks, will continue to suffer from these three issues. After all, iTunes was established at a time when P2P use was already widespread. In particular new business models based on fairness, benefit sharing, and transparency like Magnatune and those promoted by the Fair Music Initiative will increasingly attract both artists and paying audiences. According to the International Federation of the Phonographic Industry’s (IFPI) 2010 annual report, album downloads globally rose an estimated 20% in 2009, with Internet and mobile downloads and streams now accounting for more than a quarter of all recorded music industry revenues worldwide. An important public policy goal is cultural diversity. Since 2000, the worldwide annual release of new music albums has more than doubled. Thus the digital environment is clearly promoting diversity. The increase is due to the activities of independent labels and, since it occurred during the time of the rise of file sharing, one can conclude that file sharing is helping rather than hindering cultural diversity.

Last but not least, a realistic approach has to start from recognizing the fact that current levels of authors’ income are far below the average national income in all professions, that a few stars gain a disproportionate percentage of the revenues, that female authors earn significantly less than their male colleagues, and that the typical author’s income has been decreasing since 2000. These facts are unacceptable for a society that defines the culture and creative industries as its central dynamic. In fact, audiences are aware of this unbearable situation of authors and artists, leading to voluntary payments that are on average higher than the forced payments in services such as iTunes. Therefore, it is not unlikely that negotiations about fair rates for the file-sharing levy that primarily involve artists and audiences will result in higher rates than if collecting societies and industry associations were to conduct them alone.

Thus, rather than “compensation” of alleged “damages,” the system should strive to create “sustainable resources for creative activities in the digital era” that ensure that this creativity can flourish and grow. The seemingly simple question “How much?” actually leads to the core of the social contract between artists and audiences that is currently being negotiated.

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Volker Ralf Grassmuck is a media-sociologist focusing on the digital revolution and the ensuing changes in cultural practices. He has conducted research on the knowledge order of digital media, on copyright and the knowledge commons at Free University Berlin, at Tokyo University, and at Humboldt University Berlin and is currently a visiting professor in the Grupo de Pesquisa em Políticas Públicas para o Acesso à Informação (GPOPAI) at the Escola de Artes, Ciências e Humanidades (EACH) of the Universidade de São Paulo (USP).

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