Piracy statistics UK and France – and a little more price-elasticity

In March 2013 UK regulator Ofcom published new statistics on the infringing consumption of copyright content on the internet. This survey – referred to as “Wave 2” by Ofcom - is the second such exercise and covers online behaviour by users aged 12+ in the period August to October 2012. Conveniently, the French HADOPI published similar statistics in January 2013, addressing online behaviour in the year ending October 2012.

It seems that in the UK the piracy situation is essentially stable, as we wait for the introduction of the Graduated Response. In France, where the GR has been operating since September 2010, the proportion of consumers obtaining copyright content exclusively from legal sources has significantly increased.

When (and if) the “initial obligations code” for the UK GR comes into force, Ofcom will come under a duty under section 124F of the Communications Act 2003 to report to the Secretary of State on, among other things, “the current level of subscribers' use of internet access services to infringe copyright”. However, in 2011 the Hargreaves Review of Intellectual Property and Growth recommended that Ofcom should start collecting data at once, without waiting for its statutory duty to commence. Accordingly, the results of the first survey, “Wave 1”, were published in November 2012, describing online behaviour in the period May to July 2012.

Wave 2 indicates that levels of online infringement have not changed significantly since Wave 1, save that possibly the “hard core” of committed infringers has slightly increased. Taking all content types together, 71% of online consumers of content in the UK claimed to consume only legal content (Wave 1: 71%). This represented 41% of all internet users (Wave 1: 40%). 19% said that they consumed both legally and illegally (Wave 1: 22%) - 11% of all internet users (Wave 1: 12%). 9% admitted consuming only illegally (Wave 1: 8%) - 5% of all internet users (Wave 1: 4%).

According to Wave 2, films were the most popular target (and increasingly so) of illegal consumption among those who consumed any particular category of content online: 36% of those who watched any film content had done so illegally on at least one occasion in the 3-month survey period (Wave 1: 31%). However, this represented only 6% of the internet-using population (Wave 1: 6%). Strikingly, the survey reports that: “Online film copyright infringers were responsible for illegally downloading or streaming an estimated 47% of all digital film consumed on the internet.” The proportion found by Wave 1 was 35% - a considerable change in a few months (though one notes a large increase in volumes which may have to do with release schedules. A comparison may be misleading). For music, on the other hand, 10% of internet users had consumed illegally (Wave 1: 8%). That is to say, among content types consumed, film was most likely to be consumed illegally, but the number of infringers was smaller than in the case of music.

By comparison, in France the proportion of online content consumers obtaining content exclusively from legal sources rose from 71% in December 2011 to 78% in October 2012. The “hard core” obtaining content solely from illegal sources fell as a proportion of consumers from 6% to 3%. As a proportion of internet users, the proportion of infringing consumers (whether obtaining all or only some of their content from illegal sources) fell from 20% to 15%. (It perhaps should be noted that the definition of a content consumer was that the internet user had consumed at least one cultural good online in the preceding 12 months, as compared with a survey horizon of 3 months in the UK study.)

The daunting annexes to the Ofcom report contain rich details which must be of great interest to commercial strategists. For example, Ofcom measured the willingness-to-pay of consumers, finding – predictably – that demand rose as price fell. For downloading a hypothetical newly released film from a reliable online service, the average price that a 100% legal (so to speak) consumer was willing to pay was £4.13, a partially illegal consumer £4.53 and a 100% illegal consumer £3.18. This is consistent with Ofcom’s general conclusion that it is those who obtain content from both legal and illegal sources who are the biggest spenders on legal content.

source: Ofcom

One might infer that enforcement against such persons would produce increased legitimate sales – as seems to be happening in France (see also Danaher (2012)). Leaving that aside, Ofcom’s remarkable report is more evidence that the market for licensed content is price-elastic – as argued in my last post on the UK’s controversial proposal to introduce a private-copy exception without compensation for right holders.

Evidence-based policy making and the private copy

The Graduated Response does not require specific legislation - it can be founded on simple contract between right holders and ISPs (as in the US). However, its structure and, one might say, public legitimacy depend on the underlying copyright law. One of the most debated proposals of the Hargreaves Review of IP and Growth was that the United Kingdom should introduce a private copying exception. The Copyright Directive 2001/29/EC allows Member States to adopt such an exception and most EU countries have done so, usually introducing a levy on blank media or copying devices from which authors are compensated. The UK has long been implacably opposed to any kind of levy. This has accordingly been a key element in the case for or against a private copying exception.

In some countries, such as the Netherlands, the view is widely held that the downloading of pirate copies is sanitised by the exception for private copying. The downloader is not infringing copyright, so the argument goes - the legality of the source is irrelevant. However, right holders would argue that this notion is inconsistent with the Directive and some jurisdictions have agreed. In accordance with the Berne Convention, the Directive requires that all exceptions to the reproduction right must satisfy the so-called Three-Step Test, namely that the exception applies only "in certain special cases, provided that such reproduction does not conflict with a normal exploitation of the work and does not unreasonably prejudice the legitimate interests of the author" (Article 9(2), Berne). 

In September 2012, in ACI Adam BV and Others v Stichting de Thuiskopie and Others (Case C-435/12) the Dutch Supreme Court referred this question  to the Court of Justice of the European Union (CJEU), so we shall find out eventually who is correct. Of course, Member States are free to provide that copying from an illegal source is not permitted and many do, whether or not Berne and the Directive require it.

Mr Hargreaves and the UK IPO have been emphatic about the need for evidence-based policy-making. Curiously, it seems that evidence-based policy-making can proceed retrospectively: a policy is adopted, then evidence is sought to support it. The dangers of this approach became apparent yesterday with the publication by the UK IPO of economic research into the so-called pricing-in of the cost of private copies.

In December 2011, the IPO consulted on Hargreaves' proposals for exceptions and in December 2012 published its response, approving its proposal for a private copying exception without compensation.

Under the Directive, the "legitimate interests" of authors are protected by the requirement that it is a condition of a Member State's adoption of a private copying exception that "the rightholders receive fair compensation which takes account of the application or non-application of technological measures" (Article 5(2)(b), Directive). In Padawan v SGAE (Case C-467/08) the CJEU held that private copying "must be regarded as an act likely to cause harm to the author of the work concerned" - in effect a presumption that compensation is required to the right holder if there is a private copying exception. However, it clearly remains a factual matter how far right holders are harmed by the loss of their right to license private copying. The Directive says that "where the prejudice to the rightholder would be minimal, no obligation for payment may arise" (Recital 35). 

The UK maintains that right holders suffer no harm from private copying, as they can "price in" the cost of the opportunity to make a private copy when selling the content. Therefore, no compensation is required. This idea first appeared in the Gowers Review of Intellectual Property (2006), in a more nuanced form (it was recognised that the pricing-in could not be assumed for existing copies in consumers' hands). Although Gowers was on a different level of quality compared with the Hargreaves Review, this was a piece of nonsense, as it assumed that the market for content was always completely price-inelastic. Hargreaves simply asserted that "As rights holders are well aware of consumers’ behaviour in this respect, our view is that the benefit of being able to do this is already factored into the price that rights holders are charging." As for evidence, however, there was none.

Yesterday the IPO published an empirical study by Roberto Camerani and others, Private Copying. The research shows that home entertainment distributors can and do charge more for copies which can be copied – such as UltraViolet-enabled copies. This is what one would expect in a market which gives at least some protection to copyright works and in which technological measures are at least somewhat effective to allow retailers to segment the market in accordance with willingness-to-pay.

At the same time, the economists say in relation to music: “We did not find any evidence in support of a widely-held view that stores are including in their price the permission to copy.”  In the summary, they say: “However as private copying for personal use is widespread and allowed in the UK, it is plausible that private copying is already largely or fully priced in the UK market.” I cannot notice any basis for that rider in the body of the report (and one wonders whether the sentence was not suggested by some helpful civil servant), but it may be right: if content is very widely available without copy-protection, right holders are probably not able to charge a supplement for the opportunity to make a private copy. It does not follow, however, that they can in fact charge all purchasers for that possibility by pricing it into all retail prices - even if right holders were the price-setters. All that is for another discussion.

Be that as it may, it results that price discrimination in the audiovisual market is empirically observed. Home entertainment retailers can charge more for the right to make private copies - or not do so.  Two points follow. First, the market has worked to provide private copying solutions, so an exception is not required for audiovisual content (unless we think it is a bad thing that people can get the content they want by paying for it). Second, the assumption that the possibility of copying is priced-in to non-licensed products is false. This is surely because digital rights management works well enough to prevent the average consumer from copying – as the film industry has always said.

I wonder whether this means the end of the UK proposal for a private copying exception for audiovisual content - or the end of the short life of evidence-based policy-making...

Irish Data Protection Commissioner fails to halt GR

The Irish High Court recently applied CJEU jurisprudence to quash a direction of the Data Protection Commissioner that sought to prevent ISP Eircom operating a voluntary Graduated Response scheme. This continues the trend of judicial disregard for the fulminations of the Article 29 Group and their lay followers.

In January 2009, the Irish Recorded Music Association, representing record labels, settled an injunction claim against Eircom, the leading Irish ISP, on the basis that the latter would implement a Graduated Response scheme. The compatibility of the scheme was tested in proceedings before the High Court (EMI Records & Ors -v- Eircom PLC [2010] IEHC 108 (16 April 2010)). However, it was subsequently held that there was no jurisdiction under the Irish Copyright and Related Rights Act 2000 to issue an injunction against an ISP requiring the prevention of infringements by subscribers (EMI Records [Ireland] Ltd & Ors -v- UPC Communications Ireland Ltd [2010] IEHC 377 (10 November 2010)). Eircom said that it would continue, however, to perform the terms of its compromise agreement and apply the Graduated Response in the case of detected infringements (Eircom press release, 8 December 2010). (The Irish Government has recently amended the 2000 Act to correct this gap in its implementation of Article 8(3) of the 2001 Directive on Copyright in the Information Society.)

On 11 January 2012, however, the Irish Data Protection Commissioner issued a direction to Eircom instructing it to desist from operating its graduated response scheme, citing violations of data processing law. This provoked an application for judicial review by the record companies party to the scheme (EMI Records (Ireland) Ltd v Data Protection Commissioner [2012] IEHC 264). On 27 June 2012, Mr Justice Charleton, granted the application, quashing the direction. Charleton J held that the Commissioner’s sketchy reasons for issuing the direction were misconceived. Reviewing recent decisions of the Court of Justice of the European Union, he held that the operation of a Graduated Response scheme did not per se violate data protection law, and that to the limited extent the Commissioner had given reasons for his direction, he had misunderstood the law.

It seems that the judges, both national and supra-national, continue to upset the assumptions of the online privacy lobby.

Online piracy declines in France - but by how much?

HADOPI, the High Authority responsible for implementing the Graduated Response in France, has marked its first 18 months in operation by publishing a report on the changing level of online infringement. Although the downward trend is clear, the report offers four different measurements of the decline. Using panel surveys, the fall in P2P infringement over the 12 months of 2011 was either 17% (Neilson) or 29% (Médiamétrie). Studies based on the analysis of actual network traffic, on the other hand, indicated a fall of 43% (Peer Media Technologies) or 66% (ALPA - the French anti-piracy association for film).

This divergence may not be as perplexing as it first seems. The user surveys indicate the number of visitors to pirate sites, not the number of downloads per visitor. In relation to the network surveys, the Peer Media figure of 43% represents initiated downloads of a rolling slate of the top 200 to 300 films. The ALPA figure of 66% represents completed downloads of the top ten films (also a rolling slate). Many downloads are not completed; and the top 10 titles are much more in demand than the top 300, so a decline in the overall level of P2P infringement would be expected to have a proportionately greater effect on the most popular (and profitable) titles.

Coupled with the recent academic analysis of Dr Danaher and colleagues (a recent video presentation from Canada Music Week here), this evidence tends to support the proposition that HADOPI is succeeding. Its leadership may relieved that they have been able to reach such a point before the presidential election, the first vote in which takes place on 22 April. Under a Président Hollande, HADOPI's continued existence would surely be in question, even if the candidate of the Partie Socialiste has become increasingly nuanced on the subject.

English Court of Appeal upholds the Digital Economy Act; slaps down the European Data Protection Supervisor

Today the English Court of Appeal handed down its judgment in British Telecommunications plc and TalkTalk Telecom Group plc v Secretary of State for Culture, Olympics, Media and Sport [2012] EWCA Civ 232. BT and TalkTalk had sought judicial review of the Graduated Response provisions of the Digital Economy Act 2010 (DEA) and the statutory instrument dealing with the costs of the process. On 20 April 2011, Mr Justice Kenneth Parker had handed down a judgment rejecting all the ISPs' complaints about the DEA, but striking down part of the costs order (see my post of that date). Today the Court of Appeal dismissed the ISPs' appeal in respect of the DEA, but struck down a slightly wider portion of the costs order. In the course of doing so, they made some important observations about the consistency of Graduated Response with the EU's data processing rules, giving a no doubt unintentional sideswipe to Peter Hustinx, the ubiquitous European Data Protection Supervisor.

The ISPs' challenge to the DEA on appeal was as follows:

(1) the DEA was a "draft technical regulation" that should have been notified to the European Commission under the Technical Standards Directive 98/34/EC. Rejecting this, the Court of Appeal held that it was the Code of Initial Obligations, on which Ofcom has been working, that was the "technical regulation". The DEA itself was more in the nature of enabling legislation which did not produce binding legal effects on individuals.

(2) the DEA was incompatible with the Electronic Commerce Directive 2000/31/EC, because (a) it would render ISPs potentially "liable for the information transmitted", contrary to the "safe harbour" in Article 12; and (b) it amounted to a restriction on the freedom to provide information society services from other Member States within the field exclusively governed by the Directive. The Court of Appeal held that the DEA did not make the ISPs liable for the "information transmitted" - that referred to liability arising from the "information", such as copyright infringement liability, not regulatory obligations. In any case, the Directive explicitly provided that it did not "affect the possibility for a court or administrative authority, in accordance with Member States' legal systems, of requiring the service provider to terminate or prevent an infringement". That was exactly what the DEA did. On the preemption point, the Court observed that the Annex to the Directive explicitly excluded "copyright" from the exclusive field of the Directive.

(3) the DEA was incompatible with the Data Protection Directive 95/46/EC (DPD) and the Privacy and Electronic Communications Directive 2002/58/EC (PECD). As to the DPD, right holders using the procedure would violate the data processing rights of subscribers by gathering their IP addresses and information about their allegedly infringing activity. However, the Court of Appeal rejected the proposition that there would be any illegality in such evidence collection, as processing is permitted under the DPD if it "is necessary for the establishment, exercise or defence of legal claims" (Article 8(2)(e)) - which was the present case. As for the PECD, which regulates the processing of "traffic data", any processing fell within an exception under Article 15. Referring to the ECJ decision in Productores de Musica de España (Promusicae) v Telefonica de España Case C-275/06, the Court of Appeal held that the processing of traffic data was permitted for the purpose of the protection of the rights and freedoms of others, including the protection of the right to property. The DEA was enacted for that purpose and its operation entailed no impermissible data processing.

(4) the DEA was inconsistent with the Authorisation Directive 2002/20/EC (as amended in 2009) on the freedom to operate in the telecommunications sector. The ISPs contended that the copyright protection provisions fell within the Directive's definition of a "general authorisation" and so should have been included in the general licensing arrangements for ISPs, not in separate legislation; and that in any case the copyright protection provisions were conditions attached to the ISPs' general authorisation that fell outside the list of conditions permitted under the Directive. The Court of Appeal held that there was no obligation to include all authorisation provisions in the "general authorisation", at least in relation to national measures intended "to pursue general interest objectives, in particular relating to content regulation and audio-visual policy" (referring to Article 1(3) of the Framework Directive 2002/21/EC on telecoms regulation); and in any case the DEA fell within the list of permitted conditions set out in the Annex to the Authorisation Directive, being " Restrictions in relation to the transmission of illegal content, in accordance with [the Electronic Commerce] Directive 2000/31/EC". BT and TalkTalk also attempted to argue that it was discriminatory and disproportionate to exclude smaller ISPs and mobile providers from the scheme. The ISPs affected have some 93.4% of the market, so the Court gave this short shrift.

The Court of Appeal therefore rejected all the ISPs' arguments relating to the substance of the DEA. On the question of the costs of operating the procedure, they agreed with the ISPs that it was inconsistent with the Authorisation Directive to impose on them any of the costs of the appeals body set up to handle subscriber appeals. It had been intended that ISPs would bear 25% of those costs. Now right holders will presumably be expected to fund 100%. 

And what about the European Data Protection Supervisor, Peter Hustinx? The EDPS, a crusader for ever-widening application of data privacy rules, issues Opinions on matters of public policy, whether requested to do so or not. In June 2010 he saw fit to issue an Opinion "on the current negotiations by the European Union of an Anti-Counterfeiting Trade Agreement (ACTA)". 

The Opinion recites that "the EDPS particularly regrets that he was not consulted by the European Commission on the content of such an agreement." Nothing daunted, Mr Hustinx issued his Opinion anyway, expatiating on the data privacy and human rights evils of the Graduated Response, which at that time some thought might be included in the treaty (it was not, as it turned out). 

The judicial view is one of the many hardships that data privacy officials have to bear in the course of their important work. In the BT case, the Court of Appeal did refer to the Opinion of the EDPS. Suffice it to say, it did not carry the day:

"I should mention for completeness that the appellants placed reliance in this context on an Opinion dated 22 February 2010 of the European Data Protection Supervisor ("the EDPS") on then current negotiations by the EU of an Anti-Counterfeiting Trade Agreement with third countries. We were told by [Counsel] that the Opinion was provided by the EDPS of his own motion and was based on the EDPS's own understanding of what was then proposed. At paragraph 52 of the Opinion, in relation to the possible imposition on ISPs of a "three strikes internet disconnection policy", the EDPS acknowledged that the collection of targeted, specific evidence, particularly in cases of serious infringements, might be necessary to establish and exercise a legal claim, but he cast doubt on the legitimacy of wide-scale investigations involving the processing of massive amounts of data of internet users. It is not clear that he had Article 8(2)(e) of the DPD specifically in mind, but if he did it is difficult to see why the applicability of that provision should depend on the scale of the operation. In any event the view expressed by the EDPS is not binding on us and it does not cause me to alter my own view that the processing in this case would fall within Article 8(2)(e)."

HADOPI boosts legitimate sales

On 23 January 2012, the International Federation of the Phonographic Industry published its Digital Music Report 2012. Alongside news about the state of the online music business, the report referred to new research on the effect of the French HADOPI laws. In "The Effect of Graduated Response Anti-Piracy Laws on Music Sales: Evidence from an Event Study in France", US academics Brett Danaher and others examine iTunes sales data in France in the context of the enactment of the HADOPI laws. In a rather persuasive analysis, they find that HADOPI resulted in an increase in iTunes sales of some 22.5% for individual songs and 25% for albums. 

This research is unusual in that, on the basis of a powerful dataset, the academics were able to estimate the effect of enforcement measures on revenues. Almost all the prior research focused on the less immediate question whether illegal file sharing damaged legitimate sales.  Apart from oft-quoted (but discredited) papers by Oberholzer-Gee and Strumpf (2005 version), that research generally found a substantial effect on legal sales. However, unless enforcement makes a difference to sales, the question of damage is merely of academic interest to business people. The Danaher paper points out that its conclusions probably represent a minimum effect on the legitimate market, as there are legal music services other than iTunes which could be expected also to have benefited from HADOPI.

It will be interesting to see whether this transparent research will have any impact on the debate about online piracy, which has a theological, rather than a scientific, character. 

EU judges set Belgian court straight on filtering

The Treaty on the Functioning of the European Union - once the Treaty of Rome - provides that the Court of Justice of the European Union "shall have jurisdiction to give preliminary rulings concerning... the interpretation of the Treaties" (Article 267). It is interesting to bear this definition of its jurisdiction in mind when considering the decision handed down today in Case C-70/10, SABAM v Scarlet Extended SA, referred from the Belgian court.

It was in 2004 that SABAM, a music collecting society, obtained a decision from the Brussels Tribunal de première instance entitling it in principle to an injunction against Scarlet, an ISP, requiring it to prevent the mass pirating of works of its repertoire through peer-to-peer file-sharing. In 2007, following a report by a court-appointed expert and some procedural wrangling, a further judgement was handed down which required the ISP to implement a filtering mechanism based on (highly accurate) fingerprinting technology (the method specifically considered was that of Audible Magic). The Belgian courts approached the whole case with a mixture of insouciance and common sense which was almost bound to lead to a reference, and so it did... 

The defendant appealed to the Cour d'Appel de Bruxelles, which in January 2010 referred to the EU Court certain questions of interpretation under Article 267 of the Treaty, namely whether the relevant Directives and the European Convention on Human Rights permitted a Member State to authorise a court to issue an injunction requiring an ISP "to install, for all its customers, in abstracto and as a preventive measure, exclusively at the cost of that ISP and for an unlimited period, a system for filtering all electronic communications, both incoming and outgoing, passing via its services, in particular those involving the use of peer-to-peer software, in order to identify on its network the movement of electronic files containing a musical, cinematographic or audio-visual work in respect of which the applicant claims to hold rights, and subsequently to block the transfer of such files"; and if so, do the Directives require the national court "to apply the principle of proportionality"? 

Today the EU Court handed down a brief judgment giving its answer. The implications of its lapidary remarks will reverberate through national courts in the coming years.

The EU Court confirmed that a national court may order an ISP to take action to terminate infringements and also to prevent future infringements (confirming that the principle expressed in the recent Case C‑324/09, L'Oréal and others, applies to copyright cases as it does to trade marks). However, the implementation of a filtering system would amount to the general monitoring of Internet traffic, contrary to Article 15 of the Electronic Commerce Directive. Also, as previously decided in Case C‑275/06, Promusicae, the protection of intellectual property under Article 17 of the European Charter of Fundamental Rights was not absolute, but had to be balanced against other fundamental rights, such as the freedom of Scarlet "to carry on a business" (Article 16, Charter). The injunction would require the ISP "to install a complicated, costly, permanent computer system at its own expense", was not subject to any limitation in time and applied to works not yet in existence.

Yet further, the operation of the system would involve a systematic analysis of all content and the collection and identification of users’ IP addresses. The addresses were protected personal data because they allowed those users to be precisely identified. The system might also block lawful communications, contrary to the freedom to receive and impart information (Article 11, Charter).

The Court concluded that "in adopting the injunction requiring the ISP to install the contested filtering system, the national court concerned would not be respecting the requirement that a fair balance be struck between the right to intellectual property, on the one hand, and the freedom to conduct business, the right to protection of personal data and the freedom to receive or impart information, on the other." The law must be interpreted as precluding "an injunction made against an ISP which requires it to install the contested filtering system".

The Court does not share with the reader its analysis of data protection law or the reasons why compliance with a court order would involve any infringement of the privacy rights of users (a matter of Belgian law). It also spares the national court the tiresome business of deciding on the facts whether the filtering system would unduly block non-infringing communications by the ISP's customers. It is hard to imagine the Belgian court's informing the EU Court that in reaching conclusions on these matters it had exceeded its jurisdiction; but perhaps there is somewhere a Bruxellois equivalent of the UK's late, lamented Mr Justice Laddie.

Given the fact-specific nature of the questions, right holders will not feel completely downcast by the outcome. The relief obtained by SABAM was always a bit too good to be true. However,  the Court's comments on monitoring, data privacy and freedom of expression create obstacles for deploying against piracy the ISPs' traditional, if unpublicised, methods of controlling their subscribers' behaviour.