Microsoft Xbox One: Regulatory puzzles in a converging marketplace

On Thursday, 12 September 2013, the Royal Television Society's Cambridge Conference heard Nancy Tellem, Microsoft's Entertainment & Digital Media President, explain the thinking behind the Microsoft Xbox One console, due for release on 22 November 2013. Xbox One is a "state of the art gaming console, a new generation TV and movie system, and a whole lot more". Gaming, internet browsing, Skype telephony and watching films and television all take place through a single set-top box. Users can rapidly switch between uses or enjoy them simultaneously, using vocal or gestural controls. 

When I asked Nancy Tellem, who started her career as an attorney, where she expected Xbox One to be regulated, and whether as television or video game or both, she engagingly confessed that she "would have to get back to me". 

As the European Commission observed in its April 2013 Green Paper on convergence in audiovisual services, we are experiencing an "on-going transformation of the audiovisual media landscape, characterised by a steady increase in the convergence of media services and the way in which these services are consumed and delivered". Different set-top boxes and interfaces are vying to become the dominant gatekeeper to the digital household. Microsoft's new product seeks to do so by offering an immersive, highly interactive experience, breaking down the border between gaming and filmed entertainment. Microsoft proposes a truly interactive form of television. Understandably, they are beginning with a live action version of a popular game, Halo, created in partnership with Steven Spielberg.

Now, it is not clear precisely how interactivity will be integrated into these live action dramas, but it is obvious that elements of gaming will be part of the user experience. In the UK, the sale of computer games is regulated by the Video Recordings Act 1984 (as amended in 1994 and re-enacted in 2010). However, this does not cover streamed content, as there has to be a supply of a disc or other storage device before the Act bites. Similarly, the Video Recording (Labelling) Regulations 2012 apply only to physical carriers. While PEGI Online, a voluntary scheme for rating online games, is made available by the Interactive Software Federation of Europe, this important category of gaming is essentially unregulated (save by the law of obscenity). Xbox One will make the regulatory gap more troubling to policy-makers and parents alike.

However, the Audiovisual Media Services Directive 2010/13/EU, as implemented by Regulations in 2009 as part 4A of the Communications Act 2003 (further amended in 2010), envisages that EU Member States will regulate on-demand services which are "television-like". As the Xbox One service will involve "the provision of programmes the form and content of which are comparable to the form and content of programmes normally included in television programme services" (section 368(1)(a), 2003 Act), it seems likely (subject to the crucial jurisdictional question) that Microsoft will be subject to regulation by the Authority for Television on Demand and, in relation to advertising associated with its on-demand services, the Advertising Standards Association. Among the many requirements of the 2003 Act is this: "If an on-demand programme service contains material which might seriously impair the physical, mental or moral development of persons under the age of eighteen, the material must be made available in a manner which secures that such persons will not normally see or hear it" (s. 268E(2)). The Directive requires Member States not only to prevent advertising for tobacco products, control product placement, discourage discrimination and so forth, but also to require such services to promote "the production of and access to European works".

So the question is: in what circumstances would the UK have jurisdiction over Microsoft's Xbox One service? To (over)simplify a complex set of provisions, an EU Member State will regulate where the operator is substantially established in that state (either by having its head office there or, where the head office is in another Member State, maintaining a significant part of its relevant workforce there) or uplinks to a satellite from or uses satellite capacity appertaining to that Member State (unlikely to be relevant to Xbox One). 

Although Microsoft has staff working on this service in the UK, they might choose to deliver the service wholly from the US. Would that put them in the clear? Largely. However, the Xbox One service seems to be a "television licensable content service" within section 232 of the 2003 Act. Under section 329 of the 2003 Act, Ofcom can ask the Secretary of State to proscribe a foreign service that is "unacceptable" on grounds that it repeatedly contains matter which offends against taste or decency, or is likely to encourage or to incite the commission of crime, lead to disorder, or be offensive to public feeling. If an order is made, the service may not be included in a cable package - which might be a problem for Microsoft in sub-distributing their service, if that was what they hoped to do. So in practice in the event of concern on Ofcom's part as to the content of the Xbox one service, Microsoft would in fact find itself subject to regulatory pressure.

Be that as it may, the reality is that regulation of streamed services must surely come, even if they emanate from the US. As Professor Joel Reidenberg has argued for some years, it is clear that cyberspace will eventually be subject to regulation, even (or especially) in democratic countries. Recently the British Prime Minister, David Cameron, pushed ISPs to provide better protection for children. As technology and commercial innovation break down the borders between traditional product categories, the process of assimilation of the online to the offline world will accelerate. Xbox One seems to be a new challenge to those product definitions, and if it succeeds, regulatory change must be likely.

Ireland: Data Protection Commissioner loses in Supreme Court over GR

On 3 July 2013 the Irish Supreme Court gave its judgment in the appeal by the Irish Data Protection Commissioner ("DPC") in EMI Records (Ireland) Limited & ors v The Data Protection Commissioner [2013] IESC 34. Although this represents an endorsement of the voluntary graduated response scheme agreed between ISP Eircom and the record labels, the decision was based essentially on technical grounds. It offers an interesting example, however, of the attitude of an authority charged with enforcing data protection laws.

As described in an earlier post, EMI and other record labels had sued Eircom for participating in the infringement of copyright by its Internet access subscribers. The case was settled by a contractual GR scheme, under which an infringing user would on his third notification be suspended from Internet access for one week; after a fourth notification, Eircom would terminate his access agreement. The user was free to find another ISP if he could.

The DPC had taken the position that the conventional process of gathering anonymous data and its transmission and processing by Eircom was in some way an infringement of the rights of internet users under data protection law. The parties to the original action took the matter back to court to get a ruling on the issue, but the DPC refused to take part in it. He had asked the parties to pay his costs, win or lose, or at least not claim costs against him, which the parties had declined to agree. Nonetheless, Charleton J gave a judgment on the issue, robustly holding that there was no valid data protection objection to the GR scheme. 

Nothing daunted, the DPC issued an enforcement notice against Eircom under the Data Protection Acts 1988-2003, ordering it to stop operating the scheme. Eircom sought to appeal using the statutory procedure and the labels sought to be joined in that appeal. In an impressive display of fairmindedness, the DPC opposed their joinder, demanding in any event that the labels agree that they would receive no costs if allowed to take part. The labels, who had no automatic right to participate in the appeal, applied for judicial review of the enforcement notice, alleging that the DPC was wrong in law and, in any case, had failed to state any reasons in his notice (a requirement under the Data Protection Acts).

On 27 June 2012 Charleton J ruled on the judicial review application ([2012] IEHC 264), holding that the enforcement notice was bad in law, confirming his earlier analysis that peer-to-peer enforcement involved no breach of privacy, and held that the notice was bad in any event for lack of reasons.

The Supreme Court has now confirmed his decision, affirming that the lack of reasons was fatal. Given this procedural point, however, the court does not reach the substance of data protection law, beyond saying, en passant: 

"it appears to be accepted that the method by which the Protocol works is that all Eircom does is to receive a series of IP addresses from the record companies, write the appropriate letter to the customer corresponding with that IP address, and invoke the suspension or termination provisions of the Protocol as appropriate. On that basis it is not inherently obvious as to why such activity necessarily involves a breach of data protection law." 

No doubt the DPC will return to the fray in due course. 

UK: Regulation of the press – judicial review in prospect?

The Leveson Inquiry into the culture, practice and ethics of the press was announced in July 2011 and concluded its first part with the publication of Lord Justice Leveson’s Report in November 2012. Although the recommendations of the Report raised controversy, there seemed little doubt but that some fairly radical strengthening was likely in the control of the news media. After so much time, it is reasonable to ask: where are we?

It is ironic that so far the only concrete change in press regulation has been the passing of the Defamation Act 2013, which makes it easier for newspapers to escape liability for libel. However, it does seem as if we are edging towards a new settlement in regulation of the press which will benefit from greater independence from industry and be sustained by more substantial enforcement powers. The intrusion of the law, however tentatively, into this field is likely to produce administrative law challenges to the regime. In this post I want to summarise the proposals and speculate briefly about what may subsequently happen in the administrative court.

On 18 March 2013, Prime Minister David Cameron announced agreement between the political parties as to the way forward, which involved the creation of a body to oversee self-regulation by the press. A draft Royal Charter was published by the Government, which, if approved by the Privy Council, would create a body corporate, the Recognition Panel, the job of which will be to approve and review the performance of self-regulatory “Regulators”. The Recognition Panel exercises what is explicitly a public function (clause 4.4 of the Charter) and is clearly susceptible of judicial review. It approves or withdraws approval of Regulators by reference to “recognition criteria” set out in Schedule 3 of the Charter.

These criteria include the Regulator’s independence (no current newspaper editors or MPs need apply to serve on the board of a Regulator) and the terms of its “standards code”, which must take into account freedom of speech, the interests of the public, the need of journalists to protect confidential sources and the “rights of individuals” (such as rights to privacy). There is no reference to the need to have regard to the commercial interests of subscribers (save in so far as that impliedly enters into the requirement of proportionality).

The Regulator shall have authority to pursue issues on its own initiative and subscribers (i.e., newspapers and online news services) must be required to cooperate with any such investigation. The Regulator must have power to impose a fine of up to 1% of turnover, up to a maximum of £1m, and to require corrections and apologies. It must create a “ring-fenced enforcement fund”. It must also establish an arbitration scheme to resolve civil claims by aggrieved persons against subscribers.

In the meantime, on 25 April 2013 a group of press trade associations published an alternative draft Royal Charter and submitted it to the Privy Council for approval. Although this has delayed the presentation of the Government’s proposal to the Privy Council (originally intended for the Privy Council meeting of 15 May 2013), it seems unlikely that it will prevent the eventual approval of the Government’s draft.

But why would a publisher sign up with a Regulator under any such self-regulatory scheme? The Crime and Courts Act 2013, which received Royal Assent on 25 April 2013, provides certain negative and positive incentives.

By sections 34 to 39, a publisher who is not a subscriber to a recognised Regulator may be held liable for damages which are exemplary (i.e., punitive) or aggravated (i.e., compensating for the hurtfulness of the wrong) in a claim for libel, slander, breach of confidence, misuse of private information, malicious falsehood or harassment, where that claim is “related to the publication of news-related material”. These provisions come into force one year after the establishment of the Recognition Panel (or some equivalent body under Royal Charter).

However, where the claim could have been dealt with through the Regulator’s arbitration scheme, irrespective of the outcome the publisher who is a subscriber to a Regulator will not normally be ordered to pay the costs of a claim of this sort; but must normally be ordered to pay the costs where he could have been a subscriber and was not, and the claim could have been arbitrated under the Regulator’s arbitration scheme (section 40).

One can foresee judicial review challenges at various levels:

• To the Privy Council, as to its decision to approve the draft charter proposed by the Government (as opposed to the rival charter of the industry) - cf ECHR Art. 10/EU Charter Art. 11 (freedom of expression); EU Charter Art. 16 (freedom to conduct a business)
• To the Recognition Panel, as to its recognition of or withdrawal of recognition from Regulators (no doubt based on independence/terms of the proposed standards code); and as to the possible removal of members of its own board (by 2/3rds majority of the board)
• To decisions of Regulators (under the Nagle v Feilden [1966] 2 QB 633 principle), as to specific decisions to punish subscribers, for example on grounds of proportionality or procedural fairness (the Regulator will be both prosecutor and judge).

It will also be interesting to see whether the courts discover any friction between the proposed regulation of news web sites and the Audiovisual Media Services Directive 2010/13/EU. In addition to publishers of newspapers or magazines containing news-related material, the Royal Charter scheme would apply to a “website containing news-related material (whether or not related to a newspaper or magazine)”. In relation to television-like services delivered online, Article 4(7) of the Directive requires Member States to “encourage co-regulation and/or self-regulatory regimes at national level”. Such regimes “shall be such that they are broadly accepted by the main stakeholders in the Member States concerned and provide for effective enforcement”.

Given the indications from the press that some publishers will boycott the proposed system, it is likely that the Royal Charter will not be (or ever have been) “broadly accepted by the main stakeholders”. In relation to news web sites falling within both regimes (admittedly a small category), the Directive would offer an argument against the enforceability of the new regime.

One way or another, the administrative court is likely to scrutinize the operation of the new regime before long.

UK: Speech is free - and so are private copies

On 7 June 2013 the Government published four short consultation papers, setting out for technical comment the draft statutory wording by which it proposes to implement new exceptions for private copying, parody, quotation and public administration. I should like briefly to discuss the private copying exception.

The consultation paper states that it is the Government’s intention that the exception be available to an individual, not a body corporate; that the individual must have lawfully acquired the copy from which the further copy is made and on a permanent basis; and that the further copy must be made for the individual’s private use, for non-commercial ends. The Government contends that no compensation should be payable to the right holder, on the basis that its proposal “allows for appropriate compensation to be paid at the point of sale, and ensures the exception will cause minimal harm to copyright owners”.

The Government proposes to insert the following section 28B in the 1988 Act:

28B Private copying

(1) Copyright is not infringed where an individual uses a copy of a copyright work lawfully acquired by him to make a further copy of that work provided that:

(a) the further copy is made for that individual’s private use for ends that are neither directly nor indirectly commercial;

(b) the copy from which the further copy is made is held by the individual on a permanent basis (for example it is not a copy that is rented to the individual for a specified period or borrowed from a library); and

(c) the making of the further copy does not involve the circumvention of effective technological measures applied to the copy from which it is made.

(2) Copyright is infringed where an individual who has made a further copy of a copyright work pursuant to subsection (1):

(a) permanently transfers the copy to another person; or

(b) permanently transfers the copy from which it is made without destroying the further copy

and the further copy shall in those circumstances be treated as an infringing copy.

(3) Nothing in subsection (2) prevents an individual from storing a further copy made pursuant to subsection (1) in an electronic storage facility accessed by means of the internet or similar means, where that facility is provided for his sole private use.

(4) To the extent that the term of any contract purports to restrict or prevent the doing of any act which would otherwise be permitted by this section, that term is unenforceable.

The Government will add this new exception to the list of exceptions falling within the intervention mechanism under section 296ZA of the 1988 Act.

It will be recalled that Article 5(2)(b) of the Copyright Directive 2001/29/EC permits an exception “in respect of reproductions on any medium made by a natural person for private use and for ends that are neither directly nor indirectly commercial, on condition that the rightholders receive fair compensation which takes account of the application or non-application of technological measures … to the work or subject-matter concerned”. Application of any exception “shall only be applied in certain special cases which do not conflict with a normal exploitation of the work or other subject-matter and do not unreasonably prejudice the legitimate interests of the rightholder” (Article 5(5)).

There are some interesting and, for right holders, concerning aspects to the proposal.

Lawful ownership

The Government was clear that the exception would apply only to copies lawfully owned by the copier. In a digital era, however, the defining of ownership requires some thought. The Government attempts to address this by providing that the original copy has been “lawfully acquired” by the copier and that it is held by him “on a permanent basis”. There is no requirement that he be the owner of the physical carrier in which the original copy is embodied. However, in digital transactions there is no transfer of a physical carrier, so it would be difficult to define the exception by using explicitly the concept of “ownership” - in the “sale” of a digital copy, nothing changes hands: the vendor performs a service which changes the condition of media in the prior possession of the purchaser. The drafting of sub-section (2), which appears to attempt to confine the use of private copies to temporary lending, can be expected to provoke much debate. 

Cloud storage

Sub-section (3) aims at legalising the use of online storage facilities for private copies. The proposed wording does not purport to insulate Cloud service providers from liability. It will be for the courts to decide who “makes” the copy when a user stores a copy in the Cloud. Cloud storage facilities usually encode the uploaded data and potentially perform various transformations upon them, all of which would appear to require a licence of the reproduction right. The problem with this draft provision is that it applies where the online storage facility “is provided for [the user's] sole private use”. This condition seems to focus on the setting up of the facility, not its use. It might be read as excepting the stored copy even if it could easily be accessed by others. Questions would then arise whether there was an infringing communication to the public and if so, by whom and in what jurisdiction.

Strictly sub-section (3) is unnecessary. If from a technical perspective the consumer is “making a private copy” within sub-section (1), it does not matter where it is stored. It might better for it simply to be omitted; or for the reference to provision of the facility amended so as to read: “where that facility is used [or “accessed”] solely by him”. In this way the copy would cease to be a private copy if the online account were accessed by others.

Compensation

As mentioned above, the Copyright Directive requires that where there is a private copying exception there be “fair compensation which takes account of the application or non-application” of TPMs. In Padawan the Court of Justice of the European Union held that “[c]opying by natural persons acting in a private capacity must be regarded as an act likely to cause harm to the author of the work concerned.”

The exception would apply whether or not the original copy was made by or with the consent of the holder of the UK copyright. Clearly it is the holder of the UK copyright who is entitled to compensation (if any). If, as the Government argues, the UK right holder can “compensate” himself at the point of sale it seems inadmissible that, for example, copies could be acquired from outside the UK and then copied pursuant to this exception without compensation. It would be more logical to provide that the original copy must be one which was put in circulation or made available to the public “by or with the consent of the owner of the [UK] copyright”.

As mentioned in previous postings, the Government’s argument that the value of the private copy is “priced in” at the point of sale has been undermined by recent research, which shows that in the audiovisual sector right holders can and do segment the market for licensed copying by price, charging more for content which can be format-shifted. In any case, the right holder may have nothing to do with the setting of the price in the UK.

The Government’s justification for denying compensation ignores the requirement of Recital 35 that “account should be taken of the particular circumstances of each case”. It would deny compensation even to right holders whose works have never been the subject of a sale. As mentioned above, it ignores the fact that the UK right holder often will not be the licensor of the copy from which the private copy is made. It treats all right holders in the same way, whatever their vulnerability to the copying of their works. It would seem also to apply to the entire legacy of physical copies in the market, even thought they were sold prior to the application of any private copy exception (a point which the 2006 Gowers Review recognised as preventing retrospective application of a format-shifting exception). Arguably, to impose a private copying exception on existing copies would be an expropriation of private property, contrary to Article 1, Protocol 1 of the European Convention of Human Rights: Balan v Moldova (2008) ECHR, application no. 19247/03.

The CJEU in Padawan held the Spanish system of private coping levies incompatible with the Directive because it failed to strike the correct balance between the need to compensate right holders and the interests of persons involved in production of private copies. An indiscriminate levy on all copying media, whether used privately or professionally, was not permissible. The court also held in Thuiskopie that, having regard to the Three-Step Test, a Member State which introduces a private copying exception “must guarantee, within the framework of its competences, the effective recovery of the fair compensation intended to compensate the authors harmed for the prejudice sustained, in particular if that harm arose on the territory of that Member State”.

In the present case, the reverse applies: instead of an indiscriminately broad levy on recording media, there is an indiscriminately narrow (or rather, non-existent) levy in respect of all works. It seems possible that the present wording, if enacted in a statutory instrument, would be struck down by the English court as being incompatible with the Directive.

The closing date for comments on the proposed exceptions is 17 July 2013. The UK Intellectual Property Office will hold a series of open meetings in the week commencing 8 July 2013 for discussion of the draft exceptions.

UK: Intellectual Property Bill

The United Kingdom Intellectual Property Bill was introduced in the House of Lords on 10 May 2013 and received its first parliamentary discussion on 22 May 2013 at Second Reading. The Bill was referred to a Grand Committee for further examination, which is scheduled to begin on 11 June 2013, following the recess.

The Bill addresses a disparate collection of intellectual property issues, mainly concerning itself with designs and patents. Apart from laying the foundations for the Unified Patent Court, pursuant to the agreement among EU Member States reached on 19 February 2013, the Bill’s most eye-catching provision is the creation of a criminal offence of deliberate infringement of a UK or Community registered design, to be enforceable by Trading Standards.

The offence is committed where someone copies a registered design in the course of a business so as to make a product exactly or substantially to the design, knowing or having reason to believe that the design is a registered design. An offence is similarly committed in relation to such a copy where someone “offers, puts on the market, imports, exports or uses the product, or stocks it for one or more of those purposes”, knowing or having reason to believe that the design has been copied without the consent of the registered proprietor.

It seems that the IPO was not satisfied with the established wording of section 107 of the Copyright, Designs and Patents Act 1988 as a model for describing the ancillary acts which will incur liability. Perhaps some tidying up will occur in committee: “offering” seems rather vague.

The offence is punishable with up to 10 years’ imprisonment, putting it on a par with the most serious copyright and trade mark offences. The criminalisation of registered design right infringement has for many years been the objective of the designers’ anti-counterfeiting body, ACID, who have welcomed the Bill. However, as ACID and some peers at second reading observed, unregistered design right, which is in practice of greater importance to SME designers, is not covered by the offence.

The Bill also provides for UK accession to the Hague system of international design registration. This will allow UK designers to apply through WIPO for multiple national design registrations using a single application.

Of great interest to policy advocates is the creation of a duty in the Secretary of State to make an annual report to Parliament on the Intellectual Property Office’s contribution to the promotion of innovation and economic growth in the UK and the effectiveness of intellectual property legislation in that regard (including the legislation of the European Union). This report is likely to become the focus of much lobbying, as it will not only influence the legislative and administrative agenda at home, but may also be a bridgehead into policy-making at EU level.

In responding to speeches calling for a more specific (and broader) specification of the report, the IP Minister, Lord Younger, assured peers that “the report will also cover policies and services that impact on the licensing of intellectual property". This will include the Copyright Hub, centrepiece recommendation of the controversial Hargreaves Review.

Some peers speaking in the Second Reading debate indicated an intention to move amendments. Lord Clement-Jones, in a speech largely directed to strengthening intellectual property protection, urged the IP Minister to consider position of authors in relation to unfair contracts. The IP Minister undertook to discuss “this important and complex matter further”, indicating that he would meet with Lord Clement-Jones and the Creators’ Rights Alliance. This raises the prospect of further attempts to interfere with freedom of contract in the licensing sphere, something the Government has embraced in relation to copyright exceptions. Other countries, such as Germany, have made attempts to strengthen the author's contractual position as against the distributor (see Articles 32 and 32a of the Urheberrechtsgesetz, as amended in 2002 (English version)).

The Bill now proceeds to consideration in Grand Committee, where amendments are made only by consensus. While the debate there will indicate what will be urged when the Bill returns to the floor of the House of Lords, it is unlikely that the Bill will undergo significant modification at this stage.

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...