Piracy in Canada: We Don’t Have a Lawlessness Problem But a Competition Problem

The Public Interest Advocacy Centre (PIAC) has requested me to prepare a Report in connection with the application by the FairPlay Coalition to the CRTC and its proposed website-blocking mechanism. PIAC asked me to assess the Applicants’ claims in light of the best available theoretical and empirical evidence. More specifically, to determine whether the academic literature and the Application itself substantiate the alleged harms of piracy and the efficacy and benefits of the proposed website blocking remedy.

If you’d like to read my Report, here it is. If you’d like to read only the introduction and the conclusion, keep reading.

The logic that animates the Application is straightforward: “[i]nvesting in programming is already risky, and becomes increasingly unviable if even the rare hit cannot be effectively monetized because it is pirated online.”^[1] This logic is not only intuitively appealing but also theoretically sound, so long as sufficient attention is given to the key words if and because. To the extent that unauthorized use of copyrighted content undermines the producer’s ability to appropriate the returns from its creation, more piracy, even though it increases access to works, might be overall harmful if it reduces the incentive to create content in the first place.^[2]

It is possible that piracy harms legitimate distributors such as licensed BDUs or OTT digital services. Indeed, in the recorded music industry, the advent of digitization, broadband internet, and the emergence of peer-to-peer file-sharing was correlated with a sharp decline in record labels’ sales and revenue. Even though establishing causation and determining the magnitude of the decline that can be attributable to piracy has been challenging and controversial, “[a]s the evidence has developed, most scholars in this area now agree that the unpaid consumption made possible by digitization is responsible for the lion’s share of the revenue reduction in the music industry.”^[3] But although record labels’ sales and revenue declined, neither movies, books, nor television have experienced a similar revenue crisis.^[4] Therefore, while it is possible that piracy harms legitimate content distributors (and potentially lowers content creators’ revenue by extension), such an outcome is not necessary, inevitable, or can be simply assumed. Nor such an outcome should, from a policy perspective, be presumed.

In fact, the best available evidence does not support the Applicants’ claims about the alleged harms to legitimate content distributors, let alone harms leading to the Application’s parade of horribles. On the contrary, “more money is flowing into content creation than ever before”.^[5]

But even if piracy harms content distributors, and even if it leads to lower revenue for creators, it only might harm the creation of new content. A causal connection between lower revenue and a dwindling flow of quality content, while plausible, is neither necessary or inevitable, nor should it be simply assumed or presumed, because as I explain in greater detail below, both theory and evidence indicate that piracy may cause no such harms, and under some conditions might—counterintuitively—lead to low prices, greater choice, higher quality of service and increased production of quality content.

For example, even in the recording industry, record labels’ revenue crisis has not slowed down the flow of new music, nor did it lower its quality. On the contrary, even though record labels’ revenue has declined, the flow and quality of new music have not.^[6] And across the entire creative industries, digitization and related technological advancement have ushered in a golden age of music, movies, books, and television.^[7] There is even some new evidence indicating that Canadian content is doing particularly well globally, making Canadian creators even stronger beneficiaries of this golden age.^[8]

The Application rings loud alarm bells about piracy’s devastating harms to content creation, but the Applicant’s sweeping claims about harms of harms are as broad as the evidence they provide to substantiate them is thin.

The Application proposes a mechanism for the grant of what is effectively an extrajudicial injunction, against non-infringing parties, granted on the basis of allegations of copyright infringement which would not have been proven in court. Canadian law does not recognize such a remedy, nor does it contemplate it. There is no need to speculate whether there would ever be any harm that could justify such an extraordinary remedy, because even if there could be, the Application fails to make the case for it.

In a nutshell, the Applicants frame piracy as a problem of lawlessness, to which tougher law and stronger enforcement are the only or best solution. Sound theory and evidence do not support this common perspective. True, some people who engage in piracy break the law, but the main drivers of piracy are availability and affordability of legal access to content. Canada does not have a lawlessness problem; it has a competition problem that reduces the availability and affordability of legal access to content. The rest of this Report explains why this is the case.

* * *

The rest of this Report proceeds as follows: Part ‎II describes my qualification and experience. Part ‎III summarizes the main harms alleged by the Applicants. Part ‎IV provides an introductory overview to the economics of copyright and broadcasting and Part ‎V explains the basic economics of piracy and its causes. Part ‎VI asks whether piracy is harmful and to whom. It addresses four related topics and explains why:

• Not all piracy is harmful to content distributors or creators as well as why piracy, in some circumstances, might benefit them;
• Even if piracy reduces distributors’ or creators’ revenue, it might not necessarily reduce their profit and even if it does, the reduction might not necessarily decrease the amount or quality of new works;
• Quantity and quality of creative content could increase even if distributors’ or producers’ profit margins decline; and
• There are strong reasons to believe these dynamics explain the current golden age of music, movies, books, and TV, the Applicants’ alarmist claims notwithstanding.

Part ‎VII explains why the Application does not support the claim harms and Part ‎VIII demonstrates why the Application fails to show that the proposed website blocking mechanism would be an effective and efficient way to reduce piracy. That part also explains why the proposed blocking regime is likely achieve very little gains while inflicting disproportionate harms. Part ‎IX asks whether the proposed website blocking benefit Canadian creators and will it spur Canadian creativity. Part ‎X concludes by explaining why the proposed website blocking mechanism is not only antithetical to the goals of the Telecommunications Act and the Copyright Act but is also likely to impose limitations on freedom of expression that could not be demonstrably justified in free and democratic society.

* * *

The full Report is available on the CRTC website and you can also download it here.

Or, if you are only interested in reading the conclusion, here it is:

In 1403, a group of manual scribes, illustrators, bookbinders, and booksellers who worked near St Paul’s Cathedral in London, England formed a guild in 1403. They were known as “stationers” because unlike many other tradespeople they worked at a fixed location. Seven decades later, the printing press arrived to England. For the stationers, its arrival was a blessing and a curse. A blessing because no longer they needed laboriously to transcribe books by hand, and could easily increase production, and expand their markets; a curse because any other printer could equally expand into theirs. Responding to numerous petitions, a Royal Charter from 1557 established the Company of Stationers, and granted its members collective monopoly over the book trade. This monopoly, however, was not granted gratuitously. In Britain (as in elsewhere in Europe), the monarchs and the Church were interested in controlling the dissemination of new, and as far as they were concerned, seditious, ideas, so in return for a lucrative monopoly, the Company of Stationers was, for the next century and a half, expected to ensure that only books that were licensed by the appropriate state or church authorities would be sold.^[9]

Five centuries later, the arrival of digitization has presented broadcasters and BDUs a similar blessing and a curse: a blessing because it has dramatically reduced the cost of producing content, deliver it to consumers, and allows them to expand their markets; a curse because many more content producers or distributors can do the same and compete with them.

If the goals of the Copyright Act or the Telecommunications Act were limiting access by Canadians to creative works, then the proposed blocking regime could make some sense as the control of the book trade in the sixteenth century did.

But in the twenty-first century, blocking access to works is no longer a desirable policy objective. In fact, any law enacted or regulation promulgated with such a goal in mind would be an unconstitutional limitation on freedom of expression. As the Federal Court of Appeal noted recently,

“[c]opyright protection exists because we find the works it protects valuable. There are many ways in which they may be valuable—encouraging learning, spreading knowledge, fostering creativity, exciting discussion, providing enjoyment, triggering reflection and promoting human flourishing … It is because of all of these potential benefits that we both desire to encourage copyright protected works and also desire to provide wide access to them.”^[10]

The Application proposes that the CRTC establishes a new independent organization, the “Independent Piracy Review Agency” or “IPRA”, whose role will be “to consider applications from rightsholders and other applicants regarding the addition of a website to the list of piracy sites, receive and review evidence from the applicant, the alleged piracy site, and ISPs, hold an oral hearing by teleconference if required, and then submit a recommendation to the Commission on whether to add that site to the list of sites to which ISPs are required to disable access.”^[11] Establishing such a regime is necessary, they maintain, because piracy threatens to undermine Canada’s social fabric along with a long list of harms.

To convince the CRTC that their proposal advances the goals of the Copyright Act and the Telecommunications Act, the Applicants rings loud alarm bells about piracy’s devastating harms to content creation, but the breadth of their sweeping claims about harms stands in stark contrast to the dearth of evidence they provide to substantiate them.

As I have explained in this Report, as a matter of theory, piracy might result in such harms. However, such an outcome is neither necessary nor likely. As a matter of fact, there is no credible evidence indicating that such harms have occurred or will likely occur. In fact, the best available evidence shows that we are in the midst of a golden age of movies, music, books, and television. More and better works are produced, more people watch them, and more money is flowing into their production than even before. Not only did piracy not hinder these developments, but it might also have contributed to them for the reasons that I have explained above.

Digitization and related technological advancements resulted in a more competitive environment for content creation, dissemination, and consumption, and have spurred the current golden age of creative production. Competition from legitimate sources such as Netflix and illegitimate ones such as pirate streaming services, have undermined broadcasters’ and BDUs’ legacy business models, and forced upon them a new reality to which they have not been accustomed to. There is no evidence that broadcasters or BDUs are incapable of adapting or that this new competitive environment has devastated them, but transitioning from business models in which advertisement-based or subscription-based economic profits are almost guaranteed regardless of the selection of quality of content to a new competitive environment is a challenge that any legacy business model would preferably like to avoid or delay.

While piracy has not resulted in any reduction in the production of content (and is unlikely to do so), piracy is facilitating the transition into a more competitive industry where the secure flow of legacy profits is no longer guaranteed, by reducing consumers’ opportunity cost of cord cutting. And as the number of cord cutters grows, online content providers are likely to produce or acquire more content, thus reducing BDUs’ and other incumbents market power. Piracy accelerates this transition by acting as a temporary bridge. The bridge is temporary because piracy has an inherent scalability limitation. Just as online piracy of music stopped being regarded as a major problem as the number and quality of legal offering has grown, so video piracy will likely become marginalized once legal offerings increase.

The proposed website blocking will not eliminate piracy, but it might slow down the growth of competition and prolong the ability of dominant incumbents to earn legacy economic profit. From their perspective, attempting to delay competition as much as possible makes perfect sense. Just like their ancestors from near St Paul’s Cathedral, they would like to enjoy the blessing of the new technologies and minimize the curse of competition. But from a public policy perspective it does not.

1. Application Pursuant to Sections 24, 24.1, 36, and 70(1)(a) of the Telecommunications Act, 1993 to Disable On-line Access to Piracy Sites, 29 January 2018 [Application], para 5. ↑
2. Paul Belleflamme & Martin Peitz, “Digital Piracy: Theory” in Martin Peitz & Joel Waldfogel, eds, Oxford Handbook of the Digital Economy (Oxford University Press, 2012) at 493. ↑
3. Joel Waldfogel, “How Digitization Has Created a Golden Age of Music, Movies, Books, and Television” (2017) 31:3 J Econ Perspect 195 at 197. ↑
4. Ibid at 197–98. ↑
5. Gillian Doyle, “Digitization and Changing Windowing Strategies in the Television Industry” (2016) 17:7 Telev New Media 629 at 633. ↑
6. Joel Waldfogel, “Copyright Protection, Technological Change, and the Quality of New Products: Evidence from Recorded Music since Napster” (2012) 55:4 J L Econ 715. ↑
7. Waldfogel, supra note 3. ↑
8. Joel Waldfogel, Luis Aguiar & Estrella Gomez-Herrera, Does Digitization Threaten Local Culture? Music in the Transition from iTunes to Spotify (2017) (manuscript). ↑
9. Lyman Ray Patterson, Copyright in Historical Perspective (Vanderbilt University Press, 1968); Mark Rose, Authors and owners :the invention of copyright (Cambridge, Mass.: Harvard University Press, 1993); Joseph Loewenstein, The Author’s Due: Printing and the Prehistory of Copyright (University of Chicago Press, 2002); Adrian Johns, Piracy: the intellectual property wars from Gutenberg to Gates (Chicago: The University of Chicago Press, 2009). ↑
10. Re:Sound v CAB, supra note 133, para 90. ↑
11. Application, supra note 1, para 74. ↑