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Thursday, May 31, 2012

A Coasean Look at Commercial Skipping...

Readers may have seen that DISH has sued the networks for declaratory relief (and was promptly cross-sued) over some new digital video recorder (DVR) functionality. The full set of issues is complex, so I want to focus on a single issue: commercials skipping. The new DVR automatically removes commercials when playing back some recorded programs. Another company tried this many years ago, but was brow-beaten into submission by content owners. Not so for DISH. In this post, I will try to take a look at the dispute from a fresh angle.

Many think that commercial skipping implicates derivative work rights (that is, transformation of a copyrighted work). I don't think so. The content is created separately from the commercials, and different commercials are broadcast in different parts of the country. The whole package is probably a compiliation of several works, but that compilation is unlikely to be registered with the copyright office as a single work. Also, copying the work of only one author in the compilation is just copying of the subset, not creating a derivative work of the whole.

So, if it is not a derivative work, what rights are at stake? I believe that it is the right to copy in the first place in a stored DVR file. This activity is so ubiquitous that we might not think of it as copying, but it is. The Copyright Act says that the content author has the right to decide whether you store a copy on your disk drive, absent some exception.

And there is an exception - namely fair use. In the famous Sony v. Universal Studios case, the Court held that "time shifting" is a fair use by viewers, and thus sellers of the VCR were not helping users infringe. Had the Court held otherwise, the VCR would have been enjoined as an agent of infringement, just like Grokster was.

I realize that this result is hard to imagine, but Sony was 5-4, and the initial vote had been in favor of finding infringement. Folks can debate whether Sony intended to include commercial skipping or not. At the time, remote controls were rare, so skipping a recorded commercial meant getting off the couch. It wasn't much of an issue. Even now, advertisers tolerate the fact that people usually fast forward through commercials, and viewers have always left the TV to go to the bathroom or kitchen (hopefully not at the same time!). 

But commercial skipping is potentially different, because there is zero chance that someone will stop to watch a catchy commercial or see the name of a movie in the black bar above the trailer as it zooms by. I don't intend to resolve that debate here. A primary reason I am skipping the debate is that fair use tends to be a circular enterprise. Whether a use is fair depends on whether it reduces the market possibilities for the owner. The problem is, the owner only has market possibilities if we say they do. For some things, we may not want them to have a market because we want to preserve free use. Thus, we allow copying via a DVR and VCR, even if content owners say they would like to charge for that right.

Knowing when we should allow the content owner to exploit the market and when we should allow users to take away a market in the name of fair use is the hard part. For this reason, I want to look at the issue through the lens of the Coase Theorem. Coase's idea, at its simplest, is that if parties can bargain (which I'll discuss below), then it does not matter with whom we vest the initial rights. The parties will eventually get to the outcome that makes each person best off given the options, and the only difference is who pays.

One example is smoking in the dorm room. Let's say that one person smokes and the other does not. Regardless of which roommate you give the right to, you will get the same amount of smoking in the room. The only difference will be who pays. If the smoker has the right to smoke, then the non-smoker will either pay the smoker to stop or will leave during smoking (or will negotiate a schedule). If you give the non-smoker the right to a smoke-free room, then the smoker will pay to smoke in the room, will smoke elswhere, or the parties will negotiate a schedule. Assuming non-strategic bargaining (hold-ups) and adequate resources, the same result will ensue because the parties will get to the level where the combination of their activities and their money make them the happiest. The key is to separate the analysis from normative views about smoking to determine who pays.

Now, let's apply this to the DVR context. If we give the right to skip commercials to the user, then several things might happen. Advertisers will advertise less or pay less for advertising slots. Indeed, I suspect that one reason why ads for the Super Bowl are so expensive, even in a down economy, is that not only are there a lot of viewers, but that those viewers are watching live and not able to skip commercials. In response, broadcasters will create less content, create cheaper content, or figure out other ways to make money (e.g. charging more for view on demand or DVDs). Refusing to broadcast unless users pay a fee is unlikely based on current laws. In short, if users want more and better content, they will have to go elsewhere to get it - paying for more channels on cable or satellite, paying for video on demand, etc. Or, they will just have less to watch.

If we give the right to stop commercial skipping to the broadcaster, then we would expect broadcasters will broadcast the mix they have in the past. Viewers will pay for the right to commercial skip. This can be done as it is now, through video on demand services like Netflix, but that's not the only model. Many broadcasters allow for downloading via the satellite or cable provider, which allows the content owner to disable fast forwarding. Fewer commercials, but you have to watch them. Or, in the future, users could pay a higher fee to the broadcaster for the right to skip commercials, and this fee would be passed on to content owners.

These two scenarios illustrate a key limit to the Coase Theorem. To get to the single efficient solution, transactions costs must be low. This means that the parties must be able to bargain cheaply, and there must be no costs or benefits that are being left out of the transaction (what we call externalities). Transactions costs are why we have to be careful about allocating pollution rights. The factory could pay a neighborhood for the right to pollute, but there are costs imposed on those not party to the transaction. Similarly, a neighborhood could pay a factory not to pollute, but difficulty coordinating many people is a transaction cost that keeps such deals from happening.

I think that transactions costs are high in one direction in the commercial skipping scenario, but not as much in the other. If the network has the right to stop skipping, there are low cost ways that content aggregators (satellite and cable) can facilitate user rights to commercial skip - through video on demand, surcharges, and whatnot. This apparatus is already largely in place, and there is at least some competition among content owners (some get DVDs out soon, some don't for example).

If, on the other hand, we vest the skipping right with users, then the ability for content owners to pay (essentially share their advertising revenues) with users is lower if they want to enter into such a transaction. Such a payment could be achieved, though, through reduced user fees for those who disable channel skipping. Even there, though, dividing among all content owners might be difficult.

Normatively, this feels a bit yucky. It seems wrong that consumers should pay more to content providers for the right to automate something they already have the right to do - skip commercials. However, we have to separate the normative from the transactional analysis - for this mind experiment, at least.

Commercials are a key part of how shows get made, and good shows really do go away if there aren't enough eyeballs on the commercials. Thus, we want there to be an efficient transaction that allows for metered advertising and content in a way that both users and networks get the benefit of whatever bargain they are willing to make.

There are a couple of other relevant factors that imply to me that the most efficient allocation of this right is with the network:

1. DISH only allows skipping after 1AM on the day the show is recorded. This no doubt militates in favor of fair use, because most people watch shows on the day they are recorded (or so I've read, I could be wrong). However, it also shows that the time at which the function kicks in can be moved, and thus negotiated and even differentiated among customers that pay different amounts. Some might want free viewing with no skipping, some might pay a large premium for immediate skipping. If we give the user the right to skip whenever, it is unlikely that broadcasters can pay users not to skip, and this means they are stuck in a world with maximum skipping - which kills negotiation to an efficient middle.

2. The skipping is only available for broadcast tv primetime recordings - not for recordings on "cable" channels, where providers must pay for content.  Thus, there appears to already be a payment structure in practice - DISH is allowing for skipping on some networks and not others, which implies that the structure for efficient payments are already in place. If, for example, DISH skipped commercials on TNT, then TNT would charge DISH more to carry content. The networks may not have that option due to "must carry" rules. I suspect this is precisely why DISH skips for broadcasters - because it can without paying.  In order to allow for bargaining however, given that networks can't charge more for DISH to carry content is to vest the right with networks and let the market take over.

These are my gut thoughts from an efficiency standpoint. Others may think of ways to allow for bargaining to happen by vesting rights with users. As a user, I would be happy to hear such ideas.

This is my last post for the month - time flies! Thanks to Prawfs again for having me, and I look forward to guest blogging in the future. As a reminder, I regularly blog at Madisonian.

Posted by Michael Risch on May 31, 2012 at 08:05 PM in Information and Technology, Intellectual Property, Legal Theory, Television, Web/Tech | Permalink

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Comments

Fantastic analysis. I don't have much of a comment on the law or hard economics of it, but would just add that total commercial skipping could exacerbate a trend we're already starting to see—the integration of the commercial into the show itself. For lack of a better phrase, I will call it product placement 2.0. The most egregious example I've seen were a couple of episodes of the Canadian series "Being Erica," one in which Erica spent the first five minutes of an episode test driving a Ford Focus and another in which the cast discovered Tetley's Infusions tea mix. (For an American example, the NBC series "Heroes" did this repeatedly, with characters constantly using Spring phones and a plot line centered on a Nissan Rogue.) While these sorts of product placement have inevitably been attacked by viewers, I suspect they are only signs of what is to come, especially as more viewers engage in time shifting and commercial-avoidance technology becomes readily available.

Posted by: Charles Paul Hoffman | May 31, 2012 9:26:00 PM

Great topic and thoughts. What occurs to me is that TV, say 1955 style, was like a tax and transfer system. Everyone paid the tax by virtue of buying products that had higher prices to cover the advertising budget and the production costs (of the programming). The transfer mean that TV was available to all allegedly "free." I do not know about the incidence analysis of the tax itself but higher income people probably paid more tax. Lower income probably less. Benefits were allocated roughly equally. Skipping changes this. The mechanism for funding television programming is altered. On possibility is that advertisers -- given fewer viewers -- will be less willing to contribute to the creation of programming. My sense is that is what is set off is a far more PPV market-- perhaps down to individual programs. While the Coasian analysis may be correct -- who knows -- the distributive effects will almost certainly disadvantage the less affluent.

Posted by: Jeff | Jun 1, 2012 2:13:36 PM

Mike, I did a pretty similar (and even longer) analysis of the entitlements to show or be free of ads in http://ssrn.com/abstract=912524 Eric.

Posted by: Eric Goldman | Jun 1, 2012 11:58:03 PM

Thanks, Eric. I knew you did this article - I hadn't considered how it would apply to fair use. I'll have to read it again with fresh eyes - it's been a while!

Posted by: Michael Risch | Jun 2, 2012 8:14:18 AM

Thank you for breaking down your thoughts in relation to skipping commercials. I’m one of those TV viewers who record everything. I can then watch the shows I like on my own time, and I can easily fast-forward through all of the commercial interruptions. I haven’t thought much of skipping commercials except that it’s avoiding an interruption that I have no desire to watch. So over two months ago when I found out from my boss at Dish that I would soon have a new feature on my Hopper that would help what I already do with commercials easier, I was excited. What’s interesting about my situation is that I never watched programs from the four major networks until I got a Hopper. Only days after I enabled the Primetime Anytime feature, I started browsing the primetime shows from these networks that were automatically recorded for me, and I started watching them. I think that with the ability to watch these shows without commercials makes me want to watch these shows even more. I went from not knowing a single title from the primetime lineup to becoming a fan of several shows on a few of the major four networks.

Posted by: Jordan Kenedy | Jun 13, 2012 7:14:49 PM

Why don’t CBS, FOX, and NBC execs want consumers to enjoy commercial-free TV? It’s what we want! I’m a customer and employee of Dish, and I think Auto Hop is great because you can easily watch commercial-free TV. A well known consumer advocacy group, Public Knowledge, agrees that people should have the right to control how they watch TV. They’re taking a stand for consumers by creating a petition that tells CBS, FOX, and NBC media to keep their hands out of your living room and DVR. Sign their petition to keep control of how you watch TV http://bit.ly/KigXAn

Posted by: James Pacheco | Jun 16, 2012 12:09:51 AM

Jordan and James -

Thanks for writing. I think something that your comments are not giving enough credit to are the ex ante incentives to create. Why do the broadcast networks want viewers to watch commercials? Because if they don't, no one will advertise, and if no one advertises there is no broadcast TV. It's as simple as that. Now, maybe that's OK, because most people pay for their TV, but I can assure you that if Dish started the hopper for pay channels, Dish customers would be paying a lot more for those channels. Indeed, ask yourself why Dish is only doing the hopper for broadcast TV - the answer is that it is the only set of channels where Dish can do so without having to pay more for content.

It's funny that there's a petition to keep these channels "out of your living room and DVR" because people sure don't seem to mind when they are in their living rooms with free content.

Posted by: Michael Risch | Jun 16, 2012 8:05:34 AM

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