Revenue at risk through C-32: The CCA stands by its estimate of $126M a year

CCA Bul­letin 9/11

March 14, 2011

 

Just the facts

On Feb­ru­ary 7, 2011, the Cana­dian Con­fer­ence of the Arts (CCA) pub­lished a bul­letin pre­sent­ing the rev­enue received by cre­ators and other rights hold­ers which are at risk if Bill C-32 is adopted with­out amendments.

In his March 3rd blog titled “The CCA’s $126 Mil­lion Wheel of For­tune: Guess­ing at Bill C-32’s Costs”, Uni­ver­sity of Ottawa Pro­fes­sor Michael Geist raised seri­ous ques­tions about the CCA’s cred­i­bil­ity stat­ing, among other things, that “the $126M does not stand up even to mild scrutiny” and that “key sources of ‘losses’ are sim­ply fabrications.”

The CCA takes such accu­sa­tions very seri­ously. In this bul­letin, we will respond to all the main points raised in Pro­fes­sor Geist’s blog. We wish this bul­letin were  more suc­cinct, how­ever, in order to re-establish facts and not just chal­lenge them, it had to be lengthier.

• 
  

  A gen­eral com­ment and a correction

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  The broad­cast­ing ephemeral exception

• 
  

  The pub­lic per­for­mance of video in schools

• 
  

  The pri­vate copy­ing levy

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  Edu­ca­tion and fair dealing

• 
  

  Poten­tial rev­enue for photographers

First, a gen­eral com­ment and a correction

We will rec­og­nize at the out­set that the title of Bul­letin 6/11 is mis­lead­ing. Had our pur­pose been, as the head­line sug­gested, to estab­lish “the finan­cial impact of C-32 on cre­ators and other rights hold­ers,” we would be remiss for not hav­ing fac­tored in the poten­tial rev­enue com­ing from the new rights granted in the bill. But as the bul­letin clearly demon­strates, that was not our intent. What we did was sim­ply list those “rev­enue sources for artists and rights hold­ers which are at risk unless Bill C-32 is amended.” We apol­o­gize for mis­rep­re­sent­ing our own pur­pose through an ill-chosen title.

The broad­cast­ing ephemeral exception:

“Two ele­ments that appear to be accurate”

Pro­fes­sor Geist acknowl­edges the accu­racy of two of the fig­ures put for­ward by the CCA, but sug­gests that it may be rev­enue that deserves to be eliminated.

The first fig­ure of $29.8 mil­lion rep­re­sents the roy­al­ties paid by broad­cast­ers for the ephemeral record­ing of music as part of their broad­cast­ing activ­i­ties. Pro­fes­sor Geist refers to the broad­cast­ers’ pub­lic cam­paign against the Lib­eral Party where they claim that this required pay­ment is unjus­ti­fied and that they need the money to “save local radio.” Pro­fes­sor Geist then asks some­what sur­pris­ingly “whether radio sta­tion for­mat shift­ing mer­its nearly $30 mil­lion in compensation.”

Com­ments: Pro­fes­sor Geist ques­tions the value to broad­cast­ers of mak­ing an ephemeral copy of the music they use. As is explained in the Cul­tural Indus­tries Joint State­ment on C-32, broad­cast­ers con­tin­u­ally use the repro­duc­tion right in songs and record­ings. They clearly value the copies they make, since these copies are the foun­da­tion of auto­mated broad­cast­ing, which rep­re­sents huge oper­a­tional sav­ings for them. In other words, broad­cast­ers gain a sig­nif­i­cant eco­nomic advan­tage from mak­ing copies over which oth­ers have a right. Under the cur­rent Copy­right Act, cre­ators and other rights own­ers have the exclu­sive right to make, or autho­rize the mak­ing of such copies. The basic prin­ci­ple of copy­right is that for value received by the user, the owner is enti­tled to remu­ner­a­tion – except under spe­cific exemp­tions. In this case, the right to remu­ner­a­tion has long been rec­og­nized and its value, which Pro­fes­sor Geist chal­lenges, has been estab­lished by the Copy­right Board after a rig­or­ous process dur­ing which both par­ties have had full oppor­tu­nity to make their case.

The sec­ond com­ment is about the capac­ity of com­mer­cial radio broad­cast­ers to pay. Con­trary to the fears they expressed dur­ing the debate around the cre­ation of mechan­i­cal repro­duc­tion rights, com­mer­cial radio has become even more prof­itable in the ensu­ing decade. As a mat­ter of fact, radio broad­cast­ing is one of the most prof­itable busi­nesses in Canada today. Even in the con­text of an impor­tant finan­cial reces­sion, in 2009, com­mer­cial radio earned a pre-tax profit mar­gin of 21.2%. Out of the $1.5 bil­lion earned in 2009, com­mer­cial radio sta­tions paid only $21 mil­lion for repro­duc­tion rights, which is less than 1.4% of their rev­enue. Accord­ing to the Copy­right Board Fact Sheet (2009), the small­est radio sta­tion pays a max­i­mum of $706 a year to clear mechan­i­cal repro­duc­tion rights for what amounts to 80% of its input mate­r­ial. In this con­text, is it fair to sup­port expro­pri­at­ing a legit­i­mate and exist­ing right under the pre­text of “sav­ing local radio?”

Finally, a point made by broad­cast­ers and repeated sev­eral times by a few mem­bers of the C-32 leg­isla­tive com­mit­tee is that broad­cast­ers are pay­ing twice for the same thing. Noth­ing could be fur­ther from the truth. There are dif­fer­ent rights that apply to play­ing music on the radio. One is for the per­for­mance of music, acquired through one par­tic­u­lar licence. Another one is for the right to make copies of the work, which is a dif­fer­ent issue alto­gether. When broad­cast­ers buy a CD or when they legally down­load an MP3 file (in real­ity, most are pro­vided the music for free), they acquire the right to play this sam­ple and this sam­ple only. If they start mak­ing copies to improve their oper­a­tions, this trig­gers pay­ment for copy­ing. So it is absolutely false to pre­tend that broad­cast­ers are pay­ing twice for the same thing.

Pub­lic per­for­mance of “cin­e­mato­graphic works” in schools

The sec­ond fig­ure which Pro­fes­sor Geist does not dis­pute is the annual $25 mil­lion for pub­lic per­for­mance of videos in Cana­dian schools:

“These licens­ing rev­enues are col­lected by Audio Ciné Film (ACF) and Cri­te­rion, which pri­mar­ily pro­mote U.S. films. U.S. schools are exempt from sim­i­lar pay­ments due to an excep­tion in their Copy­right Act. Given that the dol­lars flow pri­mar­ily to U.S. stu­dios (though not exclu­sively — there is some rev­enue that goes to Cana­dian films) and that U.S. schools are exempt from sim­i­lar pay­ments, this seems like good pol­icy.” (MG)

We have gone back to our sources and they main­tain that the $25 mil­lion is indeed rea­son­able, even con­ser­v­a­tive, and seri­ously at risk should Bill C-32 be passed in its cur­rent form. It is impor­tant to note that this fig­ure does not attempt to quan­tify the loss of poten­tial future rev­enues caused by the elim­i­na­tion of oppor­tu­ni­ties (for which the indus­try has been invest­ing) that oth­er­wise would have been present  thanks to the use of dig­i­tal tech­nolo­gies by the K-12 sector.

Com­ments: Here unfor­tu­nately, Pro­fes­sor Geist repeats some erro­neous state­ments made by Mr. Steve Wills, of the Cana­dian Asso­ci­a­tion of Uni­ver­sity Teach­ers, dur­ing the Feb­ru­ary 15 hear­ing of the leg­isla­tive com­mit­tee on C-32.

1. Both make the incor­rect assump­tion that the $25M applies exclu­sively to fea­ture films licensed by Cri­te­rion and ACF alone. The exhi­bi­tion of all forms of “cin­e­mato­graphic works” in schools requires a pub­lic per­for­mance licence, includ­ing among oth­ers fea­ture films, TV pro­grams, doc­u­men­taries and pro­grams specif­i­cally pro­duced for class­room use. The $25M rep­re­sents the rev­enues that will be lost by the aggre­gate of all of the Cana­dian com­pa­nies that serve the edu­ca­tion com­mu­nity, not just Cri­te­rion and ACF.
2. Sec­ond, it is sim­ply false that most of the rev­enue gen­er­ated through pub­lic per­for­mance licences is “shipped to the USA.” In fact, only a small por­tion of the gross rev­enues leaves the coun­try. Most of it is used to sup­port a num­ber of Cana­dian com­pa­nies, pro­duc­ers and dis­trib­u­tors, both pub­lic and pri­vate. In the case of the NFB for exam­ple, edu­ca­tional sales rep­re­sent crit­i­cal rev­enue and every penny earned flows back to users in the form of rein­vest­ment in pro­gram­ming and ser­vices.  Addi­tion­ally, the roy­al­ties earned by U.S. film stu­dios are paid to their Cana­dian offices (which, if it does not cre­ate much rev­enue for Cana­dian cre­ators and other rights hold­ers, nonethe­less con­sti­tutes a con­tri­bu­tion to the Cana­dian econ­omy through jobs, offices, taxes, etc.).
3. Finally, it is also worth not­ing that while it is true that U.S. schools are exempt from pay­ing roy­al­ties for pub­lic per­for­mances of movies, this edu­ca­tion exemp­tion was the cause of the col­lapse of the “edu­ca­tional pro­duc­tion indus­try” in the U.S. Com­pa­nies which were the sta­ple of the busi­ness are long gone from the indus­try and have not been replaced. The casu­al­ties include the audio-visual divi­sions of com­pa­nies such as McGraw-Hill, Ency­clo­pe­dia Bri­tan­nica, Film Cor­po­ra­tion of Amer­ica, BFA, Coro­net, Singer, etc.

Let us now move to the two fig­ures put for­ward by the CCA which Pro­fes­sor Geist calls “CCA fabrications.”

The pri­vate copy­ing levy

Pro­fes­sor Geist writes:

“It should be obvi­ous to any­one that the $30 mil­lion fig­ure is a guess since the aver­age amount gen­er­ated by the levy over the past decade is an irrel­e­vant num­ber when try­ing to cal­cu­late the cost of an iPod levy. If the CCA was seri­ous about gen­er­at­ing an esti­mated cost, it would iden­tify the num­ber of dig­i­tal devices sub­ject to the levy that are sold in Canada each year and then mul­ti­ply that by the pro­posed levy amount.”

Com­ments: Here again, Pro­fes­sor Geist mis­in­ter­prets our pur­pose. We have nei­ther tried to guess what he calls “the cost of an iPod levy” (our empha­sis) nor what legit­i­mate remu­ner­a­tion will be lost by not extend­ing the levy to iPods and MP3 play­ers used by con­sumers for copy­ing music. In fact, we have delib­er­ately shied away from such an exercise.

What we have done is indi­cate the real and his­tor­i­cal rev­enue at risk with the rapid aban­don­ment of audio­cas­sette tapes and CDs by con­sumers. The $30 mil­lion fig­ure is not a guess.  As we make plain, it is the aver­age annual rev­enue that rights hold­ers have received over the past nine years and will no longer receive because C-32 does not make the pri­vate copy­ing regime tech­no­log­i­cally neu­tral by extend­ing it to MP3 play­ers. If the CCA’s doc­u­ment had included a pro­jec­tion for rev­enue poten­tially gen­er­ated by a levy on MP3 play­ers, that would have been a guess. There is no way right now of know­ing exactly the amount such a levy could yield, if only because there are no reli­able fig­ures con­cern­ing the sales of MP3 play­ers in Canada. The only thing that is clear is that extend­ing the pri­vate copy­ing levy regime to MP3 play­ers would gen­er­ate impor­tant rev­enue for cre­ators and other rights hold­ers. We decided to stick to quan­tifi­able facts and

we stand by our rather con­ser­v­a­tive fig­ure of $30 mil­lion at great risk if C-32 is adopted as is regard­ing copy­ing for “pri­vate purposes.”

The exten­sion of fair deal­ing to include education

The other fig­ure put for­ward by Pro­fes­sor Geist as a “pure fab­ri­ca­tion” is the $41.4 mil­lion in rev­enue put at risk by intro­duc­ing the vague term “edu­ca­tion” into the fair deal­ing pro­vi­sions of the Act.

“This num­ber is a mas­sive exag­ger­a­tion. First, there is no one that real­is­ti­cally argues that the edu­ca­tion excep­tion will cover all copy­ing such that schools could rely on fair deal­ing to avoid any fur­ther pay­ments. As has been dis­cussed repeat­edly, any fair deal­ing claim is sub­ject to the Supreme Court of Canada’s six fac­tor test. (…) even if there are some small reduc­tions in pay­ments owing to fair deal­ing, it is very likely (our empha­sis) that the sav­ings will be used to pay for increased data­base access or to acquire new books since libraries will seek to ensure that there are no reduc­tions in their over­all bud­gets. In other words, even the prospect of a small reduc­tion in the col­lec­tives rev­enues due to fair deal­ing will be off­set by new rev­enues that go to authors and pub­lish­ers. The net effect is a wash, not the irre­spon­si­ble claims of a $41 mil­lion dol­lar loss.” (MG)

Com­ments: First of all, we did not claim a $41 mil­lion loss but indi­cated that given the vague­ness of the con­cept of edu­ca­tion and the fact that it will be left to all and sundry to deter­mine what is fair and what is not fair until chal­lenged in court, the cur­rent rev­enue can in fact be declared

at risk

. This posi­tion is sup­ported by most legal experts who have tes­ti­fied in front of the com­mit­tee, includ­ing the Que­bec Bar Asso­ci­a­tion.

Sev­eral wit­nesses have also come before the com­mit­tee to say that enshrin­ing the Supreme Court of Canada’s (SCC) six fair­ness fac­tors is not going to pro­vide the cer­tainty needed for an effi­cient mar­ket­place or to avoid years of costly lit­i­ga­tion.  In fact, the Supreme Court found, in its land­mark CCH rul­ing (paras. 52–53), that there is no set test and that whether a deal­ing (or use) is fair will depend on the facts in each case.  The “test” that pro­po­nents of the edu­ca­tion excep­tion blindly rely on for com­fort, that the mar­ket­place will not be dis­rupted and cre­ators and pub­lish­ers will not suf­fer hard­ship, does not pro­vide hard and fast rules. It is, rather, a case-by-case approach. This is no assur­ance of any­thing. It does not for exam­ple, guar­an­tee that the effect on the mar­ket will deter­mine fair­ness (as is the case in the U.S. under Fair Use).  It also does not pro­vide any assur­ances that the rev­enues cur­rently dis­trib­uted to cre­ators and pub­lish­ers via col­lec­tives would not dis­ap­pear under fair deal­ing for “edu­ca­tion.” And what con­cerns cre­ators most is that the SCC instructs us to take a “broad and lib­eral” inter­pre­ta­tion of exceptions.

The weak­ness of the blind faith argu­ment is appar­ent in con­tin­u­ing legal bat­tles in the U.S. as well as in Canada, where the courts are divided on how to deter­mine fair­ness. Even after the land­mark SCC deci­sion on fair dealing, Access Copy­right may be head­ing to the Supreme Court to defend a Fed­eral Court of Appeal deci­sion on licens­ing that went against the argu­ments put for­ward by the Min­is­ters of Edu­ca­tion (Que­bec Min­is­ter of Edu­ca­tion excepted) that more of the copies by K-12 schools should have past the fair deal­ing test. The par­ties have already spent seven years before the Copy­right Board and the Courts, stem­ming from the very fac­tors that Pro­fes­sor Geist and his fol­low­ers would like cre­ators and pub­lish­ers to take com­fort in.

Sec­ond, there is enough anec­do­tal evi­dence that some in the loosely defined edu­ca­tional com­mu­nity are impa­tient to test what fair deal­ing may mean. Here for exam­ple is a state­ment made in front of the leg­isla­tive com­mit­tee by Mr. Noah Stew­art, Com­mu­ni­ca­tion and Pol­icy Coor­di­na­tor for the Cana­dian Fed­er­a­tion of Students:

“…

our posi­tion is that we would not to restrict the def­i­n­i­tion (of edu­ca­tion), (…) regard­less of the con­text of the edu­ca­tion, whether it be for­mal edu­ca­tion, in a col­lege or uni­ver­sity class­room, or going to the exam­ples given by my col­league, a church group, a YMCA swim class, wher­ever, that they should have access to this excep­tion. (…) as long as you’re using the work for an edu­ca­tional pur­pose, regard­less of the kind con­text, and as long as that is fair, you have access to this excep­tion and that it means that it’s there for every Cana­dian and not sim­ply a priv­i­leged minority.”

Whether it admits to it or not, the edu­ca­tion sec­tor is look­ing for sav­ings. The fed­eral government’s own back­ground paper on C-32 says its inten­tion is to reduce the “admin­is­tra­tive and finan­cial bur­den” on the edu­ca­tion sec­tor. It’s pretty explicit: money is the issue.

Given this, it will take more than protes­ta­tions of good faith by uni­ver­si­ties, col­leges, libraries and Pro­fes­sor Geist to reas­sure the rights hold­ers’ com­mu­nity. There­fore,

the CCA main­tains its posi­tion that it is fair to say that $41.4M of cur­rent rev­enue is poten­tially at risk if the ill-defined term “edu­ca­tion” is included in the fair deal­ing definition.

New rev­enue for photographers

Pro­fes­sor Geist writes:

“new pho­tog­ra­pher rights could gen­er­ate mil­lions of dol­lars for those cre­ators (…) Even assum­ing that the pho­tog­ra­phers may have been exag­ger­at­ing, if only 20% of pho­tog­ra­phers are able to gen­er­ate half of the low end of the esti­mate, the pro­vi­sions are worth $70 mil­lion in new rev­enue (2,800 pho­tog­ra­phers gen­er­at­ing an aver­age of $25,000 in addi­tional rev­enue per year).”

Com­ments: As we explained at the out­set of this bul­letin, our pur­pose was not to spec­u­late on poten­tial rev­enue and there­fore we will not engage in a con­tro­versy about Pro­fes­sor Geist’s guesses con­cern­ing the poten­tial rev­enue pho­tog­ra­phers could derive from pro­vi­sions in C-32.  Let us say sim­ply that as in many other instances, what C-32 gives with one hand, it takes away with the other. Indeed, this legal gain is pos­si­bly with­out any eco­nomic advan­tage since Sec­tion 38 of Bill C-32 tam­pers with it through the addi­tion of a para­graph in sec­tion 32.2 of the Act. The new para­graph (f) will per­mit unlim­ited repro­duc­tion of a pho­to­graph com­mis­sioned from a pho­tog­ra­pher for all pur­poses except com­mer­cial ones. Thus, for exam­ple, the lucra­tive mar­ket of copies of wed­ding pho­tographs for rel­a­tives may well dis­ap­pear. Of course the bill men­tions that agree­ments to the con­trary may be con­cluded, but users will likely lean on this excep­tion to keep from hav­ing to pay repro­duc­tion royalties.

Con­clu­sion

For all the rea­sons exposed above, the CCA stands firmly by the fig­ure of $126M it has ascribed as rev­enue at risk if C-32 is adopted as it now stands.