Is copyright dead?

"No wonder they call Economics the Dismal Science. At the Internet Video Policy Symposium in Washington yesterday (co-sponsored by Content Agenda), a chorus line of academic economists postulated that content owners face a far more difficult challenge than they know in monetizing their content on the Internet, and that the odds that we can build our way out of the current debate over how to manage scarce online capacity are virtually nil.

The most enthusiastically glum was Gerry Faulhaber, a professor at the Wharton School of Business at the University of Pennsylvania and the former chief economist for the FCC. According to Faulhaber, copyright is a dead letter.

"Copyright is a very big issue in the legal world today, but in the business world, when you talk to consumers about protecting copyrights, it's a dead issue," he said. "It's gone. If you have a business model based on copyright, forget it."

According to Faulhaber, the "world of open piracy," created by digital technology will always thwart content owners seeking to leverage the monopoly granted to them by copyright law.

"The music industry is yet to figure this out," he said. "The current iTunes model is probably the best they can do. In both movies and music this is likely to result in substantially lower revenue for content owners." The movie studios will have an even tougher time than the music companies, according to Faulhaber, because some of the monetization models that can work for music--such as advertising--probably won't work for full-length movies.

The likely result? "Content providers will have to hook up with the conduit guys," Faulhaber said. "They're the only ones in a position to monetize content online because they can control its distribution."

Faulhaber was also gloomy about resolving the current stand-off over the allocation of bandwidth.

"Video takes lots and lots of bandwidth, and bandwidth is not cheap," he said. "If bandwidth were cheap, the business would be attracting new entrants, which clearly it isn't."

As a result, some degree of "traffic shaping," or "network management" is both essential and inevitable, as it has been for telephone networks for decades. Regulating or prohibiting traffic shaping, Faulhaber claimed, would only make the problem worse.

"Regulating traffic shaping will reduce available capacity," he said. "If demand exceeds supply, total throughput on a network declines, sometimes to zero. The best illustration of this is highway traffic. When the volume of traffic exceeds that capacity of the highway, everyone has to slow down."

According to Scott Wallsten, senior fellow at the Georgetown University Center for Business and Public Policy, simply building more capacity won't solve the problem.

"Japan has 100 MBs networks and they still have congestion, and ISPs still have to shape traffic," Wallsten said. "If you price something at zero, people will use too much of it. Creating more capacity alone is not the answer to congestion."

What is? Recognizing the value of network management, according to Wallsten. "The data say that a small number of users are creating an externality," he said, using the economists' term for an action that imposes a cost on parties not directly involved in a transaction. "You need to make those heavy users internalize those costs," through something like congestion pricing," he said.

The focus of policy makers, therefore, according to Wallsten, should be on making sure that the unavoidable tools of traffic shaping are not used anti-competitively.

"There's a huge role for anti-trust here, but those laws are already on the books," he said. "We don't need new regulation to prohibit anti-competitive behavior."

How will this affect VOD?  If it's as these gentlemen say studios are in for a rough ride indeed.