The Copyright Board issued yesterday its decision certifying SOCAN's Tariff 24 for ringtones. The Board set a base rate of 6% of the price paid by the subscriber for the ringtone (net of any network usage fees) with a minimum of $0.06 per ringtone. The main legal controversy before the tribunal was whether the delivery of ringtones is "communication to the public" but I don't want to comment on that here. Instead, I want to comment on a more fundamental issue, and ask why should the royalties be set by a tribunal at all? Why wouldn't copyright holders and ringtone suppliers enter into voluntary agreement and decide who should pay and how much? Ordinarily, prices are determined by the "market". Why then are these prices set in a strange way in which one seller (SOCAN) proposes prices and then, over a period of three years lawyers, prominent economists and other experts try to convince a tribunal what those prices should be?
The conventional answer is that SOCAN exists to overcome a market failure; that the transaction costs involved in direct negotiations between copyright owners and users are soo high that they such transactions become impractical. So SOCAN solves the problem by aggregating the rights from all right holders and licensing them on a blanket basis. But at the same time, because SOCAN becomes the sole seller of such rights, some form of oversight over the prices it sets is necessary to restrain its monopolistic power. I have earlier questioned the validity of this justification for collective administration of copyrights in SOCAN's paradigmatic activity: the licensing of performing rights (for broadcasters, bars, discotheqeus, etc.), and further suggested that new technologies undermine this justification even further. But whatever one thinks about the justification for collective administration of performing rights, this justification doesn't seem to hold at all in the case of ringtones.
Unlike businesses that publicly perform music who need rapid access to a wide and changning repertiore of songs, end users of ringtones--wireless subscribers--purchase only a handful of ringtones, and typically use only one at a time. Consequently, ringtone sellers (wireless carriers) offer a relatively narrow number of ringtones and sell them on a per-unit basis. Essentially, the wireless carriers are the equivalent of music stores who sell and deliver content (CDs or ringtones) on a per-unit basis to end users, after buying them from producers (record companies in the case of CDs; aggregators in the case of ringtones). What market failure prevents the aggregators from negotiating with copyright holders and obtain a license to create the ringtone and further distribute it to wireless carriers? And what market failure prevents the parties to such licenses to include in them the right to communicate the ringtone to the public and authorize wireless carriers so to do? Apparently none. Aggregators must negotiate with copyright owners when they produce the ringtone, and could equally negotiate the terms for the right to communicate the ringtone to the public. The only reason why this doesn't happen is that the Copyright Act, by assuming that a market failure exists, allows copyright owners not to compete against each other and have SOCAN act as their monopolistic agent. But if no market failure exists, this policy doesn't make sense to me. Just like any other product, the amount of royalties paid for ringtone should be detemined in a competitive marketplace, not by a tribunal.
