Tuesday, August 14, 2018

Robust Physical and Intellectual Property Rights Encourage Economic Activity

On August 8, 2018, the Property Rights Alliance published the 2018 International Property Rights Index (IPRI), ranking 125 countries around the world based on the strength of both physical and intellectual property rights. The countries included in the 2018 edition comprise over 98% of global gross domestic product (GDP) and over 93% of the world’s population. Most notably, the IPRI finds that property rights are a defining factor impacting a country’s investment, entrepreneurship, and economic activity.

The IPRI includes three core components (legal and political environment, physical property rights, and intellectual property rights) and ten corresponding categories. The legal and political environment component includes judicial independence, rule of law, political stability, and control of corruption. The physical property rights component includes the protection of such rights, the ability to register property, and the ease of access to loans. The intellectual property (IP) rights component includes the protection and enforcement of such rights, strength of patent protections, and the level of copyright piracy. Using data from other international indices, the IPRI compiles scores from each of these components into a 0-10 scale for each of the 125 countries.

Finland ranks highest with a score of 8.69, followed by New Zealand and Switzerland with scores of 8.63 and 8.62, respectively. The United States ranks 14th with a score of 8.12, which is exactly where it ranked in 2017. But its 2018 score did improve slightly from 8.07. On the other end of the scale, the bottom three countries are Venezuela, Yemen, and Haiti, with scores of 2.96, 2.79, and 2.73, respectively.

Significantly, the Index provides insight into correlations between IPRI scores and many economic outcomes. Free State Foundation scholars often have stated that strong protection of property rights, specifically strong protections of IP rights, foster creativity, innovation, and economic growth. The strong positive correlations found in the IPRI are consistent with those statements. For example, IPRI scores have a correlation coefficient of 0.833 with GDP per capita, 0.756 with gross capital formation per capita, and 0.904 with global entrepreneurship. Other strong positive correlations include a 0.900 coefficient with networked readiness/connectivity, 0.807 with telecommunication infrastructure, 0.842 with civic activism, and 0.818 with overall economic freedom.

With these robust positive correlations, it should not be a surprise that the top 20% of countries in the IPRI have an average GDP per capita of over $56,000, while the bottom 20% of countries have an average GDP per capita under $3,000.
Notably, China ranks 52nd overall with a score of 5.91. As I stated in a blog last week, although China does not have the weakest IP system in the world, the size of its economy in conjunction with its lack of strong IP rights protections and enforcement means it is a major threat to U.S. creators and innovators. While the IPRI does not give specific policy proposals about how each country should improve its intellectual and physical property rights, it provides an aggregate view of how countries compare to each other and how strong property rights incentivize economic activity around the globe. The IPRI, along with the Global Innovation Policy Center’s (GIPC) International IP Index, provide policymakers useful tools for assessing ways to improve their country’s property rights systems.

From the correlations cited above, it is clear that robust physical and IP rights foster innovation and economic prosperity. As undeveloped and developing countries (like China, Mexico, and Haiti) continue to strengthen their property rights protections, U.S. companies will be more inclined to expand international trade with those countries, creating economic opportunities in impoverished parts of the world. Robust property rights reduce poverty by incentivizing economic activity because entrepreneurs understand that their innovations and earnings will be protected.

Finally, the U.S. must continue to strive to be a leader throughout the world by participating in free trade agreements that contain effective provisions that support the protection of property rights. The U.S. ranks first overall in GIPC’s International IP Index, but only 14th in the IPRI. The United States’ lowest score was in the component of political stability, followed by judicial independence and ease of access to loans. While it may be difficult to create a stable political environment overnight, political instability often is the product of unemployment and a stagnant economy. Economic indicators suggest that unemployment is very low and the economy is growing. Expanding international trade and promoting innovation policy through the protection of property rights should stimulate the economy even further.

The United States should strive to improve its IPRI score even further. If it does, the effort should encourage additional entrepreneurship and economic activity.

Monday, August 13, 2018

Comcast's Internet Essentials Plays an Essential Role

Encouraging ubiquitous broadband deployment is an essential part of any strategy to get more and more Americans connected to the Internet. And, of course, Free State Foundation scholars over the years have always had much to say regarding the public policies that encourage deployment.

But encouraging broadband adoption, especially among those segments of the population that lag behind regarding adoption, is an essential part of the "connecting up" strategy. It's fair to say that Comcast's Internet Essentials program has played -- and continues to play --an essential role here.

And today Comcast announced it has now connected more than six million low-income Americans to the Internet through its Internet Essentials program, which is the largest and most comprehensive broadband adoption program for low-income families in the U.S. It said it has connected more than two million people in the last year alone, the largest annual increase in the program’s history.

And Comcast also announced it will significantly expand eligibility – for the eleventh time in seven years – to low-income veterans, nearly one million of whom live within the Comcast footprint. According to the United States Census Bureau’s 2016 American Community Survey, less than 70 percent of low-income veterans have Internet access, and about 60 percent own a computer.

Private efforts like the Comcast program -- and others offered by other companies -- are often overlooked. But they shouldn't be. These private companies have invested billions of dollars in efforts to help close remaining "digital divides." This is worthy for acknowledgment -- and thanks.

Friday, August 10, 2018

A 3 Minute Read Gone Bad

Jared Whitley has a piece titled "Facebook Is Not the Bad Guy" which The Weekly Standard ran on July 30. The piece advertises itself, right at the top, as a "3 min read."
Thankfully, it wasn't any longer. Because, say, if it were a "6 minute read," it might have been twice as flawed as it already is.
The premise of the piece is that, when it comes to data privacy and security concerns, the focus on Facebook, and presumably Google, Amazon, and other web giants, is misplaced. Mr. Whitley suggests "the media have been quite gleeful in their cheering of Facebook's recent bad news." Then, he claims "we're picking on the wrong bad guys." According to Mr. Whitley: "Telecom companies – AT&T, Verizon, Comcast – have access to more of our data and treat it with nowhere near the scruples that Silicon Valley does."
Even a cursory read of Mr. Whitley's piece will demonstrate he produces no evidence to support the claim that the "telecom companies" [he means: Internet service providers or ISPs] lack the "scruples" of Facebook, Google, and the other web giants. Mr. Whitley tosses out character-bashing bombs based on nothing more than his assertion "that they're eager to get into the digital advertising space that Google and Facebook dominate."
The reality, whether Mr. Whitley wants to admit it or not, is that Facebook has been in the news because its conduct and practices regarding privacy and data security have been problematic, even if not necessarily unlawful. Facebook's senior executives, including Mark Zuckerberg and Sheryl Sandberg, have acknowledged the company's privacy and data security shortcomings surrounding the Cambridge Analytica matters and other incidents.
My purpose here is not to pile on to Facebook to build a case that it is a "bad guy" – to use Mr. Whitley's terminology. Or to assert that a case has been made for heavy-handed government intervention of Facebook or Google. Rather my purpose is to show that if Mr. Whitley, or anyone else, is concerned about online privacy, it's unwise to ignore the web giants because, to paraphrase Willie Sutton, that's where the market power – and hence money – is.
It may be true, as Mr. Whitley claims, that the Internet service providers like Comcast and Verizon are eager to get into the digital advertising space. Sure enough. But it is also true, as he concedes, that in this space "Google and Facebook dominate."
As of December 2017, Google and Facebook accounted for 73% of the U.S. digital advertising market. And as of July 2018, Google had access to over 86% of all Internet searches in the United States and controlled almost 50% of the web browsing market. Despite its recent troubles, in July 2018, Facebook still controlled 54% of the social media market. The market shares of these web giants indisputably are significantly larger than that of any single Internet service provider.
In a February 2016 paper, “Online Privacy and ISPs: ISP Access to Consumer Data is Limited and Often Less than Access by Others,” Peter Swire and his colleagues stated that 70% of Internet service provider traffic would be encrypted by the end of 2016. Under that scenario, ISPs, at best, only have access to 30% of consumer data. Encryption keeps getting ever more prevalent so, in 2018, ISPs likely have access to even less consumer data. In other words, the Googles and Facebooks of the world, not the ISPs, have far greater access to consumers’ personal information than ISPs.
In the face of this reality regarding market power dominance in the digital advertising space, I'm baffled as to why Mr. Whitley felt the need to portray Internet service providers as the "bad guys" in order to defend Facebook, Google, Amazon, or other web companies. In a two-sided market, ISPs connect consumers to Internet access and web companies like Facebook to deliver content. Both sides have an incentive to collect consumer data to deliver targeted advertising and to respond to evolving consumer demand with innovative, pro-consumer offerings. Done right, this enhances overall consumer welfare.
What we don't want to do (per Mr. Whitley) is to engage in unfounded sweeping generalizations. Instead, we want to have a regulatory regime that emphasizes consumer disclosure and consumer choice. And we want to target bad actors – "bad guys" if you will – for appropriate sanctions if they are found, after proper procedure, to have committed unfair or deceptive practices or other abuses.
And we want to make even a "3 min read," or perhaps especially a "3 min read," accurate, not rife with unfounded accusations.

Thursday, August 09, 2018

Senate Should Vote on the Bill to Modernize Music Copyright

Congress last overhauled the Copyright Act back in 1976, and provisions in the old law are often a poor fit for today’s digital music marketplace. Right now Congress has a stellar opportunity to make overdue updates to music copyright law. In April, the House of Representatives unanimously passed the Music Modernization Act. The Senate Judiciary Committee unanimously passed a similar bill in June. Rather than let this important legislation get sidetracked now, the Senate should act promptly to vote on the Music Modernization Act. 

The Music Modernization Act is an omnibus bill that would better secure copyright protections and royalty payments for recording artists, songwriters, and other music professionals. If passed by the Senate and signed into law, the bill would: (1) secure to copyright owners of sound recordings made before 1972 federal copyright protections for public performances of their recordings via digital audio transmission; (2) set up a streamlined process for producers, mixers, and sound engineers to receive direct royalty payments via SoundExchange; and (3) enable more timely and accurate payment of market-based “mechanical license” royalties to songwriters while providing blanket licenses for digital streaming services. 

Despite unanimous votes in the House of Representatives (H.R.5547) and in the Senate Judiciary Committee (S.2823), there are reports that the Music Modernization Act is being held up by just a few members of the Senate on account of the bill applying a uniform market-based “willing buyer/willing seller” royalty rate and providing full protection terms to pre-72 sound recordings. But these objections don’t hold up. They should not keep the Senate from taking a timely vote on the Music Modernization Act.

First, the “willing buyer/willing seller” royalty rate standard is the most sensible standard for achieving the purpose of music copyright law, and the Music Modernization Act’s expansion of that standard to pre-72 sound recordings and to music compositions is commendable. 

Under many circumstances, music copyright holders are subject to a compulsory licensing system in which licensees must pay royalties according to a rate formula set by Congress and applied by the Copyright Royalty Board. Although copyright holders are free to negotiate royalties with music service providers, those rates operate as backstops when negotiating is particularly burdensome or unsuccessful. Unfortunately, current law imposes different music copyright royalty rates depending on the delivery technology or service involved. Such a non-neutral approach is arbitrary and unjustifiable. Copyright law should not specially privilege one type of technology or service over others. Rather, it should apply the same standard across the board.  

The Music Marketplace Act sensibly follows the U.S. Copyright Office’s 2015 report recommendationthat “[a] single, marketoriented ratesetting standard should apply to all music uses under statutory licenses.” Indeed, the “willing buyer/willing seller” standard is market-oriented in that it is intended to “most clearly represent the rates and terms that would have been negotiated in the marketplace” among willing parties. As mentioned above, the Music Modernization Act would apply the “willing buyer/willing seller” standard to public performances via digital audio transmission of pre-72 recordings and also make that standardthe basis for mechanical licensing royalties paid to songwriters and other copyright owners of musical compositions. Thus, the Music Modernization Act would more closely align music copyright policy with free market principles and more equitably secure the intellectual property rights in sound recordings and music compositions. 

Second, the Music Modernization Act is on principled ground in securing the same copyright protection terms for pre-72 sound recordings that apply to post-72 sound recordings. The Senate should not be deterred from voting on the Music Modernization Act because one or a few members may hold outlier opinions about how long copyright protections ought to last. 

In general, copyright protection terms for sound recordings made on or after 1972 run for the life of the author plus 70 years. This makes sense in the Digital Age, since copyrights in sound recordings are far easier to transfer and track than previously, and the economic value of such rights are potentially far greater than ever before. It is the copyright owners who have the foremost right to receive proceeds from their intellectual property. 

Recent decisions under state law indicate that pre-72 sound recordings are already protected under many or perhaps most state laws. But state litigation is complex, costly, and uncertain. An important upshot to the Music Modernization Act is that it offers a federal-level resolution to myriad state-level disputes over public performance royalties involving pre-72 recordings. Federal copyright protection terms for pre-72 sound recordings are a critical component of that resolution. 

The U.S. Constitution’s Article I, Section 8 Copyright Clause entrusts Congress with the power to secure exclusive rights in creative works so that the producers of such works can enjoy the fruits of their labors. Consistent with the purpose of the Constitution’s Copyright Clause, the Music Modernization Act would better secure music copyright protections in the Digital Age. The Senate should promptly give the Music Modernization Act a vote on its merits.

Wednesday, August 08, 2018

A Trade War May Not Fix China's Weak IP Protections

Earlier this month, President Donald Trump threatened to impose tariffs on $500 billion of Chinese imports, the value of all U.S. imports from China in 2017, because he claims China has taken advantage of the United States. President Trump already imposed 25% tariffs on $34 billion of Chinese goods. He said his action was taken “in light of China's theft of intellectual property and technology and its other unfair trade practices.” China immediately retaliated with equivalent tariffs, 25% on $34 billion of imported U.S. goods.
President Trump’s concerns about China’s weak protections of intellectual property (IP) rights are justified, but imposing tariffs and igniting a trade war may not be the best way to fix the problem.
In 2013, international trade of counterfeit and pirated goods represented up to 2.5% of world trade, or as much as $461 billion. Of that, China alone is estimated to account for more than 70% of global physical trade-related counterfeiting, amounting to more than $285 billion. Physical counterfeiting accounts for the equivalent of 12.5% of China’s exports of goods and over 1.5% of its GDP. China and Hong Kong together are estimated to account for 86% of global physical counterfeiting, which translates into $396.5 billion of counterfeit goods each year.
China and Hong Kong account for 87% of counterfeit goods seized coming into the United States. The annual cost to the U.S. economy of counterfeit goods, pirated software, and theft of trade secrets exceeds $225 billion and could be as high as $600 billion. According to the Global Innovation Policy Center’s (GIPC) 2018 International IP Index, China ranks 25th out of 50 countries in the study with regard to strong IP systems. So while China’s IP system may not be the weakest in the world, the size of its economy in conjunction with its lack of strong IP protections and enforcement means it is a major threat to U.S. creators and innovators.
IP-intensive industries comprised over 38% of the entire U.S. economy in 2014, equating to $6.6 trillion. And IP-intensive industries directly accounted for 27.9 million jobs and indirectly accounted for 17.6 million jobs, totaling 45.5 million jobs or about 30% of all U.S. employment in 2014. Therefore, when IP rights are violated in the U.S. or abroad, it stifles innovation and job-growth throughout the economy.
As FSF Senior Fellow Ted Bolema discussed in a Perspectives from FSF Scholars, “Why Economists Consistently Support Free Trade Policies,” free trade policies lead to higher paying jobs and lower prices. Protectionist policies, like tariffs and trade wars, ultimately harm consumers and entrepreneurs in both China and the United States and likely harm other countries because investment and innovation are hindered.
The best way to address violations of IP rights in China is through diplomatic efforts, like the adoption of a new free trade agreement creating robust IP protections in China. Hopefully, China will adopt IP protections that are similar to those in the United States, the global leader according to GIPC’s 2018 International IP Index. Then, consumers and entrepreneurs in both countries will benefit from mutual gains from trade and legitimate economic activity.
The U.S.-China Joint Commission on Commerce and Trade (JCCT) is a high-level dialogue on bilateral trade issues between the United States and China, dealing extensively with strengthening IP rights protections in both countries and fostering innovation. Also, the U.S.-China IP Cooperation Dialogue is a group of professionals from both countries who meet to discuss how IP systems can be improved to spur innovation and economic activity between the two countries. The common theme of both of these groups is that China’s IP rights protections can be improved in three main areas: reducing the amount of bad-faith trademarks, combatting online piracy, and decreasing theft of trade secrets.
Bad-faith trademarks are trademarks that are meant to look similar to popular brands and confuse consumers into buying seemingly familiar products. According to GIPC’s Index, China’s trademark law “provides limited criteria for obtaining design protection and no substantive review takes place, leading to many low-value patents and a high rate of invalidations.” China should combat the pervasive problem of bad-faith trademarks by strictly filtering trademark applications. On a positive note, the establishment of China’s IP courts in 2014 has already created a strong precedent on bad-faith trademarks when it found that the Chinese retail sports chain Qiaodan had violated Michael Jordan’s naming rights. Hopefully, this precedent will deter bad-faith trademarks from emerging in the future.
With regard to online piracy, China should adopt e-commerce-related legislation to strengthen the supervision and enforcement of online piracy and counterfeiting. China must continue to provide more licensing opportunities for Internet companies in the music and movie industries, which should discourage piracy by increasing access to legal content. Also, improving the patentability of software by allowing applicants to file partial design claims and extending the grace period that precedes the patent application should reduce rampant software piracy in China by encouraging competition and ultimately lowering prices.
Theft of trade secrets is defined as stealing, misappropriating, or receiving such secrets with intent to convert the trade secret into an economic benefit for anyone other than the rights holder. Although China recently amended its Anti-Unfair Competition Law to shift the burden of proof to the accused infringer for many trade secrets cases, this action does not address the issue sufficiently. The amended law likely will lead to a “one-size-fits-all” enforcement approach that may not be suitable for all types of trade secrets. Instead, China must adopt trade secret legislation which should include steps to assist rights holders in seeking preliminary injunctions and include evidence and asset preservation measures under China’s Civil Procedure Law. Also, China can do more to engage the public about trade secrets protection and streamline its processes for providing trade secrets licensing.
Instead of igniting a trade war, President Trump should welcome free trade with China. With the adoption of a new bilateral free trade agreement (or multilateral if other countries choose to participate), the United States could address the concerns regarding bad-faith trademarks, online piracy, and theft of trade secrets by establishing an IP chapter that creates strong IP rights protections in China. This would spur trade between the two countries even more because a strong IP system in China would encourage additional innovation and economic activity.

Friday, August 03, 2018

Shareholders Approve Disney to Buy Fox Assets

Last week, Walt Disney Co. and 21st Century Fox Inc. shareholders approved the $71.3 billion deal for Disney to acquire Fox's entertainment assets. This approval comes after Comcast dropped its $65 billion bid to focus its efforts on acquiring the European pay-TV company Sky. The two companies were in an aggressive bidding war, but both were in good standing to receive antitrust clearance. Disney has already received antitrust clearance, subject to certain divestiture conditions, and if Comcast had stayed in the running, it likely would not have faced any significant antitrust concerns either.