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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.


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.