CONTU: Economic Effects of Program Copyright

That copyright gives authors exclusive rights in their writings seems to cause some to equate it with all monopolies. This has led to the fear that protection for programs may give the copyright owner the power to dominate the program market, the machine market, or both.

To begin with, it is necessary to distinguish between those lawful monopolies whose existence is permitted or even encouraged on policy grounds and unlawful monopolies which are declared to be inimical to the public good. Permitted monopolies generally are found in regulated industries, such as public utilities, in which economies of scale are so great that the existence of more than one firm makes little sense and in which regulation, when properly accomplished, prevents such abuses as monopoly pricing or refusals to deal. Such limited monopolies as patents and copyrights are encouraged while the public interest is protected in various ways. Protection of the general good is found in the limited term and stringent standards associated with patents, the proscription of the protection of ideas under copyright, and the refusal to allow the extension of patents or copyrights beyond their limited scopes. This last matter may be the heart of the concern about the economic effects of program copyright.

The utilization of lawful patents to attempt to monopolize unpatented processes has been consistently found unlawful.112 Because copyright grants no monopoly over ideas, a parallel line of cases does not really exist, but in certain instances courts have reached similar results. In a leading copyright-antitrust case, Judge Frank outlined how competing public interests could be balanced:

We have here a conflict of policies: (a) that of preventing piracy of copyrighted matter and (b) that of enforcing the antitrust laws. We must balance the two, taking into account the comparative innocence or guilt of the parties, the moral character of their respective acts, the extent of the harm to the public interest, the penalty inflicted on the [copyright owner] if we deny it relief. As the defendants’ piracy is unmistakably clear, while the [owners’] infraction of the antitrust laws is doubtful and at most marginal, we think the enforcement of the first policy should outweigh the enforcement of the second.113

Thus, it is not the fact of a constitutional and statutory monopoly which is disfavored, but only abuses of the lawful monopoly.114

One of the hallmarks of a competitive industry is the ease with which entrepreneurs may enter into competition with firms already doing business. The absence of significant barriers to entering the program-writing market is striking. There are several hundred independent firms whose stock in trade is computer programs.115 New software firms may be formed with few people and little money; entry into the market has thus far been fairly easy.116 None of the evidence received by the Commission suggests that affording copyright to programs would in any way permit program authors to monopolize the market for their products. Nor is there any indication that any firm is even remotely dose to dominating the programming industry.

The effect of program copyright on the retail prices of consumer goods and services is so small as to be undetectable. Across a wide variety of industries, packaged software amounts to between one and two percent of data processing expenses, which themselves comprise a like percentage of a firm’s gross income. This has led one commentator to describe data processing costs as a whole as “a noise-level expense, probably less than the phone bill of an average company.”117 Thus, from each one hundred dollars {Page 24} of income, a firm is likely to spend between one and two dollars on data processing, of which from one to four cents are spent on packaged software. There is no easy way to separate out the costs of protection from that figure, but it is clear that such costs are miniscule when compared to a firm’s total operating expenses.

The market for computer hardware has been characterized by severe but not insurmountable barriers to entry. Economies of scale are very great; a firm must be prepared to invest tremendous amounts of money in creating, building, and marketing machines.118 Natural barriers to entry, such as economies of scale, should not receive the opprobrium properly reserved for anti-competitive conspiracies. Barriers erected by present members of an industry may well be – and frequently are – antitrust violations.

The inability of hardware firms to dominate the software market was recognized by the Public Interest Economics Center, when it stated:

[W]hatever their historical dominance, the hardware corporations lack the ability to control entry into the software market, and . . . their market shares are being steadily eroded by the independents. Thus, we can tentatively conclude that protection of software . . . serves to benefit consumers by enhancing competition and increasing long-run supply.119

In the market for computers, monopolistic practices have been attacked by the Department of Justice on numerous occasions. As the result of an early consent decree, IBM, the largest firm in the industry, has agreed to sell its equipment instead of only leasing it. In 1969, immediately after the Justice Department filed its antitrust suit, IBM stopped selling its machines and programs as a package, thus ending a tying arrangement, the legality of which had been questioned. The government is currently prosecuting that action against IBM through which it seeks the division of IBM into several firms, much as resulted in the Standard Oil case.120 This relief, as is typically the case in an antitrust action, is directed toward the sources of a firm’s alleged dominance of an industry. It is interesting to note that neither the government nor any private antitrust plaintiffs has ever argued that IBM’s assertion of copyright in its programs is even remotely related to its alleged anticompetitive behavior.

Successful antitrust attacks where copyright was important to the cause of action apparently have occurred only with respect to performing rights organizations. Both ASCAP and BMI operate under consent decrees which resulted from Justice Department actions directed toward the monopoly created when performance rights not only were pooled but were available exclusively from the pool. The resulting settlements permitted the pooling to continue upon the provision that customers could go to individual proprietors as well as to the defendants to obtain performance rights. Another attack on ASCAP demonstrated again that it is not the copyright monopoly which is disfavored, but rather attempts to extend that right to acquire monopoly power in the market. When a music publisher who belonged to ASCAP sought damages for infringement from film exhibitors who had without license shown films containing the plaintiff’s music on the soundtrack, in denying the relief sought, the court ruled:

Refuge cannot be sought in the copyright monopoly which was not granted to enable plaintiffs to set up another monopoly, nor to enable the copyright owners to tie a lawful monopoly with an unlawful monopoly and thus reap the benefits of both.121

The policy implications of such cases seem clear and correct: the lawful copyright monopoly may not be used other than as intended. A copyright owner may monopolize his expression but not the market in which it is purveyed. To suggest, as does the Public Interest Economics Center (PIE-C), that no “large” hardware manufactures be permitted to assert copyright in programs they write is to propose an instrument of dubious legality and effectiveness.122 Certainly any large firm could create a separate entity to do its program-writing to avoid any proscription of its ownership of program copyrights. {Page 25} The PIE-C proposal may he less than relevant to the extent that it might lull its advocates into a false sense of having dealt with the problem of industrial concentration when they have not. Being against bigness at all costs should not be a substitute for analytical action on behalf of the general public and consumers.

On the whole, the direct approach against alleged monopolists seems far superior to fighting perceived economic evils on copyright grounds. The enforcement and, where necessary, emendation of present antitrust laws is more appropriate to the problem, if any, than the invention of a class of works which are generally copyrightable but not when their authors are disfavored, for whatever well-intentioned reasons. In the patent and copyright antitrust cases, there is no language suggesting that statutory protection should be unavailable to the defendants, notwithstanding the proof that they had abused their lawful monopolies. To create such a remedy on bald suspicion would indeed be unjust.

Next section: Cultural Effects of Program Copyright

112 Morton Salt Co. v. G. S. Suppiger Co., 314 U.S. 488 (1942); Mercoid Corp. v. Mid-Continent Investment Co., 320 U.S. 661(1944).

113 Alfred Bell & Co. v. Catalda Fine Arts, Inc., 191 F.2d 99, 106 (2d Cir. 1951).

114 For another case in which the same court refused to permit a copyright owner to use his lawful monopoly to the detriment of the public, see Rosemont Enterprises, Inc. v. Random House, Inc., 366 F.2d 303 (2d Cir. 1966).

115 Harvey, The Developing Software Industry,Infosystems 34 (July 1976).

116 Computer Sciences Corporation, which has over $100 million in annual sales, is said to have been founded on a capital investment of less than $1,000.

117 McLaughlin, 1976 DP Budgets, Datamation 52 (February 1976).

118 Amdahl Corporation, a newcomer to the market for large computers, spent five years and $45 million before shipping its first order. Can Amdahl Live with IBM’s New Strategy?, Business Week 56B (August 5, 1977).

119 PIE-C Report, supra note 21, at IV-13.

120 Standard Oil Co. v. United States, 221 U.S. 1 (1911).

121 M. Witmark & Sons v. Jensen, 80 F.Supp. 843, 848-49 (D. Minn. 1948).

122 PIE-C Report, supra note 21, at IV-13.