Policy Analysis No. 438

Policing Pirates in the Networked Age

Executive Summary

New Internet-based technologies appear to threaten the ability of copyright owners to collect revenues for their intellectual creations, as epitomized by the recent public trials and tribulations experienced by Napster. That has resulted in new legislation against pirating and has given rise to new technologies to protect intellectual products. Both the new technologies and the counter-technologies that have followed them have attracted attention and analysis, sometimes bordering on the apocalyptic, from competing camps. The basic issue, whether technologies that enhance the ability to create unauthorized copying are destructive to the principles of copyright, is not a new one, however. Technologies that make it easier to pirate copyrighted materials have undergone economic examination for over two decades. Prior analysis, and prior experience, has indicated that the previous generations of copying technologies have not had dire consequences for copyright owners.

This paper examines whether new Internet copying technologies are likely to be different from prior technologies in their ability to destroy the value of intellectual property rights and concludes that they are. It then examines the evidence that has been put forward to support a claim that Napster had a negative impact on the compact disk industry and concludes that the evidence does not support such a finding. I then explain why it is that the negative impacts of Napster were unlikely to have been felt at the time these examinations were undertaken.

Finally, the analysis examines the impact of a possible market-based solution to this potential problem, based on new anti-piracy technologies known as digital rights management. This technology not only promises to make copying harder, but also allows the copyright owner to charge tiny micropayments for various degrees of use of the product. This extra control by copyright owners over the use of the copyrighted material has set off a firestorm of controversy by individuals concerned that traditional “fair use” of a product will disappear and further claiming that digital rights management will lead to economic inefficiency. Fair use has historically allowed scholars and others to use small amounts of copyrighted materials for research or study without being obligated to make copyright payments. I show that digital rights management, contrary to these claims, does not eliminate fair use and is likely to enhance economic efficiency. Nevertheless, attempts by government to force the adoption of anti-copying technology appear misguided.

Read the Full Policy Analysis

Stan Liebowitz is a professor of economics at the University of Texas at Dallas. This study is based on portions of his forthcoming book, Rethinking the Networked Economy, to be published by Amacom Press in 2002.