Thursday, 9 February 2012

How does copyright law affect investment?

As economies become more knowledge based, the climate of IP legislation matters more and more.  Here's a recent paper by Josh Lerner on the effects of copyright law on venture capital investment that is interesting.

The paper is “The Impact of Copyright Policy Changes on Venture Capital Investment in Cloud Computing Companies” which studies how a change in US copyright law relative to the EU affected the willingness of US venture capital to invest in innovative projects relative to such investment in the EU. My reading of the paper is as follows.

In 2006, Cablevision developed a Remote Storage Digital Video Recorder (RS-DVR), which allows customers to record and replay TV on a hard drive.  However, the difference with traditional DVRs, is that it did not sit at home, but remotely, thus recording and playing back from remote servers in the “cloud”.  In 1984, in the Sony Betamax case, the Supreme Court had found that at viewer using a home VCR to “time shift” i.e. record for viewing at a later time, did not contravene copyright, being of fair use.  The plaintiffs in this case were careful to argue that the remoteness made Cablevision making the copy, not the viewer (see e.g. discussion in

In response, a consortium of U.S. television and copyright holders filed a complaint against Cablevision in May 2006 over alleged copyright infringement and won an initial judgment in 2007 in a lower court,  quoted by Lerner

[P]laintiffs successfully argued that Cablevision’s proposed system would directly infringe their copyrights in three ways.
·        First, by briefly storing data in the primary ingest buffer and other data buffers integral to the function of the RS-DVR, Cablevision would make copies of protected works and thereby directly infringe plaintiffs’ exclusive right of reproduction under the Copyright Act.
·        Second, by copying programs onto … hard disks …, Cablevision would again directly infringe the reproduction right.
·        And third, by transmitting the data … to … customers in response to a “playback” request, Cablevision would directly infringe plaintiffs’ exclusive right of public performance.
In 2009, the Supreme Court affirmed the decision of a lower court to overturn this judgment saying there was no copyright infringement. Lerner, drawing on accounts by computer commentators, argues that this clarified the legal role of cloud computing, who potentially would have been contravening copyright offering such cloud-based computing services. 

His key finding is that average quarterly venture capital investment into cloud-based companies rose by 41% in the US after the decision.  Since investment is rising everywhere, he needs a benchmark against which to judge this and takes the EU, where investment rose by less, 27%.   He therefore argues that the liberalsation of copyright significantly positively affected venture capital investment.  This additional effect, is, he argues robust to controlling for other factors such as broadband penetration etc.  The following figure gives a sense of the statistical results: 

The relative uptick seems to be there, but it does come a bit after the decision, given by the vertical line. Perhaps investment takes time to come on stream?

One might also ask whether this result necessarily means that EU copyright law need reform.  I am no expert on it, but given that the legal position is so confused, as Hargreaves notes, this can hardly help matter in Europe.