Wednesday, August 3, 2011

Copyright infringement /= theft.

It has become common, especially among those lobbying for tighter enforcement of copyright protection, to refer to illegal copying of copyrighted material as theft. I want to address a question of language: should illegal copying of copyrighted material be called theft? Let me be clear about two things. First, this is definitely NOT a discussion of whether or not copying is good, or what copyright policy should be, or any hard question like that. It is also not a debate about “correct” language, per se; most interesting discussions of language are not about right or wrong, but rather about what is useful. Is calling copyright infringement “theft” useful language? I think the answer is no, in the sense that it does not correspond to standard use of the word theft. Of course, the terminology might be useful politically for those wanting tougher enforcement of copyrights; certainly no one likes being called a thief, and theft has a particular negative connotation that goes beyond simple law breaking. Many people might admit to breaking the speed limit; virtually everyone agrees that theft is morally wrong. But it is a bad use of the language, in terms of corresponding to our usual definition of theft, to attach the term to copyright infringement.

It is useful to start with a “conventional” example of theft. If I steal your computer, than you have one less computer and I have one more computer. No additional computers are created; my enjoyment of your computer prevents you from enjoying it.

Copyright infringement can’t be considered theft of the work itself, since my copying the work does not destroy the initial copy of the work. The claim, then, is that the intellectual property, which is a right to exclude others from enjoying copies, is what has been stolen. What I want to claim is that infringement of a right to exclude is not routinely called theft; in fact it is quite unnatural to call it that. Perhaps the clearest example of this is your front yard. You have the right to exclude others from your front yard. If someone has walked across your front yard, would you call them a thief? I think not; they have trespassed, but calling them a thief would be misleading. If you yelled “Stop, thief!” when the person crossed your lawn, and a nearby policeman apprehended the trespasser and asked you what was stolen, you would probably be quite embarrassed to accuse them of stealing the right to exclude them from your front yard, even if they were guilty of trespassing. This shows the sense in which use it is important to make sensible use of language: whether or not it is technically correct to say that the trespasser stole your right to exclude doesn’t change the fact that it is misleading to use the term in that way. (And it explains why those wanting tougher copyright protection use the term: yelling “Stop, thief!” is a very effective way to get the attention of law enforcement.)

Most of the discussion of the use of the term theft in regard to copyright infringement focuses on the foregone value that the copyright holder could have received by selling the work to the person who makes the copy. But this is no different, in principle, from the front lawn example: you could have charged the trespasser to cross your lawn, and you lost that revenue when the trespasser crossed your lawn without permission.
Perhaps the difference, then, is that the trespasser wouldn’t have paid to cross the lawn. But if one claims that the difference in the copyright example is in the magnitude of the lost revenue, does that mean that infringement of copyright is fine if the infringer wouldn’t have been willing to pay for the work that is infringed? The term copyright infringement, like trespassing, need not come to a judgement about willingness to pay, and therefore is more precise than theft. Even if you want to focus on a substantial destruction of value as the motive for calling infringement theft, it is still difficult to justify. If the trespasser tramples your flowers, it would still not by typical to call them a thief, even though they have destroyed value and might sensibly be asked to pay restitution.

(Destruction of value, though, is itself a tricky concept in a world of competing ideas. Certainly a new album released by Lady Gaga reduces the value of the other music on the shelves, as customers substitute away from those albums and toward the popular new release. Of course we do not expect Lady Gaga to pay restitution any more than we expect a popular new restaurant that draws customers from neighbouring restaurants to pay restitution to its neighbours. On the other hand, if Lady Gaga’s album were literally a copy of one of those other works, the substitution toward Lady Gaga’s album would be viewed differently. In practice, copyright opens up a difficult grey area in between. Some say that Lady Gaga is reminiscent of Madonna; if so, do we view sales of Lady Gaga’s album as destroying value for Madonna in a way that demands restitution? Or do we simply say that Lady Gaga has simply added value by standing on the shoulders of what came before, as all ideas do? These are the hard questions that are beyond the scope of this discussion, but certainly interesting ones to think about.)

Agreeing that it is misleading to call copyright infringement theft doesn’t mean that copying is OK, or that copyright laws are bad, or anything like that. Nothing about this discussion takes a stand on that. It is just a question of what language is useful: calling these acts theft is not helpful, because it doesn’t correspond to our usual notion of theft. In a sense, calling a trespasser or a trampler of flowers a thief might be technically correct, since they have taken your right to exclude, or your right to enjoy untrampled flowers. But the language isn’t helpful, since we have other more specific words for what has happened, and a common use of the word theft that doesn’t include acts like trespassing, trampling flowers, or infringing copyrights.

Tuesday, December 1, 2009

A strategic framework for Mr. Harper’s visit to China

When Prime Minister Harper visits China to warm up the political relationship he will have much to build on. Business ties are still warm despite the official coolness of the past few years. Canada’s brand has a high profile due to the popularity of Cirque de Soleil and Mandarin-speaking Canadian entertainer Mark Roswell, known in China as Dashan and regarded as one of the most country’s most famous foreigners. Both will be prominent at Canada’s imaginative Expo 2010 pavilion in Shanghai which will be visited by tens of millions of Chinese. Less well known but also significant, Chinese officials have learned from Canada’s model of financial regulation, credited with helping avoid the global financial crisis, and its system of fiscal federalism.

Yet the Prime Minister’s visit seems to lack a strategic framework. As with India, an implicit goal is to diversify Canada’s economic ties beyond its unchangeable proximity to the US market. Canada will deepen its trade and investment ties with India, but free trade agreements are not an option with China whose FTAs are largely motivated by foreign policy considerations to be friendly to its Asian neighbors.

Canada should identify goals, say within a 2030 time frame, to reshape and redevelop the relationship. By 2030, barring a catastrophe, the Chinese economy will be the world’s largest. But it is approaching physical and demographic limits to the industrial growth that has fueled its rise. The population will be more middle class and urban than today, but it is aging fast and income inequality has reached US levels.

Canadian exporters have benefited from the demand for natural resources generated by China’s industrial machine. Rising interest in the oil sands will bring a higher investor profile in production and transportation. But China’s industrial machine is losing importance as the economy is rebalanced to reverse the side effects of its thirty-year dash for growth. Current strategies will phase out subsidies for land, energy and capital and step up enforcement of environmental regulations already on the books to raise the costs of water and air. As these input prices rise manufacturers’ razor-thin margins will decline and creative destruction will ensue: industry will gradually shift towards less materials-intensive and more knowledge-intensive manufacturing and into services. Education standards will rise; renewable energy will be more prominent in China’s supply profile (targeted to provide as much as 20 percent of total energy needs by 2020).

China’s aging population will concentrate among the rural poor who lack access to financial instruments and institutions to support their financial needs. Public spending on health, education and social security tripled between 2002 and 2008 as the government moved to repair the social safety net which disintegrated in the 1990s. Banks still dominate finance, however; bond and equity markets are under-developed and dominated by favored state enterprises. The heavily managed exchange rate and controls on capital flows will have to be eased if Shanghai is to become an international financial center by 2020 as the central government has decreed.

Canada’s framework should anticipate these shifts. While Canadian financial institutions are not big players we have brand in entertainment and business services; our expertise in pension design, environmental equipment and services can leverage these successes. Canada’s large research universities are second to none yet Australia, Japan and the United States are far ahead in exporting education services.

China will loom large in the political and economic future of Canada’s youth. Despite a diaspora of nearly a million Chinese most Canadians have not focused on the shift in economic gravity to Asia. The headline for Canada’s long term strategy should be a large scale youth exchange program that replaces the European grand tour in the minds of students and their parents with opportunities to spend summers or gap years in China, and vice versa. Expanded twinning arrangements between cities and towns – or even provinces – would facilitate citizen exchanges. The opportunities are there. The Prime Minister’s visit should be the first step in a longer journey.

Friday, October 16, 2009

Are cable companies stealing from over-the-air channels? Are antenna companies?

You may have seen the ad campaign by over-the-air TV channels arguing that local TV’s future is in jeopardy. The CRTC has responded to the over-the-air channels’ cries of hard times with a 50% increase in the fee (the “Local Program Improvement Fund (LPIF)”) that cable companies pay to the CRTC, to be transferred to local channels.

But the LPIF increase is really only the opening salvo into the broader debate over carriage fees, with CRTC hearings now set for December. Of course, local stations want carriage fees. Together with the LPIF they amount to a small scale “TV station bailout.” Over-the-air stations argue that the fact that cable companies rebroadcast their signals without a charge is fundamentally unfair; their argument is that cable companies are getting content for nothing in return. In truth, over-the-air stations benefit from the rebroadcast of their signals. They make money based on ad revenues, which in turn is based on viewership. Rebroadcasting by cable companies increases viewership, and therefore increases the value of the product (ad time) that they sell. A company that sells antennas also makes money delivering over-the-air stations’ content, without paying the stations anything. Do the stations think they deserve carriage fees from antenna companies, too?

Rogers’ response has been to change their pricing scheme to explicitly pass along the entire LPIF fee (both the increase and the fee from before) to consumers, and start their own ad campaign. But if they make more profit charging the extra fee now, why didn’t they pass on the LPIF before the increase? In fact, those costs were probably included in the old price, to the extent that doing so was optimal for Rogers. Effectively they are increasing prices by three times the cost increase, by adding both the new and old LPIF fees to the final bill. Many have argued that a likely explanation for this substantial price increase is to agitate consumers in advance of the fight over carriage fees. After all, is a price increase of three times the cost increase plausible, just on profit maximization grounds, and not thinking about politics?

One way to get a handle on the issue is by using basic microeconomics. To know how much a firm will increase prices in response to a cost change, we need to know how sensitive its customers are to price increases. Mayo and Otsuka, in their 1991 RAND Journal article, report a price elasticity (measuring the price sensitivity of customers) of 1.5 for basic cable in urban areas. Transferring that number to Rogers, that means that a one percent increase in price costs Rogers 1.5 percent of its customers. Textbook microeconomics tells us that the optimal mark-up in response to an increase in cost, if the elasticity is 1.5, is exactly a factor of three times the cost increase. From that perspective, maybe Rogers’ response is simple profit maximization, and not some long term political goals.

However, a lot has changed since 1991, and now cable companies face many new forms of competition from alternative TV providers, especially satellite providers. Better alternatives mean customers are probably more sensitive to Rogers’ prices, so a one percent increase in price is likely to cause a greater reduction in Rogers’ customer base than the 1.5 percent in the Mayo and Otsuka study. If demand is more sensitive to changes in price, the optimal pricing response to an increase in marginal cost is reduced. It therefore seems unlikely that the Rogers price increase is driven purely by textbook microeconomic motives, and more likely that something else is involved.

Thinking about the stations’ side, the simple economics of these local stations is that they purchase programming on the speculation of future ad revenue. Downturns in the ad market naturally lead to shortfalls for local broadcasters. (It also lowers the value of airtime, making on-air pleas for support less expensive.) If this downturn is making them ask for more from the regulators, the natural question to ask is, are they planning a rebate to the cable companies in good times? After all, if broadcast over-the-air is a viable business model, then in good times their ad revenues will once again exceed the cost of their programming. If fairness is the key issue, as CTV has said, do cable companies deserve a cut of the ad revenue in exchange for the visibility that the cable companies offer?

In the end this isn’t about fairness. Over-the-air stations want carriage fees because they think it will improve their bottom line. Cable companies don’t want to pay them because they know, like any microeconomics course will tell you, that even a firm with market power can’t pass all cost increases on to consumers indefinitely, as they appear to suddenly be doing with the LPIF. But both sides had better be careful of the possible negative impact. If over-the-air carriage fees become burdensome, cable companies might push to offer their customers packages without those stations. New HDTV antennas are both inexpensive and very effective, and channels like CTV broadcast a high definition signal to everyone for free over-the-air (unless the stations take up my idea of charging carriage fees there, too!).

The big picture is that technological change is empowering consumers. With the growth in streaming video over the internet, over-the-air channels and cable companies need to be careful not to price themselves right out of the future of TV.

Tuesday, October 6, 2009

Demons, Dragons and Eclipsing Recessions

Many ancient cultures believed that solar eclipses were the result of a dragon or some other demon trying to devour the sun. Since the loss of the sun would be catastrophic, community members would often perform some ritual to either drive the demon away or help the sun fight back. In China, we are told, people would bang pots and drums to try to frighten the dragon away. In India, they would immerse themselves in the local river to help the sun fight off the dragon. These, and other practices, were always successful at bringing the sun back. Better still, they worked quite quickly and were likely reasonably cheap to perform.

Of course, today, we know that the solar eclipse has nothing to do with dragons or demons and that the rituals the ancient people performed had nothing to do with the sun’s return. We enlightened moderns scoff at such silly beliefs and rituals. In economist-speak, we know the difference between correlation and causation; that is, the sun’s return may have occurred as the ritual was being performed – the sun’s return is correlated with the performance of the ritual – but the sun did not return because the ritual was performed. Unlike people in the past, we know that the sun would have returned regardless of whether or not the ritual was performed. The ancient people, of course, didn’t really want to take that chance. The rituals were cheap to perform and, no doubt, by the time the community had noticed that the eclipse was happening and had assembled for the performance of the ritual, it wasn’t long before the sun was returning. Why risk the chance that the sun would never come back?

There are many others cases throughout history in which correlation and causation are confused. The patent medicine vendors and snake oil salesmen of the eighteenth and nineteenth centuries profited from this confusion. The concoction of alcohol, water and herbs sold as a cure for “what ails you” had no curative properties whatsoever. However, by the time the patient felt ill enough to use the foul-tasting mix and repeated its use for the prescribed amount of time, the illness had gone away: correlation not a cure.

In the twenty-first century, we have banished dragons and demons from the natural world; however, we have not banished them from our lives. A modern demon that obsesses us today is the economic recession. All of us became aware of this demon devouring our wallets and portfolios about a year ago. To drive the demon away, we didn’t bang pots and drums or submerge ourselves in rivers; instead, we relied on government stimulus packages for the cure. Much as in ancient times, the community leaders are now all declaring these packages to have been successful. While the recession dragon hasn’t gone completely, it is receding. With continued stimulation, it will be gone for good.

The question is, of course, is all of this causation or correlation? In a system as complex as the global economy, it is never easy to sort out causation and correlation. Further, accurate data on stimulus spending is not always easy to find. As the Canadian Parliamentary Budget Officer notes, it is difficult to tell how much of the infrastructure money in the government stimulus package has actually been spent. The suspicion is that little spending has actually occurred yet. In the US, information from the webpage suggests that about $35 to $40 billion of infrastructure monies in the US stimulus package have been spent. The relatively modest amounts of infrastructure spending to date make it difficult to believe that many jobs have been created or that this spending has pulled these economies out of recession. Of course, politicians, like the ancient leaders and patent medicine vendors of the past, are more than happy to take credit for the recovery. Stimulus has worked!

If stimulus spending has not caused the recovery, we need to ask how this happy correlation between stimulus packages and recovery occurs. The explanation is this: It typically takes quite some time for all of us to notice that a recession has occurred. In the current recession, it was almost a year before the seriousness of the economic downturn became apparent. Once the recession is identified, political leaders and policy makers require time to formulate their policy / stimulus package and pass the legislation authorizing the spending. Further time passes while a bureaucracy is set up to approve projects and distribute stimulus money. Once the stimulus money begins to flow, so much time has passed that, for reasons completely unrelated to the stimulus spending, the economy is already coming out of the recession. It’s much like the patent medicine that “cures” your illness. Like the patent medicine vendors, political leaders declare victory and we go on believing in the importance of stimulus spending for fixing recessions.

Not surprisingly, politicians today, much as the leaders of old, don’t want to risk not stimulating the economy. After all, the stimulus money is not theirs and any perceived delay in economic recovery is politically costly. Unfortunately for all of us, the cure for driving away the recession demon is not an hour or so of our time spent banging drums or wallowing in a river. For the tax payer of Canada the cost is tens of billions of dollars; for the taxpayer of the US, it’s hundreds of billions of dollars. No cheap cure, that.

Tuesday, September 29, 2009

The G20 Surprises

The Pittsburgh summit of the G-20 was a pleasant surprise. Having begun as a common front to restore calm during the 2008 global financial crisis, the Leaders’ forum finally got down to work: delivering a reasonable work plan complete with deadlines for progress. The strongest signal of its seriousness was its designation of the G-20 as “the premier forum for our international economic cooperation” effectively giving the major emerging market economies equal seats at the table and consigning the G-7/8 to security issues.

Canada will host the first meeting of this new configuration and has a major opportunity to set the tone. It should downgrade the smaller event and ensure the G-20 delivers on its commitments. Having one of the world’s soundest financial systems has gained Canada international credibility; some of this political capital might be used to push for completion of the Doha trade round next year.

The G-20 commitments at Pittsburgh are substantial but incomplete: they acknowledge the need for carefully phased withdrawal of government support as market forces once again drive growth, commit themselves to more realistic regulation of the financial sector and reform global governance, and they confront the need to reduce the international imbalances that were a significant seed for the crisis. They are incomplete because while climate change received attention there was only passing rhetorical commitment to completing the Doha trade round.

Many observers and people engaged in business decisions will dismiss the 16-page communiqué as obfuscating hot air that papered over some strong disagreements, such as European resistance to giving up some of their clout in governing the IMF, the US administration’s insistence that its duty on Chinese tires merely “enforces existing agreements,” and China’s sensitivity to discussion of sustainable exchange rates.

Some issues are ripe for action in 2010-11: on tightening financial regulation through higher capital and liquidity requirements on banks where consensus has emerged; now the actual numbers need to be negotiated. And on IMF reform where, if emerging market governments have more say, they are more likely to heed its analysis and listen to its advice.

Without stronger leadership other issues will disappoint: one is completion of the Doha trade negotiations in 2010. Business pressure has been notably absent as a driver of this round, in part because global supply chains and offshoring have reduced the impact of border barriers. On the climate change negotiations leading up to Copenhagen the prospects of a global compact by December are dim even though China provided an unexpected commitment to reduce the carbon intensity of its growth (mainly because of rising domestic pressures for cleaner air).

Deeper cooperation will be necessary to deliver some tangible process on reducing international imbalances. Is this possible in such a diverse group? Or will the majority of participants be free riders, leaving the hard bargaining to the United States and Europe or China?

I think deeper cooperation is possible. We tend to forget that G-7 governments engaged in policy coordination for a period from the late 1970s through the 1980s to reduce international imbalances and currency misalignments among Europe, Japan and the United States. International peer pressure played a role in encouraging governments to take unpopular policy actions that were in their own long term interest. Central banks engaged in unprecedented cooperation to accelerate dollar depreciation against the yen when the trend began in currency markets.

Policy changes and institutional reforms that would reduce imbalances today are similarly in countries’ own long term interests. Take the imbalances between the United States and China. The United States needs to save more and spend less while China needs to do the opposite. In the United States the administration is under considerable domestic political pressure to deliver on a commitment to reduce its fiscal deficit, expected to total 13 percent of GDP in 2009, to a more sustainable 2-3 percent by 2013. This will require deficit-neutral health care reforms and tax increases on households which have begun to repair their damaged balance sheets after a 30 percent decline in house prices. In the interim, continued Chinese purchases of US government securities is filling the gap despite publicly expressed concerns by the Chinese Premier and other senior officials about the sustainability of US fiscal policies.

For their part, the Chinese authorities have acknowledged the unintended consequences of their thirty-year dash for growth. Much of this growth was driven by investing nearly half of GDP in capital- and energy-intensive industrial production aimed at export markets. Rising income inequality and pollution are the unintended consequences. Rebalancing would shift the growth model towards one driven by domestic consumption in which services and less polluting and capital- and energy-intensive production play larger roles. To encourage more consumer spending the central government has increased its funding of health care, education and pensions which households have had to cover themselves from their savings. But other reforms are needed to change the model towards one that produces more jobs. These include reducing the manufacturing and investment bias in production by eliminating subsidized energy prices, reducing tax subsidies for manufacturing, requiring state enterprises to pay dividends, deregulating the service sector -- and even more fundamental—allowing greater exchange rate flexibility which would shift monetary policy away from exchange rate management, free up interest rates and force reforms in the government-owned banking system which relies heavily for profits on income from China’s administered interest rate spreads.

Reducing international imbalances will not be easy. Compared to US health care reform, which has dominated the headlines for months, China’s agenda is formidable, with inter-linked reforms of which exchange rate appreciation is one part. Little wonder that the Chinese authorities resist international pressures for exchange rate reform by itself. The package of social, industrial, monetary and financial reforms are very much in both China’s and the international economy’s long term interests, however, and should – like the US fiscal deficit -- be monitored and encouraged through peer review in the G-20 in the years ahead.

Tuesday, September 22, 2009

What should we expect the G20 Summit to accomplish?

On September 24-25, 2009 G20 leaders will hold their third summit in a single year. Officials’ attempts to play down expectations of what will be accomplished prompt questions about what leaders should attempt. To their credit, they have established the priorities. Now they have to deliver with action on (a) global financial standards to make the international financial system safer; (b) a policy framework for reducing the global macroeconomic imbalances that contributed to the crisis; (c) direction to trade ministers to complete the Doha negotiations; and (d) reform of the International Monetary Fund to give the large developing countries more say.

As immediate growth prospects improve the focus is shifting to sustaining the recovery and applying the lessons from the crisis to improve the future functioning of the world economy.

The most tangible action at Pittsburgh will be on financial regulatory reforms to reduce the risks posed by large cross-border institutions whose business failures would, like Lehman Brothers, have such serious systemic consequences that taxpayers are forced to bail them out. US Treasury Secretary Geithner’s call for higher capital cushions in banks and lower leverage ratios will reduce leverage throughout the system; the Basel Committee on Banking Supervision’s proposals to strengthen national governments’ powers to intervene and cooperate in resolving problems are one step, and forcing such institutions to prepare plans for their own windup in the event of insolvency, known as “living wills,” are another. Other steps are also needed to increase the transparency of derivatives transactions and oversight of credit rating agencies.

Government supervision of bank managers’ remuneration is also likely to be agreed, in part to paper over differences about centralizing global financial supervision, which French President Sarkozy pushed to address the too-big-to-fail problem. The reality is that most non-European governments are unwilling to cede sovereignty to a global super-regulator and for good reason. The size and reach of a global regulator cannot make up for the local knowledge and judgment of national regulators who must be very knowledgeable about the institutions they oversee. Nor is there any one model for a national financial supervisor. The UK model of a single independent regulator failed to prevent a crisis in which the banks had to be temporarily nationalized while the decentralized arrangements in the United States had severe short comings as well. Large complex institutions like Citigroup, with an entire floor of supervisors onsite, were at the heart of the financial crisis.

Macroeconomic cooperation is the other important issue for Pittsburgh but one where little progress will be evident. Cooperation on fiscal and monetary stimulus prevented the collapse of the international financial system. Now attention must shift to reducing the large current account surpluses and deficits that contributed to the crisis. The “engine that could”-- the US consumer -- is now busy repairing balance sheets, saving more and spending less. Public and private saving will have to rise for the United States to dig out of its deficit hole, which in 2009 will be at least 13 percent of GDP. Future growth will have to come from the large exporters: Germany, Japan, China and other East Asian economies who must now import more. This kind of switch will require painful reforms, such as Asians relying less on the export-oriented regional production system targeted at the US consumer, and more on Chinese and other Asian consumers. The latter are habitually high savers, however, and have very different buying habits. Government rebate schemes have encouraged Chinese to buy stoves, cars, and TVs, but these are one-time purchases. Social safety nets are needed in Asia to assure people they can save less and spend more and these will take years to construct.

The third priority -- trade openness – is where Pittsburgh is likely to be dismissed as a talk shop. The US duty on low-end Chinese tires imposed on September 18, while technically legal, signaled that support for US health care reform trumps openness. The only way the G20 can restore credibility on openness is to give a clear order to complete the Doha round by a specific date in 2010.

Global governance is the fourth priority and part of the plumbing that makes the global architecture work. G20 leaders rely on existing institutions like the International Monetary Fund to implement their decisions. The IMF suffers from credibility problems following the Asian crisis decade ago when it was perceived to be less than helpful in their time of need. Giving emerging market economies a greater say in its governance in line with their relative economic clout (and the Europeans less) will help to restore its proxy status as the international lender of last resort.

In short, Pittsburgh needs to act on financial reforms; it needs to kick off a new phase of international cooperation on the difficult medium-term actions needed to rebalance world growth away from heavy reliance on US consumption. Asian reforms will be central to this process – which is a good reason to hold the next summit in Asia. South Korea, which takes over the chairmanship of the G20 in 2010, is well placed to push forward the rebalancing agenda. But Pittsburgh must launch it.

Friday, September 11, 2009

Canadian Content Regulation: An Outdated Policy

I’m planning a few blog entries about the economics of government policy, and its relationship to changes in technology. The first issue I am going to take up is Canadian content regulations.

Canadian content regulations have long generated significant debate. I’m not going to get into the classic arguments over whether these are cultural guarantees or simple protectionism. Nor will I step into the long debate about what the proper definition of “Canadian enough” ought to be. Instead, I am going to argue that these regulations are simply from a different time, and not appropriate to the new technologies that produce and deliver media. With every passing day the idea of regulating media content is less helpful to Canadian artists, more harmful to Canadian broadcasters, and in a broader sense becoming impossible.

Keep this thought in your head. The Canadian content regulation for television was first passed in 1959. Imagine what TV was like then. There were (at best) two broadcasters in a market. Producing content for TV was incredibly costly, and only a few large production companies could realistically compete. There was no alternative to TV; either you were played on TV, or you were not seen. In those days, the case could be made that the market was not very competitive, and that the returns to scale necessitated dominance by a few production companies selling to a few broadcasters. An economist might call it similar to a natural monopoly: a situation where the costs of doing business necessitate one, or few, producers. The economics textbook’s favourite example is utilities like electricity delivery. It was understandable, perhaps, to be concerned that Canadian content might be lost in the middle of these big players.

Radio wasn’t much different. It was the dominant mode of marketing music. Music production was focused at a few large publishing companies, and radio was king. Again, it might have seemed natural to worry about where the Canadian artist would fit in.

Contrast that with the state of affairs today. Music is delivered through the radio, but also through a variety of internet sources. People listen to songs directly on the web pages of the acts themselves, and sometimes buy directly from there. Developments in video technology mean that television production requires much less overhead, and there are such a large number of stations as to serve very narrow markets. There is a channel devoted to Golf. The US supports a Soccer channel, despite its low level of popularity there. It doesn’t take a huge market to generate a marketable channel. On top of the proliferation of cable channels, internet delivery of video, both televised material and material that has not reached the airwaves, is closely following the rollout of high speed internet connections capable of carrying that content. In the language of economics, technological change has reduced the “minimum efficient scale” of production. It is now possible to efficiently produce and distribute music at a much smaller scale.

What do all of these changes mean for content regulation? They mean that content regulations are less effective at encouraging Canadian works, and more of a burden for Canadian broadcasters.

In music, radio stations that are subject to these regulations now compete against other sources which do not. Music subscription services, like, offer unlimited streaming of a large library of songs for a fixed monthly fee. Since the listener controls the playlist, there is no control over the “Canadian-ness” of the music. A listener can hear about an artist from a friend, or their favourite music review webpage, or simply by asking the music service itself what songs are typically liked by people with similar tastes. Of course the listener could also stream any of a number of US radio stations, without regard to content restrictions, directly over the internet. These new distribution technologies are making it harder for a radio station burdened by the extra restriction of Canadian content to survive. Independent record labels and internet distribution offer a democratization of music that makes the content of Canadian radio stations far less relevant. Canadian content regulations only hasten the demise of radio in Canada: it adds one more way in which radio can’t keep pace with the times.

If the competition from these new outlets seems like bad news for Canadian content, keep in mind that this reduction in minimum efficient scale is probably great news for exactly the kind of up and coming Canadian artists that content requirements seek to protect. As in many areas of industry, small is often associated with new. Content requirements mostly focus on radio stations, which by and large are entrenched outlets. That is probably why it is so hard to point to recent Canadian artists which were success stories as a result of radio airplay generated by content requirements, and why it is much easier to point to a few Canadian stars whose songs are repeated on Canadian radio to meet the content requirements. Rather than finding great new Canadian artists, the lumbering radio giants look to established Canadian stars that hardly need the exposure. This is nothing new to an economist: big firms are often not willing to take the risks that small firms will.

Some important rising Canadian artists, like Arcade Fire, were never the beneficiaries of much Canadian airplay until they broke through the independent music scene in North America generally. Their story is very telling: it illustrates avenues that are now available for Canadian bands (holding aside the issue of whether Arcade Fire, a band from Montreal but with members from Texas, would formally “count” as Canadian). They took advantage not of the content regulations, but rather benefitted from all of the new technologies that make small scale production and distribution feasible, and offer an avenue for artists who are not yet a sure thing.

TV is headed in the same direction. Streaming video is taking North America, especially the US, by storm. Hulu offers free on demand video content for many popular US shows. It is currently formally not available in Canada, but Canadian stations already offer a (diluted) version of on-demand, streaming content for shows through their webpages. Viewers choose which content plays. Even Hulu, although blocked to Canadian IP addresses, can be accessed easily through a proxy server service. Media is out there, and short of building a Great Firewall of Canada that would have to be even greater than the Great Firewall of China, there is no keeping it from Canadians. Content regulations only serve to hinder Canadian broadcasters who must compete in this environment.

Just as technological change in music gives artists new tools for finding markets, the same applies to video. Websites like Funny or Die offer video that would never see the light of day in a world with only a few broadcast channels, with some videos reaching more than 60 million views. Between the internet and specialized cable channels, video is becoming democratized in the same way as music, offering exciting new outlets for artists who want to produce content and have it be seen.

The world is flat. More and more each day, media comes from everywhere, and goes everywhere. This is great news for Canadian artists who now have the tools to reach out both to Canadians and the rest of the world using these new technologies. But it also means that the idea of regulating Canadian content is starting to look as out of date as a 1959 TV set.