Safe Harbors and the Evolution of Music Retailing

According to the music recording industry, YouTube, one of the largest purveyors of on-demand digital music, evades paying market rates for the use of copyrighted content by exploiting the Digital Millennium Copyright Act’s “safe harbor” provisions. The source of the distortion in licensing negotiation appears to be that at any one time, there may be multiple unauthorized copies of a particular song available notwithstanding compliance with the safe harbors, suggesting that services may essentially be able to offer access to music without paying royalties and still claim safe harbor protection for infringement. The evidence appears to confirm the claim: market-based royalties for subscription-based services are about eight-times larger than that paid by YouTube. An interesting question, it seems to us, is how much revenue the recording industry loses from the distortions caused by the safe harbor provisions? Employing accepted economic modeling techniques, we simulate revenue effects from royalty rate changes on YouTube’s service. Using 2015 data, we find that that a plausible royalty rate increase could produce increased royalty revenues in the U.S. of $650 million to over one billion dollars a year. This is a sizeable effect, and lends credence to the recording industry’s complaints about YouTube’s use of the safe harbor.