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Mr. Chairman, Ranking Member Smith, and other members of the Committee, I am David Balto, a Senior Fellow at the Center for American Progress Action Fund. I appreciate the privilege of testifying before you today on Competition and Commerce in Digital Books which focuses largely on the Google Books project and the proposed settlement of litigation between Google and authors and publishers. As many of you know, I had a long career as a trial attorney in the Antitrust Division of the Justice Department and as the policy director of the Federal Trade Commission, and I frequently represent consumer and public interest groups in antitrust and intellectual property matters and testimony before Congress. Based on my extensive review of the proposed settlement and the filings in the litigation, I strongly believe that the settlement in the Google Books project litigation does not pose significant competitive concerns and should be approved.

I have two simple points to my testimony. The Google Books project is a remarkable transforming achievement that we should all recognize has tremendous potential to democratize information and knowledge. I do not think anyone can dispute that. Second, the competitive concerns raised about specific narrow provisions of the settlement are not a basis to reject the settlement.

One of the greatest achievements in the last several years is the Google Books project, which scanned millions of books, many of which were available in only a handful of the most preeminent research libraries. This project led to class action litigation brought by publishers and authors charging a violation of copyright laws. To resolve the litigation, the protagonists entered into a settlement, which created a Book Rights Registry to make sure authors are appropriately compensated for their works. This settlement is currently under review by a federal district court.

The tremendous benefits from the Google Books project

The Internet is a great device for creating new markets, democratizing knowledge, and increasing competition. Google Books takes full advantage of this opportunity to expand the world’s access to knowledge. Anyone can simply go on the web and, through Google Books, reach an almost endless array of information on nearly any topic. At the start of the 20th century, Andrew Carnegie spent an enormous sum to build the first truly public libraries in this country—before then, our libraries were for the most part only available to the educated and affluent. Google has taken on tremendous risk and expense to perform a comparable service, one that creates a virtual library of unprecedented proportions to millions of people, regardless of location, economic status, or resources. Thanks to the Google Books project, any individual anywhere in the United States will have access to an unprecedented corpus of information.

Under the settlement, Google Books will put out-of-print, expensive, or otherwise rare and hard-to-come-by texts online at reasonable prices. Libraries across the country will give people free access to Google Books: Google has pledged to give all public and university libraries across the country free, full-text, online viewing of millions of books at designated computers. Low-income, isolated, and underserved communities will have access to books that would have previously required enormous effort to track down. Lateef Mtima, a law professor at Howard University School of Law, has said that the settlement, by giving broad access to books and research materials to low-income communities, will “bridge the digital divide.” Google’s efforts will have the effect of expanding the body of knowledge readily available to the public, and make it even more accessible to people with disabilities and low-income or isolated populations.

It is not surprising that numerous public interest organizations and consumer rights advocacy groups have come out in favor of the settlement, including:

• United States Students Association
• American Association of People with Disabilities
• League of United Latin American Citizens
• Leadership Conference on Civil Rights
• National Federation of the Blind

Just to give one example of the remarkable consumer benefits, just consider the world of people with visual impairments—approximately 15-30 million in the United States alone. Google has committed to providing access to these users so that they “have a substantially similar user experience as users without print disabilities.” Google’s commitment to making all books available to people with visual impairments through screen enlargement, screen reader, and Braille display technologies will completely transform the educational experience for the blind and visually impaired in this country and, indeed, around the world. The National Federation of the Blind, the nation’s leading advocate for access to information by the blind, has stated that the settlement will have “a profound and positive impact on the ability of blind people to access the printed word.”

The settlement will also provide researchers with the ability to analyze books and language in ways that were previously impossible. They will, for example, be able to search the entire digital library corpus to compare language and cultural development, and to track literary developments across countries. The potential to unlock knowledge is seemingly unlimited. Not surprisingly, universities around the country have overwhelmingly acknowledged these benefits. According to Michael Keller, Stanford University’s librarian and publisher of the Stanford University Press, “[t]he settlement promises to change profoundly the level of access that may be afforded to the printed cultural record, so much of which is presently available to those who are able to visit one of the world’s great libraries.”

As a public interest attorney, I represent many who often cannot afford to purchase books and who do not live near Harvard or Stanford or other research libraries. For all of these people, and millions more, the settlement will unleash greater access to a tremendous amount of information. The public benefit of the settlement is, to me, unmistakable.

Imagine if you are an energetic and inquisitive student at the Wayne State University, or at a community college in Alaska, and you are doing research on an obscure medieval text. Currently, you might have to travel to one of the great research libraries in Cambridge or Stanford to conduct research. Now, the corpus of many of the major research libraries will be only a click away on your computer.

The Google Books project is a tremendous achievement. The scope of that achievement and its potential to open access and information for millions of consumers should be considered as the committee and the courts consider the limited competitive issues raised by the settlement.

Competitive concerns of the settlement are unfounded

A tremendous amount of ink and paper has been spent raising the specter that the Google Books settlement will be harmful to consumers. In fact, some of the witnesses testifying today have claimed that Google will become a “cartel ringmaster” and coordinate a cartel of publishers and authors, a “monopolist” and charge excessive prices to consumers for digital books, and a “monopsonist” and decrease compensation to authors, thus resulting in the reduction of output of books. As I explain in a moment, none of these labels are supported by real world facts.

As I explain in my testimony it is easy, but misleading, to confuse popularity with market power (i.e., the ability to harm consumers by raising price). Google may have popular products, but it has not harmed consumers. To paraphrase Senator Lloyd Bentsen in the Bentsen-Quayle vice-presidential debate in 1988: “I know monopolists, I have sued monopolists, and Google is no monopolist.”

My experience of over 15 years as an antitrust enforcer taught me to be cautious about substituting labels for real antitrust analysis. Antitrust labels may be attractive to the press or in a public debate, but they are not a substitute for analysis. As Justice Byron White cautioned in the Broadcast Music case thirty years ago, “easy labels do not always supply ready answers” to the question of whether conduct is illegal under the antitrust laws. Anyone looking at the unique issues in the settlement should be guided by that cautionary instruction. Rather than relying on easy labels, the critical question in analyzing whether conduct is anticompetitive is what is the incentive and ability for a firm to engage in the alleged anticompetitive conduct?

To answer that question we need look no further than Google’s conduct in the numerous markets it currently participates in. Certainly, Google is large, innovative, and remarkably popular in search. But one should not confuse size and popularity with market power. Google does not charge consumers for the use of its very popular search product. That is because it lacks the incentive to charge for its use—its product is valuable to advertisers because of the numbers of users of the product. It also lacks the ability to charge because of the numerous free search alternatives also in the market. When it comes to allegations of anticompetitive conduct concerning Google search, the proof is in the pudding: Google lacks the incentive and ability to harm consumers.

So let’s return to the claims of the critics of the settlement. Does Google, through the Book Rights Registry, have the incentive and ability to act as a “cartel ringmaster” directing thousands of authors or publishers in some sort of cartel waltz and facilitating a price increase? No. Over 95 percent of Google’s revenue is through the sale of search advertising. It has no incentive to artificially increase book prices since that will undermine its advertising revenue. The amount of revenue Google would earn from trying to form or facilitate a publisher or author cartel is inconsequential compared to the advertising revenue they would lose. “Cartel ringmaster” is a job Google would never apply for.

The critics of the settlement create the specter of harm by conflating Google and the Book Rights Registry as if they were one entity. They are not. The board of the registry will be appointed by authors and publishers. The registry will be charged with getting the most money for authors, whereas Google will be interested in books being as inexpensive as possible, because it wants to increase usage of its site and search tools, so it can make money the way it usually makes money: advertising. Rather than be in a collusive relationship, Google and the registry are more likely to be in an adversarial relationship.

Would Google act as a “monopolist” and drive up the costs of digital publications offered through the registry? Again, acting in this fashion would be contrary to its economic incentives. Moreover, since there are many other sources for the most valuable and popular books, it seems unlikely this effort to charge supracompetitive prices would be anticompetitive.

Those who suggest that Google can act as a “monopolist” also misunderstand how books will be priced. Critics point to the fact that some books will be priced through an algorithm. The settlement provides only an offer to sell rightsholders’ books at certain prices, however, and authors may reject this offer. This is no different than a situation in which a distributor offers multiple suppliers the chance to sell through the distributor at a given price, and sellers can reject or accept the offer. Further, I believe that 80 percent of digital books will initially be priced under $10. Over time, the algorithmic pricing must be designed to mimic a perfectly competitive market. Moreover, authors have the choice to opt-out of these “pricing bins” and determine their own price. The result of this is that if Google sought to set monopoly prices, each author would have an incentive to undercut the market price in order to make additional sales.

And of course, all of these books will have to compete with: (1) public domain books which are free and downloadable from the site, and (2) the fact that every public and university library in the country will be able to have a free public access service terminal. So any monopoly rents that Google might try to secure will be undercut by the fact that you can get the same thing for free at your local public library.

For the same reason that magazines practically beg you to subscribe, offering a fraction of the newsstand price, Google is more likely to pursue a model of broad access rather than price gouging for its subscription product, because that increases the advertising base. And even if Google misunderstood this, it is nevertheless obligated under the settlement to price the subscription to ensure “the realization of broad access to the Books by the public, including institutions of higher education.”

Finally, there is the claim that Google will act as a “monopsonist.” A monopsonist is a firm that has market power in purchasing and may use that power to drive down compensation for a service provider resulting in a reduction in output. I have testified before Congress on behalf of farmers, nurses, doctors, and other healthcare workers about monopsony concerns, and there are very serious monopsony concerns in their markets. Monopsony concerns can arise where a service or good provider has limited outlets to sell its service or good. The Book Rights Registry is just one of dozens of means for authors or publishers to reach the market. If the prices are set too low, authors and publishers have numerous alternatives. The claims that Google would have the incentive or ability to become a monopsonist are simply fanciful.

The settlement enhances the potential for entry

The remaining competitive concerns are actually very narrow. There are two questions. First, does Google’s access to “orphan works” limit the ability of alternative digital libraries to arise and compete against Google? Second, does a most favored nation provision restrict entry?

Both of these questions focus on entry barriers, and it is essential to get the entry barrier question right. The question is not whether it is hard to enter the digital books arena—it obviously is not easy. The operative question is whether the settlement increases entry barriers for the market. And to that, the answer is unequivocally no. As a group of 30 of the most preeminent antitrust law professors has observed, the “settlement overcomes barriers to entry for Google, without raising them for any rival because every right the settlement gives to Google to digitize, display, or sell books is expressly non-exclusive.” Thus, any right secured by Google can be shared with any existing or potential rival of the Google Books project.

Actually, the settlement makes it easier for others to follow in Google’s footsteps in trying to enter the digital library arena. The settlement offers the potential to increase output and choice by expanding reducing legal and logistical barriers to similar digital books projects.

First, by expanding the public domain and resolving the uncertainty of rights of millions of books, the settlement will decrease entry barriers. Many books that have already been scanned by Google actually belong in the public domain; however, their status is currently unclear. In order to determine the copyright status of books under the settlement, Google is using records that have been scanned, compiled, corrected, and disseminated by Carnegie Mellon, Project Gutenberg, the Distributed Proofreaders, and Google itself. In addition to expanding the public domain in this way, the settlement also creates a procedure for publishers and authors to determine who should own digital rights, and it is expected that this will result in the clarification of these rights for thousands of publications. All of these efforts significantly expand access and facilitate entry. One study projects that the settlement should identify and resolve rights issues for at least 80 percent of rightsholders.

Second, the settlement will also facilitate entry in another way: through its creation of the Book Rights Registry, an independent, nonprofit organization. The registry will significantly enhance the ability of subsequent entities to pursue book digitization initiatives.

Third, the registry will represent the interests of authors and publishers and locate rightsholders who have been separated from their works. With rightsholders’ permission, it will be able to license millions of books, among them the most commercially valuable works covered by the settlement, to third parties, including Google competitors, on terms that might disfavor or disadvantage Google. Licenses will be provided on a nonexclusive basis, which means that authors and publishers will have the ability to negotiate with the registry or separately with other digital book providers. The ability to negotiate with other entities makes it unlikely that the registry could impose unreasonable license fees or otherwise restrict the availability of electronic books.

Finally, any institution with a license will be able to share the works in the project with other entities, including potential entrants into the digital books arena.

Access to orphan works

Much of the remaining competitive concerns surround Google’s supposed exclusive access to orphan works. Orphan works are books that “retain their copyright but for which the rightsholders are unknown or cannot be found.” The concern is that Google’s so-called control over these works will limit the ability of other other book scanning projects to be successful. These claims are overstated.

This provision affects a small number of books

First, there are a relatively limited number of orphan works. According to a careful economic study, orphan works probably make up less than 9 percent of the works at issue. Other estimates suggest there may be as few as 1.4 million works, of which Google may have scanned around 580,000. Further, this number should decrease over time as the efforts of the Book Rights Registry to reach out to authors and publishers allow them to clarify the copyright status of a number of the books in questions.

It is hard to see how this small set of orphan works would be some kind of bottleneck to limit market entry. Moreover, these works may be “orphaned” for a reason—they may have gone out of print because other works were superior.

As soon as an author or publisher clarifies their rights to an orphan book, that book ceases to be an orphan. The rights holder can then contract directly with potential users, such as libraries, and Google will not enjoy any special advantages at this stage, either.

The settlement does not grant Google exclusive access to orphan books

Second, the settlement only provides Google with nonexclusive access to orphan books. The settlement does not give Google any advantages over second entrants for books which still have orphan status, and Google’s current efforts in fact lower the barriers for second entrants. Any company that chooses to begin scanning orphan books will face fewer obstacles than Google has confronted. Critics claim that other firms would be unlikely to attempt a similar class action suit to obtain their own default licensing rights to orphan books. This is not necessarily the case. By increasing the size of the public domain, clarifying uncertain rights, and addressing innumerable complex legal issues, Google Books simultaneously provides a map and blazes trails through previously unchartered territories that others will be able to use for their own explorations.

The settlement creates value for orphan works

Finally, it is important to recognize that the value of orphan works is currently zero—there is no demand for them. If they already had value, they would be in print or otherwise available to consumers. The Google Books Settlement creates economic value for these books by creating a means for consumers to access them and exercise demand for them.

The combined effect of the settlement’s rights clarification efforts and financial incentives will be to clarify the copyright status of many works. As a result, the number of orphan works will be substantially reduced. The settlement enhances the ability of companies other than Google to provide digital access to books including orphan works.

The so-called most favored nation clause

A careful analysis of the most favored nation provision also shows that it is unlikely to increase entry barriers or harm competition in any other fashion. The “most favored nation,” or MFN, provision of the settlement is extremely limited. It prevents the registry from offering a more favorable deal to other entities and the provision lasts for only ten years. I have written extensively and testified about the competitive implications of MFNs. These clauses can promote consumer welfare by permitting first movers to recoup their investments in innovation. Conversely, MFNs can impede entry and adversely impact competition. The MFN clause in the settlement falls into the former category.

The so-called “MFN” clause is narrow

The MFN provision is probably the most misunderstood provision of the agreement. This provision will have a limited effect on the marketplace. Nothing prevents the registry from striking better deals with Google competitors. Specifically, the registry can pursue better deals with Google’s competitors for all in-print works, which represent the vast majority of today’s book sales. Google competitors could also wait to see what the top-selling books are and strike deals only with respect to those books. Competitors could surely function in this way, like radio stations that seem to succeed despite playing only the top 30 songs over and over again. Section 3.8(a) pertains only to unclaimed works, that is, truly orphaned works, which no one comes forward to claim. It also only operates if the registry is later authorized to license unclaimed works that fall within the scope of the settlement. The Book Rights Registry does not have this authority, and it may never receive this authority within the ten years that Section 3.8(a) operates. Thus, even Professor Picker’s paper appears to concede that when the settlement first goes into effect, this provision will have no effect whatsoever.

Clearly, the parties recognized that they were negotiating in an environment where Congress was very likely to legislate—orphan works. In fact, Google continues to advocate for orphan works legislation. This provision ensures that if legislation, or perhaps some future class action settlement, provides the registry authority that it does not have now that Google will receive equal treatment (not preferred treatment) under the new regime. If that never happens, then this provision will have little relevance. This point has been lost on many of the provision’s critics.

This is therefore a provision that will have no impact when the settlement goes into effect, and may never have any impact, and even if it does have an impact, it will only affect books which no one has claimed—books that have the least expected economic value.

The so-called MFN clause has efficiency justifications

Setting aside how narrow this provision is, it is worth noting that non-discrimination provisions are not uncommon. They are often used to protect the investment of first-movers who anticipate that their efforts will reduce the costs for second-movers, who can then strike more advantageous deals by free-riding off the investment of the first-mover. In fact, copyright law itself serves the same purpose: it protects the economic investment of the first mover—the author—who might not write if everyone could then free-ride off his investment. That is an undesirable outcome for all involved, including consumers. Google has invested $34.5 million in helping to create the registry, and millions more in legal fees, and thus, has a legitimate economic interest in protecting the value of that investment from free-riding.

Conclusion

As Judge Learned Hand instructed over half a century ago, the antitrust laws are not intended to punish “superior skill, insight, and industry.” When Google announced this project five years ago, book scanning technology was in its relative infancy and cost-prohibitive. At its own risk, Google developed its own scanning technology, negotiated numerous agreements with libraries, and navigated the uncertainty surrounding complex copyright issues. Its ability to do all of these things led to a virtual library that offers an unprecedented level of access to millions of consumers. The purpose of the antitrust laws is to open access and opportunities and that is precisely what the Book Rights Registry and the settlement does. Innovation should not be confused with monopoly power. The Google Books settlement is in the public interest and should be approved.

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