David Jevons is a Partner at Oxera
Internet intermediaries facilitate the free flow of information online by assisting users to find, share and access content. However, users may sometimes share copyright-protected or illegal content; ‘internet intermediary liability’ (IIL) laws define the extent to which the intermediaries are liable for this. Holding internet intermediary start-ups accountable for user content will reduce the costs of enforcement but may also harm the incentive for entrepreneurs to develop new intermediary business models. To help inform this debate, Google asked our team at Oxera to examine the effect of different IIL laws in terms of success rates and profitability on Internet start-ups, including a detailed examination of four countries: Germany, Chile, Thailand and India.
The effects on start-ups of clear and cost-efficient requirements
Ambiguity in IIL laws can lead to over enforcement, which can alienate users. SoundCloud, a streaming service in Berlin, suffered a user backlash resulting from issues in its takedown policy, including petitions and threats to open a competing platform. Over-compliance is a related issue, which can be costly for the start-up. MThai, a web portal in Thailand, employs more than 20 people to check content before uploading, and prevents uploading during the night, in order to limit its costs. In extreme cases, ambiguity in legislation can lead to inadvertent violations of the law. The executives of Guruji, an Indian search engine, were arrested in 2010 following claims that they were infringing copyright which eventually led to the shutdown of the music search site.
In line with these examples, we find that intermediary start-ups could benefit considerably from a modified IIL regime with legislation that is clearer and sanctions that are focussed on cases where it is socially efficient to hold intermediaries liable. This is reflected in the quantitative results of our study, with the largest effects found in markets (such as India and Thailand) where current legislation is most ambiguous. Our analysis indicates that an improved IIL regime could increase start-up success rates for intermediaries in our focus countries by between 4% (Chile) and 24% (Thailand) and raise their expected profit by between 1% (Chile) and 5% (India).
Estimated impact on start-up success rates (%)
Estimated impact on the expected profits of successful start-ups (%)
Implications for the design of future IIL regimes
The IIL regime is one of several levers available to policymakers wishing to encourage more start-up activity, however it may be one of the easier ones to pull for policy makers wanting to stimulate growth in this sector.
Our study highlighted the following implications for the design of future IIL regimes:
- Find the right balance between the cost effective enforcement of copyright and allowing innovation in intermediary start-ups.
- Costs matter when designing safe harbours. The costs of compliance are likely to have a considerable impact on intermediaries, particularly on start-ups.
- Legal uncertainty increases costs of compliance. Intermediaries will find it difficult to ascertain the required level of compliance and may ‘over-comply’
- Start-ups comply with take down requests as they do not have the resources to engage in legal action. Legitimate user content may be removed as a precaution.
- Start-up vibrancy can be lost as high risks and compliance costs increase the likelihood that a start up with a commercially sound, legitimate business model fails.
If you are interested in finding out more about our study and the economic issues surrounding IIL, please read our full study on the Oxera website.