ISPs Landed With Up To 76% of Costs of Sending 3 Strikes Piracy Notices

A considerable decrease in instances of alleged illegal file-sharing after a 3 strikes regime was implemented in New Zealand has resulted in the government refusing to change the prices righthsolders pay to send warnings. Due to rightsholders' reluctance to send many at this price, ISPs are being denied the benefits of economies of scale associated with processing large amounts of notices. As a result they are out of pocket and in one instance spending four times more than the amount they recover.

Following the introduction last year of 3 strikes style mechanism to deal with the issue of illicit file-sharing, New Zealand rightsholders have been playing a somewhat cautious game.

The Copyright (Infringing File Sharing) Amendment Act was implemented last year but in July 2012 it was revealed that far from sending out large quantities of warnings to deter would-be file-sharers, quite the reverse had happened.

Put off by the $25 NZD (roughly $20 USD) price they have to pay ISPs per notice sent, it was revealed that the movie industry sent out a grand total of zero warnings. The industry said it wanted warning notice prices cut to pennies.

RIANZ, the Recording Industry Association of New Zealand, sent out 2,766 notices between October 2011 and April 2012. The music group asked for warning notice cost price to be cut to around $2 each.

ISPs, on the other hand, claimed that they had geared and costed their systems to deal with a large number of infringement notices. Because that volume hasn’t been forthcoming they are increasingly out of pocket – one ISP asked for warning notices to increase to NZ $104 (approx $83) just to cover costs.

But in a cabinet paper released today by Minister of Commerce Craig Foss, all parties have been told they will have to make the best of the current situation – no change will be made to the NZ $25 notice fee. Minister Foss justified his decision by claiming that even though few notices had gone out, fear of being caught up in the scheme had deterred people from pirating.

“There has been a significant reduction in the volume of illegal file sharing in the first
six months of the regime being in force. This suggests that the level of the fee has
not initially prevented the regime from having the desired outcome,” he wrote.

Foss referenced a Waikato University study that found that traffic downloaded by P2P applications decreased by more than 50% after the legislation came into power last year, and that the overall number of P2P users in January 2012 was roughly half those active in January 2011.

RIANZ agreed that P2P activity was down since September 2011 but pegged the drop at 18%. NZFACT said that from 110,000 infringing movie downloads tracked in August 2011, downloads had now leveled out to between 40,000 and 60,000 per month. NZFACT have sent zero notices so far. “NZFACT submits that the level of the fee is the reason for their non-participation,” the paper reads.

Of course, New Zealand’s 3 strikes regime was targeted at P2P and it was expected that some people would modify their behavior either by hiding their activities or choosing other file-sharing methods. The government said that this had indeed been the case.

“There was growth in the use of tunnelling, remote access and file transfer protocols. These are technical methods that savvy infringers use to hide file sharing downloads,” Foss wrote.

“This growth was nonetheless much smaller than the drop in file sharing, which suggests that only some of the infringers that have stopped using file sharing networks have moved to try other means.”

On ISPs, who are already out of pocket, Foss said that he would not make their position worse.

“While the fee does not allow full cost recovery by IPAPs [Internet Providers], it does allow recovery of an appropriate proportion of their costs, and at a level which appears to be
consistent with similar regimes overseas. Lowering the fee at this time would impose an inappropriate level of costs on IPAPs,” he said.

Whether ISPs agree that they are recovering an “appropriate proportion” of their costs seems debatable. Details of four ISPs are listed in the table below. None are covering their costs and at least one is losing $NZ 76 ($60) on every one sent.

ISP Costs

The paper also reveals the money spent by ISPs to set up the 3 strikes system.

“In addition, IPAPs [ISPs} have incurred significant setup costs in gearing up to comply with the regime. These costs vary between IPAPs depending on the level of systems investment
that has occurred," Foss writes.

"The TCF states that $919,000 [US$730,000] has been spent between Vodafone,
Telecom, TelstraClear, Orcon and CallPlus in setting up for the regime. The highest of
these has been Telecom which submits that it has incurred $360,800 [US$286,500] prior to the regime coming into force.”

Having lobbied intensively, it was expected that Internet users would be getting third strike notices left and right, but only yesterday – 12 months after the introduction of the scheme – was it revealed that a token three individuals are now facing punishment after receiving their third and final warning.

The Justice Ministry confirmed Tuesday that RIANZ would be dragging three individuals, all account holders with the ISP Telecom, before the country’s Copyright Tribunal.

“Telecom takes the issue very seriously and will continue to work with both the Justice Ministry and Rianz to comply with their obligations under the law,” Telecom spokeswoman Jo Jalfon said.

Justice Ministry spokesman Nathan Green confirmed RIANZ were taking action.

“Three applications for an order requiring payment to a rights owner under Section 122(O) of the Copyright Act 1994 have been received from the Recording Industry Association of New Zealand,” he said.

The individuals face “fines” (actually forced compensation payouts to RIANZ) of up to NZ$ 15,000 (US$ 11,900).

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