Analysis of an advertisement based business model under technological advancements in fair use personal recording services Myunsoo Kim ⇑ , Byungtae Lee College of Business, Korea Advanced Institute of Science and Technology, 85 Huegiro, Dongdaemoon-gu, Seoul 130-722, Republic of Korea article info Article history: Available online 8 November 2014 Keywords: Information technology Copyright law Fair use Video on demand Personal recording abstract In 1982, Betamax, the world’s first personal recording service was ruled as a fair use in court. Although the copyright holders of TV content claimed that Betamax was an infringement of copyright, the court determined that the benefits of personal recording services were significant and that the copyright holder’s profits could be protected because the original service was of better quality and had a better cost structure. It also ruled that the loss from manual advertisement skip was minimal. However, recent advancements in information technology have allowed new kinds of personal recording services such as a cloud DVR that provides unlimited storage and flawless quality, and an Auto-hop feature that automatically removes embedded advertisements. This paper introduces a microeconomic model for reviewing the copyright holder’s business model and social welfare under the court’s decision in relation to newer personal recording services powered by information technologies. Before cloud DVR existed, applying fair use to personal recording services increased social welfare while protecting the copyright holder’s profits; however, after the introduction of cloud DVR, it may no longer do so. Ó 2014 Elsevier B.V. All rights reserved. 1. Introduction Innovations in information technology have greatly helped content providers with low copy and distribution costs (Shapiro and Varian 1999, Davenport 2013). Ironically, the same informa- tion technologies are now threatening content providers’ major business models by automatically removing advertisements from content. In March 2012, Dish Network Corp., a satellite TV pro- vider, introduced an Auto-hop feature that allows users to auto- matically skip commercials when playing TV content recorded with its Hopper Digital Video Recorder (Bauder 2012). TV networks such as Fox, CBS, and NBC who hold the copyright of the broad- casted content considered the service a threat to their business models, which they claim are supported by advertising, and filed against Dish in May 2012 for copyright infringement (Jeffery 2012). According to CBS spokesperson Shannon Jacobs, ‘‘this ser- vice takes existing network content and modifies it in a manner that is unauthorized and illegal.’’ In response, Dish CEO Joe Clayton pointed out that about 50% of viewers had already been skipping advertisements with VCR and DVR technology while watching their recorded content. Since the VCR and DVR technologies were already ruled as personal fair use under copyright law, he claimed that Auto-hop is only a ‘‘slightly complicated version of a fast- forward button.’’ The court subsequently denied Fox’s request for a preliminary injunction against Auto-hop in November 2012 (Flint 2012), which was confirmed by the U.S. Court of Appeals in July 2013. The court also came to the same conclusion for ABC Television’s request on September 2013 (Jeffrey 2013). Disney finally settled with Dish, who agreed to ‘‘postpone’’ enabling the Auto-hop feature for selected Disney digital content (Palmeri and Moritz 2014). The Auto-hop legal dispute is not the first battle between fair use personal recording services (PRS hereafter) and TV content copy- right holders. When Cablevision Systems Corporation launched its cloud based digital video recording service (cloud DVR hereafter), which stores personal recordings in central server storages and plays them back via Internet streaming, in March 2006, copyright holders sued Cablevision for copyright infringement, but ultimately lost the case (Albanesius 2008). The Supreme Court agreed with Cablevision’s argument that their cloud DVR should be treated the same way as customer-owned fair use devices such as a Beta- max, because only its storage location differs. The fair use doctrine of copyright law, which has thus far been applied to PRS, should protect both social welfare and the copyright holder’s incentives by allowing some personal copies to be free of copyright infringe- ments (Cooter and Ulen 2011). When Betamax first entered the market in 1982, a similar legal dispute between Sony Corporation of America and Universal Studios went to court and the service http://dx.doi.org/10.1016/j.elerap.2014.10.004 1567-4223/Ó 2014 Elsevier B.V. All rights reserved. ⇑ Corresponding author. E-mail addresses: jamaica@business.kaist.ac.kr (M. Kim), btlee@business.kaist. ac.kr (B. Lee). Electronic Commerce Research and Applications 14 (2015) 169–180 Contents lists available at ScienceDirect Electronic Commerce Research and Applications journal homepage: www.elsevier.com/locate/ecra