Trying to wade through the submissions to the UK Intellectual Property Office’s IP review threw up the following quotation, from the BPI’s submission:
It appears that the flexibility in voluntary copyright licensing has facilitated that growth. Record companies have reportedly obtained equity stakes in several internet start-ups, including Lala, Imeem and Spotify. It is not clear on what terms companies such as Spotify obtained content licenses, or whether equity stakes were accepted in lieu of royalty payments in initial deals. However, it appears that negotiations have been flexible to accommodate new distribution channels and accompanying business models.
Such evidence suggests that the market for copyright music is functioning well within the UK. This is remarkable considering the unprecedented pace of technological change impacting the music industry over the last decade.
The most flexible offer a record company can make is to set a price for a given usage, offer the deal to all comers, and stand back and watch innovation and music services thrive to the benefit of all. Surely it is the least flexible negotiating position, that a business has to swap some permanent ownership in return for a limited and temporary right to distribute music. The fact that record labels both want to and can demand equity, or that start-ups feel that they can and should offer it, is evidence of a market that is hardly functioning at all, let alone well.
The problems with equity for rights are very easy to see. For a start, music is a multi-stakeholder industry. Should artists share in returns on equity in music services? Should all other music stakeholders also insist on equity? If the music companies wanted to own and run consumer services, then they are at liberty to invest and innovate themselves. Fair trading regulations should prevent anti-competitive tying between music production and music retail.
And what are music services buying with that equity? If the music is available on fair and reasonable terms in an open wholesale market, then the difference in value between equity in a licensed business and an unlicensed one will be related mostly to the operational costs involved in negotiating the deal and receiving the music. If it is greater, then it means that the record label is artificially creating a premium by licensing selectively; not just picking winners, but acting as kingmaker too. The service is therefore buying a less competitive market – ultimately bad for consumers and producers.
It is also easy to see how these kinds of deals accelerate concentration in the recording industry. The biggest record labels will get a multiplier on their deals, where the smaller labels get a structural disadvantage. Artists, songwriters, and publishers should be very concerned to see competition among record labels for their services disappearing, as a duopoly rapidly forms in many markets.
Regulators are consistently failing to look after markets in copyright, preferring to become kingmakers themselves and pick their own winners. But this is a mistaken strategy, for the simple reason that interference in competition, whether from strong incumbents or from regulators, always misallocates resources and eventually leaves all of us worse off. The alternative is fair and open wholesale markets for copyrights. What could possibly be wrong with that?