Category: regulation

There seems little point in trying to block the acquisition of EMI’s recorded music business by French conglomerate Vivendi. Citibank, EMI’s owners, have made it clear that they don’t give a fig what Roger Faxon thinks about EMI’s structure or prospects as a standalone company. The UK Government seems determined to watch from the wings, rather than finding a national interest to protect (why is it that musicians’ taxes are requisitioned to support bankers, but the other way around is so politically unacceptable?).

EMI has been making a reasonable job at adapting, albeit a decade later that it might usefully have, to the online digital music business. But Vivendi’s Universal Music Group has demonstrated time and again that it sees its financial and market power as primarily a weapon to be used against its competitors than a tool to expand the market for all. The migration of Robbie Williams is just a more visible sign of the talent drought and second best market access that Universal can impose at will on EMI.

This might be the reality of the music market – large and rather unsophisticated beasts feeding off the carcass of a dead business model. UMG’s new president, Lucian Grainge, is notorious for suggesting that the music industry has a terminal disease, but that his company will be the last one alive. But what if he is wrong, and there is a rejuvenated music industry waiting to emerge? Rather than allow relentless consolidation to create its own rationale, what could regulators do to ensure that the future is less bleak than the most powerful music executive seems determined to make it?

Regulators have a very rare opportunity, with music’s biggest company now a supplicant rather than dictating wishlists to Business Ministers and Commissioners for conversion into new laws. Here’s a little list of things that even in a consolidated market will help creators and consumers come to terms with the new world, and might even tilt the business back towards inclusiveness, innovation, and stronger public support.

1. Make a concerted attack on the ‘black box’.

There’s hardly a corner of the music industry without so called ‘unattributable’ revenue piling up, later to be shared out among the biggest companies on grounds of market share. Even the most apparently fair of the collecting societies are structurally funnelling cash up to their board members which should by rights go to their small and middling members. This is mirrored internally in many businesses – bigger artists get a share, younger upcoming ones have to hope and wait. Quarterly reporting sets up an irresistible incentive for executives to divert the value of catalogues into unattributable pots – equity in licensees, deal fees, delivery fees, unrecoupable advances and minimum sales guarantees all play their part.

Universal can legitimately be asked to lead on dismantling not only the practice itself but also incentives to perpetuate the unfairness. A bigger more honest and cleaner company would be better for music and the market than two majors of the old school.

2. Tackle intra-industry copyright infringement.

Copyrights are infringed within the music industry on a serious scale, but because this is ‘family business’ rightful owners are reluctant to shine a light or ask for help. Typically larger businesses just assume a wider set of rights than they have been granted by smaller ones and by artists, knowing that those involved will be far keener to preserve a relationship than to insist on their copyrights.

Sometimes this is just clumsiness, as when global businesses just claim ‘worldwide’ rights because the administration to do anything else is onerous. Many artists and small labels find their music either claimed or blocked on new platforms for this reason. Sometimes however it is a kind of systematic arrogance, with serious competitive effects on the small companies on the receiving end.

Whichever, what is needed is for the infringed to be encouraged to come forward more often, and for a behavioural nudge to help infringers stay on the straight and narrow. A simple record of cases and adjudications, kept at the IPO, would quickly identify serial offenders, and help everyone know when they need to keep a special watch on their property.

3. Protect trade associations and collecting societies from capture

Trade associations are always going to be vulnerable to capture by their biggest members, who will naturally take the majority of important committee places and are assured votes on the board. Add to that their greater resources for attending and for briefing their representatives, and it is unsurprising that major label voices dominate the debate.

Collecting societies are not immune either, and often play a role in lobbying as well as their core purpose. The guardian of performers’ rights in sound recordings in the UK, PPL, is dominated by the record labels, and acts as a sort of slush fund for industry initiatives, such as the Featured Artists Coalition, leaving the artists themselves with no clear independent self-funded voice. In the recent term extension debate artists effectively found themselves lobbying for a deal that left them very much the poor cousin in the share out of spoils.

It should not be contentious to make sure collecting societies collect and distribute, leaving lobbying to lobbyists. Nor should it be too much to ask trade associations to make it clear where their money comes from and what they spend it on, and to record their decisions. More accountability to all their members is the best protection for trade associations and collecting societies.

Three simple things that would make the music industry much better, with or without an independent EMI in it. It is difficult to be sad about a business that long ago sacrificed its destiny to the whims of financial engineers and asset strippers. The real British music industry is alive and well in the hundreds and thousands of independent record labels, artists, managers, songwriters, studios, venues and festivals that will find their own destiny. We mustn’t let their interests get obscured by the knackered elephant dying in the room.

Richard Mollett, writing on the Publishers Association blog, makes a strident and impassioned plea for the Government to drop its demands for evidence and just accept his credo on the harm done by copyright infringement. He does himself a disservice in comparing the properly sceptical to flat earthers and climate change deniers.

A music industry internal study a few years ago showed three sources of harm to record company revenues: piracy, wholesale price erosion, and unbundling (selling one or two tracks as downloads where before an album might have been bought). It failed convincingly to identify one of these as a critical factor, and ignored effects on profitability, cost structures, and re-investment in new production.

Nobody I have talked to over the last decade has maintained seriously that the net effect of piracy is probably anything other than harmful, in Government, or in ORG, or anywhere else for that matter. The debate Richard seems to have missed is about how harmful it is, and what is an appropriate response, from the music industry itself, the tech and comms industries, and from Government.

In fact, the same internal music industry study attempted to articulate some possible responses and found a great reluctance to address whether music licensing practice, for instance, might be inhibiting the development of services that consumers might prefer to unlicensed filesharing. Instead the drive from the bigger trade associations was to try to revisit secondary liability for communication providers, forcing a strong pushback from ISPs that might otherwise have proved themselves business partners and allies in converting expensive and useless internet traffic into revenue for them.

Hargreaves found that the creative industries as a whole had not even got their own digital supply chain infrastructure in order, despite a decade of trading online. Music, as a sector, is not yet ‘fit for business’ in the digital world; when I have raised this at trade associations I have been told in the past that it’s not an industry level issue, but the rest of the world thinks it is.

My argument to Richard is that a decade of misdirected lobbying has done at least as much harm to the music industry as online piracy, and that his frustration is a direct result of the environment he helped create while at the BPI. As an industry, music saw the relationship between its top executives and Government ministers as more valuable than that between the artists and the fans and music lovers. It failed to help two major UK ISPs get exposed to the positive value of music, while sending its lobbyists to Brussels to argue against service provider exemptions. It failed also to act in proportion to its own estimates of harm, shying away from a robust public defence of its own property in the courts.

Music needs a rebuild from the ground up, and there are many innovative businesses engaged in doing just that. I suspect that the same might be true in publishing. The old big companies are not excluded from the fun – far from it – but they should think twice about using Government Relations as an incumbent defence strategy.

The EU looks like it will vote to extend copyright in sound recordings to a maximum of 70 years. Today’s Financial Times notes that the chief beneficiaries are the record labels, who get an additional term on valuable old copyrights (Love Me Do was due to move to the public domain next year) and will see an uplift in the value of their catalogues.

Given that there is no new money coming in to the industry as a result of this extension its effect will be almost entirely redistributive, from younger artists to older and dead ones, and from small innovative labels to moribund catalogue vaults. It would be interesting to see how our Government is going to justify this as good public policy, even if there is a small increase in our national music export revenue.

And I am reminded of Billy Bragg’s eloquent plea that if copyright is to be extended it reverts to the artists themselves. Far more effective as a pension plan, very fair, and potentially a great stimulant to innovation as a stream of valuable recordings get a chance to be made available under a wider range of business models.

So a windfall for Citibank, a bonus for Vivendi, a smash and grab on the public domain, and the usual raw deal for artists. Trebles all round!

Update: Nitpickers might point to a ‘use it or lose it’ provision, a ‘clean slate’, and a ‘session musicians’ fund’ in the text of the Parliament’s draft directive. I would just point out that the ‘use it’ test is set at a very low level (as far as I can see just selling on iTunes would be enough to satisfy it), and of course the other provisions follow on from that. Very different to a reversion in anyone’s book, and anyway in the gift of the record label.

The PRS has proposed that music related search results should be flagged with a ‘traffic lights’ indicator of whether, according to an independent body, the site linked to is properly licensed for music. The BPI had a similar ‘consumer education’ scheme, whereby approved sites got to display a badge.

This seems a very simple idea. Online music services that want to be licensed would presumably be happy to differentiate themselves, and consumers who want to make sure their business goes to those who pay copyright owners can distinguish them at a glance. Let’s assume that the independent body is well enough managed to keep the list up to date and supply it in a useful way to search engine operators, who are also well enough managed to use it. The PRS proposal simplifies a problem and addresses the consumer confusion set out by Hargreaves.

Dig a little deeper however, and as with so much that comes out of the music industry lobbying machine there is another layer or two beneath this that needs a bit of scrutiny. What effect, for instance, might traffic lights have on music licensing?

The law gives music and recording copyright owners a bundle of rights that they can wrap contracts around for a mix of different uses in different contexts. Some rights are limited, so for instance once a song has been performed or published anyone can perform or record it on payment of a reasonable fee, and can go to a tribunal to get the fee adjudicated. Other rights can be withheld from the market entirely. This is the basis of competitive negotiation in the music industry.

One would imagine that a music service will, if the traffic lights do make the intended difference with consumers, rapidly converge on an ‘essential’ catalogue, the owners of which will be able to charge above their market share as the price for completing the deal, such will be the importance of a green light. To be sure this already happens, but the market can do without a fossilising layer of regulatory bureaucracy to enshrine the behaviour for the foreseeable future.

This would translate into fewer opportunities for smaller or more innovative companies, and fewer choices for musicians and performers when they are selecting their business partners and building their careers. In other words a less open and less fair market for digital music, from creator to consumer.

I have for a long time held the view that the consumer does not need to be patronised and have their time wasted with education schemes. Markets and consumers in them are sophisticated and it is insulting to treat them like primary school children who need to be nudged and bribed to modify their behaviour. The problems the music industry has are the predictable consequences of a dysfunctional wholesale market for music rights, and will be ameliorated by market reform and not enforcement regulation. In fact much of the lobbying I am currently observing seems to me, as a participant in the digital music industry, to be aimed at preserving the market dysfunction to the advantage of the incumbent organisations.

I do not believe that the UK Government has yet made a serious attempt to analyse the copyright market, despite all the fine words about the importance of the creative industries. It would take strong leverage on Government’s part, if not actual compulsion, to discover the evidence which is buried in hundreds of private contracts. Yet we need weights, measures, and fair trading in music just as much as in any other business and none but Government can enforce them for us. There’s a challenge for you Mr Vaizey.

I was asked by ORG to write a short response to the Hargreaves IP Review, and have subsequently found myself a bit out on a limb, particularly in my opinions about his proposal for the DCE. In my defence I plead the fatigue of dealing with large volumes of music and rights metadata daily for the last decade. I know what this stuff is like, and I know the generators and users well. But also I have read carefully a range of responses, and can see how it has already become all things to all people, a panacea for a multitude of gripes.

Anyway, I am republishing my piece for ORG here, and would welcome comments.

Hargreaves: More than Half Baked, but a Few Currants Short of the Full Bun…

My multiple trade association memberships (I work in music and technology) might well have left me confused as to what I wanted Hargreaves to do for copyright in the second decade of the 21st Century. I watched my subscription fees being consumed in a frenzy of lobbying. On the whole I think I paid the music industry more to lobby against the ISPs than vice versa, but recovered some of my investment by being paid to talk to a telephone researcher for an hour as a representative small business owner working with IP. Looking at the submissions it can fairly be said that IP reviews generate much more heat than light, but this one to its credit seems to have emerged from the oven more than half baked.

Five years ago, around the time of Gowers, I would have said that flawed copyright regulation was responsible for many woes, and was implicated in major issues for government, from broadband investment through to the sustainability of recorded music. I was pleased to see however that Hargreaves would not now agree with my views back then, as I have since changed my mind. So, thank you professor, for trying to keep commercial minds focused on the market.

Copyright industries spend far too much time and effort trying to change the rules, despite the historical evidence that many of the technological advances they tried to kill have made them rich. Others are frustrated by the Byzantium of IP licensing, which has not seemed to keep pace with the speed and reach of digital technology. Hargreaves’ brief was to recommend changes that would deliver economic growth, not to be swayed by the whining of creators, users, or rightsholders. His rhetoric meets this challenge admirably, but to my mind the substance could be classed as a near miss.

Here’s a typical phrase, chosen from among several similar: “more choice, better services and lower prices for consumers from a more open and contestable market further up the supply chain”. I couldn’t have put it better myself, and have been arguing to anyone who will stop for a few minutes and listen that it’s the lack of such a market that has blighted music and continues to threaten collateral damage to citizens’ and consumers’ interests, technology and the internet. So that’s a big click on the ‘Like’ button.

Hargreaves is right too about cross-border licensing for the EU, despite the wide disparity between national music markets. There is something here to fear for UK music companies as we have both a high value domestic market and a positive balance of trade, making the UK a target for what used to be known as ‘parallel imports’ – music bought outside our borders and sold back in. I am not sure that Hargreaves really got his head around the complexities of this, and the similar effects of tax arbitrage that sees mail order CD sales dominated by the Channel Islands, but the prospect of a European single market for UK originated digital music is a challenge we should be delighted to meet.

Also very welcome is a recognition that access to the IP regulatory framework is difficult for the small businesses which are critical for growth and long term success. Far too many small software companies find themselves unable to realise the value of their work because they ducked the formalities of IP at a critical moment, leaving them vulnerable to legal bullying or aggressive buy-out tactics. And far far too many ideas fail to get off the ground because access to others’ IP is such a high hurdle to jump, whether that be through licensing or joining a patent pool, or getting rights to distribute creative works. It would be nice to think that Hargreaves might tip the balance for some innovators that allows them an independent route to success, as too often big technology and media companies buy young upstarts in order to bury a threat, denying them the satisfaction of achieving scale, and consumers the benefit of their breakthrough ideas.

And that leaves the ‘big idea’ of the report, the curiously soviet style Digital Copyright Exchange (DCE). And this is the proposal I am least enthusiastic about. I have no issue at all with the premise that ‘efficient markets for copyright licensing [are] strategically important to the UK’s growth prospects’. Of course they are. Hargreaves says the answer to the machine is in the machine, but mandating a new machine is a cop out for copyright policy making. A braver and ultimately much healthier approach would be to regulate fairness and openness into the market, and allow entrepreneurs to provide whatever technical services are required to create efficiency. Mandating a database pushes innovation in market structures and technology to the periphery. I think we need innovation at the core.

So ultimately I am disappointed, even while welcoming much of the report. The evidence taking was good, the diagnosis was spot on, the prognosis hopeful, but on the critical issue of a fair and open market Hargreaves ultimately offered quarantine and palliative care, not a cure. To be sure the bigger copyright companies are fierce and persistent lobbyists, so perhaps the professor shied at the hurdle; or perhaps he is at heart a technocrat more than a free marketer. Not that I think the DCE is a bad idea, and if it comes to pass it might well tidy up some parts of the market as Government pulls a few of the levers Hargreaves has carefully provided. It is not however the transformative thing Hargreaves thinks it is, and if any other jurisdiction gets its act together and provides genuine market incentives the DCE will prove itself more a straitjacket than a springboard.

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?