ratpie

Unlicensed downloading is just as widespread in Switzerland as it is in most well connected and wealthy countries. Being outside of the European Union however allows the Swiss Government to take its own legal and regulatory path. And the Federal Council has just concluded that filesharing and unlicensed downloading are not a problem.

Here’s a translation of part of their statement on the subject:

The share of disposable income spent by consumers and consumers in this area remains stable. However, there transfers within the budget. Thus, users of sharing sites continue to spend the savings they make by downloading free Internet content on entertainment, but instead of buying CDs and DVDs, they choose concert tickets, films, and merchandising.

It is mainly large foreign production companies which suffer from these new patterns of consumption and they must adapt. As shown in the entertainment budget transfers outlined in the report, fears that these changes have a negative impact on Swiss cultural creativity are unfounded. The Federal Council therefore reaches the conclusion that there is no need to take legislative action.

In other words a simple nationalistic test is all that is necessary. The Swiss have I suspect a negative balance of payments in music and film, and therefore perhaps are less susceptible to arguments that jobs and taxes are dependent on strong withholding rights.

With music licensing increasingly a global business it will be interesting to see if the less protectionist approach the Swiss have adopted keeps out the rights licensing businesses that otherwise might have benefited from the sophisticated financial services infrastructure, low tax, and stability the country offers. Some of the well established performers already live there, ironically benefiting from low taxes on royalties earned in less permissive music markets. A less obvious tax haven for artists is Ireland, which offers an exemption for the first €40,000 in earnings. That of course was not nearly enough to keep Ireland’s biggest music exporter from becoming it’s biggest permanent export when U2 moved their business out in 2006.

The impact of tax rates on royalty flows is dramatic. The Netherlands, despite its unimpressive representation in the creation of music copyrights is nevertheless one of the world centres for licensing due to its zero rate withholding tax on royalty income. If you are shopping for a friendly regime, Deloitte’s provides a handy list and can no doubt advise which presents the best all round value for your particular circumstances. Malta has recently got into the game too with a 0% rate on music.

Is there any kind of lesson here? Switzerland can hardly be held up as a model of progressive liberalism, and indeed its own rationale is a kind of ‘I’m all right Jacques’ two fingers to Hollywood. Tax arbitrage will ensure that no matter how transparent collecting societies are some royalty flows will always be invisible to regulators. Meanwhile national ‘cultural creativity’ seems to march on regardless – there were at least three accordionists in the train station at Swiss watch town Biel when I visited last summer, and all seemed to be collecting enough Francs for a kebab while playing in front of posters for Alpine Opera (a startled marmoset staring at a soprano) and a Peugeot with Lady GaGa bundled from Universal Music.

So no, free downloading makes very little difference to the Swiss, beyond marginally shrinking the number of recording artists who might eventually be looking for a friendly place to domicile their wealth. But for the rest of us the Swiss opinion on downloading is equally irrelevant.

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.