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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?