Chapter 3 Relevant Music Markets
The music industry is a very fragmented and concentrated economic sector, where most creators and enterprises are price takers without any pricing power. Pricing is usually negotiated by representative national organizations (for mechanical and public performance licensing) or via labels and publishers of large rights portfolios in the hybrid licensing scheme of streaming, and the special cases of ‘grand rights,’ such as theatrical use, film ‘synchronization’ and advertisement.
Both the publishing and recording side of the industry is exploiting intellectual property, i.e. copyrights and neighbouring rights, and gives licenses for the use of the music. The publishing side also licenses live performances, even in cases when the composer is present on the stage of the live performance.
Some forms of licensing, such as exploitation on theatrical stages, the price setting is completely unregulated—an artists or her publisher can freely negotiate with a theatre on the use of the music in a dramatic setting. This is, however, a small minority of the music uses. In most cases, there is some form of compulsory licensing in place. Until the emergence of music streaming, the buyer side of the music industry was so much more concentrated than the seller side, that for practical reasons, music was sold in bundles. If an artist released a record, and gave a mandate to license this record to radio or television stations, it was not possible to revoke this license (it became part of a so-called ‘blanket license’). In the absence of seller choice (the artist had no say on the actual sales volume, or price), various forms of regulated pricing schemes had been introdcued in the 20th century.
Both the publishing and recording side of the industry is exploiting intellectual property, i.e. copyrights and neighbouring rights, and gives licenses for the use of the music. The publishing side also licenses live performances, even in cases when the composer is present on the stage of the live performance. The licensing policies are set by various forms of regulations on the exploitation of intellectual property. Copyrights and neighbouring rights are governed by international law, and in Europe, they are further harmonized by EU law. Because the United Kingdom has harmonized its laws with the EU for four decades, at this moment, UK law is very similar to EU law. The valuation principles of intellectual property are set by various standards set by the World Intellectual Property Organiztaion and the International Financal Reporting Standards Board. The IFRS standards are incorporated into both UK and EU accounting law, and the WIPO standards have a similar international law underpinning as the more specific copyright and neighbouring right. The valuation and price setting of music must comply with the broadest fair value principles (set by international financial reporting standards) in the light of the intellectual property standards set by WIPO. At last, copyright and neighbouring rights law have special provisions, often called as “equitable remuneration.” From an economic perspective, we treat equitable remuneration as a special case of fair valuation. Even when equitable remuneration is not literally applicable in the music industry, we believe that the broader fair valuation principle should yield a similar result.
The music industry is a very global industry, and these international standards harmonize many aspects of music licensing. The high level of global standardization had been one of the pre-requisites of the emergence of global music service providers like Spotify or Apple Music.
In a competition-based market study, the aim may not be the investigation of price setting, however, understanding the empirical difficulties in setting the prices is important to understand the difficulties and opportunities for any form of market analysis.
3.1 Platform-specific considerations
3.1.1 UUC
We argue that UUC platforms are not directly comparable to other licensed forms of music uses. Until recently, the biggest UUC platform, YouTube, has claimed that it is not “communicating to the public” music, it is merely a neutral player between the user who uploads the content and the other user who uses it. In the past decade, there has been an important and contentious debate weather this position is in line with the “safe harbour” exceptions of copyright law, and if the compensation and piracy protection provided by YouTube is sufficient.
In the UK, YouTube is a major UUC service, and is popular among those who use free streaming services (UUC or otherwise) to listen to music (in 2021, 69% of such users had used YouTube).53 Other UUC services with a music focus include TikTok and SoundCloud.
The representative associations of composers (GESAC 2015a, 2015b; CISAC 2017), performers (AEPO-ARTIS 2016, 2017), and producers (Moore 2016) in Europe were all strongly calling for a change in these practices, while technology companies on the other side were vehemently lobbying European governments and members of the European Parliament to stop or water down proposals. Eventually the European Union adopted the new Copyright Directive (EUR-Lex 2019). This directive intends to bring the licensing practice of music streaming and UUC platforms closer to each other.
As the CMA scoping statement states, in the UK the “DCMS Committee Report raised concerns that ‘safe harbour’ provisions that apply to UUC services may distort competition among music streaming services (due to a disparity in the dynamics of rights negotiations) and lead to a ‘value gap’ that reduces the revenues available to rightsholders.” The scoping report also states that CMA intends to analyse the “impact of UUC music streaming services, and the safe-harbour copyright protections they benefit from (see paragraphs 70 to 74) on competition in music streaming services, including whether such services enhance competition or have distortionary effects on competition that harm consumers.”
We have conducted a similar analysis in other jurisdictions which so far has not been litigated. Our experience shows that this analysis is rather different from the analysis of music streaming and should be seen as a potentially different form of music use.
On 22 June 2021, the Court of Justice of the European Union (CJEU) made a preliminary ruling upon request from the German Federal Court of Justice in relation to two proceedings concerning unauthorised uploading of copyrighted content to YouTube and to another file sharing system (the YouTube/Cyando Case). This decision has significance for the United Kingdom because it is still based to the new EU Copyright Directive’s predecessor, the Information Society Directive 2001/29/EC (the InfoSoc Directive), and to the Electronic Commerce Directive 2000/31/EC (the e-Commerce Directive), which have been incorporated into UK law and jurisprudence, and it is likely that UK courts will at least take into consideration this ruling.
This ruling makes it clear that the business model and practice followed by YouTube is shielded from platform (copyright) liability, and therefore creates a very different use than other business uses of music which are based on copyright/neighbouring right law and the traditional licensing formats (Wise and Ibbetson 2021).
Our analysis in competition law-based cases excluded YouTube and other UUC companies from the market of licensed uses of music, because we have found the business and legal model, and the empirically observed prices very dissimilar from other forms of music. Not only we have estimated much different (lower) implied prices than in other forms of music use, but we also did not really find any mechanism that would bring the prices closer via supplier-side substitution. Part of the heated debate on UUC platforms and the value gap is that rightsholders do not give a prior consent to the use of their music, can only protest and take down the copies; however, because of the role the platforms play in music discovery and use, takedown is not a credible strategy for individual or small rightsholders.
In our experience, we have estimated a significant value transfer from the licensed music market to UUC, but we have never seen relevant UK data. The ambition to investigate the value gap certainly requires a very broad scope of music uses, probably including other forms of zero price uses, including home copying. We do not believe that the UUC model is sufficiently similar to licensed music streaming and mechanical licensing to physical products on one hand, but dissimilar from public performance, particularly in radio and television, to justify the current value chain definition and scope of the CMA market study.
3.1.2 The use of zero prices
A particularly difficult aspect of empirically observing music markets is the prevailance of zero end-user (consumer) prices, which is present in radio, television, in UUC, home copying, and even in the minority uses of licensed (ad-supported) music streaming. Our analysis in non-UK markets showed that most of music uses takes place in zero price conditions.
As the CMA report on platform notes, the “The advertising-funded business model is not novel, nor is it inherently problematic from a competition perspective. Newspapers have been generating revenue in the UK through advertising for several hundred years. On television, ITV provided the first alternative to the BBC in 1955, when it began its ad-funded broadcasting. Similarly, commercial radio stations have been generating revenue through advertising in the UK ever since the market was liberalised in 1973. These services have added substantial value to our society. The same is true of many services provided by digital platforms” (Competition & Markets Authority 2020, 44–45).
In many jurisdictions, home copying is an exception to copyright law. In such jurisdictions governments provide a compensation mechanism to righsholders to the loss of revenue to home copying. Such an exception was briefly introduced in the United Kingdom in 2014, only to be crushed by UK courts in 2015. The lack of this exception theoretically would make it possible that UK rightsholders make claims to households on the basis of infringing their rights. Regardless of legal status of home copying in the United Kingdom, we find it difficult to believe that households are not engaging in home copying—in other surveyed jurisdiction, including rather recently the UK, we have found that this is still practice widely.
Our argument is not for or against private copying exceptions or UUC, but we merely state the fact that most of the music uses takes place based on various legal situations and a zero price.
While there is a growing body of consensus and practice on how to incorporate zero price transactions into competition practice in theory, in practice we have found this very challenging because there is no primary data source on these uses. Zero price transactions have no invoices, and no accounting trail. This is a serious problem, because in normal market conditions, both the quantity of the sales and the price is recorded on the invoice, and this information is translated into tax returns and financial statements.
The methodology we introduce in the subsequent chapters were designed to provide adequate estimates for various forms of zero-price transaction, including the use of UUC platforms, radio, and home copying.
3.2 Fair Value
The concepts of copyright law, such as equitable remuneration, set a legal basis for the remuneration of creators, particularly in cases where the seller has no freedom of contracting the actual user. Such rules, however, do not contain regulations on how to set the payable sum—this often leads to a confusion. In the United Kingdom in 2020-21 there had been a lively debate about various forms of equitable remuneration. Yet it is not the equitable remuneration right that tells what the price should be applied when an artist is paid out.
This is not an unusual situation in modern market economies. Owners of natural monopolies, or large corporate structures are not always allowed to freely negotiate prices. In the European Union, copyrights are treated as constitutionally protected rights which are protected on an equal level with fair competition. Pricing in these cases usually follows some legal norm and economic principle.
When rightsholders are not in the position to negotiate rates freely, various legal, accounting, and economic norms, and institutional guarantees must be in place so that they receive fair and equitable remuneration. Because copyrights and neighbouring rights (in European parlance or recording copyrights in U.S. terminology) are valuable intellectual property rights, they entail fair compensation for the use of rightsholders’ works or recorded fixations.
When intellectual property is sold (against a lump-sum payment), or licensed (for periodical payment), or used as a pledge against a loan, the transaction must comply with the Fair Value standard. This standard is, similarly to copyright law, set by international law, which generally can only in detail be modified by UK law. The Fair Value standard of the International Financial Reporting Board has been incorporated into UK law law via EU law and remained UK law after Brexit. Our understanding is that music prices should mainly follow the Fair Value standards, but they are also inspired by the more generalArm’s length principles: whenever a market transaction is not possible, the compulsory conditions should resemble of something that two market powers without power or proximitiy of interests (at arm’s length) would agree to pay.
In 2008, the global recording industry body, IFPI, published Valuing the use of recorded music, created by PriceWaterhouseCooper (PwC 2008). This excellent methodological guide applies the WIPO and IFRS standards (IFRS 2011; Flignor and Orozco 2006; Puca and Zyla 2019) on valuing copyrights in more practical terms for the music industry. The valuation principles are enshrined in the fair valuation principles of the WIPO, and the fair value principles of the International Financial Standards Board—their use is not a recommendation but statutory obligation in most IFRS countries. This makes applications of valuation examples (particularly in competition practice) from other countries, Slovakia, and Hungary in this case, largely applicable in the United Kingdom.
The recognized fair valuation principles stipulated that the “most applicable method” must be used in valuations, which almost always leaves out in copyright contests the (historical) “cost approach,” and leaves open the use of the “income approach” and the “market approach.”
The income approach compares the royalty flows of a work of its recording via the using an appropriate “discount rate.” When a user buys in a music store an mp3 file on 1 July 2015, it triggers a single royalty payment after the deductions of the cost of sale on the marketplace. In a streaming platform, the same user’s royalty payments appear every month when she listens to the song, and in radio, usually every year. The discount rate provides a proper comparison between remuneration received in July 2015 and April 2021.
The market approach tries to identify a payment rate, regardless of if it is made in lump sum, monthly or annually to established, sufficiently similar uses. Many ideas were tried internationally to identify the sufficiently similar use of music streaming; for example, relating ad-supported and automatically selected songs to radio streams, and relating cases where the user controls the selection of songs, and may even download them to music downloads. In this research report I do not try to review these cases, as many of them may be subject to litigation in various jurisdictions that apply both equitable remuneration and fair valuation principles, and similar principles of competition law.
The application of fair valuation principles is particularly challenging in the case of private copying, where the transactions are not recorded (as they are not market transactions) and in streaming, which is a relatively new technology that is seen in licensing as a mixture of earlier mechanical copy-based and public performance-based licensing, and has so many transactions that most rightsholders (and even their national organizations) like the data processing capacity to administer the rights or challenge incorrect payments.
Comparing royalties is challenging because some royalties are paid upfront and for perpetuity (like in the case of the digital download model of mp3 music, mp4 audiovisual or epub book files); music streams are remunerated monthly, based on actual use; and public performance streams, such as broadcasting, are usually remunerated annually, in equitable proportion to the use of the works and recordings. Furthermore, radio stations, for example, pay for both mechanical copying of music and making it available to the public. So direct comparison, as we will see in the subsequent chapters, requires a common unit of measure—we translate all rates to annual rates.
3.2.1 The full market comparators model
The CEEMID full-market model (introduced in Music Use and Rightsholder Damages and Enjoyment of Audiovisual Content and Rightsholder Damages) was partly based on Valuing the use of recorded music, an excellent methodological guide created by PriceWaterhouseCoopers for IFPI (PwC 2008). In our understanding, similar valuations presented here in this short example must meet high statistical standards (Bína, Vladimir et al. 2012) and IFRS Fair Value standards (IFRS 2011; EUR-Lex 2012) which had been adopted into EU law.
This was the framework that CEEMID, a cooperation of several European rightsholders including SOZA started to develop, when they started to cooperate on meeting the data requirements of these valuation techniques. It was used for royalty pricing and compensation claims in Hungary (Antal 2017a, 2018), Slovakia (Antal 2019b) and Croatia (Antal 2019a) are comparing per hour royalty revenues in various licensing and compensation models, therefore providing a common metric for mechanical, public performance, streaming and private copying compensation revenues.
This model is based on a competition policy-based argument. Radio stations, television, YouTube and streaming platforms are all competing for the attention of consumers, and they are competing with each other. In any minute when a user is listening to music or a podcast in a car, she is not listening to radio; when he is watching YouTube, he is not watching television. And of course, when a vinyl record is played on a turntable at home, the digital radio is not playing.
Our full market comparator model takes further the market comparator model of PWC published by IFPI with connecting to the entire US and European music value chain models.These value chain models traditionally divide the music industry by three revenue streams: live music, publishing and recording side. We incorporated all three-revenue stream’s licensing income into the model.
- The public performance model has various pricing standards for live music, publishing and the recording side. For radio, transmission, and background music it uses annual blanket licensing. We translated the revenues from these income streams, excluding the background music sold to business-to-business uses in the hotel, restaurant, and catering sectors, into notional hourly royalty figures. In the case of live performances, we took the notional concert visits of each country as a 90-minute performance, to compare variously priced live performance revenues with a similar currency unit / per hour format. It is worth mentioning that live music only uses the public performance model, and it plays a relatively minor role in the live music ecosystem. Our model is focusing on the recording and publishing side of the music business.
The publishing and recording side of the industry has two mature business models that are highly comparable internationally or in long-term longitudinal analysis. Both the mechanical licensing model and the public performance model is based on the same international regulation (harmonized on the level of international law) and follows a same business (licensing) model. In most cases, the actual licenses are territorial, and the prices and exact licensing terms are specific to the country. But these aspects of our full market comparator model are very easy to replicate for any year and licensing territory (national jurisdiction.)
The mechanical licensing model is used for physical products, legalized digital downloads, and for home copying, has lump sum values. In the case of home copying levies/compensation, the sum is not expressed per unit, but in annual lump sums, which are historically connected to the mechanical pricing model. (See Private Copying in Croatia where we explain in detail this analogy (Antal 2019a)).
Both the mechanical licensing and the public performance model very well harmonized internationally. Our model could be easily applied in the UK or the EU, or even in the US if we account for the somewhat strange exception of radio transmission licensing in the US, which has been a contentious topic in copyright law ever since it was introduced. It is important to notice that the value or public performance rights is different in each country because of the licensees (for example, radio stations, or cable television) operate under different market and regulatory conditions.
• The regulation of free uses, particularly the home copying exception and its remuneration is different in each country which has this exception at all–but private copying levies, when applicable, do follow an adopted form of mechanical licensing. The compensation is annualized, like in public performance, and the rates (prices) are somehow related to the mechanical royalty rates.
The streaming model is de facto harmonized by the fact that the major players in the world are the same, and they are using similar model contracts. Legally speaking, the solutions differ among the UK, U.S., and EU solutions, but the streaming model is always hybrid of the mechanical licensing and the public performance models. A streaming provider needs to have a license from both the publishing side (that is present in mechanical licensing) and all interested parties that are present in public performance licensing.
The UUC model, as recognized by the scoping report, is very different.
Price observation (estimation) and comparison is challenging. Traditionally, public performance licenses are blanket licenses that cover any use for a set period (usually a year), but these blanket revenues are distributed by the collective management organizations by radio transaction logs, or samples of such logs. So, the payment is not directly connected to a single use, and much data would be required to calculate the implied price per use. Our approach is to calculate an implied hourly price per user.
In the streaming platforms, the end users pay a lump sum subscription fee, and their use, either using the pro-rata or a user-centric algorithm. To make a comparison possible, we have translated the streaming revenues, like other revenues to hourly figures, even though we could calculate implied per use prices.
Mechanical royalties are lump sum payments in the sense that the licensing fee is payable for one mechanical copy/download of the song (often priced differently in bundles, i.e. “albums.”) Unlike streaming prices, this price is not for a single use, but for any number of uses during the useful life of the copy. Unlike the public performance licenses, the royalty payment is not related to a time period—again, the lump sum payment is made for the entire useful life of a copy. One possible approach to express the cash flows of the lump payment as a perpetual annuity’s annual cash-flow. In a simpler model, if we assume that the useful life and the renewal of music collections is stable, we may assume that the annual mechanical licenses are paid for the part of the collection that are replacing the old elements in a record collection that reached their useful live.
The translation of various prices to GBP/listening hour or HUF/listening hour requires plenty of estimation work. To systematically use listening hours, we used the standardized CAP surveys (see 2.2.) Most public performance revenues were available in annualized, national aggregates, in this case we could easily compare the self-reported use hours with annualized revenues for the entire user population.
As our experience showed in Hungary, Slovakia, and Croatia, even though in these use cases, there are legal mechanisms that should allow the prices to converge to each other — after all, our model is a price-setting model for royalties originally—the prices can greatly deviate. Some countries have not adjusted their home copying compensation for a long time, or there is some local regulatory interference (like in the U.S.) with radio licensing. But at least on the level of the international legal norms and the model contracts, we can expect some sort of convergence that allows using the prices of any other use as a comparator for any analysed use.
In an EU jurisdiction, before the implementation of the DSM Directive, we can objectively exclude the UUC model from this comparison, as there is no similar licensing model that would allow price convergence.
Our solution in the Hungarian and Slovak models was to report figures with and without the inclusion of UUC, which was dominated by the use of YouTube. As a base case, we excluded UUC uses from the market comparators as there was no sufficient price harmonization and our a sufficiently similar contracting practice, or legal basis for the revenues.
3.3 Equitable remuneration
In the UK policy debate, a potential redefinition of equitable remuneration rights received noteworthy attention, and it is a good starting point to understand music earnings. Equitable remuneration is originally connected to a compulsory license that must be paid when recorded music is played on a publicly accessible location to the performing artists and music producers.
The current UK debate is perhaps too much focused on the UK definition of equitable remuneration rights. The changes promoted by the Broken Record campaign were successfully made in several European jurisdictions, but they did not significantly change the earnings of most creators. By focusing on the re-definition of the equitable remuneration right, the debate is only focused on the re-distribution of a very small portion of the music ecoystems’s income. This blurs the fact that the general level of earnings—which is not governed by the equitable remuneration right, but by fair value, arm’s length standard, and competition law—is declining and seems to be inadequate compared to historical levels.
Equitable remuneration is a legal concept which has an economic aspect. In international law, it was first enshrined as Convention C100 of the ILO, stipulating that men and women should receive equal pay for equal work (ILO 1951). Within the context of international copyright law, it was introduced as a modification of the Berne Convention by the Rome Convention for the remuneration of the broadcasting of recorded fixation of music works (recordings) since 1971. This right is further elaborated by the WIPO Performances and Phonograms Treaty (WPPT).These copyright conventions are administered by the WIPO (WIPO 1996a, 1996b).
The equitable remuneration is originally connected to a compulsory license that must be paid when recorded music is played on a publicly accessible location to the performing artists and music producers.The compulsory licensing means that the rightsholders are not in a position to negotiate the royalty rates, or deny use to any business entity. (Compulsory licensing never applies to private end-users.) The paiable rate is called equitable (and in some jurisdictions, fair), because it is not a negotiated, market rate. The law stipulates in these cases, however, that the rate must be set as if they have negotiated in a market transaction of two willing parties without monopoly (supplier power) or monopsony (buyer power) In economic terms, these rates must be set on a fair value basis.
The [scoping paper] correctly excludes the analysis of equitable remuneration from the scope of the UK market study. The equitable remuneration standards in international treaties do not set a standard on how to calculate equitable remuneration. In an international context, a study of Europe Economics and IVIR has shown that there are notable differences in how equitable remuneration is understood—and it is often used as a synonym to fair remuneration (Europe Economics & IVIR 2015). In our understanding, the equitable remuneration should happen at 3.2fair value as defined by economics and international accounting standards.
It is sufficient to note that equitable remuneration is not a pricing issue, but it is an important legal mechanism to make sure that copyright and neighbouring rightsholders are remunerated. In spite of the national differences, it is a sufficiently harmonized system that allows the functioning of the global music industry without major barriers, and therefore allows the comparison of revenues, prices and volumes, too.
3.3.1 Private Copying and Illegal Activities
In this report, we do not distinguish among various unlicensed uses of music. There are unlicensed uses that do not fall under the private copying exception, and therefore it should be persecuted by the Slovak state, and the rightsholders could claim damages from users on a different legal basis.
However, this distinction is rarely made in copyright administration and enforcement, because understanding the legal and technical nuances of the excempted and illegal use requires both copyright law and technical knowledge. Slovak authorities hardly use these distinctions: non-exempt private users are hardly ever persectued, and damages are hardly ever paid for rightsholders on a different legal basis. The distinction would be even more difficult to make for ordinary citizens, who are randomly invited to the survey interviews. Some illegal uses of music are also criminal activities, and it would be unethical and produce unreliable results if we would ask people about criminal activities that would incriminate themselves.
Therefore, whenever they claimed that they copied unpaid music, films, series episodes, television programs, audiobooks on their devices, we used the term “unlicensed use” and we assumed that these cases should be compensated under the private copying regime. Of course, the rightsholders and the competent authorities of Slovakia may decide to choose a more nuanced approach, and litigate cases that may not fall under the private copying excemption on a different legal basis.