10

Written evidence submitted by UK Music

1. From its inception, the Hargreaves Review of intellectual property was aligned very publically, intrinsically and explicitly to economic growth.

2. In our submission to the Hargreaves Review, UK Music applauded the focus on economic growth as the driver for any change, and set out the contribution that the music sector could make to economic growth in the future. However, we also expressed regret that the call for evidence started with the premise that the copyright framework is an inhibitor to growth. We believed this to be an incorrect and therefore unsafe premise upon which to launch a policy review.

3. The Hargreaves Report made 10 recommendations which, it asserted, would add between 0.3 and 0.6 percent to annual GDP growth.

4. In accepting these recommendations, Government seized on this assertion and repeated that the 10 recommendations could add up to £8 billion to the economy, and cut over £750 million of ‘deadweight’ costs.

5. UK Music has now had the opportunity to study Supporting Document EE, Economic Impact of Recommendations, which details how the £8 billion growth figure is calculated and identifies the £750 million savings from deadweight costs.

6. We note that recommendations relating to the copyright framework and the infrastructure for trading in copyright content (which is our members’ area of expertise) amount to some 45% of the cost savings identified, and between 60 and 72% of the growth projections identified.

Table 1

Recommendation	Cost saving p/a	Growth impact p/a
Digital Copyright Exchange	£10 m - £20 m	£2.2 bn
Format shifting	£0.5 m	£0.3 bn - £2.0 bn
Parody and pastiche	£1 m	£0.1 bn - £0.6 bn
Orphan works	£320 m	£0.1 bn - £0.3 bn
Cross border licensing	£10 m	£0.6 bn
Total	£341.5 - £351.5 m	£3.3 - £5.7 bn
	44 to 45% of savings	60 to 72% of growth

7. Insofar as we have been able to calculate in the very limited time available to us, UK Music believes that these growth projections and cost savings are overstated and unrealistic, and are based upon underlying assumptions and extrapolations that are facile and deeply flawed.

8. We devote the remainder of our submission highlighting extracts from Supporting Document EE, Economic Impact of Recommendations, showing why we do not consider them to be credible or reliable. In the short time and space available, we focus on growth projections and cost savings arising from the recommendations relating to a Digital Copyright Exchange, an exception for private copying, and an exception for parody. However, we have similar concerns with projections relating to other recommendations such as orphan works and cross border licensing.

Digital Copyright Exchange:

9. The Digital Copyright Exchange is identified by Document EE as the single greatest contributor to economic growth projections, adding up to £2.2 billion to the UK economy by 2020.

10. Document EE seems to arrive at the £2.2 billion figure in a roundabout way. It takes as its starting point a report entitled The Economic Impact of a European Digital Single Market published by economics consultants Copenhagen Economics. Copenhagen Economics were commissioned to write the report by the European Policy Centre, whose partners are Vodafone, Microsoft, Nokia, Ericsson, Intel, Sitra (the Finnish Innovation Fund) and the Central Denmark Region.

11. The purpose of the Copenhagen Economics report was to provide an initial assessment of the economic benefits of a "European digital single market". The report estimates that the net impact of an acceleration of the digital economy on the EU27’s GDP would be around 4 percent over a 10 year period. Whilst UK Music offers no critique of the Copenhagen Economics report, we observe that the focus of the report and its recommendations spanned issues such as investment in infrastructure, harmonisation of legal frameworks, skills and training in ICT, as well as consumer attitudes towards privacy and security in the online market. The report’s projection that GDP across Europe could grow by 4% was predicated on concerted action across all of these fronts.

12. Document EE seizes on the 4 percent growth projection for the whole of the EU, and attempts to apply it directly to the impact of a Digital Copyright Exchange in the UK, in complete isolation of all of the other factors considered in the Copenhagen Economics report. It appears to do this simply by applying 4 percent growth to the 4 percent of the UK’s economy which is ‘copyright intensive’, which apparently yields £2.2 billion.1 As the focus of the Copenhagen Economics report is cross-border market unification -- and not a study of how changes in the UK market can improve growth and productivity in the UK – it would be impossible to extrapolate the impact of a digital copyright exchange.

13. UK Music is well-placed to question the growth projections related to the creation of a Digital Copyright Exchange. The UK’s commercial music industry is at the forefront of developing a database of copyright ownership information for both music recordings and musical works, with support from the European Commission and with partners from the technology sectors who would make use of such a facility. This database of ownership information would be the first step to any Digital Copyright Exchange, as Government correctly acknowledge. Innovation by rights holders (in terms of licensing structures) and online services (in relation to new business propositions) can only occur if the data and data exchange standards necessary to ensure the smooth administration of agreed licences have been put in place. To fail to resolve these issues ahead of any other aspect of licensing is to put the cart squarely in front of the horse.

14. The experience of our members is that the key challenges in the context of multi-territorial digital licensing lie in the urgent identified need for (1) the unique identification of all entities involved in any individual transaction (2) a centralised authenticated global database for each type of creative work which identifies all works in that category (with metadata linked to the unique identifier), the creators of those works, all rights associated with that work and the identity of the owner of the rights in those works by rights type, by usage type, by territory and by exploitation date and (3) the development and adoption of technical standard message formats for the exchange of information and standard protocols for the exchange of those messages to support the high volume transactions. Only when these three challenges have been successfully addressed can there be any prospect of investigating the scope for automated licensing processes.

15. The time and resources already invested by the commercial music industry into these efforts have been considerable, and yet Document EE takes little account of the time, effort, complexity and costs involved in this ‘first step.’

16. We note that it is contemplated that the DCE could become a functioning cross-sector licensing platform mandated to represent rights holders of the worldwide repertoire for licensing of services in the UK and for other territories. It appears from Document EE that the growth projections relating to the DCE would arise from this function as a licensing platform. We have identified a quagmire of legal, commercial and political obstacles which lead us to view this ambition as unrealistic and not something which would have the support of the content industries. In summary these hurdles include:

- Any reference to a one stop shop implies a monolithic structure raising a number of challenging and complex competition, governance and "incentive" issues.

- A voluntary platform could not expect full aggregation and especially not if it has multi-territory ambitions (some of the most important assets would be owned by entities outside of the UK)

- Licensing solutions cannot be viewed in isolation from the European and international context so to introduce a new structure which could be at odds with recommendations pending from Europe and elsewhere would put the UK content industries in an impossible position

- The content industries are necessarily focussed on stripping out additional cost. Any layering of a new platform over existing platforms is unnecessary and would cause duplication between this UK initiative and the existing collecting societies who are currently evolving to provide streamlined aggregated licensing hub solutions which are consistent with the way the industry does business in Europe and the world

- The lack of data standards make this cross-sector initiative impossible in the medium term.

17. We now turn our attention to the cost savings identified in this section. These are estimated by reference to the costs of collection societies. The document states that transaction costs for rights users are the order of £50 to 100 million every year. It is not clear how this figure is calculated but we assume it is based on the differential between collections and distributions in 2008-9 for the 12 licensing bodies listed on p.19 of Document EE. The text accompanying that table refers to £900-£950 million collected in 2008-9, and £844 distributed, which gives a total running cost of £56 - £106 million.

18. The obvious flaw here is that it is fundamentally wrong to assume that 100% of a licensing body’s running costs are transaction costs with rights users. The reality is that a substantial proportion of those running costs actually relate to the cost of the distribution process to members. Moreover, it is very superficial to make an "analysis" based on collections and costs which does not take into account the material differences in the scale and nature of the different licensing bodies’ activities, and which are in any case based on the position several years ago.

19. The document also works on the assumption that the transaction costs between collecting societies and licences are likely to be mirrored at least 1:1. We do not know on what basis this assumption is made. However, even of the running costs which do relate to transaction costs with users, only a fraction will relate to transaction costs of digital licensing. Therefore, we believe the conclusion that "digital procurement in these types of industries can save up to 20% in terms of productivity over a relative short period, suggesting cost savings for rights users of £10 to 20 million annually, " to be incorrect.

20. Document EE suggests that a Digital Copyright Exchange will most benefit the types of businesses "aiming to introduce new services using new devices or software systems which present content to consumers in new ways." A significant element of the transaction costs associated with clearing rights for new and innovative uses arise instead from the complexity in assessing what the value of those rights are in the first place, when the services are completely unknown and untested in the market. By way of example, Committee Members may be aware that Apple, Amazon and Google are currently looking to develop a cloud based music service, each offering different features and specifications. What is the market value of such services? No one really knows. And yet, once precedents are set for new digital services, it is very difficult to recalibrate them in the future, even if, in hindsight, it becomes clearer that the initial prices set were off the mark. A Digital Copyright Exchange will never be able to mitigate the inherent complexities in valuing and pricing innovation.

21. Document EE make a number of statements more generally about licensing body efficiencies and regulation. UK Music would refer Committee Members to the submission from PPL and PRS for Music which we support, which provides greater detail on the role and function of licensing bodies.

Format-shifting:

22. A format-shifting exception for private use is identified in Document EE as the second greatest contributor to growth, adding up to £2 billion per annum to the UK economy by 2020.

23. Document EE arrives at this figure by surmising that the absence of a private copying exception has been responsible for restraining UK technology firms from developing innovative new products and services such as MP3 players over the past decade.

24. Further, Document EE predicts that a private copying exception will provide the springboard for UK firms to create new products and markets over the next decade worth up to half the size of the iPod market over the last decade.

25. It is apparently nothing more than this simplistic two-step reasoning process which forms the entire basis for how the £2 billion per annum figure is calculated.

26. We ask the Committee to carefully question whether the absence of a private copying exception played any role at all, much less a significant one, in restraining UK technology firms from developing new products such as MP3 players. In the late 1990s and early part of the new millennium, a number of different companies around the world were experimenting with the technology that led to MP3 players, including British firms. Apple’s eventual dominance in the market can be attributed to a number of factors but it is perhaps unsurprising that the biggest rivals to the iPod in the early days of the MP3 market were manufactured by technology firms (such as Creative, iRiver and Rio) based in Singapore, Korea and Japan – countries defined by their high-tech industries. The UK’s manufacturing base lost ground to global competitors some years ago and this decline had nothing to do with copyright but rather capital investment into new tech companies and cheaper labour elsewhere. We expect the Committee would be hard-pressed to find any convincing evidence that the UK technology sector felt inhibited from developing a digital music device because of concerns over private copying restrictions.

27. We also ask the Committee to question the second assumption – that should the UK introduce a private copying exception, UK technology firms will create an explosion of new products and markets worth up to half the size of the iPod market over the last decade. We point out that there is already a healthy market for digital products that incorporate legal format shifting under licence, for example, digital downloads are licensed for format shifting up to 10 devices, and sales of digital downloads for singles are now running at 99% of all single sales. In any case, the MP3 market appears to have peaked, while mobile phones and other devices such as tablets have MP3-enabled players embedded in them, for which they pay a patent fee to the patent-holders of the MPEG format.

28. Whilst UK Music hopes that the UK technology sector grows and flourishes, we would suggest that other factors will have a much greater impact on the size and shape of the market over the next decade. The influence of dominant players in the market is one of them. We refer the Committee to recent announcements by Hewlett Packard, another established technology ‘giant’ – that it is withdrawing from the tablet market. Many market analysts suggest that this is due to the dominance of the iPad as the consumer’s choice2. Other crucial factors that will affect the growth potential of the UK’s technology sector are the availability of finance, particularly the ready supply of investment to develop innovative new products and services.

29. We now turn our attention to the cost savings identified by the introduction of a format shifting exception. Document EE calculates that £500,000 can be saved each year from a reduction in complaints to the Advertising Standards Agency and IPO from fielding complaints arising from private copying restrictions.

30. The Document makes specific reference to the "Brennan" case. The Brennan is a "CD jukebox" which enables consumers to load their CDs, records and cassettes onto the machine for playback. An unidentified complainant referred an advertisement for the Brennan player to the Advertising Standards Authority, alleging that the advertisement incited consumers to break the law. The ASA found that the ad breached the advertising code and ordered the makers of Brennan to amend the ad.

31. This case strikes us as very odd. To our knowledge, the Advertising Standards Authority never received a complaint against Apple for any of its MP3 devices over the past decade, yet it received a lone complaint against the manufacturer of the Brennan device. The complaint was seized upon by the Hargreaves team to serve as an example of how the lack of a private copying exception has hampered the development of products and markets. Document EE notes that "Brennan was forced to amend its advertisements, causing potential damage to its business, as the normal operation of the product as thought to breach copyright law. It is worth nothing that of all the major players who produce and design devices which make use of format shifting, none of them appear to be British, and when a young innovative firm comes along, like Brennan, the law works against them."

32. If the ASA has received only 1 complaint relating to private copying restrictions over the past decade, it is difficult to see how a private copying exception will generate a savings of £500,000 per year for the ASA. As a comparator, we note that the average cost of cases heard by CISAS and the Ombudsman Services: Communication is around £400 per case.

33. We must therefore assume that the majority of the cost savings will come from a reduction to complaints or questions directed to the Intellectual Property Office relating to format shifting. However, Document EE offers no documentation as to the costs incurred to IPO to date from such questions or complaints.

34. As this submission is focused entirely on the projections for economic growth and cost savings identified by the Hargreaves Review, we restrict ourselves to questioning the prejudices in those assumptions. However, we feel it worth noting that Document EE is littered with other prejudices and assertions which mean that the costs of some recommendations are not identified and so not factored in to the overall estimates. For example, "Given that the Review recommends a limited private copying exception corresponding to the expectations of buyers and sellers of copyright content, compensation is already priced into the purchase."

We wholly and absolutely refute that compensation is already priced into the purchase and will continue to press the case that a private copying exception without compensation in the UK will result in economic harm. The point in raising this issue here is to show that there are not only weaknesses in the growth projections and cost savings identified, there are weakness in what has been left out and avoided.

Parody:

35. An exception for parody is identified in Document EE as adding up to £.6 billion per annum to the UK economy by 2020.

36. Document EE arrives at this figure by taking the value of the global entertainment market which it reckons is approaching $2 trillion, and estimating that the UK’s share of this market could growth by up to .05% from a parody exception, translating into annual growth of £130 million to £650 million. Document EE goes to surmise that if the comedy market is worth 1% of the $2 trillion market, ($20 billion), a parody exception might enable the UK to gain from 1 to 5% ($200 million to $1 billion).

37. The increase in the UK’s share of this market would arise directly as a result of a parody exception, but it is difficult to understand how or why. Document EE states that UK comedy programmes "appears to be losing ground [in the global entertainment market], as programmes cannot use copyright content without long clearing processes." The document also states that today, the chance of a British comedy show becoming a global success "is zero". We are perplexed by these statements. British comedy has been enjoyed and admired around the world for decades and British formats are enjoying a period of outstanding success in many foreign territories. Sales of UK finished programmes to international broadcasters are a source of growth in overseas markets and, according to PACT, are up 24% to £87 million3 for the independent television production sector alone. No statistics are provided by Document EE to indicate that the UK comedy is losing ground in the global entertainment market.

38. As the growth projections are entirely dependant upon the benefits to be derived from a parody exception, far greater analysis is required. To put growth projections in context, the annual survey of television sales produced for UKTI found that sales of finished programming accounted for £549 million of export revenue. Document EE forecasts that a parody exception might benefit the economy by up to £600 million. This is more than the current entire UK TV programme export revenue.

39. Document EE refers to "Weird Al’ Yankovic as an example of how parody can be profitable. Weird Al Yankovic sought and received permission from the copyright owners of the works he parodied, he is signed to Universal Music Publishing as a creator of copyright works himself, and his success was not predicated on a parody exception. The existing system works and enables profitable creativity.

40. In the view of UK Music no evidence has been adduced to support an economic case for a parody exception; against this the fact that such an exception would ride roughshod over the very limited moral rights which were given to creators under the 1988 Act – moral rights which of themselves provide an incentive to create.

Conclusion

41. UK Music and its members are keen to play our part in growing the economy and believe we have much to contribute. As economic growth is stated as the driver for changes to the IP framework, we believe that it is important to raise concerns about how realistic these growth projections are. We fear they betray an ideological approach to the review, and will ultimately disappoint a Government which is (rightly) focused on economic growth.

42. We hope for the opportunity to discuss with the Committee any point raised in this paper.

5 September 2011

Annex A

UK Music is an umbrella organisation representing the collective interests of the UK’s commercial music industry - from songwriters and composers, artists and musicians, to studio producers, music managers, music publishers, major and independent record labels, music licensing companies and, now, the live music sector.

UK Music exists to understand, explain, promote, protect and nurture the UK’s commercial music sector so that its inherent value grows and its positive knock-on effects reverberate ever further and ever deeper.

UK Music’s membership is comprised of:

· AIM – Association of Independent Music - representing over 850 small and medium sized independent music companies;

· BASCA - British Academy of Songwriters, Composers and Authors – with over 2,000 members BASCA is the professional association for music writers and exists to support and protect the artistic, professional, commercial and copyright interests of songwriters, lyricists and composers of all genres of music and to celebrate and encourage excellence in British music writing

· The BPI is the representative voice of the UK recorded music business

· MMF - Music Managers Forum - representing 425 managers throughout the music industry

· MPG - Music Producers Guild - representing and promoting the interests of all those involved in the production of recorded music – including producers, engineers, mixers, re-mixers, programmers and mastering engineers

· MPA - Music Publishers Association - with 260 major and independent music publishers in membership, representing close to 4,000 catalogues across all genres of music

· Musicians’ Union representing 30,000 musicians

· PPL is the music licensing company which, on behalf of 47,500 performers and 6,300 record companies, licences the use of recorded music in the UK

· PRS for Music is responsible for the collective licensing of rights in the musical works of 75,000 composers, songwriters and publishers and an international repertoire of 10 million songs

· UK Live Music Group, representing the main trade associations and representative bodies of the live music sector