MPRA Munich Personal RePEc Archive
Counting the Costs of Collective Rights Management of Music Copyright in Europe
Ghafele, Roya and Gibert, Benjamin Oxfirst
17. October 2011
Online at http://mpra.ub.uni-muenchen.de/34646/ MPRA Paper No. 34646, posted 11. November 2011 / 12:55
Counting the Costs of Collective Rights Management of Music Copyright in Europe
By Roya Ghafele & Benjamin Gibert
Roya Ghafele is a Fellow at the Said Business School of the University of Oxford and the Director of Oxfirst Limited
Benjamin Gibert is a Research Consultant at Oxfirst Limited
Corresponding Email Addresses
[email protected] [email protected] [email protected]
Copyright is held by the authors
Table of Contents
Table of Contents ...... 2 Executive Summary ...... 3 Figures and Tables ...... 4 Abbreviations ...... 4 1. Transaction Costs and Collective Rights Management ...... 6 Transaction cost theory ...... 6 Transaction costs and collective rights management...... 7 2. The Challenges and Opportunities for Collective Rights Management in Europe .... 8 Technologies and Transaction Costs ...... 9 Balancing Competition and Repertoire Fragmentation ...... 11 3. The Value of Digital Music in Europe ...... 12 The value of the European digital music market ...... 13 Comparing estimated market value with actual revenue ...... 17 4. The Cost of Licensing Digital Music ...... 23 Conclusion ...... 27 References ...... 30 Appendix 1 ...... 33 A. Digital Music Market Estimate ...... 33 B. Comparing Estimated Market Value with Actual Revenue ...... 35 C. Royalty Distribution Efficiency ...... 36 D. Digital License Costs ...... 38 Appendix 2 ...... 42 A. Digital Music Market Estimate ...... 43 C. Royalty Distribution Efficiency ...... 51 D. Digital License Costs ...... 52
2 Executive Summary
As music consumption increasingly takes digital forms, Europe must modernize its collective rights management system in response to new challenges and opportunities. A transaction cost analysis of the current collective rights management system in Europe suggests multiple transaction costs exist. Collective rights management organizations (CRMOs) operate on a national basis and enjoy monopoly privileges within each jurisdiction. Though the trade-off between competition for EU-wide rights clearance among CRMOs and repertoire fragmentation must be balanced carefully, the lack of any competitive pressures renders collective rights € 5 billion – potential value of management in Europe inefficient for digital music. digital music in Europe
The estimates of the value of the digital music market and the costs associated with licensing across borders € 400 million – potential value of suggest that growth in digital music is stifled to a digital music royalties in Europe significant extent by market inefficiencies. Piracy, while an important factor, is by no means the sole cause of this lost market opportunity. € 212 million – potential value of digital music royalties in France, The results of this report affirm the potential Germany and the UK economic value of digital music in Europe. The total addressable market for digital music services in € 49 million – total new media Europe (EU27) is estimated to be over € 5 billion, royalties collected by SACEM, GEMA, representing a royalty market opportunity of over € and PRS for Music in 2009 400 million. The three largest digital music markets (France, Germany and the UK) compose around € 2.6 billion of this total market and € 212 million in 19% - average capture of digital royalties. Yet the corresponding CRMOs (SACEM, royalty market in Europe GEMA, and PRS for Music) generate only € 49 million in royalty revenue from all new media (online services, mobile services and internet radio). The 23% - average capture of digital disparity between potential and actual revenue for all royalty market in USA of the European markets is significant. European CRMOs capture 19% on average of the potential market for royalties in comparison to 23% for 85% - increase in cost of licensing on- CRMOs in the USA, which do not enjoy the same demand digital music streaming from exclusive licensing privileges. The estimate of license USA to France, Germany and the UK costs for a digital music service implies further issues. The cost of setting up a digital music service in the three largest European markets (France, Germany and the UK) was estimated to be 85% higher for streaming services and 6% higher for downloading services than in the USA. The transaction costs of digital licensing across borders in a nationally oriented copyright framework are also significant.
The current structure of collective rights management is inefficient at extracting value from the digital music market. Artists do not receive sufficient royalties, commercial users suffer from high transaction costs and prohibitive license fees, and individual consumers suffer from insufficient legal alternatives to digital piracy. New solutions should be sought to capitalize on the market for digital music services in light of increasing broadband penetration and changing consumption patterns in Europe.
3 Figures and Tables
Table 1. Total and Royalty Market Estimate for Digital Music 14 Figure 1. The Total Addressable Digital Music Market 15 Figure 2. The Digital Royalty Market 15 Figure 3. Total Addressable and Royalty Market for Digital Music 16 Figure 4. Potential and Actual CRMO Digital Royalty Revenue 17 Figure 5. Royalty Market Capture 18 Figure 6. Digital Music Royalty Revenue 19 Figure 7. Royalty Market Capture as Percent of Potential Royalty Market 19 Figure 8. Lost Royalty Market Opportunity 20 Figure 9. Lost Income for Artists 21 Table 2. Digital Market Capture and Potential Distribution 22 Table 3. Digital License Cost for the UK, France and Germany 24 Table 4. Digital License Cost for the United States of America 24 Figure 10. Breakup of Download License Fee by Organization 25 Figure 11. Breakup of Streaming License Fee by Organization 25 Figure 12. Total License Cost for Streaming Service 26 Figure 13. Total License Cost for Download Service 27
Abbreviations
ASCAP American Society of Composers, Authors and Publishers BMI Broadcast Music, Incorporated CRMO Collective Rights Management Organization GEMA Society for Musical Performing and Mechanical Reproduction Rights HFA Harry Fox Agency IP Intellectual property IPR Intellectual property rights ISP Internet Service Provider PRS for Music Performing Rights Society for Music SACEM Société des Auteurs, Compositeurs et Editeurs de Musique SESAC Society of European Stage Authors and Composers
4 Introduction
The Internet has revolutionized the consumption and distribution of creative content worldwide. This has produced many new opportunities and challenges. The music industry is at the forefront of the struggle to curb the impact of digital piracy by developing innovative business models in response to new distribution possibilities. Legal digital music services that provide on-demand downloads and streaming content are vital in the effort to monetize changing consumption behavior. Though the music industry is a major component of the European economy, these new services often struggle to establish digital distribution channels across national boundaries due to the currently fragmented collective rights management system. As a result, intellectual property (IP) rightsholders struggle to exploit their rights in cyberspace and potential licensees of musical repertoires are confronted with a confusing and costly framework for the clearance of intellectual property rights (IPRs). Collective rights management organizations (CRMOs) – including mechanical rights agencies and performing rights organizations - traditionally play a critical role in remunerating rightsholders and facilitating music licensing. The complexity of the identification and clearance of rights internationally has historically inhibited rightsholders from individually capitalizing on their IPRs and simultaneously presented enormous obstacles to users wishing to license these rights. CRMOs evolved on the basis that they greatly reduced the transaction costs associated with the large-scale licensing of music. However, as digital technologies present new opportunities for music distribution and rights monitoring, it is important to reflect on the current framework for collective rights management. The cost and complexity of licensing digital music services across national boundaries in Europe may be an obstacle to the growth of a highly lucrative market.
This report evaluates the economic cost of the current system for collective rights management in Europe. The music market in the USA is also briefly presented in order to provide a basis for comparison in each quantitative section of the report. This report is not a cost benefit analysis but outlines only the costs associated with the current system. The conclusions that can be drawn should be considered in light of this fact. Yet, the results suggest there is a problem that must be addressed if the framework for collective rights management is to become more in tune with the needs of European users. The report is structured as follows. Section 1 provides an introduction to transaction cost theory and the conventional rationale for collective rights management at the national level. This puts the system in historical perspective and provides a framework to assess new challenges and opportunities in light of digital technologies. Section 2 outlines these opportunities and reflects on the interplay between competition, cross-border licensing and the fragmentation of musical repertoires. The value of the European digital music market is estimated in Section 3 in terms of both the total addressable market size and the revenue opportunity for rightsholders from royalty payments. This estimate is then compared to current CRMO revenue from online sources, which suggests there is a revenue gap that is unlikely to be solely attributable to digital piracy. After calculating the overall royalty distribution efficiency of CRMOs based on data from published annual reports, the amount of lost income to artists is quantified. Finally, section 4 introduces a hypothetical case study of a digital music service in order to approximate the costs associated with licensing digital music in Europe‟s largest music markets (France, Germany and the United Kingdom). Comparison with the USA shows that Europe
5 suffers significantly higher license costs. These license costs, along with the other transaction costs associated with current collective rights management system in Europe, must be reduced in order to leverage new revenue streams from digital music.
1. Transaction Costs and Collective Rights Management
Transaction cost theory
Transaction cost economics owes its origin to Ronald Coase, who sought to make the assumptions underpinning modern economic theory more explicit (Coase 1937; 2007). The Coase Theorem describes the economic efficiency of an allocation or outcome in the presence of externalities. Founded firmly on free market principles, it assumes that private negotiations will always lead to a more efficient allocation of resources than state intervention, when there are no transaction costs. Coase himself argued, however, that economic exchange is plagued by transaction costs, which must be understood in order to mitigate their negative impact on the efficiency of contractual exchanges. New institutional economists further developed the theory, accepting the reality of transaction costs in order to understand their origins, incidence, and ramifications (Williamson 1979). Acknowledging the existence of transaction costs enables economists to hypothesize about the efficient coordination mechanisms that could minimize them (Hansen and Schmidt Bischoffshausen 2007).
Very high transaction costs may inhibit the realization of cooperation profits because if the transaction costs exceed the utility of transaction, a rational actor will not go through with it, regardless of whether both sides could profit from it. Transaction cost economics seeks to facilitate market transactions by enhancing the efficiency of the institutional arrangements that govern them. While the approach has limitations, such as ignorance of the impact of private bargaining on outcomes and the influence of state intervention and macroeconomic regulation (Hansen and Schmidt Bischoffshausen 2007), it is a useful theory to understand the collective rights management of copyright. Transaction costs arise in economic exchange because formal market transactions require the identification of partners, the communication of contractual terms, the conduction of negotiations before agreement, the drafting of contracts and the inspection and monitoring of ensuing behavior to ensure compliance with a contract (Coase 2007).
The four chronological phases of a market transaction result in four different categories of transaction costs (Cooter and Ulen 2007):
1) Search and information costs – the costs accrued when soliciting potential contracting partners, which must be identified and information about them supplied and processed. 2) Bargaining and decision costs – the costs accrued during the negotiation and conclusion of contracts, once a contracting partner is identified. The contract process is time-consuming and legal advice is expensive. 3) Enforcement costs – the costs accrued after the contract is concluded and compliance must be monitored and often legally imposed.
6 4) Adjustment costs – the costs accrued over time when unforeseen need for contractual review may arise.
These different transaction costs have a significant impact on the economic efficiency of collective rights management and their existence has strongly influenced the institutional architecture of collective rights management systems in Europe (M. Kretschmer 2005; Handke and Towse 2007; Hansen and Schmidt Bischoffshausen 2007; Riis 2011).
Transaction costs and collective rights management
The existence of transaction costs, and the economies of scale and scope attainable by the centralized management of copyright, fuelled the evolution of national monopolies for collective rights management of music in Europe. The economic function of a CRMO is founded on the notion that the mass use of copyright works creates the need for a huge number of discrete, separate licensing transactions between rightsholders and commercial users. CRMOs should both reduce transaction costs and permit higher transaction volume. The cost to rightsholders and potential license partners of the information, coordination and administration mechanisms required to conclude and enforce license agreements would be prohibitively high if done individually (Besen, Kirby, and Salop 1992). CRMOs capitalize on economies of scale because, despite having high fixed costs to establish and maintain the administrative infrastructure necessary for collective rights management, they can reduce fixed administrative costs per member on average by increasing the volume of rights clearance transactions (Handke and Towse 2007). Thus the highest possible economy of scale is achieved when the largest number of rightsholders entrust the most works to the fewest CRMOs. Many commentators suggest the decreasing average costs of CRMOs cast them as historically efficient natural monopolies (Merges 1996; Balogh 2010; Aggarwal and Walden 2009). CRMOs also capitalize on economies of scope in collective rights management, because the profitability of producing licenses can be increased when combining the rights that are to be managed (Riis 2011). The pooling of copyrighted works is justified because a single point of access minimizes search and information costs, as well as the bargaining and decision costs for both users and rightsholders. Economies of scope are achieved via the issuance of blanket license for entire musical repertoires, a common practice amongst CRMOs. Blanket licenses reduce transaction costs while simultaneously increasing the number of musical works available to users, thus increasing the value of the product offered by rightsholders from the perspective of users.
Adopting the transaction cost framework detailed above, CRMOs are believed to reduce transaction costs in the following ways (adapted from Handke and Towse 2007):
1) Search and information costs – the CRMO creates a central contact and information point to channel licenses and clarify rights clearance a. CRMO helps rightsholders with the detection of illegitimate use and the identification of licensees b. The search and information costs to users of soliciting multiple rightholders for rights clearance (especially if ownership is unknown) is reduced through a central point of contact
7 c. The complexity of ownership in many musical works would result in high search and information costs for users. CRMOs facilitate the identification and clearance of these rights. 2) Bargaining and decision costs a. The time and cost of negotiating licensing agreements is reduced because of established contractual terms and tariff rates; the application of uniform conditions confers legal certainty on all parties involved (reduces costs of recourse to legal advice) b. Issuance of blanket license – users allotted bundles of rights without need for specification about works in repertoire - granted for period of time without individual utilization procedure becoming crucial to determining user fee c. Costs are reduced because users and rightholders only need to deal with one contractual partner (rather than multiple) 3) Enforcement costs a. Recording usage and administrative facilitation of payment handling (royalty collection and distribution) reduces costs b. Repetitive, specialized activity of enforcing unauthorized users to comply reduces legal enforcement costs 4) Adjustment costs a. Repetitive activity and experience with adjusting contractual relationships enables CRMO to reduce costs in favour of rightholders while also facilitating conclusions of negotiations and contracts for users
By reducing transaction costs and increasing the number of transactions, CRMOs increase the revenue opportunities for rightsholders and also lower costs associated with rights clearance to users of copyrighted musical works at the national level. However, the development of digital technologies and the harmonization of European markets pose considerable challenges to this organizational framework. Digital music services on the Internet exemplify the complexity of this shift. As the consumption of music in Europe increasingly assumes digital forms, there is a need to adapt regulatory frameworks so that legitimate music services are not hindered by the complexity and cost of multi-territory licensing.
2. The Challenges and Opportunities for Collective Rights Management in Europe
Recent interest on the issue of multi-territory licensing has spawned numerous studies on the interplay between competition and the efficiency of collective rights management (KEA 2006; European Parliament 2009; European Commission 2010; GESAC 2011). While there have also been several positive developments in collective rights management, such as the CISAC decision in 2008, the current cost and complexity of multi-territory licensing in Europe is still an obstacle to the creation of legitimate digital music services. If the impact of digital piracy on industry revenue is to be mitigated, convenient and cost-effective access to legal music services is a vital step in revitalizing the music industry in Europe by adapting to the changing needs of consumers. This requires the ability to easily license rights across borders in the European Union. There is a lack of competitive pressure on CRMOs as
8 a result of their control of copyright at the national level (Day 2010; Balogh; Conley 2008; Katz 2005). However, increased competition amongst CRMOs regarding the EU-wide clearance of rights also risks fragmenting musical repertoires (Gervais and Maurushat 2003). In order to get a more granular understanding of the transaction costs associated with the current market practices of CRMOs in Europe, the transaction cost framework introduced above is applied to the collective rights management of digital music. This explores the socio-economic costs of collective rights management across multiple markets with fragmented musical repertoires. Multiple studies analyze the problems with the current system in light of the possibilities afforded by technology (Guibault and Gompel 2006; Battisti 2001; Conley 2008; Day 2010; Hansen and Schmidt Bischoffshausen 2007; M. Kretschmer 2005; Maloney 2007; Mutoro et al. 2007). This section outlines the potential impact of digital technologies on transaction costs. Then the cross-border licensing of rights and the impact of repertoire fragmentation is discussed in greater detail.
Technologies and Transaction Costs
Digital technologies, such as automated systems of rights clearance, enable new opportunities for the monitoring and enforcement of copyright. Commentators frequently remark how the administrative bureaucracy of CRMOs creates cost that would not occur if technologies were adopted by artists themselves (Conley 2008; Battisti 2001; Hansen and Schmidt Bischoffshausen 2007; Maloney 2007; Mutoro et al. 2007). There is a large literature on the positive and negative aspects of this technology (Barron 2006; Consalvo 2003; Foroughi, Albin, and Gillard 2002; Gillespie 2006; McCourt and Burkart 2003; Nill and Geipel 2009). The purpose of this section is not to assess the social and political impact of this technology, but rather to briefly outline how digital technologies impact some of the costs associated with the four categories of transaction costs:
1) Search and information costs a. The ease and cost of copying and distribution in digital networks means that search and information costs in the case of mass use and detection of illicit uses is enormous b. Automated rights clearance mitigates some of these costs by automatically registering and blocking illegal uses of works c. Digital technologies can reduce the costs of registration and using music works as well as the royalty distribution process by introducing automated services d. The complexity of ownership in many multimedia works is facilitated by the automatic identification of relevant rightsholders in an automated rights clearance system e. Technologies can reduce search and information costs associated with soliciting rightsholders for licenses, but works must be registered in a central database for this to be effective f. Digital technologies do not reduce the impact of informational asymmetries between rightsholders and potential users 2) Bargaining and decision costs
9 a. Technologies can reduce the need for geographical proximity between CRMOs and users of musical works by enhancing the communication channels available to both b. Blanket licenses cannot be granted for works using automated rights clearance unless they are pooled into a central database c. If works are registered into a single database, a single point of access for users and rightsholders renders the system more efficient; this benefit is mitigated if rightsholders all separately monitor and enforce their rights with separate automated systems d. Digital technologies do not reduce potential for opportunistic behavior among users and rightsholders with different bargaining power 3) Enforcement costs a. The individual registration of musical works using automated rights clearance enables the automatic monitoring and invoicing of uses where the payment mirrors precisely the intensity of use b. Rather than depending on costly litigation to retroactively punish illegal use, automated rights clearance pre-emptively prohibits illegitimate use by blocking content 4) Adjustment costs a. Automated rights clearance technologies can be fine-tuned according to new use parameters
Some bargaining and decision costs continue in the digital environment, but the relative cost of all other collective administration procedures is reduced. Digital technologies present a valuable opportunity to reduce search and information, enforcement and adjustment transaction costs in collective rights management online. Most significantly, cross-border licensing is significantly more efficient under an automated system that could identify and clear rights instantaneously across multiple jurisdictions (Maloney 2007; Mutoro et al. 2007; Day 2010). However, this requires that works continue to be registered in central databases in order to capitalize on the cost reductions while retaining large enough repertoires to be attractive to commercial users. This is the rationale behind recent initiatives like the Global Rights Database, a partnership between major music publishers, CRMOs, and distributors to facilitate cross-border rights clearance. The importance of a centralized point of access underlines the detrimental influence of repertoire fragmentation when managing cross-border license arrangements.
CRMOs have evolved in Europe due to the economies of scale and scope this offers for the negotiation of licenses with users and the ensuing administration and enforcement of copyright (Guibault and Gompel 2006; M. Kretschmer 2005). The creation of a single channel for the clearance of a large repertoire of rights is considerably more beneficial to users than the existence of a multitude of different organizations each representing a share of artists. Though rightsholders may be able to use automated systems of rights clearance to monitor and license their rights more effectively in a number of cases, commercial users still benefit greatly from the centralized point of access provided by a CRMO. If any content management system is to work, it requires a centralized transnational database of musical works that overcomes some of the problems associated with fragmented repertoires. If collective rights management continues to operate at the national level, the transaction cost
10 reductions that justify CRMOs will decline as digital technology evolves. CRMOs must be able to assume EU-wide scope in their licensing operations if these advantages are to be preserved (Riis 2011).
Balancing Competition and Repertoire Fragmentation
The collective management of digital rights is difficult to justify on a national basis, and multi-territorial licenses are needed to continue to exploit the economies of scale that collective licensing achieves (DG INFSO and DG MARKT 2009). The bargaining and decision costs associated with license agreements are propounded with every organization involved. Multiple tariff fees and restrictions apply to each individual CRMO repertoire as well. It is not difficult to imagine the complexity and cost of licensing a digital music service in multiple European markets when separate license agreements must be negotiated with each CRMO. Multi-territorial licensing requires the cross-border administration of both the granting of licenses to commercial users and the distribution of royalties to rightsholders. Guibault and Gompel argue that these two services currently „do not function in an optimal manner and hamper development of innovative markets for the provision of online music services‟ (Guibault and Gompel 2006). The recent call for licensing on an EU-wide basis has been widespread. This is because „the creation of attractive online content and services and its free circulation inside the EU and across its borders are fundamental to stimulate the virtuous cycle of demand‟ (European Commission 2010). By making cross-border licensing easier, digital music services will proliferate and digital consumption of music will be increasingly monetized. Section 2 of this report estimates the potential demand for these services while section 3 quantifies the license cost that can be a major obstacle in cross-border licensing.
The lack of competition between CRMOs may have effects on administrative efficiency. Rightsholders are currently contractually restricted to a single CRMO, inhibiting their ability to choose the most cost-effective administration of their rights. This is justified because if multiple CRMOs administered the same rights there would be substantial redundancies and inefficiencies. However, insulation from competition results in no market pressure exerted on CRMOs to become more efficient. Members cannot directly compare the results of different organizations and even if they could a high degree of information asymmetry exists about the processes on which these decisions could be based. There is also an opportunity cost for greater distribution, since CRMOs often refuse licenses to commercial users situated outside of their given territory.
Online clearinghouses for copyrighted works – also labeled „one-stop-shops‟ - have been proposed as a potential solution. Economic theory suggests that competition amongst CRMOs in terms of the quality and cost of collective rights management will improve their efficiency. The system would permit rightsholders to choose a single organization to administer their rights across multiple nations in Europe. This formed the basis for the recent CISAC decision. The European Commission argued that CRMOs should compete based on service quality and administration costs, presenting the recent IFPI Simulcasting Agreement in the USA as a prototype for efficient competition in collective rights management (Riis 2011). This agreement restricts competition amongst American CRMOs to the level of administrative fees charged to
11 members. The approach is believed to increase transparency and good governance in these organizations because rightsholders will invest resources in choosing the most cost-effective CRMO. The ability to withdraw rights from a CRMO will force them to adapt business practices and efficiently manage their repertoires online in order to capitalize on new and valuable revenue streams. This system could mitigate some of the inefficiencies associated with cross-border licensing but might also stimulate increased fragmentation of repertoires as rightsholders withdraw their copyrighted works from inefficient organizations. Unfortunately, major music publishers have routinely rejected the development of such a system and refuse to grant their rights to a one-stop-shop.
Repertoire fragmentation results from competition amongst CRMOs due to the two interrelated interest that must be juggled in collective rights management: those of commercial users and those of rightsholders (Riis 2011). For rightsholders, high quality of service implies that licensing yields the highest possible return on their copyrighted works, while retaining low administration costs in the monitoring and enforcement of these works. For commercial users the quality of service relies on the size of the repertoire and the cost of the license. The issue is that users such as a digital music service will seek the lowest license price with the largest possible repertoire. Since the price determines the amount of royalties allocated for distribution to rightsholders, rightsholders who can choose amongst various CRMOs may feel they are getting insufficient payment for their work. If these members withdraw their rights, the repertoire shrinks and the license becomes less valuable. This reduces a commercial user‟s willingness to pay and thus these two levels of competition complicate the collective rights management landscape (Riis 2011). The European Parliament found that the CISAC decision ultimately increased legal uncertainty in the licensing landscape, created fewer and stronger CRMOs and fragmented the musical repertoire, leading to less cultural diversity in the music sector (European Parliament 2009). If a high degree of repertoire fragmentation exists, most commercial users will not license small, specialized repertoires. This is because these are only needed in niche markets and most copyright users can supply attractive services without them. In an efficient market, the aggregation of smaller repertoires with publishers or societies overcomes this problem. This tension exhibits the trade- off between the efficiency gains, which result from competition at the level of rightsholders, and the negative impact of repertoire fragmentation. Since collective rights management aims to reduce transaction costs, the fragmentation of repertoires on the supply side must be prevented in favour of the commercial users who generate demand (Riis 2011). This is a difficult balance that must be achieved to render the collective rights management of digital music more efficient.
3. The Value of Digital Music in Europe
Is Europe capitalizing on the revenue opportunities of the burgeoning market for digital music services within its borders? To answer that question it is necessary to estimate the size of the current digital music market. This estimate is then compared to the current revenues generated by CRMOs from online sources. While there may be multiple reasons for the disparity between potential royalty revenue from digital music and actual revenue, it is reasonable to assume that any major difference is partly the result of the current collective rights management system. Digital piracy is
12 certainly significant, but it may be just as much a symptom of the current system as it is a cause of its current challenges. Without cost-effective and convenient legal alternatives to access digital music, illegal downloading is sure to remain (BIS 2009). It is not within the scope of this report to analyze the cause or impact of digital piracy. Substantial academic attention has already been paid to its nature, scope and impact (Cenite et al. 2009; Kretschmer, Klimis, and Wallis 2001; Marshall 2004; Smiers 2000; Yar 2005). Rather, this section quantitatively estimates the value of the European digital music market in order to compare it against current revenues extracted from online sources by CRMOs.
The value of the European digital music market
This section estimates the total addressable market for digital music services in Europe. This is then used to quantify the value of the royalty market that CRMOs could be extracting from this sector for rightsholders. See Appendix 1, section „A. Digital Music Market Estimate‟ for a discussion of the methodology and its limitations. The following table presents the estimate for total addressable market and royalty market in different European countries and the United States (see next page):
13 Table 1. Total and Royalty Market Estimate for Digital Music
COUNTRY DIGITAL MUSIC MARKET DIGITAL ROYALTY MARKET European Union (27) 5,016,677,188.32 € 401,334,175.07 € France 995,947,390.11 € 79,675,791.21 € Germany 894,293,509.40 € 71,543,480.75 € United Kingdom 771,542,940.02 € 61,723,435.20 € Spain 466,003,642.49 € 37,280,291.40 € Italy 325,002,635.58 € 26,000,210.85 € Netherlands 294,458,656.12 € 23,556,692.49 € Poland 195,316,791.28 € 15,625,343.30 € Sweden 131,913,850.38 € 10,553,108.03 € Belgium 98,902,584.21 € 7,912,206.74 € Denmark 97,920,195.96 € 7,833,615.68 € Norway 97,166,069.56 € 7,773,285.56 € Finland 76,459,931.18 € 6,116,794.49 € Hungary 71,373,681.16 € 5,709,894.49 € Romania 69,306,185.34 € 5,544,494.83 € Greece 68,915,933.19 € 5,513,274.66 € Austria 65,417,873.33 € 5,233,429.87 € Portugal 60,388,993.96 € 4,831,119.52 € Czech Republic 49,962,163.61 € 3,996,973.09 € Bulgaria 48,275,339.20 € 3,862,027.14 € Slovakia 37,216,319.90 € 2,977,305.59 € Ireland 36,657,513.25 € 2,932,601.06 € Lithuania 24,568,030.88 € 1,965,442.47 € Latvia 19,623,367.20 € 1,569,869.38 € Croatia 19,517,759.48 € 1,561,420.76 € Slovenia 16,972,943.04 € 1,357,835.44 € Estonia 8,522,364.69 € 681,789.18 € Luxembourg 8,485,740.02 € 678,859.20 € Macedonia, FYR 7,975,207.67 € 638,016.61 € Iceland 5,069,912.27 € 405,592.98 € Cyprus 4,069,275.98 € 325,542.08 € Malta 3,094,262.43 € 247,540.99 €
United States of America 3,245,774,905.50 € 259,661,992.44 €
The digital music market column is the final estimate for the total addressable market in digital music services in each country. This is effectively the value of digital music to end-user services that provide European consumers access to musical repertoires. Each country estimate consists of the number of people accessing content online and the amount that they would pay for it. The royalty market column is the nominal 8% royalty fee deducted from consumer payments by CRMOs for their members. The results show a significant market for digital music in Europe (see figure 3). The relative size of the markets is not surprising. France, Germany, and the United Kingdom are repeatedly calculated as the largest European markets for music by other
14 industry estimates (IFPI 2010). It is important to note that, though the top three European markets are significantly larger than the others, there is still a valuable revenue opportunity for rightsholders in other markets. The USA is without a doubt the largest single market for music in the world. A comparison of this market to Europe‟s three largest markets gives an idea of their relative sizes at a glance (see figure 1). These markets represent the most valuable opportunity to generate greater revenue for artists from royalty payments (see figure 2).
Figure 1. The Total Addressable Digital Music Market (in Euro millions)
Figure 2. The Digital Royalty Market (in Euro millions)
15 Figure 3. Total Addressable and Royalty Market for Digital Music
16 Comparing estimated market value with actual revenue
Comparing the estimated royalty market value with current revenues that CRMOs extract from online sources demonstrates how efficiently digital music is monetized. Current CRMO licensing revenues from online sources are based on Annual Reports from 2008-2009. This was the most recent year where a broad selection of Annual Reports was available. It is also directly comparable to market estimates compiled for the same year. See the Appendix 1, section „B. Comparing Estimated Market Value with Actual Revenue‟ for further details on the methodology. The results show a great disparity between current online royalty revenues and potential revenue from online sources according to the estimate (see figure 4).
Figure 4. Potential and Actual CRMO Digital Royalty Revenue (in Euro millions)
PRS for Music in the United Kingdom is the most effective CRMO in terms of capturing value from online sources. It has managed to capture almost double the revenue that GEMA has in Germany despite operating in a smaller total digital music market. This suggests that more effective steps are being taken by PRS for Music‟s management in order to capitalize on new revenue opportunities. This is evident in steps such as the International Copyright Enterprise (ICE) initiative, where PRS for Music has collaborated with Sweden‟s STIM to develop a consolidated digital data platform regarding who has the mandate to license in which territory, a significant
17 step in streamlining pan-European rights clearance processes. PRS for Music has captured over double the average percentage of the digital royalty market captured by all other individual CRMOs (see figure 5).
Figure 5. Royalty Market Capture (percentage)
KODA in Denmark and STIM in Sweden have also managed to capture a larger percentage of the digital royalty market. This figure is distorted for KODA primarily because of a single deal it has struck with Internet service provider TDC‟s music subscription service. However, it is critical to recognize that even the most effective CRMO in Europe (PRS for Music) captures less than 50% of the potential market. More importantly, the average across the markets included in the study was a royalty market capture percentage of a mere 19.12%. This suggests either that digital music services in Europe are not generating sufficient royalties for CRMOs or that CRMOs are inefficient in capturing royalty payments from online sources. A combination of both is likely to be inhibiting the growth of digital music. Current multi-territorial licensing practices in Europe are stifling the expansion of legitimate music services, which in turn leads to inability by CRMOs to capture a larger percentage of the potential market.
Royalty capture in the US by the four major CRMOs (ASCAP, BMI, SESAC, and HFA) is more effective than the European average. Comparison with the three major
18 European markets shows that US CRMOs are generating more money from digital music than all three markets put together (see figure 6).
Figure 6. Digital Music Royalty Revenue
This is unsurprising in due to the relative size of the US music market. After all, the total US digital music market is also larger than all three major European markets put together. However, the US still scores well above the average percentage of market capture compared to European CRMOs. A total of 23.26% royalty market capture puts it more than 4 percent points above the European average.
Figure 7. Royalty Market Capture as Percent of Potential Royalty Market
19 These results show there is a significant amount of potential royalty revenue from online sources that is not being generated. In Europe, in the three major markets alone, it amounts to over 145 million Euro in royalties for a single year.
Figure 8. Lost Royalty Market Opportunity (in Euro millions)
The lost revenue for artists is quantified using the lost royalty market figures. The calculation is based on the distribution efficiency of CRMOs in relation to overall licensing revenue activities. Distribution efficiency is calculated by comparing the total revenues collected in a given year to those actually distributed to members. See Appendix 1, section „C. Royalty Distribution Efficiency‟ for further details about the methodology. Assuming the same distribution efficiency for each CRMO from online sources as they exhibit in their overall distribution efficiency ratios, the lost income to artists from each European market can be calculated (see figure 9).
20 Figure 9. Lost Income for Artists (in Euro millions)
The evidence suggests there is a large market opportunity in digital music services that is not being capitalized on. The result is a substantial loss of income to artists from European markets. It may be that CRMOs are unable to extract revenue from online sources because current consumption of digital music is not effectively monetized. The impact of digital piracy no doubt plays a role in this lost revenue. Yet the size of the difference between estimated potential revenues and current revenues suggests something else may be inhibiting the capture of revenue from online sources. Naturally, if there is no revenue generated from digital music consumption, there can be no royalty payments. European consumers may lack sufficient access to legitimate and convenient digital music services. The growth of legal digital music services has been substantial over the past few years. However, they are often constrained to working in specific markets due to the cost and complexity of pan-European licensing arrangements. The inefficiency of the current system based on national jurisdictions may be stifling growth in this sector, contradicting some of the central tenets of the European Union to promote competition and free trade within the region.
21 Table 2. Digital Market Capture and Potential Distribution
United Czech France Kingdom Germany Austria Denmark Belgium Finland The Netherlands Sweden Republic PRS for SACEM Music GEMA AKM KODA SABAM TEOSTO BUMA/STEMRA STIM OSA Potential Online Royalty Market (Euro)1 79,675,791.21 61,723,435.20 71,543,480.75 5,233,429.87 7,833,615.68 7,912,206.74 6,116,794.49 23,556,692.49 10,553,108.03 3,996,973.09 Current Online Revenues (Euro) 9,301,000.00 28,500,897.67 11,381,000.00 384,000.00 2,782,000.00 1,370,000.00 1,069,361.00 2,207,000.00 2,605,238.36 230,146.28 Lost Royalty Market Opportunity (Euro)2 70,374,791.21 33,222,537.54 60,162,480.75 4,849,429.87 5,051,615.68 6,542,206.74 5,047,433.49 21,349,692.49 € 7,947,869.67 3,766,826.80
Market Capture3 11.67% 46.18% 15.91% 7.34% 35.51% 17.32% 17.48% 9.37% 24.69% 5.76% Net Distribution Ratio4 85.34% 88.98% 92.12% 92.31% 90.79% 83.90% 89.37% 96.16% 90.83% 74.28%
Lost Income for Artists (Euro)5 60,060,263.73 29,562,791.81 55,419,612.42 4,476,409.94 4,586,357.50 5,489,082.19 4,510,707.20 20,529,672.40 € 7,219,308.59 2,797,958.46
1 Potential online royalty market is drawn from the estimate above. Current online Revenues are drawn from published annual reports. 2 Lost market opportunity represents the difference between the potential online royalty market and the current online revenues. 3 Market capture percentage is calculated based on the share of the potential royalty market made up by current online revenues. 4 Net distribution ratios are calculated according to total royalties collected and total royalties distributed. See appendix for further details. 5 Lost income for artists is calculated by applying the net distribution ratio to the figure for lost market opportunity.
22 4. The Cost of Licensing Digital Music
The cost of licensing music for digital consumption across multiple markets is a critical factor in determining the profitability of legal digital music services. There is little incentive to establish a legal service if license maintenance costs are prohibitive and transaction costs are high because repertoires are fragmented among multiple CRMOs. The transaction costs of music licensing have already been discussed above. The economic cost of licensing digital music in several markets is now considered. A large number of innovative business models exist for digital music distribution. Download services such as the iTunes a la carte model, on-demand streaming services such as Spotify based on subscription revenues, on-demand streaming services such as Grooveshark that rely on advertising revenue, and others that promote music discovery such as Musicovery. The list of services is long; IFPI placed the number of legal music services online at 400+ in 2010 (IFPI 2010). So there is no shortage of business models to monetize digital consumption. Yet these services consistently come up against licensing barriers that constrain them to specific markets. This prohibits them from capitalizing on the increasing returns to adoption and economies of scale and scope typical in digital distribution services with high fixed costs and variable costs of reproduction tending towards zero.
In order to estimate the license costs of a digital music service, a hypothetical case study is applied to the three largest European markets (France, Germany and the UK). The licensing fee of the largest CRMO in each market is used. Thus SACEM, GEMA and PRS for Music represent France, Germany and the UK respectively. This case study quantifies the license costs of two of the most prevalent digital distribution models: a la carte downloads and on-demand streaming. The case study evaluates the license costs of either type of service based on an estimate of 1,000,000 users a day (a conservative estimate relative to the size of these markets). For further information on the assumptions underpinning the case study, the methodology for calculating license costs and the limitations of these estimates, see Appendix 1, section „D. Digital License Costs‟.
Comparison to the USA market is useful as it provides a benchmark license cost for a very large music market. Also, a similar number of major licensing agencies operate in this market as exist in the major European markets. Mechanical rights in the USA are administered primarily by the Harry Fox Agency (HFA). The three largest performing rights organizations are ASCAP, BMI and SESAC. The license costs were calculated at a monthly rate and multiplied to get an estimate of license fee per year. This was done for each CRMO in the study.
23 Table 3. Digital License Cost for the UK, France and Germany
EUROPE (Major Markets)
Country United Kingdom France Germany Collective Rights Management Organization PRS For Music SACEM GEMA
Yearly License Cost (downloading) 2,376,000 € 2,376,000 € 2,970,000 €
Yearly License Cost (streaming) 2,339,656 € 2,339,656 € 2,339,656 €
TOTAL LICENSE COST (downloading) 7,722,000 €
TOTAL LICENSE COST (streaming) 7,018,967 €
Table 4. Digital License Cost for the United States of America
Country USA
Collective Rights Management Organization ASCAP BMI SESAC HFA
Yearly License Cost (downloading) 533,783 € 533,783 € 339,486 € 5,887,791 €
Yearly License Cost (streaming) 465,847 € 82,817 € 1,089,976 € 2,156,700 €
TOTAL LICENSE COST (downloading) 7,294,844 €
TOTAL LICENSE COST (streaming) 3,795,341 €
In Europe, all of the CRMOs have roughly the same license costs per market and repertoire. This is most likely because each CRMO administers both performing rights and mechanical rights and they all operate according to similar license fee structures. Unfortunately, detailed information regarding the streaming fee license structure was not available for GEMA and SACEM. These were rates based on those published by PRS for Music. In the USA, a majority of digital royalties are taken by Harry Fox Agency (HFA) because this is the only of the four CRMOs that administers mechanical rights. The other three (ASCAP, BMI and SESAC) are performing rights organizations.
24 Figure 10. Breakup of Download License Fee by Organization
DE, FR, UK USA
Figure 11. Breakup of Streaming License Fee by Organization
DE, FR, UK USA
The costs of the licenses in the USA and three major European markets fluctuate significantly for streaming services because they operate according to different license fee structures. In Europe, the license costs are generally high. An on-demand streaming service with 1,000,000 daily active users would cost over 7,000,000 € in license costs per year alone. This does not include the administration and maintenance costs of the service. In order to generate sufficient revenue to make running such a service worthwhile, subscription charges would have to be quite high. This may be counterproductive and inhibit the widespread use of such a service, further reducing the amount of revenue that can be captured by digital music consumption. The cost of licensing a streaming service in Europe‟s three major markets compared to the USA represents an increase of 85%. This massive difference is primarily due to the different licensing fee calculation schemes used. These are based on aggregate hours of music consumed rather than a per track royalty rate (used by PRS for Music). BMI is an interesting case because they have significantly lower license fees. This is because royalty rates are calculated according to „music page impressions‟ for this service (see Appendix for further details), a system that reduces the total license cost. These costs are as accurate as possible within the information constraints. All of the
25 CRMOs included in this study were contacted regarding the license fee applicable to a digital music service with the parameters used in this model. PRS for Music supplied the only response, which summarized the information already available on their website pertaining to generic streaming license fees.
Figure 12. Total License Cost for Streaming Service (in Euro 000s)
Total download license rates are much closer for the USA and the European markets than for streaming. However, a European music service still suffers a license charge of over 400,000 € more than a similar service would experience in the USA per year (see figure 13).
26 Figure 13. Total License Cost for Download Service (in Euro 000s)
This evidence suggests that the licensing fee structure for digital music services is significantly more costly in Europe than in the USA. This is particularly acute in the case of streaming services, where the licensing system based on aggregate hours of music consumed seems more cost-efficient for music services than one based on per- track royalty rates. Moreover, though American CRMOs clearly published their digital licensing rates and provided license fee cost calculation matrixes, similar transparency concerning the potential license costs was unavailable for most of the European CRMOs. This opaqueness regarding digital license costs may cause a higher degree of uncertainty in European markets, where insufficient information about the cost of licenses undermines the ability to assess the viability of establishing a digital music service in the first place.
Conclusion
The identification and clearance of music copyright is a complex process that suffers from high transaction costs when managed by individual rightsholders. The pooling of music copyright in collective rights management organizations has historically reduced these costs, while providing a larger, and thus more attractive, repertoire to commercial users via the issuance of blanket licenses. This is because national monopolies in collective rights management enjoy economies of scale and scope in license negotiation, monitoring, enforcement, royalty collection and distribution processes. However, the development of digital distribution channels and automated clearance technologies for music copyright across multiple borders presents a number of challenges to the current system. As music consumption increasingly takes digital forms, Europe must modernize its collective rights management system in response. Digital music services are at the forefront of monetizing new consumption behavior
27 and curbing the impact of digital piracy by providing legitimate and convenient alternatives. These services, and others, require an effective and sophisticated multi- territory licensing scheme in order to capitalize on these developments and promote competition in the digital music sector.
CRMOs have not sufficiently adapted their business models in light of these changes and artists‟ restrictive contracts inhibit their ability to choose between various CRMOs in Europe. The recent call for greater competition amongst CRMOs in relation to administrative fees and the pan-European clearance of rights acknowledges there is indeed a problem. This is an important step, but any solution must be wary of the problems posed by repertoire fragmentation in Europe as well as the high transaction costs that result. It must also recognize that, while digital technologies render many facets of collective rights management more efficient, a centralized point of access for commercial users to clear multiple rights simultaneously is essential. Otherwise the search, information, bargaining and decision costs associated with these transactions will remain prohibitively high.
The results of this study show there is a very large market for digital music in Europe. As broadband penetration increases and competition amongst Internet Service Providers (ISPs) in Europe enhances access to the Internet, this market will grow rapidly. The market is valued at over 2.6 billion Euro in France, Germany and the UK alone. This constitutes a potential royalty market of 212 million Euro. Yet, only 49 million Euro in royalty revenue from online sources was collected by SACEM, GEMA and PRS for Music. Moreover, the majority of this revenue was collected by PRS for Music in the UK, which is the smallest of the three markets but by far the most efficient CRMO for the collection of royalties from online sources. Other nations in Europe, though significantly smaller, still represent a valuable market opportunity. The disparity between potential and actual revenue for all of the European markets suggests there are problems with the current collective rights management system. The percentage of the royalty market captured in the USA was over 4% more than the European average. While a large part of licensing in the USA is not done through CRMOs, these organizations are still capturing more value from the digital than their counterparts in Europe. Naturally, royalty revenue cannot be collected if there are no royalties to collect. The lack of sufficient access to legitimate digital music services and the impact of digital piracy are responsible for a proportion of this gap between actual and potential revenue. However, more efficient multi- territorial rights clearance processes are needed to stimulate the growth of digital music services. The cost of license agreements for a digital music service in three European markets was estimated to be 85% higher for streaming and 6% higher for downloading services than in the USA. This estimate also does not capture the higher transactions costs of negotiating licenses across multiple organizations operating in different national markets.
The current structure of collective rights management is inefficient at extracting value from the digital music market. Artists do not receive sufficient royalties, commercial users suffer from high transaction costs and prohibitive license fees, and individual consumers suffer from insufficient access to legal alternatives to digital piracy. New solutions should be sought to capitalize on the market opportunity of digital music services in light of increasing broadband penetration and changing consumer patterns in Europe. This should help unlock the potential of digital music markets, consolidate
28 the single European market, increase competition in the administration of collective rights, and provide better services to European consumers.
29 References
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30 European Parliament. 2009. “Collecting Societies and Cultural Diversity in the Music Sector”. http://www.uni-muenster.de/Jura.itm/hoeren/INHALTE/ publikationen/hoeren_veroeffentlichungen/Collecting_Societies_and_Cult ural_Diversity_in_the_Music_Sector.pdf Foroughi, A., M. Albin, and S. Gillard. 2002. “Digital rights management: a delicate balance between protection and accessibility.” Journal of Information Science 28 (October 1): 389-395. doi:10.1177/016555150202800504. Gervais, D., and A. Maurushat. 2003. “Fragmented Copyright, Fragmented Management: Proposals to Defrag Copyright Management.” Can. JL & Tech. 2: 15. GESAC (European Grouping of Societies of Authors and Composers). 2011. “Position Paper on Certain Aspects of Collective Management of Copyright in the Single European Digital Music Market”. http://www.gesac.org/ eng/positions/gestioncollectivedownload/101VDH10.pdf Gillespie, T. 2006. “Designed to ‘effectively frustrate’: copyright, technology and the agency of users.” New Media & Society 8 (August 1): 651-669. doi:10.1177/1461444806065662. Guibault, L., and S. Gompel. 2006. “Collective Management in the European Union.” Collective Management of Copyright and Related Rights. Kluwer Law International, Alphen aan den Rijn: 117–52. Handke, C., and R. Towse. 2007. “Economics of Copyright Collecting Societies.” International Review of Intellectual Property and Competition Law 38 (8): 937–957. Hansen, Gerd, and Albrecht Schmidt Bischoffshausen. 2007. “Economic Functions of Collecting Societies-Collective Rights Management in the Light of Transaction Cost-and Information Economics.” IFPI (International Federation of the Phonographic Industry). 2010. IFPI Digital Music Report 2010, London, IFPI.
31 Merges, Robert. 1996. “Contracting into Liability Rules: Intellectual Property Rights and Collective Rights Organizations.” California Law Review 84 (5). http://papers.ssrn.com/sol3/Papers.cfm?abstract_id=11497#. Mutoro, M., L. Donoso, E. Skúladóttir, and D. Stefanov. 2007. “COLLECTIVE RIGHT MANAGEMENT IN THE DIGITAL ENVIRONMENT.” Nill, A., and A. Geipel. 2009. “Sharing and Owning of Musical Works: Copyright Protection from a Societal Perspective.” Journal of Macromarketing 30 (November 15): 33-49. doi:10.1177/0276146709352217. Riis, T. 2011. “Collecting societies, competition, and the Services Directive.” Journal of Intellectual Property Law & Practice 6 (7): 482. Rochelandet, F. 1996. “Are copyright collecting societies efficient?” Smiers, Joost. 2000. “The Abolition of Copyright.” International Communication Gazette 62 (5): 379-406. Williamson, Oliver. 1979. “Transaction-Cost Economics: The Governance of Contractual Relations.” Journal of Law and Economics 22 (2): 233-261. Yar, M. 2005. “The global ‘epidemic’ of movie ‘piracy’: crime-wave or social construction?” Media, Culture & Society 27 (September 1): 677-696. doi:10.1177/0163443705055723.
32 Appendix 1
This appendix describes the methodologies used in various sections of the report.
A. Digital Music Market Estimate
The total addressable market for digital music services is the economic value of the market to digital music providers based on consumer expenditure. This figure estimates the potential revenue for music service providers, not for CRMOs (who collect a smaller percentage for royalty distributions).
The estimate in this report is based on data compiled from Eurostat. The total number of digital music consumers is estimated using two variables:
Total population on 1 January 2008 - (S)
Percentage of population using the Internet to download, stream or purchase content in 2008 - (I)
The total number of digital music users is then calculated:
Digital Content Users (CU) = Total population (S) x percentage of population using Internet for content (I)
The total addressable market is calculated by multiplying the number of digital content users by an estimate of yearly expenditure on music. The yearly expenditure of each individual on music is calculated based on a European average of 3 Euro per month. This benchmark is adjusted for each nation according to annualized purchasing power parities for 2008 (Eurostat) and the historical average of exchange rates for 2008 (Oanda).
Total population (S) x percentage of population using Internet for content (I) x estimate of individual yearly expenditure (W)
TAM (Total Addressable Market) = SIW
The proportion of revenues from total music expenditures captured by CRMO activities is calculated by multiplying the total market with the percentage of revenue collected by CRMOs as a royalty fee for members. The digital royalty market was calculated as 8% of the total addressable market for digital music.
Digital Royalty Market = TAM(0.08)
This figure gives the potential collection sum for CRMOs in a digital market that can be compared to their current revenues from online sources. It thus provides a measure of missed opportunities in online music services, when the limitations of the data are taken into account.
33 Individuals accessing Estimated creative content on Monthly Estimated Yearly Country Population Internet Content Users Expenditure Expenditure Total Addressable Market Royalty Market (at 8%) European Union (27) 497,686,229 28% 139,352,144.12 3.00 € 36.00 € 5,016,677,188.32 € 401,334,175.07 € Belgium 10,666,866 23% 2,453,379.18 3.36 € 40.31 € 98,902,584.21 € 7,912,206.74 € Bulgaria 7,640,238 21% 1,604,449.98 2.51 € 30.09 € 48,275,339.20 € 3,862,027.14 € Czech Republic 10,381,130 19% 1,972,414.70 2.11 € 25.33 € 49,962,163.61 € 3,996,973.09 € Denmark 5,475,791 36% 1,971,284.76 4.14 € 49.67 € 97,920,195.96 € 7,833,615.68 € Germany 82,217,837 29% 23,843,172.73 3.13 € 37.51 € 894,293,509.40 € 71,543,480.75 € Estonia 1,340,935 25% 335,233.75 2.12 € 25.42 € 8,522,364.69 € 681,789.18 € Ireland 4,401,335 19% 836,253.65 3.65 € 43.84 € 36,657,513.25 € 2,932,601.06 € Greece 11,213,785 19% 2,130,619.15 2.70 € 32.35 € 68,915,933.19 € 5,513,274.66 € Spain 45,283,259 31% 14,037,810.29 2.77 € 33.20 € 466,003,642.49 € 37,280,291.40 € France 64,007,290 38% 24,322,770.20 3.41 € 40.95 € 995,947,390.11 € 79,675,791.21 € Italy 59,619,290 15% 8,942,893.50 3.03 € 36.34 € 325,002,635.58 € 26,000,210.85 € Cyprus 789,269 16% 126,283.04 2.69 € 32.22 € 4,069,275.98 € 325,542.08 € Latvia 2,270,894 33% 749,395.02 2.18 € 26.19 € 19,623,367.20 € 1,569,869.38 € Lithuania 3,366,357 32% 1,077,234.24 1.90 € 22.81 € 24,568,030.88 € 1,965,442.47 € Luxembourg 483,799 42% 203,195.58 3.48 € 41.76 € 8,485,740.02 € 678,859.20 € Hungary 10,045,401 30% 3,013,620.30 1.97 € 23.68 € 71,373,681.16 € 5,709,894.49 € Malta 410,290 29% 118,984.10 2.17 € 26.01 € 3,094,262.43 € 247,540.99 € Netherlands 16,405,399 46% 7,546,483.54 3.25 € 39.02 € 294,458,656.12 € 23,556,692.49 € Austria 8,318,592 20% 1,663,718.40 3.28 € 39.32 € 65,417,873.33 € 5,233,429.87 € Poland 38,115,641 21% 8,004,284.61 2.03 € 24.40 € 195,316,791.28 € 15,625,343.30 € Portugal 10,617,575 19% 2,017,339.25 2.49 € 29.93 € 60,388,993.96 € 4,831,119.52 € Romania 21,528,627 16% 3,444,580.32 1.68 € 20.12 € 69,306,185.34 € 5,544,494.83 € Slovenia 2,010,269 29% 582,978.01 2.43 € 29.11 € 16,972,943.04 € 1,357,835.44 € Slovakia 5,400,998 28% 1,512,279.44 2.05 € 24.61 € 37,216,319.90 € 2,977,305.59 € Finland 5,300,484 34% 1,802,164.56 3.54 € 42.43 € 76,459,931.18 € 6,116,794.49 € Sweden 9,182,927 34% 3,122,195.18 3.52 € 42.25 € 131,913,850.38 € 10,553,108.03 € United Kingdom 61,191,951 34% 20,805,263.34 3.09 € 37.08 € 771,542,940.02 € 61,723,435.20 € Iceland 315,459 37% 116,719.83 3.62 € 43.44 € 5,069,912.27 € 405,592.98 € Norway 4,737,171 42% 1,989,611.82 4.07 € 48.84 € 97,166,069.56 € 7,773,285.56 € Croatia 4,436,401 18% 798,552.18 2.04 € 24.44 € 19,517,759.48 € 1,561,420.76 € Macedonia, FYR 2,045,177 28% 572,649.56 1.16 € 13.93 € 7,975,207.67 € 638,016.61 € United States of America 304,374,846 34% 103,487,447.64 2.61 € 31.36 € 3,245,774,905.50 € 259,661,992.44 €
34 Comments
This estimate is based on population data and content access data from 2008. As broadband penetration and population increases, the number of individuals accessing content online is likely to increase. This will expand the potential market for digital music services. The estimate does not account for the increasing number of individuals that access content in Europe through their mobile phone using 3G and 4G networks. The total market may well be higher than estimated.
However, this figure of the total market is likely to be higher than current actual revenues because it is based on the number of people accessing content, not necessarily purchasing content. Key organizations in the music industry continuously remark on the negative impact of digital piracy on music sales. While this impact is without a doubt substantial, this is an estimate of potential revenue in digital music services if most of digital music consumption was monetized. As digital music services become more widespread, convenient and accessible to European consumers, the impact of piracy on revenue from digital distribution channels should decrease. Accordingly, it is reasonable to estimate the potential digital music market using data about content access online.
Another related limitation is that this percentage of users accessing content online does not differentiate between music and film consumption. However, those individuals that have sufficient bandwidth and digital literacy to download/stream/buy films are likely to also be consumers of digital music. The consumption of music via digital channels is more prevalent than the consumption of films, and is likely to make up a large proportion of this percentage. Moreover, the content access data is the percentage of individuals accessing content within a population age range of 16-74 while the total population data it is applied to is for all ages. This suggest the number of people accessing content online may be slightly lower than this figure implies.
Data on the percentage of individuals accessing content online in the USA was unavailable. It was assumed that USA would have similar levels of content access online as the three major European music markets (France, UK, and Germany). Though the USA is believed to have a greater percentage of consumers accessing digital content, the content access percentage was assumed to be the same as the average for these three major European markets.
A benchmark individual expenditure estimate of 3 Euros per month is likely to be lower than the expenditure of active users of digital music services (considering that Apple iTunes – the largest single digital retailer - sells a single track for 0.99 cents). However, a lower estimate helps compensate for those currently accessing content without paying for it.
While the individual expenditure estimate was adjusted according to purchasing power parities and exchange rates, it does not take into account the fact that citizens of different nations may have different thresholds for the amount of disposable income spent on music.
B. Comparing Estimated Market Value with Actual Revenue
35 Royalty collection for mechanical and performing rights in Europe are usually the responsibility of the same CRMO. For example PRS for Music and GEMA administer both rights in the UK and Germany respectively. In the United States, ASCAP, BMI, and SESAC are the major performaning rights organisations, while Harry Fox Agency (HFA) administers the largest repertoire of mechanical rights.
In order to evaluate the current revenue of CRMOs from digital music, data on royalty collections from online sources from official 2009 Annual Reports was compiled. In the USA, BMI and ASCAP published similar data. However, SESAC and HFA did not publish any information. Accordingly, the figure for current revenue of these organizations from online sources was estimated. This estimate was based on the fact that a total of $84 million was generated from digital licensing in the USA for 2009.6 Subtracting the revenue collected by ASCAP and BMI (published in their Annual Reports) resulted in a remainder of $34.8 million. An equal distribution was assumed ($17.41 million for HFA and SESAC each).
The actual value of royalties collected from online sources is then compared to the potential royalty market for digital music in each country. This gives an indication of the lost market opportunity. The percentage of the market captured by each CRMO in Europe is then calculated.
Lost income for members: the percentage of the royalties distributed by CRMOs to members is captured by the net distribution ratio. The overall distribution efficiency of CRMOs (total revenue in relation to revenue distributed to members) enables the calculation of the amount of revenue that could be distributed to members, were the entire value of the digital music market captured. The net distribution ratio (methodology below) calculated for each CRMO was applied to the lost revenue opportunity in order to assess the total value of lost income for rightholders.
Comments
The figure for the actual revenue from online sources is compiled from the 2009 Annual Reports of the CRMOs. This is frequently grouped under the heading „New Media‟ which accounts for several different media. These include digital download services, subscription services, mobile music, and Internet radio music licenses. The amount of royalty revenue collected from online music (excluding mobile-related revenues) is thus likely to be slightly less than this figure indicates.
C. Royalty Distribution Efficiency
The efficiency of royalty distribution processes is calculated using data from the 2009 Annual Reports. The methodology for calculating the distribution efficiency ratio is based on a previous study (Rochelandet 1996).
Variables for equations on CRMO efficiency
Total copyrights collected from users (P)
6 http://money.cnn.com/2010/02/02/news/companies/napster_music_industry/#Correction
36 Total revenue distributed to members (R) Amount dedicated to cultural and social funds (F)
Measurement of efficiency of distribution activity (ability to maximize distributions) - gross proportion of distributed revenues over given period in comparison to effective collected sums: R GDR P
Problem with measurement: before being distributed part of collections are allocated to social/cultural actions (subsidy to festivals, pension funds, etc)
The solution is to subtract these from the gross distribution sum.
Net distribution ratio (NDR) takes into account various funds:
R F NDR P
Comments
There is a more dynamic element to the royalty collection and distribution process that cannot be captured by this ratio. This is essentially that a small proportion of royalties collected in one fiscal year often roll over and are distributed the following fiscal year. There is thus a margin for error in estimating the collection to distribution efficiency of a CRMO based on data in Annual Reports. However, this is partially mitigated by the fact that some royalties collected in 2008 are allocated for distribution in the 2009, thus offsetting the impact of royalties collected in 2009 that are allocated for distribution in 2010.
There are also other considerations to take into account regarding the nature of the data presented in the Annual Reports. In assessing CRMO copyright royalty revenue, the impact of operating revenue from other sources and investment depreciation should be excluded. Whenever possible the exact value of copyright royalty revenue and distribution has been taken from Annual Reports. Some CRMOs do not publish such detailed statistics so the overall figures for revenue collection and distribution may not encompass exactly the same activities. In some cases, the amount allocated for distribution and the royalties actually distributed may differ. Wherever possible, the figure for the royalties actually distributed has been used. The published figures for royalty receipts may also include interest and other income such as membership application fees. When these are grouped in the balance sheets published in the Annual Reports, disaggregating them for this analysis is impossible. This report has consistently ensured to use the most accurate data representing the actual royalties collected and distributed, wherever possible.
The impact of income from abroad may skew the distribution ration because the national CRMO does not incur the administration costs for these revenues. However,
37 this is offset by the fact that they also collected royalties for other CRMOs (thus incurring administration costs for royalties that are not distributed to their members).
D. Digital License Costs
The license fee costs associated with licensing a digital music service is built on a hypothetical case for a digital music service. Every CRMO included in this analysis was contacted about the licensing fees associated with such a service but none responded to our requests other than to direct us to the generic licensing information listed on their website. This information was thus used to estimate the license costs. All values have been converted to 2008 Euros based on historical exchange rates for the year in order to make them comparable to the market estimates developed in the other sections.
The hypothetical case variables - factors used to estimate the cost of a license for a digital music streaming service:
Average number of users of the service per day = 1,000,000 Average consumption of tracks per user per day The license cost per track/time according to streaming/downloading royalty rates set by CRMOs
The average license cost per day (DLC) for a digital music service is calculated for each CRMO for both downloading and licensing according to the above assumptions.
The monthly and yearly costs of licensing can then be calculated:
Average monthly license cost (MLC) = (30)DLC
Average yearly license cost (YLC) = (12)MLC
Download license costs
Average downloads per day per user = 0.25 (1 every 4 days) Average users per day = 1,000,000 Average number of downloads per day = (1,000,000) x (0.25) = 250,000 Average cost of single song download = 99 cents
The license cost per track will vary according to the CRMO repertoire that the service wishes to license. For the three major European markets, it was assumed that the tracks used from each repertoire was split equally. If a total of 250,000 tracks are downloaded per day, 83,333 tracks are downloaded from each repertoire. The royalty rate for each CRMO is based on the customer payment.
The license cost for one European CRMO repertoire for one day is thus 83,333(0.99) multiplied by the royalty rate. The royalty rates are listed on websites or in relevant documents (attached):
Royalty rate (UK, FR) = 8% of customer payment = 7.92 cents per song
38 Royalty rate (DE) = 10% of customer payment = 9.9 cents per song
The license for performing rights in the USA must be obtained from each organization as well as a separate mechanical license from HFA. The license cost for one American CRMO repertoire for one day is thus 83,333(0.99) multiplied by the royalty rate. In the case of HFA (which would own the majority of mechanical rights) it would be the total number of downloads, i.e. 250,000(0.99) multiplied by the royalty rate.
Royalty rate (HFA) = 9.1 cents per song Royalty rate (ASCAP) = 2.5% = 2 cents per song Royalty rate (BMI) = 2.5% = 2 cents per song Royalty rate (SESAC) = 0.53% = 1 cent per song
Streaming license costs
Streaming rates were calculated for stand-alone non-portable subscriptions services. This means that they are streaming services that do not offer downloads and can only be accessed on a computer (not a portable device such as a mobile).
Average listening time per user per day (L) = 70 minutes Converted to the number of tracks used per day (T) = 20 tracks per day (70 minutes/3.5 average length of song)
Assuming 1,000,000 users, the average number of tracks used per repertoire per day would be 20,000,000 (6,666,667 per repertoire in three major markets).
No European CRMOs published the royalty rates for streaming services except for PRS For Music, which set a nominal rate of 0.085 p per track (in Euro: 0.000974857). This royalty rate was assumed for each CRMO. Thus the license cost for one day for one repertoire is (6,666,667)(0.000974857) = 6,499.04 Euro.
The United States operates according to a different system for calculating royalty payments from streaming services. All 3 major US PROs calculate streaming licenses according to session or hourly usage rates. Different rates apply depending on ad- supported revenue and other revenue streams used by the digital music service. These were disregarded for this calculation and the rates applicable to only to downloading and streaming services (without other sources of revenue) were used. The following is the calculation involved for a service with the same parameters as that applied to the European CRMOs. Because session-based rates do not account for tracks used from different repertoires, the total of 1,000,000 users was applied to this rate calculation (rather than the split used for the European services). This was done except for BMI, where rates are calculated according to page impressions. Thus, for BMI the same split of 6,666,667 page uses was implemented in the model.
HFA:
$0.15 per subscriber (stand-alone non portable subscription)
ASCAP:
39
License for non-interactive services rate schedule 'b' 70 minutes of music = 2 service sessions 2 service sessions x 1 million users = 2 million sessions per day Number of service sessions (2 million) x Rate based on service sessions ($0.0009) = 'session based license fee' Daily Rate: $1800.00
BMI:
Streaming license fees = (music page impressions/1000) x $0.12 „“Music Page Impressions” means a transfer request for a single Music Page.‟ ((6666667)/(1000)) x (0.12) Daily Rate: $800.00
SESAC:
Streaming license fee = aggregate tuning hours (ATH) x ATH multiplier „“Aggregate Tuning Hours” (“ATH”) means the total number of hours of Streaming content that was transmitted to and accessed by end users by means of the Licensed Service during a specified period.‟ ATH = (2000000) x (1.166 hours) (2332000) x (0.001806) Daily Rate: $4211.59
Comments
The calculated rates for downloading do not take into account differential pricing for singles or album purchases. They assume a steady rate of downloading that does not fluctuate and is evenly dispersed across the repertoires. In reality, the picture is likely to be more complicated. However, given the information constraints, this model captures the relevant costs and rates for all major markets.
In Europe, the streaming royalty rate was assumed for both SACEM and GEMA due to lack of information. PRS for Music is the only CRMO that openly published the license cost of streaming as well as being the only service, which responded to request for details about streaming license costs. This said, the nominal royalty rates set by other major European CRMOs are unlikely to differ significantly.
Major music streaming services may negotiate one-off license fees rather than reporting consumption according to the method presented above. However, since these rates are published by CRMOs and there is no information regarding other possible streaming rates, this approach captures the applicable license costs. There is also the possibility that the major publishers such as EMI, Sony BMG, Warner and Universal bypass CRMOs entirely and license their repertoires directly to digital music services. This is more likely to be the case for mechanical reproduction rights.
The US estimates are based entirely on music consumption and do not account for revenue that streaming services may make from advertising and other endorsements. This may be an important factor in determining license costs but was not relevant in
40 this analysis of comparing only streaming license costs across major markets. The relatively large differential between pricing for streaming services is attributed to very different methods for calculating license costs. The royalty rate was generally the larger of a) a percentage of total site revenue; or b) a royalty calculation based on music usage. Since there was no assumption made concerning the total site revenue for the hypothetical model, the usage-rate calculation was implemented instead.
41 Appendix 2
This appendix provides all of the raw data sheets used in calculations.
42 A. Digital Music Market Estimate
Expenditure Adjustment to Purchasing Power Parity and Historical Exchange Rates
Expenditure Adj. Expenditure Exchange Rate (ER) Country 2008 PPP PPP Adjustment Adjustment W (PPP + ER adj.) European Union (27 countries) 1 3 3 3.00 € Belgium 1.1198 3.3594 3.3594 3.36 € Bulgaria 0.835789 2.507367 2.507367 2.51 € Czech Republic 17.5412 52.6236 2.110871327 2.11 € Denmark 10.2872 30.8616 4.139440681 4.14 € Germany 1.04187 3.12561 3.12561 3.13 € Estonia 0.706171 2.118513 2.118513 2.12 € Ireland 1.21765 3.65295 3.65295 3.65 € Greece 0.898486 2.695458 2.695458 2.70 € Spain 0.92212 2.76636 2.76636 2.77 € France 1.13742 3.41226 3.41226 3.41 € Italy 1.0095 3.0285 3.0285 3.03 € Cyprus 0.895096 2.685288 2.685288 2.69 € Latvia 0.505746 1.517238 2.182134331 2.18 € Lithuania 2.17144 6.51432 1.900548489 1.90 € Luxembourg 1.16004 3.48012 3.48012 3.48 € Hungary 165.03 495.09 1.973641724 1.97 € Malta 0.72238 2.16714 2.16714 2.17 € Netherlands 1.08387 3.25161 3.25161 3.25 €
43 Austria 1.09223 3.27669 3.27669 3.28 € Poland 2.37454 7.12362 2.033460836 2.03 € Portugal 0.831527 2.494581 2.494581 2.49 € Romania 2.04842 6.14526 1.676696407 1.68 € Slovenia 0.808728 2.426184 2.426184 2.43 € Slovakia 0.683595 2.050785 2.050785 2.05 € Finland 1.17852 3.53556 3.53556 3.54 € Sweden 11.2846 33.8538 3.520862801 3.52 € United Kingdom 0.81966 2.45898 3.090335554 3.09 € Iceland 151.982 455.946 3.619716454 3.62 € Norway 11.1581 33.4743 4.069724748 4.07 € Croatia 4.89752 14.69256 2.036786071 2.04 € Former Yugoslav Republic of Macedonia, the 23.5707 70.7121 1.160571291 1.16 €
United States 1.28174 3.84522 2.613662316 2.61 €
44 Historical Exchange Rates for 2008 (01/01/2008 – 31/12/2009) – Source: www.oanda.com/currency/historical-rates/
Czech Country Republic Denmark Latvia Lithuania Hungary Poland Romania Sweden Currency EUR/CZK EUR/DKK EUR/LVL EUR/LTL EUR/HUF EUR/PLN EUR/RON EUR/SEK Period Average 24.9298 7.4555 0.6953 3.4276 250.851 3.5032 3.6651 9.6152 Curr/EU 0.040112636 0.134129166 1.438228103 0.291749329 0.00398643 0.2854533 0.272843851 0.104001997
Country Iceland Norway UK Croatia Macedonia United States Currency EUR/ISK EUR/NOK EUR/GBP EUR/HRK EUR/MKD EUR/USD Period Average 125.9618 8.2252 0.7957 7.2136 60.9287 1.4712 Curr/EU 0.007938915 0.121577591 1.256755058 0.138627038 0.016412627 0.679717238
45 Population on 1 January (Source: Eurostat – extracted on 27/07/2011)
GEO/TIME 2005 2006 2007 2008 2009 2010 European Union (27 countries) 491134938 493210397 495291925 497686229 499705496 501105661 Belgium 10445852 10511382 10584534 10666866 10753080 10839905 Bulgaria 7761049 7718750 7679290 7640238 7606551 7563710 Czech Republic 10220577 10251079 10287189 10381130 10467542 10506813 Denmark 5411405 5427459 5447084 5475791 5511451 5534738 Germany (including former GDR from 1991) 82500849 82437995 82314906 82217837 82002356 81802257 Germany (including former GDR) 82500849 82437995 82314906 82217837 82002356 81802257 Estonia 1347510 1344684 1342409 1340935 1340415 1340127 Ireland 4111672 4208156 4312526 4401335 4450030 4467854 Greece 11082751 11125179 11171740 11213785 11260402 11305118 Spain 43038035 43758250 44474631 45283259 45828172 45989016 France 62772870 63229635 63645065 64007290 64369147 64716310 France (metropolitan) 60963264 61399733 61795238 62134963 62473876 62799180 Italy 58462375 58751711 59131287 59619290 60045068 60340328 Cyprus 749175 766414 778684 789269 796875 803147 Latvia 2306434 2294590 2281305 2270894 2261294 2248374 Lithuania 3425324 3403284 3384879 3366357 3349872 3329039 Luxembourg 461230 469086 476187 483799 493500 502066 Hungary 10097549 10076581 10066158 10045401 10030975 10014324 Malta 402668 405006 407810 410290 413609 412970 Netherlands 16305526 16334210 16357992 16405399 16485787 16574989 Austria 8201359 8254298 8282984 8318592 8355260 8375290 Poland 38173835 38157055 38125479 38115641 38135876 38167329 Portugal 10529255 10569592 10599095 10617575 10627250 10637713 Romania 21658528 21610213 21565119 21528627 21498616 21462186 Slovenia 1997590 2003358 2010377 2010269 2032362 2046976 Slovakia 5384822 5389180 5393637 5400998 5412254 5424925 Finland 5236611 5255580 5276955 5300484 5326314 5351427 Sweden 9011392 9047752 9113257 9182927 9256347 9340682
46 United Kingdom 60038695 60409918 60781346 61191951 61595091 62008048 Iceland 293577 299891 307672 315459 319368 317630 Norway 4606363 4640219 4681134 4737171 4799252 4858199 Croatia 4443901 4442884 4441238 4436401 4435056 4425747 Former Yugoslav Republic of Macedonia, the 2035196 2038514 2041941 2045177 2048619 2052722
Purchasing Power Parities (Source: Eurostat – extracted on 26/08/2011)
GEO/TIME 2005 2006 2007 2008 2009 2010 European Union (27 countries) 1 1 1 1 1 1 Belgium 1.07537 1.08425 1.09208 1.1198 1.1493 1.12318 Bulgaria 0.716122 0.745436 0.783817 0.835789 0.868562 0.879008 Czech Republic 17.1135 17.2328 17.1718 17.5412 17.9449 17.8679 Denmark 10.2685 10.2287 10.1408 10.2872 10.5643 10.3201 Germany 1.03625 1.02837 1.02286 1.04187 1.06956 1.05483 Estonia 0.600063 0.638696 0.683354 0.706171 0.690538 0.680758 Ireland 1.20762 1.20853 1.18027 1.21765 1.19872 1.12102 Greece 0.853551 0.858528 0.88496 0.898486 0.943462 0.936438 Spain 0.914366 0.903263 0.897072 0.92212 0.944462 0.932204 France 1.10374 1.10859 1.09965 1.13742 1.16497 1.14209 Italy 1.03598 1.02358 1.00604 1.0095 1.03383 1.05212 Cyprus 0.870043 0.87164 0.875581 0.895096 0.914952 0.906029 Latvia 0.360975 0.399931 0.46632 0.505746 0.476353 0.451321 Lithuania 1.77704 1.86576 1.98223 2.17144 2.13242 2.03172 Luxembourg 1.13908 1.12288 1.1385 1.16004 1.1976 1.18769 Hungary 153.72 157.76 161.727 165.03 170.175 172.992 Malta 0.678412 0.690024 0.699269 0.72238 0.744434 0.734557 Netherlands 1.07125 1.06602 1.05589 1.08387 1.12575 1.0868 Austria 1.0596 1.05158 1.06824 1.09223 1.12167 1.10619 Poland 2.23432 2.26414 2.26968 2.37454 2.46997 2.42896 Portugal 0.818041 0.812617 0.812561 0.831527 0.839954 0.821948
47 Romania 1.70105 1.76004 1.86249 2.04842 2.13537 2.17377 Slovenia 0.731102 0.746268 0.774947 0.808728 0.83558 0.826498 Slovakia 0.676542 0.681474 0.672015 0.683595 0.675519 0.671212 Finland 1.16817 1.16658 1.15832 1.17852 1.20807 1.1888 Sweden 11.2108 11.1541 10.9416 11.2846 11.8672 11.7164 United Kingdom 0.760474 0.76957 0.79473 0.81966 0.852432 0.844681 Iceland 118.437 131.622 139.281 151.982 169.638 179.933 Norway 10.6347 10.672 10.8071 11.1581 11.7454 11.6853 Croatia 4.68035 4.78653 4.72844 4.89752 5.01299 5.02371 Former Yugoslav Republic of Macedonia, the 21.9821 21.9283 23.143 23.5707 23.788 24.0868
United States 1.19539 1.22742 1.23231 1.28174 1.32726 1.29649
48 Individuals Using the Internet to Access Content (Source: Eurostat – extracted 27/07/2011)
Individuals using the Internet for downloading/listening to/watching music and/or films Percentage of individuals aged 16 to 74. geo\time 2008 EU27 28 Belgium 23 Bulgaria 21 Czech Republic 19 Denmark 36 Germany 29 Estonia 25 Ireland 19 Greece 19 Spain 31 France 38 Italy 15 Cyprus 16 Latvia 33 Lithuania 32 Luxembourg 42 Hungary 30 Malta 29 Netherlands 46 Austria 20 Poland 21 Portugal 19 Romania 16 Slovenia 29
49 Slovakia 28 Finland 34 Sweden 34 United Kingdom 34 Iceland 37 Norway 42 Croatia 18 Former Yugoslav Republic of Macedonia, the 28 Source of Data:: Eurostat Last update: 26.07.2011 Date of extraction: 27 Jul 2011 19:17:19 MEST Hyperlink to the table: http://epp.eurostat.ec.europa.eu/tgm/table.do?tab=table&init=1&plugin=1&language=en&pcode=tin00121 General Disclaimer of the EC: http://europa.eu/geninfo/legal_notices_en.htm Short Description: Within the last three months before the survey. Code: tin00121
50 C. Royalty Distribution Efficiency
United The Czech France Country Kingdom Germany Austria Denmark Belgium Finland Netherlands Sweden Switzerland Republic PRS for BUMA/ CRMO SACEM Music GEMA AKM KODA SABAM TEOSTO STEMRA STIM SUISA OSA Total copyrights collected from users P (million Euro) 762.3 693.6714542 841.055 85.153 77.806 197.434128 49.86588 177.12 130.5009422 90.659115 32.48706469 Total revenue distributed to members R (million Euro) 634.09 615.7989228 713.051 77.985 63.501 165.1 42.575433 159.417 114.6377426 79.14811871 24.04070362 Total licensing and administration expenses C (million Euro) 188.067 82.69748654 128.004 12.798 8.523 34.527304 9.876559 25.356 16.99585453 18.60426603 5.223820671 Member size M 132000 80297 64354 18032 34000 35200 20720 18000 61708 27470 6426 Amount dedicated to cultural and social funds F (million Euro) 16.483 1.458707361 61.7 0.618 7.139 0.552386 1.987885 10.9 3.900508762 5.805511394 0.090338856 Online Revenues O (million Euro) 9.301 28.50089767 11.381 0.384 2.782 1.37 1.069361 2.207 2.605238364 0.230146285 Management Criterion MR (percentage) 405.33% 838.81% 657.05% 665.36% 912.89% 571.82% 504.89% 698.53% 767.84% 487.30% 621.90% Gross Distribution Ratio GDR (percentage) 83.18% 88.77% 84.78% 91.58% 81.61% 83.62% 85.38% 90.01% 87.84% 87.30% 74.00% Net Distribution Ratio NDR (percentage) 85.34% 88.98% 92.12% 92.31% 90.79% 83.90% 89.37% 96.16% 90.83% 93.71% 74.28% Collected Sums per Member PPM (in euro millions) 0.005775 0.008638822 0.013069195 0.004722327 0.002288412 0.005608924 0.002406654 0.00984 0.002114814 0.003300295 0.005055566 Distributable Sums per Member RPM (in euro millions) 0.004803712 0.007669015 0.011080135 0.004324811 0.001867676 0.004690341 0.002054799 0.0088565 0.001857745 0.002881257 0.003741161
ALL DATA COMPILED FROM ANNUAL REPORTS FOR 2009
51 D. Digital License Costs Variable Value Comments Source
Average listening time per user per day (L) 70 in minutes Spotify Guardian Article (70 minutes/3.5 Average number of tracks per user per day (T) 20 minutes per track) Spotify Guardian Article 1 download every 4 Average number of downloads per user per day (D) 0.25 days Estimate Average number of users of the service per day (N) 1,000,000 Spotify Guardian Article
PRS for Music SACEM GEMA The average number of works used per day for downloading (Tnd) 250,000 250,000 250,000 The average number of works used per day for streaming (Tns) 20,000,000 20,000,000 20,000,000
This figure must be adjusted to the use of each repertoire (here 3 repertoires are assumed to be used equally – therefore average number is divided by 3)
PRS for Music SACEM GEMA Average number of works used per day for downloading (Tnd) 83,333 83,333 83,333 Average number of works used per day for streaming (Tns) 6,666,667 6,666,667 6,666,667
52
PRS For Music SACEM GEMA
License cost per track for downloading (Ud) 0.0792 0.0792 0.099 License cost per track for streaming (Us) 0.000974857 0.000974857 0.000974857
License cost per day for downloading (DLCd) 6,600.00 6,600.00 8,250.00 License cost per day for streaming (DLCs) 6,499.04 6,499.04 6,499.04
License cost per month for downloading (MLCd) 198,000.00 198,000.00 247,500.00 License cost per month for streaming (MLCs) 194,971.30 194,971.30 194,971.30
License cost per year for downloading (YLCd) 2,376,000.00 2,376,000.00 2,970,000.00 License cost per year for streaming (YLCs) 2,339,655.60 2,339,655.60 2,339,655.60
TOTAL LICENSE COST for downloading (TLCd) 7,722,000.00 € TOTAL LICENSE COST for streaming (TLCs) 7,018,966.80 €
53
ASCAP BMI SESAC Harry Fox Agency
License cost per track for downloading (Ud) $0.02 $0.02 $0.01 $0.09 License cost per member for streaming (Us) N/A N/A N/A $0.25
License cost per day for downloading (DLCd) $2,062.50 $2,062.50 $1,311.75 $22,750.00 License cost per day for streaming (DLCs) $1,800.00 $800.00 $4,211.59 N/A
License cost per month for downloading (MLCd) $61,875.00 $61,875.00 $39,352.50 $682,500.00 License cost per month for streaming (MLCs) $54,000.00 $9,600.00 $126,347.70 $250,000.00
License cost per year for downloading (YLCd) $742,500.00 $742,500.00 $472,230.00 $8,190,000.00 License cost per year for streaming (YLCs) $648,000.00 $115,200.00 $1,516,172.40 $3,000,000.00
TOTAL LICENSE COST for downloading (TLCd) $10,147,230.00 TOTAL LICENSE COST for streaming (TLCs) $5,279,372.40
All figures subsequently adjusted to historical exchange rate – US/EU: 0.7189
54
ASCAP BMI SESAC Harry Fox Agency
License cost per day for downloading (DLCd) 1,482.73 € 1,482.73 € 943.02 € 16,354.98 € License cost per day for streaming (DLCs) 1,294.02 € 575.12 € 3,027.71 € 0.00 €
License cost per month for downloading (MLCd) 44,481.94 € 44,481.94 € 28,290.51 € 490,649.25 € License cost per day for streaming (MLCs) 38,820.60 € 6,901.44 € 90,831.36 € 179,725.00 €
License cost per year for downloading (YLCd) 533,783.25 € 533,783.25 € 339,486.15 € 5,887,791.00 € License cost per year for streaming (YLCs) 465,847.20 € 82,817.28 € 1,089,976.34 € 2,156,700.00 €
TOTAL LICENSE COST for downloading (TLCd) 7,294,843.65 € TOTAL LICENSE COST for streaming (TLCs) 3,795,340.82 €
© 2011 Oxfirst Ltd.
This Report was prepared by Roya Ghafele and Benjamin Gibert.
55 Roya Ghafele is the Director of Oxfirst Ltd and a Research Fellow and Lecturer at the University of Oxford. Prior to that, she was an Academic with the Haas School of Business at U.C Berkeley. She also held positions as an Economist with the U.N.‟s World Intellectual Property Organization, the OECD & McKinsey.
Benjamin Gibert is a Research Associate with Oxfirst Ltd. Prior to joining Oxfirst, he was a research Associate in the University of Oxford. He graduated with distinction from the University of Oxford and from Warwick University. His research won him the distinguished department prize of Warwick University.
This research material was made possible through the generous funding of Google. The authors would like to thank Google for its funding.
Disclaimer
The views expressed in this paper are the authors‟ own and cannot be attributed to Google or the University of Oxford. This research has sought to respect academic integrity to the best of its ability.
This research material does not constitute an offer or solicitation to make financial, managerial, policy or economic decisions on the basis of its content. It has been undertaken to the best of Oxfirst‟s Ltd. abilities. It should not be so construed, nor should it or any part of it form the basis of, or be relied on in connection with, any contract or commitment whatsoever. The information in our research, or on which it is based, has been obtained from sources that Oxfirst Ltd. believes to be reliable and accurate. However, it has not been independently verified and no representation or warranty, express or implied, is made as to the accuracy or completeness of any information obtained from third parties. The information or opinions are provided as at the date of their original publication and are subject to change without notice. The information and opinions provided in our research take no account of the reader‟s individual circumstances and should not be taken as specific advice on the merits of any economic, financial or managerial decision. Readers should consider our research as only a single factor in making any type of decision. Further information is available upon request. No member of Oxfirst Ltd. accepts any liability whatsoever for any direct or consequential loss howsoever arising, directly or indirectly, from any use of our research or its contents.
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