Is There a Case for Copyright Levies? an Economic Impact Analysis
Total Page:16
File Type:pdf, Size:1020Kb
Is there a case for copyright levies? An economic impact analysis April 2011 Oxera Consulting Ltd is registered in England No. 2589629 and in Belgium No. 0883.432.547. Registered offices at Park Central, 40/41 Park End Street, Oxford, OX1 1JD, UK, and Stephanie Square Centre, Avenue Louise 65, Box 11, 1050 Brussels, Belgium. Although every effort has been made to ensure the accuracy of the material and the integrity of the analysis presented herein, the Company accepts no liability for any actions taken on the basis of its contents. Oxera Consulting Ltd is not licensed in the conduct of investment business as defined in the Financial Services and Markets Act 2000. Anyone considering a specific investment should consult their own broker or other investment adviser. The Company accepts no liability for any specific investment decision, which must be at the investor’s own risk. © Oxera, 2011. All rights reserved. Except for the quotation of short passages for the purposes of criticism or review, no part may be used or reproduced without permission. Executive summary Summary of main findings The distribution of licensed digital music is evolving rapidly. New business models are emerging for downloading, streaming and other forms of accessing music. People have the ability to listen to and transfer their music collections using a variety of devices, ranging from PCs to portable MP3 players and mobile handsets. This increases flexibility and opens possibilities for new value propositions for music offerings. In this context, the existing system of copyright levies has come under particular scrutiny in recent years—it transfers payments to rights holders (via collecting societies) through levies charged on hardware and devices that can be used for copying. From an economic perspective, the copyright levy system is not well suited to the digital age, as it creates distortions and inefficiencies affecting consumers, device manufacturers and rights holders alike, hindering innovation, investment and the development of a European digital market. To contribute to the policy debate, Nokia commissioned Oxera to provide economic evidence on the impact of copyright levies. Oxera developed a model to assess the welfare effects of these levies on the EU economy as a whole, and on specific groups of market participants—in particular, consumers, device manufacturers, and rights holders. Taking into account current and future dynamics in the market, the main ‘base case’ scenarios modelled by Oxera are shown in the table below. The effect of removing copyright levies is positive in all scenarios. In the bottom row, this is shown as a welfare gain to the EU economy of between €975m and €1,880m per year. Consumers gain in each scenario. Without copyright levies, consumers would buy more devices at lower prices and consume more digital music. Manufacturers gain because they sell more devices and can take part in new business models for distributing music. Effect of removing Scenario 1: Scenario 2: Moderate Scenario 3: copyright levies Limited dynamic dynamic growth and High dynamic growth (€m per year): growth some new business and many new models business models on consumer surplus 601 809 1,088 on manufacturers’ surplus 166 166 166 on song writers’ revenues –16 7 30 on performers’ revenues 1 24 48 on producers’ (record labels’) 223 384 548 revenues Total EU-wide impact (€m) 975 1,389 1,880 Rights holders as a group can also make significant gains from the removal of copyright levies. The two biggest drivers are the growth in digital music sales and the effective compensation that rights holders can extract from selling music through the various new business models. The analysis indicates that, if there is further dynamic growth in the European digital market, song writers, performers, record labels and music publishers will all benefit directly from the removal of copyright levies (scenarios 2 and 3). The market dynamics and empirical evidence discussed in this report suggest that these scenarios are realistic. Removal of copyright levies would enhance the growth in licensed digital music, and enable and incentivise rights holders to engage in alternative business models. Finally, an increased offering of innovative digital services and the resulting boost to the sales of licensed digital content would be expected to contribute to the reduction of piracy. Even if this last effect were modest, it would significantly enhance rights holders’ revenues, and hence make scenarios 2 and 3 more likely. Policy-makers can promote dynamic growth in the European digital market by removing copyright levies and other impediments to innovative business models in the distribution of digital content. Oxera i Is there a case for copyright levies? Objective of the report The way people obtain and consume music has changed rapidly in recent years, and continues to evolve. One important development is that people have the ability to listen to and transfer their music collections onto a variety of devices, ranging from PCs to portable MP3 players and mobile handsets. In economic terms, the possibility of listening to music on various devices increases flexibility and opens new value propositions for music offerings to consumers. There have been long-standing policy and theoretical debates on how rights holders—in this context, song writers, performers, record producers and music publishers—can obtain commercial benefit when their music is acquired or consumed by others. One mechanism for transferring payments to rights holders (via collecting societies) has come under particular scrutiny in recent years: namely, copyright levies. Instead of being charged directly to end- consumers of the music, copyright levies are charged on the hardware that can be used for the private copying of music, including blank CDs, MP3 players, and, in some countries, mobile phones and PCs. The legal basis for copyright levies (as embedded in the EU Copyright Directive 2001/29/EC) is that rights holders may be ‘compensated’, for example, for the ‘harm’ suffered as a result of ‘private copying’—ie, copying unlicensed content, as permitted by national law. From an economic perspective, there is ‘harm’ to rights holders only if copying replaces a music purchase that would otherwise have been made. This may have occurred more frequently in the analogue age when copyright levies were first introduced (when music was copied onto media such as cassettes), but is perhaps less prevalent in this digital age when consumers can be licensed to transfer their collections onto multiple devices. Furthermore, copyright levies are a ‘crude’ way of addressing any ‘harm’ caused by private copying, since they target the devices, not private copying itself. This creates a number of inefficiencies and distortions, as set out in this report. The copyright levy system has a material financial impact. In some countries levies that represent as much as 5–10% of the retail price of an electronic device (or even more for certain products) are not unusual. Collecting societies in Europe collected around €0.5 billion in copyright levies in 2009. However, a much larger amount is claimed every year from device manufacturers (and is the subject of legal dispute). There is currently also pressure to apply copyright levies to newer devices with music-playing facilities, such as tablet computers. To contribute to the policy debate, Nokia commissioned Oxera to provide economic evidence on the impact of copyright levies. Oxera developed a model to assess the welfare effects of copyright levies on the EU economy as a whole, and on specific groups of market participants—in particular, consumers, device manufacturers, and rights holders. The analysis, undertaken in the period from September 2010 to March 2011, covers both static effects, in terms of how money currently flows among market participants, and dynamic effects, in terms of the impact of copyright levies on investment, innovation and creative output. While the analysis focuses on the music market and on hardware with music-playing facilities, the conceptual framework employed could be generalised to any products that are subject to copyright levies, including those used for audiovisual and printed content. The Oxera welfare model Oxera’s model captures the main market mechanisms in the hardware and music distribution markets, and the interactions between the market participants. The focus is on measuring the effects of copyright levies on consumers, hardware manufacturers, and rights holders (in this third group, the emphasis is on song writers—ie, creators). These effects are measured by analysing what would happen in the absence of copyright levies. The model is calibrated Oxera ii Is there a case for copyright levies? using current data on levy rates and sales of hardware and music. Several assumptions had to be made on some key parameters in the model, and the sensitivity of these assumptions has been tested. Three main scenarios are presented as base-case scenarios (see further below). Main market mechanisms captured in the model The following are some of the market mechanisms reflected in the model. – Consumers are affected by copyright levies insofar as hardware vendors pass the levies on in the form of higher retail prices. This in turn reduces the sale of electronic devices, and hence the demand for music downloads and other forms of music files. – Device manufacturers are affected because they absorb the levies as extra costs, or pass them on to retail prices, and hence make fewer sales. Either way, this diminishes their incentives to invest in, and introduce, new device models, and to launch new music distribution platforms. This in turn affects consumers as well. – Rights holders receive a direct financial benefit from copyright levies (to the extent that collecting societies do indeed distribute their revenues to principal rights holders—this varies by country and plays a role in the model, but is not the main focus of this report).