Hargreaves Review of Intellectual Property

Written evidence submitted by PRS for Music

Summary

1. PRS for Music is pleased to offer input to the BIS Select Committee . Throughout our paper we underline t he importance of copyright to the earnings of creators and to the creative industries but as importantly to the wider economy . The decisions taken by Government following the review will shap e the potential for the growth of the creative economy for the next 10 years . Copyright is the mechanism by which creators earn a living and p rovide for their pension and is the means by which producers and publishers of creative works earn a return , allowing them to invest in the creative talent that will provide further growth for the next generation. Copyright lies at the heart of the United Kingdom’s balance of trade surplus in entertainment and it is in Britain’s national interest, as a net exporter, to ensure a fair valuation of copyright throughout the world. The full social and economic impact of any changes that may arise from the Hargreaves review must be properly understood in order to avoid damage to existing growth businesses in order to speculate on potential growth elsewhere that might either not arise or merely represent a transfer of value to existing businesses, often based abroad and which may make a limited overall contribution to the British economy .

Introduction to PRS for Music

2. PRS for Music is the trading name for two music rights collecting societies; Mechanical-Copyright Protection Society ( MCPS ) and Performing Right Society ( PRS ) which together represent 85,000 songwriter, composer and music publisher direct members in total (including 5,000 non-UK resident members), including some of the world's best known writers. PRS represent s a global repertoire of musical works for licensing to businesses , as a result of agreements with equivalent societies around the world . Our licensing activities cover multiple sectors but can be broadly summarised as business to business licensing , enabling the use of music by businesses such as broadcasters, online services, record producers, live music promoters, pubs, clubs, retail businesses and all businesses that play music to their public.

3. PRS for Music ’s t otal royalties collected from licensing were £611m in 2010. All royalties, net of costs, are distributed to the members and to affiliated societies whose rights are represented under mandate. Collecting societies are private companies, owned by their members and governed by their members. The PRS and MCPS Boards are representative of the membership and approve licensing policy and distribution rules. We are pleased to be one of the world’s most efficient music licensing operations with a cost to income ratio of 10.4% and offering our members more money, more often, at l ower cost and its customers the most efficient means by which they can use music.

4. We have welcomed many but not all the recommendations in the Hargreaves Report , now adopted by Government . Many of the se were expressed quite broadly and the Government consultation will need to provide more clarity in order that a true assessment can be made of the costs and benefits of implementation of specific proposals and whether they contribute to the interests of the UK growth agenda.

5. Our input covers four areas :

· Copyright licensing

· Measurement of the contribution of IP to the economy

· International export policy

· Consumer education

Copyright licensing

6. The copyright licensing chapter covers a wide range of connected issues , all of interest to us and we comment on the proposals for a Digital Copyright Exchange, collective licensing, pan-European licensing and codes of conduct for collecting societies.

Digital Copyright Exchange (DCE)

7. The underlying rationale from Professor Hargreaves for proposing a Digital Copyright Exchange (DCE) was in order to lead to a ‘more flexible licensing system’ and address ‘potential inadequacies in licensing’. Any contribution to the licensing environment should build upon and add value to existing licensing offers. While there is still scope for greater growth for licensing of music rights for digital services it has been acknowledged during the Hargreaves review process that PRS for Music has a good record on speed to concluding licences, in taking on board the nuances of all the various different new business models and finding licensing solutions which match their needs. [1] At the lower end of the market PRS for Music offers automatic one click licences through its website. [2]

8. The projected costs savings for DCE are estimated by reference to costs of collecting societies and evidence on savings through digital procurement. It is not clear how this has reached £10-20M without seeing whether this looks at costs of acquiring the licence or the broader costs of supporting a licence through the relevant systems and databases for registration of works, matching, processing or producing music usage reports. A far more robust impact assessment on the costs and benefits of the DCE is clearly necessary.

9. To manage rights, collecting societies must have good quality, accurate data on all those rights, including those not managed by them. This is key to the transparency and accuracy of both rights licensing and rights management, which helps to ensure that the right people get paid for the exploitation of their works. Collecting societies are involved in the exchange and processing of this rights management data, sending it to and receiving it from partners along the value chain. Standardisation and accuracy from all actors at all points in the chain is essential. PRS for Music is a member of the Global Repertoire Database (GRD) Working Group, which is working on a scoping study for a central authoritative database for ownership information on copyright in musical works [3] . This project underlines the importance of comprehensive data and high data quality to support music licensing.

10. Naturally the DCE should take into account existing business critical initiatives such as the Global Repertoire Database. It should not replicate or distract from current projects but it could ensure that different sectors find solutions that revolve around industry-led database projects with common standards and with interoperability where that is needed. A forum to share knowledge and co-ordinate initiatives is achievable, does not require legislation and we would anticipate would have the support of all content industries. We would recommend that Government convene a cross-sector Government endorsed forum, led by the industry, to consider relevant initiatives already underway, to ensure that these developments are rigorously applying standards and ensure that these initiatives are interoperable as required.

Collective Management

11. The Report acknowledges ‘the valuable role of collecting societies in licensing markets, reducing transaction costs by enabling ‘many to many’ licensing’ . Collective licensing of rights is a benefit to rightsholders where they cannot license rights directly or individually and it is a benefit to users who can have access to a large volume of rights and works in one licence. The ability of collective management to lower transactional costs for the market is acknowledged but we are disappointed at the quality and scope of the other data the Economic Impact Assessment (Annex EE) which is provided in that report to support the comments made about collective licensing .

12. What is regrettable is that most of the section in Annex EE on the collecting societies is generally negative.

a. There is a reference to avoidable deadweight losses and inefficiencies, which is mentioned without any information or example which could allow a defence to be put.

b. It makes the assumption that there is a natural monopoly situation acr for all rights and all societies . T his is not true in the case of online music rights where competition for mandates has been opened up since the European Commission’s Recommendation on cross border collective management of online rights in musical works .

c. Annex EE claims instances of price discrimination and opaque financial reporting. No evidence has been provided to illustrate these claims.

d. I t proposes that licence fees could be set in a more transparent manner. However, in practice, most tariffs are negotiated on behalf of small businesses by their representative trade body. All rates for small businesses are publicly available to view on the PRS for Music website. I n our view, these accusations are unjustified.

e. Annex EE states that music collecting societies were amongst the more unpopular ‘regulatory cost’ faced by small businesses. PRS for Music ’s licences to small businesses can be as low as £44 per year. PRS for Music research indicates that once businesses understand that we pay individual composers and songwriters they show a far higher willingness to pay a small fee. We accept we could probably do more to increase understanding about copyright licences .

f. The report draws some c onclusions based on aggregate data for all the UK collecting societies . Collecting societies are in fact very different from each other and we would advise extreme caution in generalising from a data pool. Each society is set up by i ts members to manage rights in a specific sector for specific purposes. In PRS for Music ’s case, the rights conferred by members for management form the predominant source of their income. The way they take decisions and how the governance is managed in that case, and the costs, scope and controls on the organisation, might be very different from a society managing secondary exploitation of works where collective ly managed income may be marginal. A music publisher could earn 80% of their revenues from collectively managed rights. A book publisher may earn less than 5% of their revenues from collectively managed rights.

13. We believe it is reasonable and fair to request that any recommendations on collecting societies which are developed during and after the consultation process are based on a more detailed and rigorous impact assessment.

Pan European Licensing

14. We note that the Government response indicates it will work with the European Commission and UK interests to develop proposals that are compatible with effective licensing models. PRS for Music is already active in pan-European licensing of music r ights which is part of the framework for cross border licensing of music to all the major multi-national digital music services to operate across Europe. We believe there will be a number of consolidated hubs across Europe that support the collective licensing and processing of rights. ‘Hubs’ would be voluntary and offer data, processing and licensing services to the network of collecting societies in Europe. They would support a transition from territorial to multi-territorial licensing and help us realise economies of scale to the benefit of rightsholders. We believe that this consolidation is necessary and desirable. A key question to pose to Government is whether the UK has the right corporate environment, incentives, regulatory and fiscal system (VAT, withholding tax) to be attractive as the location for an IP hub.

Collecting Society Governance and Transparency

15. Professor Hargreaves recommended that collecting societies be required by law to adopt codes of practice and the Government is due to publish minimum standards for voluntary codes in early 2012. PRS w elcomes the principle of self regulation and has led the way by adopting a Code of Practice for public performance licensees, which has been in place for nearly two years, with complaints referred to an independent ombudsman. We also introduced a Code of Practice for members in 2011, also overseen by the ombudsman. We have selected to work with Ombudsman Services, which handles consumer dispute resolution for communications, energy and property services.

16. In general we acknowledge that collecting societies can show their commitments to good practice through the adoption of Codes and this can have a positive impact. But we also highlight the importance of the commitments to improved services throughout the business. PRS has taken action at an operational level to ensure that customers are served better, and this includes recording calls, ensuring that performance of our sales team is scored on quality of service, improving systems so that calls are dealt with more quickly, and in general identifying issues as early as possible, supported by further in-house training. Total complaints in 2010 fell from 225 to 208, down 8%, representing 1 complaint in 4000 customer contacts (0.025%).

Measurement of the contribution of IP to the economy

17. We welcome the recommendation that policy decisions must be based on good evidence.

18. The measurement of the contribution of creative industries to GDP is currently stated to be around 7% of GDP. This makes the sector a significant contributor to the economy but it is also accepted by industry and Government that the contribution to the national accounts may be understated currently and until changes to the methodology are made . We welcome the commitment from Government to change the measurements o f the investment by intellectual property industries and their contribution to the national accounts and we look forward to a future announcement in due course . The methodology will provide a more robust baseline from which both Government and industry can together measure the current value of sectors and therefore more effectively understand the viability and impact of specif i c policy interventions. Our chief econo mist has contributed directly, working closely with Imperial College’s IP Research Centre, with the support of IPO and Copyright Expert Advisory Panel, to verify and validate a methodology for measuring the contribution of music to GDP.

19. It is also critical that Government’s evidence to support the changes they propose in the forthcoming consultation is published, with sources, so that appropriate review and comments can be made. We share the widespread reservations expressed about the quality of t he supporting document accompanying the Hargreaves review, Economic Impact of Recommendations (Annex EE). More robust economic impact assessment with independent analysis during consultation will be essential .

Music is an export success

20. The international angle to copyright and creative industries is significant and should be a key focus of the Committee’s assessment as to whether the recommendations will sustain the existing growth . The UK music industry is an export success story the country can be proud of. One third of PRS income (£180M) comes from international licensing , BPI statistics show that UK artists’ share of global sales is 11.8% and that music publishers earned £33.6M from international synchronisation deals . The annual Adding up the Industry report for 2010 published by PRS for Music economists shows that only the US and the UK are net exporters of music, and that the UK ’s share of export value is even increasing faster than the US [4] . The economic success is to a large extent based on licensing copyright. PRS for Music has wide market access to licensing in 150 international market through reciprocal agreements with collecting societies globally, and publishers likewise have access through international affiliated companies or the sub-publishing network. The BIS Committee should ask whether the policy changes recommended for the UK will enhance our ability to earn copyright licensing income from abroad or inhibit it.

21. Maintaining today’s inward income flows and securing the commercial potential for licensing in new markets can be assisted by Government acting both to reduce such barriers and strengthen the international copyright system to protect the rights and royalties which can be paid to British creators. W e highlight to the Committee there are other regulatory tools , such as c ompetition, trade and fiscal policy, that the Government can use in order to increase the level of growth from copyright licensing in international markets. Of s pecific relevan ce to copyright earning industries are the framework and processes for paying income tax at source (withholding tax). Delays and costs to recovery of tax can be very onerous for UK creators who are earning considerable proportion of income from copyright licensing abroad. It is in UK plc interests to look at whether the system can be speeded up and made clearer. We recommend HM Treasury / HMRC commission a review to examine the impact of withholding tax rules on the wider creative sector .

C onsumer education for online markets

22. The Hargreaves report states: that "consumers are confused" and ‘it is not always obvious whether a music service is providing copyright material illegally". This assertion is supported by recent Harris Interactive research in which 75% of the survey said they were uncertain about whether sites they accessed were legal or not.

23. PRS for Music has been actively working to develop a s olution ‘traffic lights’ that would give consumers information about whether a website or link to content is legal or illegal before they access the files. Traffic lights would be a voluntary, industry-led consumer education initiative delivered in partnership wi th i nternet security companies and showing the status of a site on the toolbar when a consumer conducted a search. Traffic lights would be a complementary part of the package of responses, including other systems of controlling illegal material on the internet, such as site blocking and notice and takedown, and not alternatives. They sit as part of a package of measures. We kindly request that the BIS Select Committee consider offering its express support for traffic lights as a viable consumer education concept.

30 September 2011