Written evidence submitted by PPL

SUMMARY

 

1. PPL welcomes many of the Hargreaves recommendations and we look forward to playing our part in industry-led initiatives to develop and realise those ideas.

2. However, we are grateful for the opportunity to provide further information to the BIS Select Committee, as we are concerned by assertions and conclusions contained in the Review with regard to collecting societies, and in particular by errors and unsubstantiated assertions and conclusions in the Economic Impact of Recommendations (Supporting Document EE).

3. Having read the Government’s response to the Hargreaves IP Review, we would like to draw the Committee’s attention to the following:

· Collective licensing in the UK is generally regarded as efficient and beneficial to both users and rightholders. The focus should be on codes at European level.

· We agree with others that the Digital Copyright Exchange, as a network of databases, is in essence worth pursuing, provided it is industry-led.

· The Economic Impact of Recommendations is flawed. Growth estimates and cost reductions for copyright are overstated.

4. We note and support the submissions made by UK Music, the Creative Coalition and the CBI.

PPL

 

5. PPL licenses the use of recorded music – not just digital services but traditional radio and television broadcasts and also the public performance of sound recordings in hundreds of thousands of sites across the UK. A PPL licence covers over 5m tracks, produced by PPL’s 6,300 record companies (mostly small businesses), 47,500 performers and overseas contracting partners. Over the last 10 years, costs (as a proportion of revenue) have fallen from 28% to 14%.

6. A collective licensing company such as PPL is not a mere conduit for the passage of money from copyright users to rightholders. It has a dynamic role licensing rights and distributing royalties. In order to do this:

· It is necessary to determine and agree tariffs (and licence terms).

· Users must be licensed (and action taken against unlicensed users).

· The awareness of the need for a licence has to be publicised (a point that the IPO wants PPL to devote even more expenditure to).

· Usage of the repertoire must be collected and processed (usage reports can contain millions of lines of data).

· Rightholders must be paid, based on the value of the usage of their repertoire.

7. The costs of licensing (let alone distributing) vary from one use to another. For example, even within PPL:

· PPL’s licensing of public performance requires a team of 80 staff to deal with hundreds of thousands of customers. Most of the licensees pay annual fees of around £100.

· PPL’s licensing of broadcasts requires a much smaller team of staff as there are far fewer licensees and the average fee per licensee is much higher.

8. A significant proportion of PPL’s running costs relate to the costs of distributing licensing income accurately and fairly (by analysing millions of lines of usage) as opposed to the transaction costs of licensing.

9. There is a presumption in the impact assessment that all costs are bad. However, many of the activities which are called for - accuracy, transparency, investment in systems - require additional expenditure, beyond the bare minimum. For example, performers and record companies within PPL have voluntarily opted to spend an additional £3.5m a year on anti-piracy measures. This additional expenditure falls outside the licensing activities of PPL (and yet was included as a transactional cost in the impact assessment) and is for the benefit of the entire industry.

CODES OF PRACTICE

 

10. Recommendation 3 of the Hargreaves Review states that "collecting societies should be required by law to adopt codes of practice."

11. PPL fully supports the idea of codes of practice for collecting societies, recognising the benefits to members and licensees alike. We are actively participating in the British Copyright Council’s initiative to develop a set of common principles for such codes, as well as developing our own code. However, we are concerned that the conclusion reached by the Hargreaves Review (which appears to doubt that concerted self-regulation by licensing bodies is sufficient) is based on unsubstantiated and mistaken assertions which may, in turn, lead to unnecessary regulation.

12. The proposal for Codes of Practice for collective licensing is described as an "enabling measure" in the Economic Impact of Recommendations and no additional growth or cost savings are predicted. Instead the impact assessment argues that collective licensing companies "appear to be the cause of some avoidable deadweight losses and inefficiencies...[because of] this natural monopoly position." This logic is inaccurate, flawed and unsubstantiated. The accompanying analysis shows a fundamental lack of understanding of the economics of licensing.

13. Collective licensing bodies were set up by rightholders so they could benefit from the efficiencies of licensing collectively. These efficiencies also flow through to users who benefit from a one-stop shop. Rightholders control their collective licensing body (in the UK, at least) and control their costs.

14. For example, the PPL Board comprises four major record company representatives, four independent record company representatives and four performer directors, as well as four executive directors and one non-music industry director. Those Board directors are responsible for the financial management of the company and, as it is their revenue that is at stake, it is in their interests to ensure that costs are managed, the operations are efficient and the right investment decisions are taken. More information is contained in our original submission to the Hargreaves IP Review.

15. In addition to the Board, PPL has the specialist Performer Board, Finance Committee, Distribution Committee, and Audit Committee, all comprising members which scrutinise specific areas of the business.

16. We are pleased to note that the Government’s response to Hargreaves places greater emphasis on the self-regulatory initiatives of licensing bodies. Their proposal is to publish voluntary codes, in consultation with collective licensing bodies and only then draw up a backstop power.

17. We look forward to participating actively in the consultation regarding minimum standards for voluntary codes and very much hope that a collaborative approach can be adopted. A voluntary framework, which avoids unnecessary regulation and bureaucracy, is likely to be more efficient and more conducive to encouraging collective licensing. The focus should be on building on current accountability and transparency and should not be unduly influenced by the flawed analysis in the Economic Impact of Recommendations.

NATURAL MONOPOLY

 

18. The Economic Impact of Recommendations assumes that, as a natural monopoly, PPL will behave in a monopolistic fashion. However,

· Rightholders can choose whether or not to give their digital rights to PPL.

· Users choose whether or not to use sound recordings in their business. The comparison with utility companies1 is erroneous as it is difficult to imagine a business operating without power or water.

· In many areas of business, PPL clearly does not have a monopoly (for example, digital licensing, international collections).

19. PPL is a natural pro-competitive monopoly for broadcast and public performance licensing, which exists because it suits all the parties. Because of its not-for-profit structure, the incentives are to work for all stakeholders. Furthermore it provides a level-playing field for users and rightholders alike.

INCENTIVES FOR IMPROVEMENT

 

20. The impression given by The Economic Impact of Recommendations is that collective licensing companies have no effective incentives to operate efficiently.1

21. Firstly, PPL’s stakeholders demand low overheads, efficiency and service delivery. Given the well-documented financial pressures on the record industry, it is inherently unlikely that PPL’s stakeholders would demand anything other than an efficient and cost-effective service.

22. Secondly, there is competition for licensing (for example, throughout Europe PPL faces competition for the licensing of background music services) and for distribution (for example, PPL faces competition with other societies and with third party rights collection agencies in respect of the payment to performers of their international revenues).

23. Even worse, the paper makes assumptions and assertions without any evidence to back them up. Among the unsubstantiated claims are:

· "The individual organisations appear to be the cause of some avoidable deadweight losses and inefficiencies"2 – yet no specific examples of such losses or inefficiencies are provided. This conclusion appears to be based on nothing more than the range of cost-income ratios for different licensing bodies. Leaving aside the fact that the wrong figures are used (for PPL, for example), the analysis takes no account of material differences in the scale and nature of each licensing body’s operations (with different rights, rightholders, functions and licensee markets). It is erroneous to define and assess a single collective licensing model (as the Economic Impact of Recommendations seeks to do).

· "A very wide dispersion of cost margins and director remuneration in the industry suggests inefficiencies."3 – however, the opposite is true. It would be inefficient if the figures were the same for societies with different business models. The Economic Impact of Recommendations takes a pejorative stance by setting out the remuneration of the highest paid directors without providing any context (such as the scale of the society’s operations or the remuneration of directors elsewhere). In the case of PPL, it ignores the most important fact: that the top directors are appointed by the Board whose money is at stake and are subject to regular re-election by the wider membership at the company’s Annual General Meeting.

· "Instances of price discrimination."4 – again, no evidence is provided to support this claim.

· "Repeated customer complaints – in submissions or tribunals."5 – no information is provided as to whether those complaints relate to digital licensing or other areas of licensing. Furthermore, no attempt is made to assess whether any such complaints are justified. The only example given is a Copyright Tribunal decision which was a dispute over price, not customer service or good conduct.

· "Opaque financial reporting."6 – no specific examples are provided. PPL does provide detailed financial information, in its published annual accounts and in bespoke accounting to members. Again there seems to be a mistaken assumption that there should be a single reporting format, ignoring the different functions of different collective licensing bodies.

24. Several comments are made in respect of PPL making back payments following a Copyright Tribunal reference.7 These comments contain several errors:

· There was no "over-charging"8, which suggests misconduct on the part of PPL. The fees of PPL were reduced but pending the decision of the Tribunal the statutory procedure allowed PPL to charge those fees.

· There is a curious comment that PPL put that money aside in its accounts to refund licence fees following the Tribunal’s decision, with the note that "You will only be entitled to a refund if you make a claim to PPL for repayment". This suggests that PPL was wrong to say that the licensees had to make a claim. However, it was the Copyright Tribunal that specifically ordered in October 2009 that there should be a claims-based refund process.

· The refunds were only necessary because the Section 128A regime did not work (and has been repealed) and was not the expeditious process that PPL and copyright users alike had expected.

· In any event, this Copyright Tribunal order on tariffs is not evidence of any inefficiency or poor customer service.

TRANSPARENCY

 

25. The Economic Impact of Recommendations says that increased transparency is likely to improve confidence in collective licensing systems overall, thereby attracting more members to join, so the societies could gain from increased membership in the long term.1 Yet there is no evidence at all that record companies and performers are deterred from joining PPL. In fact, the opposite is true. PPL’s membership has been growing steadily year-on-year.

26. If anything, greater regulation (by the Copyright Tribunal or otherwise) could push stakeholders away from collective licensing.

27. The Economic Impact of Recommendations asserts that copyright would gain from greater transparency because they would purchase licences based on prices set in a more transparent fashion.2 For example, it is said small businesses have reported that licences from the music collecting societies were among the more unpopular ‘regulatory costs’ and that the majority of customers are not aware that they can negotiate the licence fee. (Looking at the Government’s Your Freedom exercise, this claim is overstated.)

· This licence fee is not a regulatory cost – it is a transactional cost for goods and services (the use of recorded music).3

· Many tariffs are negotiated with representative bodies.

· Individual negotiations with all licensees would not be efficient. It would drive up costs for rightholders and users. It also would run the risk of PPL acting in a discriminatory fashion by treating similar licensees differently.

28. It is then said that "greater transparency and standards of practice could reduce transaction costs for a wide range of private and public sector organisations, from sole traders to schools. Benefits from transparency may be most significant for organisations for whom licensing is an incidental rather than a central business interest, who have few or no legal resources to devote to it, and so may be particularly poorly equipped to negotiate effectively."4 There is no evidence to support this statement. On the contrary,

· PPL licensing tariffs are publicly available on the PPL website.

· Most tariffs are negotiated on behalf of small businesses by their representative trade body.

· Schools deal with a single company who have been appointed by PPL and PRS to issue licences to educational establishments.

29. Improvements for licensees will only be achieved if there are in fact substantial inefficiencies and yet the impact assessment offers no valid evidence on that crucial point. Greater regulation of an already efficient company will constrain its operations limiting flexibility and innovation just at the time when this is needed to adapt to new uses of content. More significantly, greater regulation will deter rightholders from choosing collective licensing.

COMPARISON WITH OTHER TERRITORIES

 

30. It is often stated that collective licensing is regulated in the rest of the EU, but not in the UK. It is also noteworthy that the EU agenda is dominated by complaints about collective licensing in member states other than the UK.

31. It is true that the UK does not have a proscriptive regulatory regime for collective licensing. However, there is a finely balanced regulatory system in place which combines private scrutiny with public adjudication. PPL is accountable to its members who govern and control every aspect of its business. In the public arena, PPL is subject to all the general regulatory requirements of companies. In addition, the Copyright Tribunal has specific jurisdiction and wide powers to adjudicate in disputes between collective licensing bodies and licensees.

32. In its ongoing analysis of the performance of collective licensing bodies, IFPI regularly upholds PPL as an example in terms of revenue and accountability and has asked PPL to develop a global repertoire database of recordings data.

33. Collective licensing in the UK is generally regarded as efficient and beneficial to both users and rightholders. The focus should be on codes at European level.

DIGITAL COPYRIGHT EXCHANGE

 

34. The proposal for a Digital Copyright Exchange will purportedly deliver additional growth of £2.2bn per annum, with cost reductions of £10m - £20m per annum. The growth figure is based on a projected 4% acceleration in the digital economy in a report entitled The Economic Impact of a European Digital Single Market by Copenhagen Economics. However, this presupposes a wide range of changes in investment infrastructure, harmonisation of legal frameworks, skills and training and consumer attitudes to piracy and security. A Digital Copyright Exchange alone will not deliver this.

35. Similarly, the cost estimates are excessive. The starting point, i.e. current costs of collective licensing, assume that these are all digital, when in fact most of these costs relate to traditional broadcasting and public performance revenues. The projected saving from investment in IT systems is also erroneous given that PPL has just implemented an entire new suite of Money Out systems, including a globally-enabled recordings database.

36. In our experience, developing a comprehensive database does bring tangible business benefits (hence the PPL Board’s decision to invest in those systems) and work on the Digital Copyright Exchange could facilitate these developments across the creative industries.

37. We agree with others that the Digital Copyright Exchange, as a network of databases, is in essence worth pursuing, provided it is industry-led (rather than a public IT project).

September 2011