Support for the creative economy

Written evidence submitted by UK Music [SCE 035]

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

A list of our members is attached as an annex.

Executive Summary

· We start by highlighting the contribution that UK-originated music makes to the UK’s culture and economy. We refer to this indigenous talent as a natural resource; indeed a national asset.

· We go on to show that the music industry has more to offer in the future and, alongside other copyright industries, can play a significant role in rebalancing the economy. Our ambition is for the UK to become a global copyright centre.

· This potential is conditional, however. The most critical factors to achieving our potential are: a strong copyright regime; an investment-friendly fiscal environment; and a workforce with a good mix of skills. The most important of these is copyright.

· The CMS Select Committee asks very pertinent and timely questions about the extent to which government policy is helping or hindering the creative industries in their ambitions for growth. We give our assessment under each of the three main headings: copyright, investment, and skills.

· Our broad conclusion is that the impact of government policy on copyright is likely to be damaging; the impact on investment is looking to be negligible; and the jury is still out on whether the impact on skills will be positive or negative.

· This lacklustre scorecard need not be the legacy of the Coalition Government. There is still time for Government to change direction, so that its policies have a positive impact right across the board, helping the sector reach its full potential for growth.

· Finally, we urge that a more fundamental issue be addressed. We regularly encounter a viewpoint that intellectual property per se is a barrier to innovation, a legal bureaucracy, and simply incompatible with the digital age. If this blinkered and wrongheaded attitude prevails, the UK will undoubtedly lose the competitive advantage it currently enjoys from its copyright industries.

Full Response

1. The 2012 Olympics was testament that any display of the best that Britain has to offer will feature music as a headline act.

2. With a turnover of nearly £4 bn [1] , our sector sustains in excess of 100,000 [2] jobs. The UK is the second only to the United States as a producer of global repertoire. We are one of only three countries in the world who can claim to be a net exporter of music in the world. This is in addition to being one of the world’s largest markets for the consumption of music. The upshot is that even though we buy more music per head than almost any other population in the world, we also ship more of our music abroad than almost every other country in the world.

3. Adjacent to this is the very significant value that music adds to other sectors. For example, UK Music research in 2010 showed that live music in the UK attracted more than 7.7 million visits from music tourists who spent £1.4 billion during the course of their trip, boosting the economy by nearly £865 million and sustaining the equivalent of at least 19,700 full time jobs. And, of course, music continues to be a driver of growth and innovation in the digital technology sector.

4. At the heart of our industry is the creative genius of the British people. A new wave of composers, songwriters, musicians and producers have emerged every year for the past six decades, producing music that is loved and desired by people all over the world. This natural resource is discovered, nurtured and supported by music publishers, managers and record labels who invest significant amounts of expertise and money in bringing the expression of this creativity to the consumer in the form of the finished product. So long as we can continue to nurture and invest in the indigenous talent in our population, we will continue to create a product for which there will always be a demand.

5. The music industry has withstood more than a decade of severe disruption and rationalisation in response to technological developments. While we continue to face very significant challenges and pressures today, the resilience of our sector attests to our ability to create, innovate and adapt. The sector has diversified its revenue streams [such diversification now accounts for 20% of record industry trade turnover [3] ], increased B2B income, and invested heavily in the underlying infrastructure that supports new business models, all of which have helped to rebalance the decline in revenue from the sale of recorded music direct to consumers.

6. We have reason to be optimistic about the future. The appetite for UK-originated music around the world shows no sign of diminishing. Latest BPI figures show that British artists accounted for 12.6% of all artist albums sold around the world. British artists are responsible for the best selling album in the world in four of the past five years. [4]

7. British music is incredibly popular around the world; revenue earned from its use has doubled since 2002, according to PRS for Music which represents 90,000 songwriters, composers and music publishers and collects royalties from 150 territories around the world. During 2011, UK songwriters and composers earned £187.7 million globally [5] . Growth of £100 million in international royalties since 2002 is attributed to both the widespread consumption of British music, and improved licensing of its use around the world.

8. Likewise, PPL, the collective licensing body that collects and distributes royalties on behalf of performers and record labels, has seen strong growth in international revenues in the last decade and anticipates further growth in the future. The UK’s music collective licensing bodies are continuously striving to build the infrastructure needed to secure the value arising from use of British music abroad and return it the UK. PPL concluded new international collection agreements with four new countries over the past year (Croatia, Estonia, Greece and Latvia) and secured revenue for the first time from two other countries (Bulgaria and Serbia).

9. Obviously, the way that people are accessing and enjoying music will keep changing as technology advances, and more and more of the world’s people join the digital market. Being able to participate fully and fairly in that digital marketplace is therefore vital-utterly fundamental-to our sector’s future.

10. Establishing and growing a legitimate digital market for music has been very challenging in light of significant factors, such as digital infringement on an industrial scale. Parallel to this was a culture, particularly prevalent in the earlier days of the digital market, whereby new digital services would launch a music service first and only agree to engage in licensing discussions with copyright owners further down the road when it suited their business strategies. Meanwhile, very large digital intermediaries have been able to use their dominance, and the music industry’s woes, to negotiate very advantageous terms indeed.

11. Despite such challenges, the digital marketplace continues to develop apace. The UK music industry has licensed more digital services than any other country in the world. Consumers have many choices as to how they enjoy their music, including even whether to pay because licensed services can choose to charge per play, or for subscription, or can offer free services supported by advertising revenue. Revenue from digital music (downloads and subscriptions) overtook income from sales of physical CDs and records for the first time in 2012. Digital’s share of total record industry turnover now stands at around 27%. [6]

12. As digital services continue to diversify and as developments such as the ‘cloud’ gain traction, the potential for digital revenues to continue to grow is very real. Our ambition is to position the UK as a global centre for copyright, with the world’s digital businesses coming to UK to acquire the copyright licences they need from the UK’s collective licensing bodies and hubs. Our message is that we are open for business.

13. Our ambitions are very high but they are achievable. We already have a global reputation for creativity. The UK’s music collective licensing bodies are streets ahead in terms of building the underlying infrastructure needed to process the billions of separate music usages in the digital market. The UK’s geographical position is highly advantageous, and of course our English language gives us a natural edge.

Copyright

14. Our ambition to become a global centre for copyright is dependent on a number of critical factors. A strong copyright regime is the most important factor affecting our growth potential, because it underpins the functioning of the entire market for creative content.

15. Copyright is the "currency of creativity". It gives creators six exclusive economic rights over their work, precisely so they can earn an income from their work. One of these six economic rights is the right to copy the work. Another is the right to communicate the work (to a third party).

16. Anybody else who tries to do any one of the six things without the permission of the copyright holder would be acting unlawfully. This provides the basis for commerce. Legitimate businesses and organisations that make use of music don’t want to break the law. So they ask copyright holders for permission. Copyright holders grant permission in exchange for a licence fee. The longevity and enduring success of this model in the digital age offers proof of its ability to sustain investment and reward in creative innovation.

17. Government is soon to publish draft legislation to introduce new exceptions to copyright. These exceptions will have a very direct impact on the marketplace. They will take away existing licensing income and undermine future opportunities to license where music creates value for businesses. Consider, for example, a private copying exception.

18. Consumers should be able to copy and back-up the music on their own CDs. Nobody wants to stop consumers from doing this and nobody has ever tried to prosecute a consumer for doing this.

19. The controversy on private copying music arises from a historical disagreement as to how this additional value can be monetised in the commercial supply chain. This is a business-to-business debate that has yet to be resolved.

20. There is a risk that exciting and innovative new "cloud" services, like Apple’s iMatch or Amazon’s cloud service will be needlessly dragged into the old debate on private copying.

21. Cloud services like Apple’s and Amazon’s have already been launched and are licensed by copyright holders. Copyright holders are now in negotiation with a number of other businesses offering or looking to develop "cloud" services. This is an example of the digital market developing correctly, with all parts of the value chain involved.

22. Government is proposing a new private copying exception to copyright, drawn so widely so that it would extend to music in cloud services. Such an exception would be damaging. It would create uncertainty as to whether a cloud service requires permission from copyright owners, and encourage the commercial providers of cloud services to challenge their need to get a licence from copyright holders for certain uses that are currently licensed. It would destabilise the simple formula that underpins the commercialisation of copyright (permission to use music in exchange for a licence fee). There is already evidence of this happening.

23. There is a lot at stake. The Government’s trade and investment body, UKTI, reports that the UK Cloud Computing annual market value is predicted to grow by 150% over the next two years, from £2.4 billion to £6.1 billion by 2014. Business analysts have predicted that the UK will be a leading market for cloud computing, second only to that of the United States. An exception for private copying risks excluding the UK’s creative industries from participating fairly in this market.

24. Other exceptions-for example, for educational use, public performance licences for certain events, and for parody, are also being pursued, and would again directly interfere in the music industry’s ability to generate revenue through licensing. We are puzzled and alarmed as to why the Government appears intent on proceeding down this route. Licensing, rather than exceptions, should always be the presumption for permitting uses of music or any creative work. In turn, music copyright owners are committed to simplifying the licensing process for users; and UK Music will be reporting to the Secretary of State next year on our progress.

25. We fear that the root of proposals for a new swathe of copyright exceptions lies in a viewpoint that intellectual property per se is a barrier to innovation, a legal bureaucracy, and simply incompatible with the digital age. This viewpoint is not new; nor is it unique to the UK (e.g. Sweden’s Pirate Party). But it is an ideology fundamental at odds with a market economy.

Examples:

"Can it be true that laws designed more than three centuries ago with the express purpose of creating economic incentives for innovation by protecting creators’ rights are today obstructing innovation and growth? The short answer is: yes." (Ian Hargreaves in the foreword to his review of intellectual property and growth, May 2011)

Openness and Open Business Models: "Within this theme we explore open business models which aim to replicate the success of the open source software model, with publishing, design, music and film all considered. In addition, we plan to develop and build a non-proprietary open user platform." (Research Programme as set out by the Centre for Copyright and New Business Models: a consortium of seven universities, funded by the UK’s research councils.)

"3D printing poses several challenges to our intellectual property system. Those businesses producing customised objects for consumers via 3D printing need to be able to access the designs for a wide variety of components quickly and cheaply. The current legal system means they would need to engage in costly rights negotiations with a variety of other businesses each time they wanted to produce an object, seriously curtailing the ability of 3D-printing businesses to function. Policy needs to explore different ways of organising the intellectual property systems to get around this, ensuring legal bureaucracy does not stand in the way of this exciting technology." (Three Dimensional Policy: Why Britain needs a policy framework for 3D, published by the Big Innovation Centre , October 2012 .)

26. The legitimate digital marketplace for music is growing, on the basis of licensed services, underpinned by the copyright framework, despite all the challenges highlighted earlier. This fact should prompt a new and invigorated appreciation for IP and the role it can play in future economic growth. Instead (or at least alongside of) reports and studies devoted to the theory that IP is an inhibitor to innovation, Government, IPO think tanks and academic institutions should be studying the ways in which copyright contributes to economic growth and the role copyright can play in driving future growth. That such scant data exists seems negligent.

27. UK Music is currently undertaking new research into the contribution that the music industry makes to the economy in terms of GVA, employment, and exports, as well as an assessment of its indirect effects. This work will be published in 2013. We are liaising with statisticians in DCMS, ONS, and other publicly funded bodies with the hope that data available to Government on the role that the creative industries play in the economy can be improved.

28. The UK will undoubtedly lose the competitive advantage it currently enjoys from its copyright industries unless Government and society at large embrace IP for what it is-the means by which populations and economies can realise the value of their creativity and ingeniousness. We urge the CMS Select Committee to recommend that Government change its policy on copyright as a matter of urgency.

An investment-friendly fiscal environment

29. There is an obvious and direct relationship between the confidence of those investing in artist and writers, in recordings, in digital music services, in licensing infrastructure-and levels of digital infringement. Infringement clearly distorts the functioning of a market based economy and deprives all those who invest their time, energy, talent or financial resources, from ever realising a fair return on that investment.

30. The development of the digital market in the UK will continue to be hampered by the reluctance of potential investors and financiers who question whether they can ever secure a fair return on their investment in face of widespread copyright infringement.

31. The Digital Economy Act is yet to be implemented. Provisions for site-blocking were dropped. Government-backed discussions with stakeholders on voluntary solutions to disrupt infringing sites are welcome, though we have yet to see whether they will have any impact.

32. Music companies invest considerable amounts in developing new talent. Successful acts and writers are rarely-if ever-discovered fully formed. They will have benefitted from the expertise, encouragement and financial support of record labels, managers and /or publishers. The up-front investment required is often considerable, and yet access to finance has proved to be problematic for the sector. Likewise, collecting and licensing societies must invest significantly upfront in the infrastructure needed to process music uses in digital services.

33. Our sector has long reported difficulties in accessing finance to aid growth; however in recent years, these difficulties have intensified and now pose a serious threat to our future. Debt finance is largely impossible to secure, particularly for very small music businesses. The gap in understanding between creative business sectors and financial institutions remains persistent. We welcomed efforts to improvement the way that the Enterprise Investment Scheme works, and the creation of a new SEIS scheme, but there is little sense that these have made a difference. We urge Government to help lubricate the flow of finance, which is a vital element to creating the Silicon Valley-style enterprise culture it seeks. This will help create the right conditions for growth not only for the creative content sector, but for the digital technology sector and all high value sectors of the economy.

34. 26. UK Music welcomes the development of creative sector tax credits. The existing film tax credit, as well as forthcoming tax credits for high-end television, computer games and animation has been embraced by those sectors directly involved. However, an explicit tax relief targeted directly at the UK music industry does not exist, establishing an imbalance amongst producers of creative content. UK Music would therefore ask the Select Committee to recommend that Government initiate a policy appraisal to consider the economic gains of extending creative sector tax reliefs to include a creative sector tax relief focused on Artists and Repertoire (A&R), the music industry’s research and development expenditure for future investment. Such an idea was developed further in our submission to the Government consultation on creative sector tax credits in September 2012.

Withholding tax

UK resident music publishers - claiming tax relief or exemption for foreign income in the form of royalties (including advances against royalties)

35. Our members are directed by HMRC to claim relief or exemption either by filling in a claim form from the relevant country's tax authority or to apply for a certificate of residence.  In either case the process of certification by the Revenue is too cumbersome and is taking too long to complete, particularly as regards regular repeat business conducted by our members with their sub publishers in foreign territories. Members report long delays in processing forms, loss of forms, forms being incorrectly returned by HMRC and poor communication. 

36. The response times from HMRC range from four weeks to four months and more.  Can this process be speeded up so that three weeks is a maximum time for response?  Would not the use of a simple pin code be a way to speed up the certification process?              

Double taxation treaties – a consistent global approach

37. There are territorial inconsistencies in the approach to relief and exemption which do not seem justified.  For example Spain, a country in the EU, insists on imposing withholding tax on royalties.  How can this be justified? By extension the imposition of locally/nationally applied withholding taxes may impede the continued development of multi-territorial online licensing of music. The bi-lateral territorial structure of double taxation treaties conflicts with the development of licences and royalty distribution on a multi-territory basis in the single market. More focus on transparency processes across EU states would help repatriation of income to the UK faster and with less compliance cost.

EU Interest and Royalties Directive

38. In the context of the above points on withholding tax, it would be helpful if the Directive were amended to provide that the Directive should apply to all companies and not just to associated companies (as this seems to favour larger enterprises) and further that  the benefit of the directive should extend to collection societies representing publishers and their composers.

 

National Insurance and self-employed musicians

· The Musician’s Union has been advised by HMRC that, based on an Upper Tier Tribunal appeal hearing in the case of ITV Services Ltd v HMRC, they now consider self-employed musicians fall within the regulations for Class 1 National Insurance ("NI") contributions.

· Previously, HMRC’s Guidelines On The Special NIC Rules For Entertainers (issued in April 2005) provided a specific exemption for session musicians. HMRC are currently reviewing these guidelines in light of the Tribunal decision.

· This decision widened the scope of the Social Security (Categorisation of Earners) Regulations, and could mean that musicians are now caught within these regulations, depending on the terms of their contract of engagement.

· Where performing musicians’ fees are computed by reference to time (e.g. for a recording session or live gig) this may now mean the employer has to deduct from the fee and pay HMRC 12% Class 1 NI (the employees contribution). Additionally, the employer may also be liable to pay the 13.8% employers NI contribution.

· This is potentially a huge problem both for musicians and for employers, and the MU report that it could lead to the closure of up to 13 orchestras. In addition, MU warn that overseas producers bringing inward investment into the UK’s creative economy by way of recording soundtracks for films such as the Hobbit and Prometheus may take this work elsewhere as a result of having to pay employers’ NI.

· Complete compliance with this ruling is completely unworkable and would, for example, require a pub landlord who books a musician to perform in the pub, to deduct National Insurance and to know whether to pay an employer’s contribution. This would wipe away any progress made by the Live Music Act to encourage live music in small venues.

Skills

39. UK Music is concerned about the proposals currently being consulted upon by the Department for Education to replace core subject GCSEs with English Baccalaureate Certificates. We are concerned by the evidence that the number of pupils studying music at GCSE has fallen since the English Baccalaureate was introduced in 2010 and that excellent music teachers and music departments are being sidelined.

40. The introduction of the English Baccalaureate Certificates reinforces the government’s view of academic study as the ‘gold standard’ for all and will deny young people a well-rounded education and harm the creative industries.  The push for students to concentrate only on traditional academic subjects ignores the creative and cultural sectors as core growth industries.  By ignoring these sectors, it seems the DfE is working in isolation from the skills and growth strategies at DCMS and BIS on skills 

41. The success of the Olympics and the Paralympics this summer underlined the importance of music to the very substance of Great Britain and it showcased the UK Music industry as a world leader.  We want the education system to promote the creative curriculum alongside the more traditional academic subjects, to help develop more adaptive and creative young people and address skills shortages that threaten the growth of our sector. 

42. Intellectual property and copyright education should be embedded in the national curriculum. Raising awareness of IP issues at a young age in schools could help society understand the role that IP plays in the economy and culture, and would help students understand the value of their own creativity.

43. There is a lack of apprenticeships in the creative industries and indeed in the music industry. The simplification of the Apprenticeship Grant for Employers was a welcome step, however it is crucial that Government works with employers to remove barriers to taking on apprentices. As the industry is dominated by SMEs and sole-traders it is essential that Government ensures the costs of taking on an apprentice are not prohibitive. UK Music is exploring the possibility of developing an industry-wide apprenticeship scheme.

ANNEX

UK Music’s membership is comprised of:

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

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

· The BPI representing more than 350 music companies, from major labels to the smallest independents, accounting for more than 85% of all recorded music sold in the UK

· Music Managers Forum representing 425 managers throughout the music industry

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

· Music Publishers Association, with more than 260 major and independent music publishers representing close to 4,000 catalogues across all genres of music

· Musicians Union representing 32,000 musicians

· PPL licensing for 46,000 performers and 5,750 record companies

· PRS for Music is responsible for the collective licensing of rights in the musical works of 90,000 composers, songwriters and publishers and an international repertoire of 10 million songs

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

November 2012


[1] Adding UP the UK Music Industry for 2010, by Will Page and Chris Carey, published in Economic Insight issue 20 by PRS for Music , August 2011

[2] Music Impact and Footprint, published by Creative & Cultural Skills, 2008-2009

[3] BPI press notice from 4 October 2012: “Diversifying Income Streams Boost 2011 Record Label Revenues”

[4] See AGM speech by BPI Chairman Tony Wadsworth CBE, 4th July 2012

[5] See PRS pres notice of 29 October 2012: International income from British music doubles in the last decade

[6] See the BPI’s statistical handbook for 2011.

Prepared 17th November 2012