Support for the creative economy

Written evidence submitted by Enders Analysis [SCE 081]


This submission responds to an invitation by MP John Whittingdale Chairman of the Culture, Media and Sport Committee regarding evidence for the inquiry on "Support for the creative economy", in the wake of the very successful opening and closing ceremonies of the Olympics and Paralympics 2012.

I am Claire Enders founder and CEO of Enders Analysis Limited, a leading UK independent research company. Enders Analysis serves publications, presentations and consultancy on the media and telecommunications sectors to subscribers, which include companies and investors in our coverage sectors, as well as regulators and government departments. A full list of reports is available at and Annex l of this report contains a list of subscribers. [1]

The views expressed in this report are mine alone but may overlap with those expressed by companies that are subscribers. This report has been prepared with the assistance of my team.

Before responding to certain items on the Committee's agenda, I would like to make a few general remarks. The first is to indicate my economic position as a rights owner. The reports produced by my company constitute my intellectual property and I have no respect for actions of piracy that undermine its value.

Secondly I believe mass market levels of piracy of music and video content in the UK, which takes place year in and year out, is the most significant threat to the long-term survival of the creative economy. It is not so much that piracy represents foregone sales, whose precise value is hard to pinpoint, but more that the Government has, in my opinion a duty to provide a strong signal to the people that theft of the products of the creative economy is not acceptable. It limits revenues and commercial opportunities for companies and thus the jobs the sector can create. It has been a decade since I first started to work for an industry-led anti-piracy regime, [2] whose delay is detrimental to the creative economy.

Thirdly as a rights owner, I am prepared to voluntarily act to secure public policy outcomes. I routinely supply my reports and analyst time to educational establishments without charge, [3] but would take it amiss if I was instructed by the Government to make the content 'generally available' to such establishments, especially given the current absence of an anti-piracy regime.

Fourthly, I support public policy interventions for the wider benefit of our society when there is convincing evidence of market failure (e.g. plurality in the provision of news), despite the cost to individual companies. This inquiry has under consideration public policy interventions that are said to be aimed at fostering web-based entrepreneurship, but whose costs the creative economy is expected to assume. These are the issues I have flagged below.

The value of the creative economy

By creative economy, I have in mind not only the film, music, television, design and games sectors, which this Committee has under examination in its current inquiry, but also print media, theatre, dance, fashion, the visual arts and so on. These sectors were also showcased most effectively in the opening and closing ceremonies of the Olympics and Paralympics 2012.

The UK's creative economy is both large and dense thanks to the combination of 62 million relatively well-off consumers served by a myriad of suppliers, both large commercial enterprises and SMEs, as well as the BBC, supporting many jobs. [4] The products of the creative economy also contribute to our exports. They shape the image of the UK abroad, thus contributing indirectly to attracting visitors to the UK, supporting our successful tourism industry.

Although the Committee's agenda does not mention the tax regime for philanthropy, I would like to take this opportunity to remind you that the generous support of individuals and companies is an absolutely fundamental pillar of the creative economy. In this regard, I recommend the Committee safeguard the regime and prevent its deterioration. The Coalition was wise to retreat from the dissuasive limit to individual gifting it had initially included in Budget 2012.

The challenges facing the creative economy

The most immediate challenge facing the creative economy is the weak state of consumer demand. The decline in real income in 2011 and into 2012 has forced households to devote a larger share of household budgets to necessities, at the expense of recreation and culture: £85.30 of weekly spend of £500.40 (17%) was spent on this category in 2008, compared to £78.30 of £503 in 2010 (15.6%). That means that companies in the creative economy must be smarter and focus on delivering products that consumers will buy despite their straitened wallets.

Of particular concern to me is the situation of young people today due to relatively high unemployment rates: 18.5% of 16-24 year-olds are currently unemployed vs 8.2% for the working age population. Young people often constitute the 'heartland audience' for the creative economy, such as cinema for example, and at the same time also rely on the creative economy to create the jobs that will mesh their cultural interests with a means of earning a wage.

It is another irony of the digital age that piracy's heartland audience is young people. They have more time to enjoy the products of the creative economy but cannot fully fund their consumption. Piracy is a habit formed with the support of the peer group, which then lingers on into adulthood. It has shaped the past decade's music consumption durably, to the detriment of the creative economy.

Despite the high level of unemployment amongst young people, employers often cite difficulty in finding qualified workers to support the creation of digital products, notably programmers. I think this is a problem that is due more to the aspirations of young people today than a failure of educational policy.

The UK's world-class educational system, spanning both publicly-funded and privately-funded establishments, has sufficient flexibility to respond to new demands as they arise in the marketplace. Many educational establishments already have programmes dedicated to the creative industries to assist students in finding jobs. Support for these programmes is critical to the creative economy.

In terms of the conditions facing businesses supplying the creative economy, access to finance is a constraint. There are two levels of constraint in this area:

· Access to investment capital to fund start-ups

· Access by SMEs to working capital at reasonable rates of interest

Access to investor funding for ambitious digital business models is a very competitive sector, with many aspirant entrepreneurs fighting for the attention of angel investors and investment bankers, in the context of a tax regime which I understand to be supportive of start-ups. I am not confident there is market failure requiring a public policy intervention, e.g. a state-owned bank dedicated to funding start-ups in the creative economy. It's a healthy aspect of the creative economy that business ideas must compete for investors.

SME access to working capital at reasonable rates of interest has been a severe and ongoing constraint since the onset of the credit crisis in the UK in 2008, as evidenced by the regular surveys of lending activity from the Bank of England. [5] The Funding for Lending Scheme may alleviate these conditions in 2014.

Hargreaves Review and the Copyright Hub

Building on the Gowers Review of Intellectual Property Regime (2006) and Digital Britain (2009), the Review by Professor Hargreaves has provided the basis for the Coalition's policy on copyright in the digital age. Proposals include the creation of an industry-led Copyright Hub, as well as the proposed clauses in the Enterprise and Regulatory Reform Act that will allow exceptions to be introduced by the responsible Secretary of State without primary legislation. I understand their generic purpose as being to foster the establishment of e-businesses that use the Copyright Hub or exploit exceptions to the copyright regime in order to establish new business models.

I must confess to being perplexed by the starting point and core conclusion of Hargreaves, namely that UK economic growth is being held back by the absence of a 'fit-for-purpose' copyright regime to suit the needs of the digital age.

In my long experience of the UK's creative economy, I have reached the opposite conclusion: our copyright regime is its pillar. However, its support for web-based entrepreneurship is visibly being undermined by mass market levels of piracy of music and video content, and more recently ebooks. Piracy of music content is routinely cited by digital music start-ups as being their most significant challenge.

I am not convinced that access to orphan works would foster a cornucopia of new web-based businesses. The evidence presented by the IPO on behalf of Hargreaves for example does not demonstrate that insufficient access to orphan works is an issue for VOD business models. Recently-produced content understandably dominates consumption and the offers of commercial suppliers, and few potential licensees see a business model in the 'long tail' of consumption. There are few orphan works in the music and film sectors, but many more in the area of printed content, outside this Committee's inquiry.

I am also not convinced that content owners operate a policy of hampering new web-based entrepreneurs. In my 30-year experience of the recorded music industry, I have observed a dramatic shift on the part of majors and independent labels in favour of licensing new and innovative music services, serving both the UK and any other contestable market. This pro-active licensing policy is today a publicly stated position. [6] For the recorded music industry, such partnerships with services are vital to distribute music in digital format to the widest number of customers.

Of course this wasn't true 15 years ago when the majors in particular still believed that their digital music services would populate the market, before these were found to be inconsistent with competition law. Far from being reluctant to license, labels embrace it!

I am also not convinced that the UK's distinct copyright regime is a handicap to web entrepreneurs in the UK. Google operates exactly the same business model in the UK as in the US, namely, serving search to users on a scale that drives the purchase of keywords by advertisers. Google appears to have not been worried in the least for mundane acts such as caching copies of websites on its servers by the businesses that buy search terms. (I understand that newspaper publishers in the UK have not 'opted out' of having their pages indexed by Google for fear that they would lose vital traffic, while the German newspaper publishers are negotiating for compensation.)

Instead, the main reason why the US has been a hotbed of innovation is down to the size of its market, which supports levels of R&D and innovation that are more than 10 times the level in absolute terms than in the UK. [7] The US has five times the population and number of internet users than in the UK, and the US can support a denser tissue of web- based entrepreneurs because scale is such a key success factor for e-businesses. Nevertheless, the UK has the highest spend per capita on the internet than any other major economy.

In Europe, London is a start-up hub together with Berlin and Paris. Facebook has opened its first engineering office outside of the US in London this summer, and various digital media start-ups have their origin in the UK and successfully expanded overseas.

Comparing the copyright regime of the UK with that of continental European countries, the UK is almost alone in not remunerating rights owners for private copying. This certainly prevents rights holders from enjoying an ancillary revenue stream, to the detriment of the creative economy.

Under the EU Copyright Directive, there is no obligation to introduce such a private copying exception, but if it exists, then it must be remunerated. Whilst this may appear to be a legalistic position, I believe it is a form of expropriation to introduce copyright exceptions that eliminate commercially significant potential revenue streams for rights holders.

At the same time, I fully appreciate the value to consumers of an exception for private copying. Where the creative economy in the UK has never enjoyed revenues from private copying, it makes it easier to argue that an exception would not be detrimental to current revenues.

It may also be detrimental to the creative economy to remove the oversight role of Parliament in deciding copyright exceptions, but I cannot offer an informed view.

More evidence needs to be marshalled to support the claim that the UK's economy will grow as a result of the creation of Copyright Hub. So far, it appears to have been established as a matter of public policy that rights owners will fund the Hub, even though the costs of the Hub have not been specified as yet by Richard Hooper and his team at the IPO. This is a necessary first step, to be followed by a cost-benefit analysis: the additional financial burdens on rights holders to fund a Hub and populate it with rights may well outweigh the potential benefits to licensees and the wider economy, once these are properly assessed.

Piracy and the DEA

There has been some delay to the launch of the UK's anti-piracy regime, although progress has been made since the DEA was passed. Under Ofcom's guidance, outstanding and sizeable differences of view between ISPs and rights owners regarding the 'true' costs to ISPs of sending letters to broadband subscribers have now been settled.

In addition, rights owners are also required to cover Ofcom's costs of operating the regime. [8] ln the "Online Infringement of Copyright: Implementation of the Online Infringement of Copyright (Initial Obligations) (Sharing of Costs) Order 2012", Ofcom has clarified these costs as follows (estimates for the period from Q3 2012):

2010/11 2011/12 2012/13 2013/14 2014/15

£1.8m £0.7m £1.6m £3.2m £3.2m

This has given rights owners the first visibility on the substantial costs of the future anti-piracy regime. The total is likely to be higher once their legal and other internal costs of participating in the regime are accounted for.

I note that other governments are prepared to fund anti-piracy regimes to support the creative economy. Hadopi in France is an example of a 'three strikes' regime that has been dissuasive of music and video piracy, and is fully funded by the French government.

UK Government funding of Ofcom's costs of operating the anti-piracy regime would constitute a measure of support to the creative economy and a signal that the UK Government backs anti-piracy activity.

There is a longstanding theme in UK Government policy which prefers industry-funded initiatives over new quangos. However, there are downsides in this instance, and that includes the considerable time and effort needed to convince companies to fund an 'industry-led' regime.

The Copyright Hub and the anti-piracy regime are public goods for the digital age, much like the information superhighways that broadband networks deliver, An anti-piracy regime in particular builds a culture based on respect for creation and the rights of creators to exploit their own work. That is the bedrock of the creative economy.

One issue that I would like to comment upon is 'repertoire imbalance', which Richard Hooper and Dr Ros Lynch have identified as influencing public opinion and politicians on piracy. [9] This imbalance arises mainly as a result of the practise of the audiovisual sector to license on the basis of a 'media chronology', first for theatrical exhibition in cinemas, then for sale/rental, and so on. Inevitably, first release film content is unavailable online, except in a pirated version, noting that cinema exhibitors would lose their business model if this window were to be closed. However, DVDs go on sale at retail at the same time as digital formats appear for sale on iTunes, thus removing this repertoire imbalance.

Whilst it has been said that repertoire imbalance is a trigger for piracy, I would note that recorded music does not have a media chronology (aside from a very short window for commercial radio airplay designed to build chart position and buzz), and still remains beset by piracy. In other words, I would be reluctant to causally link piracy to 'repertoire imbalance'.

In my view, the core driver of piracy is very basic and simple: it's free, and there is no societal sanction to pirates or anti-piracy regime that could interfere with the illegal downloading of content.

Tax regime for the creative economy and its sectors

Budget 2012 provided tax breaks as of April 2013 for a new category of enterprises producing video games, animation and the high-end TV production sector in the UK. Mr Wilson, director of the video games trade body Tiga, has predicted that tax relief for the video games sector should generate and safeguard 4,661 direct and indirect jobs, offer £188m in investment expenditure by studios, increase the games development sector's contribution to UK GDP by £283m and generate £172m for the Treasury. [10]

I am not a specialist on taxation. My only comment is that investments in video games, animation or the high-end TV production sector take several years to recover as their exploitation proceeds and I would warn against removing these tax breaks in the future. The UK independent film and TV show production sector has benefitted a great deal under the tax credits regime, giving us a world-class film and TV show production sector, alongside the BBC's commissioning.

November 2012

[1] Not printed.

[2] Piracy-Will it kill the music industry? [2003-12]

[3] Perth College - Speakers for Schools, Creative Industries 12 November 2012.






[6] Rob Wells, SVP Digital, Universal Music Group International "It's in everyone's interests to offer today's digital consumers the widest possible choice of innovative, fully licensed music services."

[7] $403 billion on R&D in the US vs £26 billion in the UK ($42 billion) in 2009



[8] " Copyright Owners should bear all of the costs incurred by Ofcom, the majority of costs incurred by the appeals body, and 75% of the costs efficiently and reasonably incurred by Qualifying ISPs in carrying out their obligations. "

[9] " If you cannot find a particular film or a particular piece of music legally on the internet, you may be tempted to find an illegal copy and use that. Repertoire imbalance as it is called between the physical world (e.g . DVDs) and the digital world (e . g . downloads) can be used as another "excuse" to " Justify" copyright infringement. Like in other corners of the copyright world, this may be more perception than reality but perception can and does influence public opinion and politicians. The creative industries have to take perception seriously."




Prepared 21st November 2012