Culture, Media and Sport CommitteeWritten evidence submitted by Consumer Focus

1. Consumer Focus is the statutory watchdog for consumers in England, Wales and Scotland, and for postal consumers in Northern Ireland. We would like to see competitive markets in copyright protected content where consumer demand is met in a timely manner through innovative goods and services. We would like to see a copyright system which supports this by striking the appropriate balance between the interests of creators, investors, copyright owners, intermediaries and consumers.

2. Consumer Focus welcomes the opportunity to provide written evidence to the Culture, Media and Sport Committee call for evidence on support for the creative economy. Though we note that this is the fourth inquiry into the same subject matter in two years.

3. Consumer Focus has submitted written evidence to the Business, Innovation and Skills Committee inquiry into the Hargreaves Review of Intellectual Property and the Government’s response to the Review. Consumer Focus also provided written and oral evidence to the All Party Parliamentary Group (APPG) for Intellectual Property (IP) “inquiry” into the role of Government in promoting and protecting IP. There is a significant overlap between these two inquiries, and the current Culture, Media and Sport Committee call for evidence on support for the creative economy. Similarly, there is a significant overlap with the Culture, Media and Sport Committee inquiry into the Protection of Intellectual Property, which was launched in November 2010 and suspended in April 2011.

4. Entrepreneurs, SMEs (small and medium-sized enterprises) and creators organisations are largely absent from the list of organisations which submitted evidence to the Business, Innovation and Skills Committee inquiry and the APPG for IP “inquiry”. Responding to inquiries requires significant resources. Likewise, responding to the Intellectual Property Office (IPO) consultations which followed the Hargreaves Review similarly requires significant resources. Prof Hargreaves made efforts to encourage entrepreneurs and SMEs to contribute to his Review. Similarly Consumer Focus made efforts to encourage creators’ rights organisations to respond to the IPO consultation that followed the Hargreaves Review. Creators, entrepreneurs and SMEs are significant stakeholders in copyright law, and the bedrock of the creative economy. Consumer Focus therefore would like to encourage the Culture, Media and Sport Committee to reach out to these stakeholders in particular to ensure that all relevant stakeholders get heard.

5. Consumer Focus also notes the considerable challenge of responding to a Culture, Media and Sport Committee inquiry which seeks evidence on the portfolio of the Department for Business, Innovation and Skills (BIS) and its executive agency, the IPO. We will therefore focus our written evidence on the areas of the inquiry that are within the Department for Culture, Media and Sport (DCMS) portfolio.

Barriers to Growth in the Creative Industries

6. Consumers are central to the creative industries, as they pay for creative content and services. While consumer spend on physical goods, such as CDs, DVDs, CD-Roms and books are still significant, consumer spend on digital creative content is becoming increasingly important.

7. However, as noted in our response to the recent DCMS consultation on the Communications Review, it is not correct to suggest that in the digital age ‘the ownership of content model (a physical CD at home) transforms into an access model (accessing the song from a cloud-based music service)’. As explained in greater detail in our response to Richard Hooper’s Digital Copyright Exchange feasibility study, a more accurate description of current developments in the music and book publishing market is that the physical ownership model (ie purchasing a CD or hardcover book), the digital ownership model (purchasing DRM free music MP3s or e-books) and various access models (such as Spotify and Kindle e-books) co-exist.

8. With regards to Hollywood movies digital ownership models have not developed because DVDs or digital films in the UK are always Digital Restrictions Management (DRM) restricted. However, with regards to non-Hollywood movies, digital ownership models have developed alongside the physical ownership model and various access models. Hollywood studios only started to license their movies for various access models in the UK very recently in response to regulatory and political pressure to update their business models and meet consumer demand. There is in our view a lack of competition and innovation in the UK markets for Hollywood movies, which should be addressed through a review of the communications market competition regime as part of the Communications Review.1

9. The argument that online copyright infringement by consumers is the most significant barrier to growth in the creative industries, ie consumer spend, is not supported by evidence. For example, the British music industry achieved significant digital revenue growth once it started to licence a broader catalogue of music to a variety of digital services, which provide different access models, price points and “extras” to consumers. It should also be noted that the British music industry achieved a bigger growth in digital revenues than the French music industry in the year Hadopi was fully operational.

10. According to figures published by SNEP, the Syndicat National de l’Édition Phonographique, France’s digital music industry grew by 25% to €110 million in 2011. Downloads generated €56 million of revenue, an 18.4% increase compared to 2010. Streaming and subscriptions grew by 73% to €39 million. Subscriptions services such as those from Spotify and Deezer grew by 89% to €26 million. Revenues from physical formats were down 11.5% to €412 million. Total revenues in 2011 were €617.2 million, down 3.9% from 2010.2

11. According to figures published by the British Phonographic Industry (BPI), Britain’s digital music revenues grew by 24.7% in 2011 to £281.6 million, a third of record industry trade income. The BPI also reported a stronger growth in digital albums, which was up by 43.2%, and premium subscriptions, up by 47.5%. The BPI described the 3.4% decline in total recorded music trade revenues in 2011 to £795.4 million as “modest”, with revenues from physical formats having fallen by 14.1% to £513.8 million in 2011.3 The BPI highlighted that growth in digital revenues now off set two-thirds of the decline in income from physical sales. The BPI observed that:

12. “It is highly encouraging for the long-term prospects of the industry that the pace of digital growth continues to accelerate. British labels are supporting a wide range of innovative music services and music fans are embracing digital like never before. The record industry has continued to invest heavily in discovering and supporting outstanding British talent, which has helped sustain revenues in the face of difficult economic circumstances”.

13. The UK has the biggest e-commerce consumer market in Europe, and possibly globally.4 As the European Commission has recognised, growth in the e-commerce consumer market hinges on maintaining and building consumer trust, especially in relation to online payments. As outlined in our submission to the Office of Cyber Security and Information Assurance (OCSIA) to contribute to their discussion paper on “Safer Surfing”, trust in payment systems, and the ability of businesses to provide safe payment mechanisms, have been key to creating a flourishing e-commerce market in the UK. Providing consumers with the ability to pay safely with their debit card online has been a key step in making the e-commerce market accessible to the majority of consumers. Non-card based payment mechanisms, such as PayPal, are a more recent, but equally important development. In turn, the ongoing development of cost effective micro-payment mechanisms is likely to facilitate the new digital business models of the future.

14. If the UK wants to remain at the forefront of e-commerce, it needs to remain at the forefront of online payment. Online payment is in our view the key area where OCSIA could bring stakeholders together to maintain and increase consumers’ trust, and reinforce the UK’s leadership position.

15. On the question “whether lack of co-ordination between Government departments inhibits this sector” Consumer Focus would offer the observation that “cross-departmental” is usually a euphemism for lack of progress. We are not aware that lack of co-operation among Government departments has inhibited economic growth in the creative industries.

16. However, the absence of a well functioning competition regime has inhibited innovation and consumer choice in some creative industry sectors. Effective competition can achieve important benefits for consumers such as choice, value for money, quality of products and services, and technological improvements as a result of innovation. Moreover adequate competition can reduce the need for intrusive regulation. But attempts to apply the existing competition regime to fast moving, converged, multi-layered communications, media and creative markets with a wide range of players have in many cases failed. Therefore Consumer Focus supports DCMS’s intention to assess within the scope of the Communications Review whether the existing competition regime responds effectively to the needs of rapidly changing communication and media markets.5

17. Commenting briefly on the question of “clusters” and “hubs”, in the context of competition and innovation, it appears to us that clusters of tech start-ups develop naturally. In the case of the Silicon Fen, many tech start-ups and companies have close links to Cambridge University, which the Times ranges as the 6^th best university globally for engineering and technology. It is not clear to us what the benefit to competition and innovation would be from “encouraging a greater geographical spread of companies”. It is not apparent to us that BIS’ activities in relation to promoting the UK’s existing tech clusters and hubs has been “at the expense of encouraging a greater geographical spread of companies through effective universal communication”. Indeed if “universal communication” refers to DCMS’ work to ensure universal access to basic Internet and the role out of superfast broadband, we are not aware that this work has suffered as a result of BIS’ work in relation to clusters and hubs.

18. Consumer Focus welcomes the Government’s recognition that a healthy ecosystem of tech start-ups and SMEs is important for competition and innovation, which ultimately benefit consumers. As explained in greater detail in our submission to the Hargreaves Review for IP and Growth, the traditional creative industries increasingly depend on the technology industries for innovation. Most traditional creative industries have had a long standing and symbiotic relationship with technology companies, because consumers need hardware and software to enjoy creative content, such as recorded music or films. The value of an iPod to consumers may be greatly reduced if they could not use it to consume music, but the value of a CD to a consumer without a CD player would be equally minimal.

19. Both the creative and the digital technology industry are characterised by dominant companies with large market shares and monopolies, as well as a complex ecosystem of entrepreneurs, micro-businesses and SMEs. This is a side effect of the ‘network effect’, where a single standard emerges as dominant once sufficient numbers of consumers have adopted it. As such, one producer tends to dominate the market and their products become the ‘standard’ or the ‘gatekeeper’ for complementary products. Despite the dominance of some players, such markets can experience a high degree of competition through the ‘neo-Schumpeterian’ effect; if they are characterised by rapid innovation and paradigm shift. Competition is on innovation, not price of a product, and companies will invest in innovation and development to dislodge the incumbent with new technology. This leads to fragile, temporary and serial monopolies.

20. However, the ability of entrepreneurs, micro-businesses and SMEs to dislodge the incumbent is reduced if the dominant company can prevent network effects by, for example, constraining consumer choice through lock-ins and high switching costs, or by preventing other companies from producing complementary interoperable products. A ‘direct network effect’ includes the utility consumers derive from the number of other consumers who choose to use the same product. An ‘indirect network effect’ is the sale of complementary goods and services. Consumers will attach a higher value to products, for example an operating system, if a high number of complementary products, such as software applications, can interoperate with the product. At the same time companies are more likely to develop interoperable complementary products for an existing product which has attracted a high number of consumers, known as ‘positive feedback’. In economic terms companies that operate in markets with network effects produce products for a ‘two-sided market’, as they have to attract both consumers and producers of interoperable complementary products.

21. The European Commission has moved to apply competition law to dominant creative and technology companies who operate across borders in the internal market. However UK competition authorities have thus far failed to grasp how dominant creative and technology companies stifle competition and innovation in the UK market.6 This is in our view a significant failure and we therefore welcome DCMS’ resolve to assess whether the existing competition regime responds effectively to the needs of rapidly changing communication and media markets as part of the Communications Review.

The Failure to Implement the Digital Economy Act 2010

22. The Culture, Media and Sport Committee asks for evidence on the “impact on the creative industries ... of the failure, as yet, to implement the Digital Economy Act 2010, which was intended to strengthen copyright”. Consumer Focus notes that the explanatory notes to the Digital Economy Act 2010 for sections 3 to 16 on “online copyright infringement” state that the purpose of the Initial Obligations Code is “to reduce significantly the level of online infringement of copyright”.

23. The Digital Economy Act 2010 sets up an administrative copyright enforcement process by placing certain obligations on Internet Service Providers (ISPs). Consumer Focus is not aware of any evidence which would suggest that in the absence of the Digital Economy Act 2010 online copyright infringement through p2p filesharing (which is to our knowledge the only type of online copyright infringement by consumers that could be caught under the Act, for technical reasons), has led to an increase or reduction in copyright infringement by consumers through p2p filesharing networks. As the evidence sited above shows, the UK music industry achieved a greater increase in legal digital music revenues than France in 2011, when the French equivalent of sections 3 to 16, Hadopi, was fully operational.

24. The Culture, Media and Sport Committee will probably be aware that Consumer Focus has criticised the primary legislation for a range of deficiencies, which we believe largely arise from the lack of Parliamentary scrutiny the Bill received when it was rushed through Parliament in a wash-up process brought about by the 2010 general election.

25. One of these deficiencies, which in our view is central to the delay in implementing the Act through secondary legislation, is lack of recognition for wholesale and retail ISPs, and subscribers to ISPs which pass on internet access to consumers. A typical example is a library or university, which may receive wholesale internet access from an ISP, to pass that on to consumers, and at the same time received retail internet access from an ISP for the use of its staff. Similarly, it is not known whether a provider of public WiFi, where the WiFi provider such as The Cloud received wholesale internet access from an ISP, is a subscriber or ISP for the purpose of the Act. Since the Act received royal assent in 2010 the way in which internet access is provided through various intermediaries to consumers has complicated dramatically, which further adds to the difficulty in making sense of the primary legislation.

26. However, in our view Ofcom has failed to adequately address and resolve an issue which has been apparent from the day the Act received Royal Assent. It was only in response to considerable concerns voiced by public bodies and private business which provide internet access to consumers after the first draft Initial Obligations Code was published, that Ofcom set out to address the issue. However, as outlined in greater detail in our submission to Ofcom, we believe that the second draft Initial Obligations Code published by Ofcom has significant deficiencies in this respect, is likely to impose considerable legal uncertainty and thus cost on public bodies and private businesses, and therefore is likely to lead to a reduction of internet access to all consumers.7

27. Further delay has been caused by Ofcom’s failure to make provisions on the means of obtaining evidence and the standard of evidence in its first draft Initial Obligations Code. We eventually felt compelled to commission a legal opinion and technical expert report to advise Ofcom on the implementation of the Digital Economy Act 2010 through secondary legislation. Ofcom justified its failure to comply with the requirements of the primary legislation, and instead leave it to copyright owners to set their own standard of evidence for copyright infringement reports, on the basis that such an approach “does not involve the setting of arbitrary standards that we are not in a position to understand.”8 If it is not within Ofcom’s ability to understand technical evidence standards for online copyright infringement, it can appoint an independent entity to do so. Following our advice, Ofcom sought to address these issues in the second draft Initial Obligations Code. Consumer Focus has published the technical expert report we provided to Ofcom,9 and we can share the legal opinion with the Culture, Media and Sport Committee upon request.

28. Finally, Consumer Focus would like to highlight that the delay in implementing the Act though secondary legislation is to a large extent caused by the inability of DCMS to obtain parliamentary approval for the cost order, which determines the ISP/copyright owner cost split, and who pays for Ofcom’s cost. Without rehearsing in detail why three draft cost orders did not pass scrutiny by the European Commission, the Administrative Court, the Court of Appeal, the Joint Committee on Statutory Instruments and the Secondary Legislation Scrutiny Committee, it is perhaps most informative if the Culture, Media and Sport Committee considers the report by the Secondary Legislation Scrutiny Committee on the latest draft cost order.10

29. We believe that the most significant obstacle to the latest draft cost order receiving parliamentary approval is the fact that there has to date been no commitment from the music or the film industry to pay Ofcom’s set up cost of £6.8 million and pay Ofcom’s annual cost of £10.8 million. It should be noted that in France, the taxpayer foots the bill for Hadopi, which has a reported annual budget of €11 million, and that this budget has been reduced by 23% because Hadopi “has not fulfilled its mission of developing legal content offerings”.11

November 2012