Culture, Media and Sport CommitteeWritten evidence submitted by BPI (British Recorded Music Industry) Ltd

1. BPI (British Recorded Music Industry) Ltd. is the representative voice for the recorded music industry. Our membership comprises over 350 independent labels and the three major record labels—Universal Music, Sony Music and Warner Music. Together, these account for more than 85% of the sound recordings sold in the UK every year.

The British Recorded Music Industry and the Economy

2. The British music industry is world leading and is the second biggest exporter of recorded music in the world, after the USA, with a 12% global share. Economically, UK investment in artistic originals in music in 2009 was valued at £1,331 million GVA to the UK economy (IPO 20121). Following in the footsteps of an exceptional heritage of global superstar artists, British performers punch above their weight:

Adele’s album 21 was the biggest selling album in the world in 2011;

the top-selling global artist album also came from a British act in four of the last five years;2 and

in 2011, for the fourth year running, British artists accounted for around one in 10 of every artist album sold in the US, with cumulative share of sales totalling 11.7% (up from 9.8% the previous year).

3. The trade in invisible services for music is a significant net benefit to the UK economy. Taking income abroad and payment made overseas from UK record companies for public performance royalties, synchronisation, licensing for use on sound carriers and digital income, the trade surplus for the industry in 2009 was £137.7 million, the highest annual total since 2001.

4. Worldwide, the creative sector is a growth market, and the UK should be in a strong position to capitalise on this growth. The 2008 United Nations Conference on Trade and Development (UNCTAD) found that, between 2000 and 2005, trade in creative goods and services increased at an average annual rate of 8.7%. This is higher than worldwide growth in GDP in the period. In respect of music, British companies already enjoy a share of global trade that is three times the UK’s share of world trade in goods, and 50% higher than the UK’s overall share of trade in services.

5. However, despite the exceptional creative achievements of UK artists and the expertise of UK labels in marketing their music abroad, the UK recorded music sector faces difficult times as increasing illegal downloading has deprived the industry of revenue which is essential to ongoing investment. Revenues of UK record labels have fallen by 32% since 2004 from £1,220.4 million to £823.8 million in 2011.

6. Without doubt the single biggest barrier to growth in the music industry is widespread piracy and lack of practical, low cost, timely enforcement measures in the UK to protect content. Digital Economy Act implementation is part of that, but there is a bigger part for the Government to play in ensuring businesses can compete in an online market that supports business models for investing in content. This is not just a creative industries issue—technology companies that rely on selling content for their revenues cannot compete with free, illegal content distributed online.

The UK Government should develop a strategy that ensures that: legitimate businesses are united in acting against piracy; there is adequate education of the impact of piracy on jobs and growth; and legal enforcement is proportionate, cost-effective, flexible enough to deal with technological change and swift enough to be useable by rights owners.

The Independent Hargreaves Review of Intellectual Property and Growth

7. The Hargreaves Review started from a premise that is still unproven—that copyright was a barrier to growth in technology sectors and that overall this would be of net benefit to the UK Economy. On the back of this flimsy analysis, the Government is proposing significant change that will affect the livelihoods of millions of individual UK based creators, and thousands of SMEs.

8. The economic case for exceptions has not been convincingly made by Government in its consultation on the Hargreaves Review. Government assumes that transfers of value from creators creates economic growth, even where those transfers go offshore—to US tech firms—or are merely captured in consumer surplus or lower costs for public or private sector institutions. The Government is trading jobs and growth in the world class UK creative sector in favour of sectors where the UK is not as strong.

9. The record industry has worked hard to create new business models for the digital age and as a consequence the UK has over 70 legal digital music services, more than any other country in the world. Empirically the barriers to licensing digital music services in the UK are low—otherwise the UK would not be able to boast this record on services. Hargreaves, and the IPO, assumes that there is a problem with licensing of digital music services but this is a complete contradiction of the facts.

10. The Copyright Consultation document showed that the IPO does not have a good understanding of the UK licensed music market, and it made assertions about sales prices and revenues that did not reflect what is actually happening in retail markets. BPI would refer the committee to BPI’s response to the Copyright Consultation and to the Oxford Economics Report on the Impact Assessments for the consultation for a full exposition of the problems with the consultation.

11. That said, BPI takes a pragmatic view of discussion of access to copyright, and has engaged fully with the work on the Digital Copyright Exchange. If licensing of copyright material is a problem, the solution is to make that process simpler and easier, and the Digital Copyright Exchange is the right focus for Government, not taking whole areas from the protection of copyright.

12. The main points BPI has made on the consultation are:

Private Copying Exception: BPI supports the introduction of a limited private copying exception to enable consumers legally to transfer music they have legitimately purchased on CD (or another physical format) onto their mp3 player or other hardware device for their personal, non-commercial enjoyment, provided that this is done in accordance with EU law;

Research and private study: BPI is opposed to all attempts to make music a compulsory free input into research and education. If music is to be used in any educational setting, it should be licensed and paid for. This is particularly important given the difficulties of defining appropriate limits around research and private study and the potential abuse of any such exception to obtain private benefits from obtaining free copies of music;

Parody Exception: BPI does not believe that the consultation has presented objective, credible evidence that a parody exception is justified or necessary. If Government decides to proceed with a parody exception that allows new original content to be generated it must be on the strict condition that the moral and economic rights of the original creator are fully respected; and

Education licensing: As with research and private study, BPI is opposed to all attempts by the Government to force creators to give music as a free input. BPI notes that legitimate educational establishments are covered by a very successful and low cost arrangement overseen by the Educational Recording Agency licensing scheme and that this is flexible for modern classroom needs.

13. BPI believes that the upside benefits of all of these measures are substantially overstated in the Hargreaves Review and the Copyright Consultation accepted all of the Hargreaves’ assumptions without question. In particular, BPI is concerned that the measures on the private copying exception were backed up by weak and contradictory evidence and that the damage to investment in successful UK music content has not been properly quantified by the Government.

14. As a consequence, despite BPI’s wish to find a solution to the private copying issue it is unable to support the options put forward in the consultation on private copying. If the exception applies to “cloud services”, which BPI strongly opposes, this will interfere with an emerging digital licensing market which is already worth substantial amounts in revenue to UK music businesses and has the potential for significant revenue growth in the future. BPI also note that licensing solutions such as the Amazon Cloud and iMatch services are legitimising private copying through market solutions.

15. Extending a private copying exception into the cloud is not necessary to ensure that consumers can benefit from cloud services. All it will achieve is to give a windfall to technology companies that are then able to offer music services to consumers and monetise them without paying anything to the creators of the music concerned. The Government should not be interfering in business arrangements to transfer value away from creators in this way. Particularly if it transfers that value to companies that are not UK based, and provide little to the UK economy in jobs or in tax revenues.

BPI believes the growth figures in the impact assessments for the Copyright Consultation should be verified by the Office for Budget Responsibility as an independent source of expertise in growth forecasting. BPI would also like the Government to produce empirical evidence that the exceptions, as introduced in other countries, have created similar levels of growth to those predicted by the Hargreaves Review.

BPI opposes any moves to interfere with its members’ legitimate exploitation of their rights through licensing deals with cloud services. As such BPI is opposed to a private copying exception that extends to the cloud.

Piracy

16. Internet piracy remains a huge problem for the future development of the UK digital content market. Research from Harris Interactive shows that the retail value of single tracks downloaded from unauthorised sources in the UK is £984,000,000 annually. We recognise, of course, that every track downloaded illegally would not be substituted with a legally purchased track. Taking this into account, Jupiter Research estimates the lost revenue of the recorded music industry in 2011 to illegal music downloading to be £236 million, at retail value.

17. This level of piracy affects investment in the industry but also represents a significant loss to the exchequer from tax revenue foregone and to the economy in jobs and output. Tera Consultants investigated the wider economic impact of piracy, concluding that 30,400 direct and indirect jobs in the UK are lost due to piracy.3 Every year delay in implementation is hitting legal revenues and investment in UK jobs.

18. Whilst the implementation of the Digital Economy Act would be a great step forward in protecting those rights, our international competitors are pulling ahead of us. For instance:

In the United States in 2008, the new position of Intellectual Property Enforcement Coordinator was created and placed in the Executive Office of the President, to coordinate the enforcement work of all federal Government agencies.

France established HADOPI, a body to police copyright on behalf of rights holders which is fully funded and supported by the French Government. The agency was promoted by a €3 million Government-funded advertising campaign.

19. BPI strongly welcomes the Government’s efforts to press ahead quickly with implementation of the Digital Economy Act, but has made clear that that the costs that the creative industries face in order to protect their rights are a significant burden on business—a burden that is created by activity that is infringing rights in law. This is in contrast to similar measures taken in other countries, which do not impose similar costs on rights holders. As such the Act represents a competitive disadvantage for encouraging investment in and production of original creative content in the UK.

20. Ongoing delays to the implementation of the Digital Economy Act have allowed piracy to continue unchecked. Revenues in the UK music industry have been falling as have prices of retail content in competition with free, perfect copies of UK music tracks shared illegally online. Online piracy is a big business, but one which gives nothing back to artists, creators and investors in content.

21. BPI is still very concerned about three aspects of the Digital Economy Act:

the absolute levels of cost; which are very high and will act as a serious barrier to rights holders wishing to use the process. In particular of Ofcom’s costs, where there is no transparency for rights holders for very high costs Ofcom is charging for its administration of the system;

speed of implementation; where delays are of significant financial detriment to the UK’s content industries and the DEA keeps getting held up by internal Government processes; and

lack of Government financial support; either for the DEA itself, which is in contrast to all of our competitors, or for education around the importance of copyright for creation of new content and providing reward for creators.

22. Added to this is the problem that the only enforcement mechanism open to rights holders to block illegal websites, the powers under section 97A of the Copyright, Designs and Patents Act, are expensive and cumbersome. BPI took a successful action in the High Court against one of the most obviously infringing sites, The Pirate Bay, but this took many months and many hundreds of thousands of pounds to undertake.

23. The Government should bring forward proposals to ensure that swift action can be taken against foreign websites that earn large amounts of money by providing vast amounts of infringing content. The current process does not work for rights holders, and the damage is done to artists and UK businesses long before a successful High Court action can be completed. An expedited, low cost court process that maintains court scrutiny of evidence but can deal swiftly with offending websites is an essential part of the battle for legitimate business against online infringement of copyright.

24. There is also a forward looking issue that the Digital Economy Act is only one measure needed to deal with a highly dynamic market. Alongside the Digital Economy Act, the BPI believes that the UK Government should introduce flexible measures to tackle online and mobile infringement of copyright in the upcoming White Paper. A new duty on the regulator could allow more flexibility in responding to piracy as technology changes. Ofcom could keep levels of piracy under review and take any action as necessary to ensure a fair, proportionate, response to ensure that there is effective action against piracy and support for investment in UK creative content.

25. Such a duty would complement Ofcom’s Duties to further the interests of citizens and consumers, in this instance by ensuring that there are dynamic legal content markets and consumers are protected from unlawful services and being guided to them. It would also complement Ofcom’s duty to further investment in infrastructure—as money from increased demand for innovative new legal services would be used to support infrastructure investment and growth in UK technology investment.

BPI has called for an expedited site blocking process, using the applications court, so that actions against illegal foreign websites can be low cost, swift and effective in defending the rights of UK creators and businesses.

BPI has called for the Communications White Paper to include proposals for Ofcom to have a duty to reduce online and mobile copyright infringement in the UK. This general duty should be accompanied by specific powers to require entities to take reasonable measures specified by Ofcom to achieve this objective.

In addition to this, BPI would ask the Committee to support the endeavours of the creative industries in coming to voluntary agreements to ensure that internet intermediaries such as payment providers, Internet advertisers and hosting companies do not support illegal sites and to ensure that search engines direct UK consumers to legal sites ahead of known illegal ones. Agreement on these measures would bring much needed stability to investment in the sector.

Tax Incentives

26. BPI welcomes the Select Committee suggestion that it should look at incentives in the tax system to support investment in new content. The BPI has proposed a measure that would support investment in Artists and Repertoire (A&R) spend, the R&D of the record industry, which is the fundamental driver of growth across the music industry.

27. Investment in new creative content will be one of the main drivers of growth in a digital age. Supporting investment in new UK music through A&R expenditure would help ensure that the UK remains one of the world leaders in music. A tax incentive for investment in A&R would:

help ensure the growth of the industry and maintain its strength in the global market;

encourage investment by reducing the risk; and

help the industry to maintain its investment and future revenues in the face of the impact of illegal downloading on industry revenues.

28. Expenditure on A&R (Artists and Repertoire) represents the recorded music industry’s research and development expenditure and its investment in the future. In the UK market each year’s new releases make up over half of album sales. A&R is the driver of revenues and the source of growth in the music market. The reality is that it requires significant investment in promotion to break through. When A&R investment is combined with the marketing and promotion expenditure, the amount of money spent in bringing music to the attention of consumers represents over 40% of industry revenue from recorded music, or £370 million in 2009.

29. Artist advances are the most significant part of A&R expenditure, almost half over the years 2008–09. It is the advance that gives the certainty to an artist that they can concentrate on recording through providing them with an income. The risk is spread across a large range of acts and these high risk investments help drive growth across the entire music business, and in related industries.

BPI has proposed a tax incentive on Artist and Repertoire investment above a threshold of 20%, with revenues allocated to A&R above that threshold attracting preferential rates of taxation. This would incentivise A&R investment above historical levels in the music industry, whilst not rewarding companies for investment they would have undertaken in any event. This could be monitored for impact over time.

The Intellectual Property Office and the Creative Industries Council

30. The measures on enforcement of copyright need to be backed up by an Intellectual Property Office that is properly resourced and focused on defending the rights of UK creators. The IPO has spent a lot of energy looking at how the rights of UK companies can be reduced, the BPI would also ask the committee to look at the energy the IPO puts into its role in enforcing copyright.

31. On this issue, BPI has called for a clearer set of duties for the IPO in enforcing copyright. BPI would also like to see a greater role for DCMS in overseeing the copyright aspects of the IPO’s work. The expertise of DCMS in the creative industries should be an important part of the development of policy on copyright, and the current process of consulting late in the stages of policy is not giving enough weight to the important economic concerns of impact on the world class UK creative industry.

32. The IPO has been extremely willing to work on education around the importance of copyright but it does so with very little resource. The US, France and South Korea amongst others have grasped the importance of Government driving the education around copyright. A greater understanding of the importance of copyright is an essential part of the mix of measures in ensuring legal content markets can thrive.

33. The Creative Industries Council is one forum where Ministers from the two main Departments can meet to discuss the sector. For this to be useful, Secretaries of State must remain engaged, and it must focus on progress made on the protection of Intellectual Property in a digital environment.

BPI would like the IPO to have a clear statutory duty to protect and promote the interests of UK intellectual property in the UK and overseas and a duty to co-ordinate effective enforcement of UK rights domestically and internationally. The Intellectual Property Office should also have a duty to educate consumers on the value of intellectual property and the importance of respecting intellectual property rights.

October 2012