Economics of music streaming Contents

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5The music streaming market

Competition in the streaming market

143.On one view, the market for (most) streaming services is highly competitive. First, the services themselves are relatively homogenous. The music content on mainstream services is effectively substitutable, as major labels, independent labels and self-releasing artists make their music available as widely as possible.512 One streaming service, Tidal, that attempted to make exclusive releases part of its unique selling point, has in fact faced legal action previously from fans over Kanye West’s seventh album The Life of Pablo, which was released on other platforms only two months after it was released to Tidal after being marketed as a Tidal-exclusive.513 Most features and functionality have become standardised, including offline and high-fidelity playback. Most services facilitate algorithmically and editorially-curated and individually created playlisting. As Jimmy Iovine summarised to the BBC in 2018, “the streaming services are all charging $9.99 and everyone has the same music”.514

144.Second, companies offering premium services all charge broadly identical, stable nominal prices. Most services offer individual monthly subscriptions at £/$/€9.99, which has been the case for over a decade, and it is yet to be seen whether any service can and will deviate successfully (though Spotify recently announced it will increase the price of its Student, Duo and Family plans).515 Third, because of price and service standardisation, as well as their increasing ubiquity, users have relatively complete information about the service’s product and prices.

145.Finally, this pricing is competitive to the degree that streaming services have not been historically profitable. Services like Spotify and SoundCloud have, to date, mostly posted operating losses. In fact, Spotify’s cumulative annual losses in the decade up until 2020 totalled €2.62 billion.516 These services are sustained by venture capital, which allows them to price competitively in order to maintain market growth.517 Other services, where streaming is one facet of a broader business, like Apple and Amazon, are described as loss leaders.518 In 2017, Jimmy Iovine, CEO of Apple Music, told Billboard that “streaming services have a bad situation, there’s no margins, they’re not making any money”.519 Of course, absence of profitability in a growth phase does not mean that the business in maturity would not be profitable; still less that the segment of customers who are paying, given that very many are not, are not profitable.

146.However, the Covid-19 pandemic has created unique conditions for streaming services. Due to the need for social distancing and lockdown measures required to slow the spread of coronavirus and the subsequent closure of live music venues and record shops, there has been an opportunity for streaming services to grow. Spotify is an indicative example. It alone added 30 million subscribers in 2020, including 11 million in Q4, eclipsing forecasts.520 Since January 2020, Spotify’s share price has risen faster than so-called FAANG (Facebook, Apple, Amazon, Netflix and Google) stocks. In this time, Spotify’s share price has more than doubled (an increase of over 103 percent, growing at a higher rate even than Apple (almost 85 percent) and Amazon (almost 78 percent), who both offer services beyond streaming. Moreover, each of the three companies outstripped Netflix (which grew by almost 70 percent), Google (almost 52 percent) and Facebook (almost 28 percent). Even smaller companies like SoundCloud have recently broken even in several quarters, marking a significant turnaround from just 2019 when the company made a loss of 16 percent.521 When questioned, however, representatives of the companies were hesitant to attribute success to the loss of live music. Spotify claimed that “we did well under the circumstances” but “it was not necessarily a banner year” as “throughout 2020 we saw advertising revenue suffer”.522 Paul Firth, Director of International Music at Amazon, similarly, argued that “I don’t know that we can say that there was a positive impact or even a negative impact from the situation we found”, and argued that data suggested a link between the growth of music streaming and growth in live music.523

Technology-driven challenges to the market

Algorithms and playlists

147.Streaming services remain in parity with one another on price, which has not substantially changed in over a decade.524 We note that parity of pricing can be a feature both of perfectly competitive markets and of sticky oligopolistic ones. Unlike streaming services that offer film and TV, where exclusive licences are more common, music streaming services are not differentiated by content. Instead, services have primarily differentiated themselves through their algorithmically- and editorially-curated playlists; the Federation of Independent Musicians describes playlists as being “at the core of streaming services”.525 Dr Nicola Searle argues that Spotify “is very focused on utilising algorithms to deliver what they think the user will listen to”.526 YouTube similarly is powered by its systems that prioritise likes, comments, viewer retention and view and subscription velocity. Both Apple and Amazon cited human curation as the most distinctive element of their service offering.527 Amazon in particular noted that it has invested significantly in human curation, employing music specialists for this purpose in every country.528

148.As well as providing a unique selling point for the services themselves, curation also performs an important function. Streaming provides users with access to a historically unprecedented amount of music.529 As with other content-based tech platforms, a streaming service’s systems, processes and design often play an important role in making this content accessible and manageable to end users. This gives music curators and algorithms an influential role in what music consumers actually listen to.530

Editorial curation

149.Editorial playlists are playlists created by the employees of a service or high-profile, influential, marketable third parties. Creators have told us that being featured on playlists has a significant impact on reach and revenues.531 One creator, who has achieved 17 million streams on Spotify, wrote that “my success as an artist has been largely helped by placement on Spotify editorial playlists—this has driven my streaming numbers up and has earnt me modest recognition and in turn some career enhancing opportunities”.532 In many ways, these playlists act like traditional radio, with a human gatekeeper deciding what tracks to include.533 Unlike streaming services, however, Ofcom’s Broadcasting Code specifically precludes practices such as pay-for-play, known as ‘payola’: section 10.5 states that “no commercial arrangement that involves payment, or the provision of some other valuable consideration, to the broadcaster may influence the selection or rotation of music for broadcast”.534

150.This raises questions as to the basis under which tracks are selected and whether this is open to manipulation, particularly for independent and self-releasing artists.535 In fact, several creators did argue that editorial playlists favour those signed to major labels, claiming that 85 percent of music on Spotify is major owned and comprise 90 percent of editorial playlists, which creates a self-fulfilling cycle whereby major-owned music dominates playlists, achieves significant reach and then continues to dominate new playlists.536 The ordering of playlists can also create hierarchies of importance to tracks, which impact the likelihood that rightsholders of featured tracks will be listened to in large quantities and therefore remunerated. Performers are often encouraged to pay for marketing workshops by the platforms themselves, or for services that pitch to playlist curators or otherwise develop relationships with curators themselves in order to achieve additional promotion through playlisting, despite little long-term impact on their fanbase or future revenues beyond streaming.537 One performer, writing in confidence, also asserted that some playlist curators offered to promote independent performers for a fee, creating a black market for playlisting.

151.Music curators play an important role in the discovery and consumption of digital music and are influential in how creators are remunerated. It is, therefore, unsurprising that music creators are putting more resources into catching the eye of these curators. Where curators are paid or receive benefits in kind for playlisting, we recommend that they are subject to a code of practice developed by the Advertising Standards Authority, similar to social media influencers, to ensure that the decisions they make are transparent and ethical.

Algorithmic curation

152.Algorithmic curation, by contract, refers to the recommendation systems employed by a service for music consumption purposes (rather than, for instance, personalised advertising). This can take several forms: either in the creation of personalised playlists or to curate tracks for autoplay. Isaac Anderson, a professional musician who submitted evidence, described Spotify as “somewhat of a battleground for smaller, unsigned artists”, asserting that:

When a track goes live, the first seven days are essential in ‘training the algorithm’—in other words, directing as much traffic as possible to your new release, in order for Spotify to recognise the plays and favour any chances of it being placed in an algorithmic or editorial playlist.538

However, several submissions warned that algorithms, as with any recommendation system, could reflect biases that may subsequently reduce new music discovery, homogenise taste and disempower self-releasing artists.539 Many creators in written evidence were critical of the opacity of algorithmic curation, and called for greater oversight.540 Moreover, the Spanish collecting society AIE, Incorporated Society of Musicians, Musicians’ Union and others expressed concern at a recent announcement that companies would be enabled to pay for the promotion of their music for a royalty cut.541 Finally, the BPI has noted that algorithms can disadvantage UK artists where they are based on global play counts given that territories with relatively larger populations can skew towards their own domestic artists.542

153.Algorithms are fundamental to the operation of streaming services. However, many questions remain about how they influence music consumption and how much oversight exists. The Government should commission research into the impact of streaming services’ algorithms on music consumption, including where creators are forgoing royalty payments in exchange for algorithmic promotion.

User data

154.Similarly, there are concerns that services such as Spotify, Amazon and YouTube, which offer free, ad-supported streaming to many (or most) users, may be incentivised to maximise data collection and commodification, both for advertising purposes but also as leverage in licensing negotiations. This would have implications for both user privacy, which could be undermined by more pervasive data gathering systems, and for competition, whereby services could gain a competitive advantage from aggregating large quantities of data. Indeed, we know this is already occurring to some degree, as one previous licensing arrangement between Universal and Spotify gave the former “’unprecedented access to data, creating the foundation for new tools for artists and labels to expand, engage and build deeper connections with their fans’”.543 Despite this, Spotify asserted in oral evidence that access to data was provided to rightsholders equally through its Spotify for Artists tool to alleviate competition concerns amongst the music industry.544 Nonetheless, it must be ensured that the financial interests of the music industry and streaming services do not similarly disincentivise user privacy and data ethics for digital music consumers. As the streaming market matures, the use of consumer data in advertising and licensing deals will require effective co-operation by the DMU and Information Commissioner’s Office to ensure a high standard of consumer protections.

Vertical integration

155.Given the competitiveness of the music streaming market, companies have increasingly sought to integrate vertically with other services or otherwise utilise other offerings to achieve a competitive advantage. Jimmy Iovine has argued this, positing that: “Amazon sells Prime; Apple sells telephones and iPads; Spotify, they’re going to have to figure out a way to get that audience to buy something else”.545 In many ways, this competition has promoted innovation and positive differentiation of services. This year, for example, Spotify launched its first hardware device, an in-car entertainment device called the Car Thing, in the United States.546 Other services have launched recently, advertising their services based on more ethical payment systems for rightsholders.547 In oral evidence to our inquiry, Apple spoke several times about how its business model has reflected its pro-privacy values that differentiate its products to those of other tech companies.548

156.There is a risk, however, that the current unprofitability of music streaming may lead companies to adopt increasingly anti-competitive practices in order to become (more) profitable. This may lead to a market ‘tipping’, whereby once a product or service reaches a critical mass of users, network effects create a snowball effect whereby a market rapidly tends towards monopoly equilibrium. Vertically integrated tech companies, for example, with more mature hardware and smart technology divisions could theoretically gain an advantage by creating incentives such as free trials or frictions for competitors such as denying access to third-party services or shipping with defaults that are difficult for customers to change, particularly if one piece of hardware were to dominate the market. The BBC was warned that “vertical integration can tilt the market towards the eco-system’s own services ahead of third parties whether they are alternative streaming services or other forms of audio such as Radio broadcasters”.549

157.When asked, both Amazon and Apple did detail various pro-competition business practices to ensure compliance with competition law, such as business structure (such as compartmentalisation between streaming and other divisions of the business like those working on hardware or voice assistants) and fair access to third-party services (both at set-up and thereafter).550 Some jurisdictions are already responding to allegations of anticompetitive practice. On 30 April 2021, the European Commission issued antitrust charges against Apple following an initial complaint from Spotify. Specifically, it found that Apple broke competition law with its app store policies that both require app developers to use Apple’s own in-app purchase system (which levies a 30 percent commission fee) and forbid developers from advertising other extra-app purchasing options, which allegedly have resulted in higher prices for consumers.551 Spotify’s complaints against Apple have gone further, however. In September 2020, Spotify described Apple’s Apple One subscription bundle, which also includes Apple TV Plus, Arcade, iCloud storage and other Apple products, as “anti-competitive behaviour, which if left unchecked, will cause irreparable harm to the developer community and threaten our collective freedoms to listen, learn, create, and connect” (despite the fact that Spotify itself has previously been bundled with Hulu, AT&T and Samsung552 and Amazon bundles its streaming service with Prime).553

158.It is necessary, therefore, that the UK regulatory environment is equipped to respond to these multi-faceted challenges. The CMA’s Digital Markets Taskforce issued advice to government in December 2020 on the design and implementation of a new regime for digital markets and the powers that its new DMU will need.554 The Government has committed to consulting on proposals this year and to legislating in order to provide the DMU with a statutory footing when parliamentary time allows.555 In the meantime, the CMA has announced that the DMU will work with existing CMA enforcement teams to address anti-competitive practices by digital firms within the CMA’s current remit.556

159.The market for streaming services itself is fiercely competitive. However, there is the potential that companies may leverage other aspects of their business or elsewise use vertical integrations to gain a competitive advantage; indeed, some jurisdictions have considered that this is already happening in some areas. It is important that the UK has a regulatory regime to respond to these challenges. We are encouraged that the CMA has already launched its Digital Markets Unit, which is undertaking important work in this area within the scope of the CMA’s current powers, but to ensure proper compliance the DMU needs to be put on a statutory basis as soon as possible. The Government should launch its consultation on the new pro-competition regime for digital markets by the time it has responded to this Report and commit to a reasonable timeframe (to which it can be held accountable) for when it reasonably expects legislation to be brought forward thereafter.

Prominence

160.Alongside proposed and existing regulatory regimes into competition in digital markets and data privacy, the UK also maintains a regime to support our public service broadcasting (PSB) ecosystem. In our recent Report into the ‘Future of public service broadcasting’, we discussed several challenges to PSB content and the current prominence regime for audio-visual content that similarly apply to music streaming and radio. Music streaming poses several related challenges to the prominence regime as subscription video-on-demand (SVoD) services. First, music streaming poses a market share challenge to PSB content,557 which similarly provide music and speech but also, distinctly, critically important content such as news.558 Second, smart speakers create similar problems to hardware such as smart TVs, smart sticks and set-top boxes, whereby PSB apps are not prominent, easily accessible or even installed by default.559 Vertically integrated streaming services also intermediate the relationship between PSB content and listeners through their hardware. The BBC’s submission argues that, for example, if a listener requests a jazz radio station, the default would be a streamed playlist from YouTube music rather than a live radio broadcast.560 However, there are some differences in the challenges posed by music streaming. Music streaming services do not carry PSB content (which poses a particular challenge for television).561 Irrespectively, though the BBC has responded to competition for listeners provoked by music streaming with its own BBC Sounds app, it remains disadvantaged by simultaneous progression from radio to connected devices, smart speakers and in-car devices. The Department for DCMS is currently undertaking a strategic review of public service broadcasting. The Government must ensure that the challenges posed by music streaming to the UK’s prominence regime are duly considered.

Safe harbour

Safe harbour provisions in law

161.Throughout our inquiry, voices from across the music industry railed against safe harbour provisions that were transposed into UK law from the European Union’s E-Commerce Directive. Safe harbour aimed to clarify the pecuniary and financial liabilities of ‘information service providers’ in instances of transmission (as a mere conduit), caching and, most pertinently, hosting infringing information where the provider “has neither knowledge of nor control over the information which is transmitted or stored”.562 The Directive was transposed into UK law by the Electronic Commerce (EC Directive) Regulations 2002. To benefit from this limitation of liability in regards to content hosting, it was specified that services must not “have actual knowledge of unlawful activity or information” and were required to “[act] expeditiously to remove or disable access” to the information concerned.563 The Directive also specifically prevented member-states from imposing a general monitoring obligation (though did allow for obligations to monitor content in specific cases).564 Subsequent guidance from the Court of Justice of the European Union, in a preliminary ruling on questions referred by the High Court of Justice for England and Wales in the case of L’Oréal vs eBay, further clarified that a provider loses its hosting defence in instances where it “plays an active role” or “provides assistance intended to optimise or promote” illegal content or activity or elsewise should “have been aware of facts or circumstances on the basis of which a diligent economic operator should have identified the illegality in question”.565

162.Safe harbour thus applies directly to tech companies whose services host user-generated content (UGC), such as YouTube, SoundCloud, TikTok, Facebook and Twitch. Evidence to our inquiry from the tech sector argued that safe harbour has provided policy certainty that underpins investment and therefore has facilitated user-driven creativity online.566 YouTube argued that, whilst safe harbour provides a strong foundation, “we obviously go far above and beyond the safe harbour framework with our investments” such as music licensing.567

163.Tom Frederikse noted that social media services in particular, such as YouTube, do not function as straightforward music streaming services, given that they have “a huge amount of user-generated content, […] video and other elements that are not present in the straightforward music services”.568 Nonetheless, YouTube dominates the music streaming landscape. Sales data from RIAA shows that YouTube had a 51 percent569 market share in 2019570 whilst Tom Gray estimated that “eight of the most streamed videos on YouTube ever are music videos”.571 Worldwide, YouTube’s user base far exceeds that of other services: Apple Music has around 60 million active monthly subscribers; Spotify reports 320 million active users; YouTube, by contrast, boasts an estimated two billion active monthly users (albeit using the platform for more than music streaming).572 In the UK specifically, 45 percent of consumers aged 16 and above use YouTube weekly for music, 10 points ahead of the next most used service Spotify; on a more granular level, while British teenagers are more likely to use Spotify weekly, all other demographics strongly skew towards YouTube.573 These trends may shift even further in YouTube’s favour: in the US, YouTube has a market penetration of 70 percent for 12 to 34 year olds.574 YouTube also plays an important role in music discovery: amongst UK consumers, it is second only to radio as the means for discovering new music.575 YouTube itself argues that the opportunities for discovery and revenue it provides has meant that over 610 UK YouTube channels have attracted over one million subscribers and that 84 percent of views on UK content come internationally, making it “a chief exporter of British talent”.576

Economic implications of safe harbour

Impact for UGC-hosting services

164.Tom Gray describes safe harbour as “a get-out-of-jail-free card for Google from copyright and competition law”.577 Fundamentally, safe harbour exempts streaming services that host UGC from being criminally and financially liable for content that infringes copyright in good faith as long as they act expeditiously against this content where they gain “actual knowledge” of infringing content, such as when notified.578 Safe harbour thereby protects social media companies’ free-to-use, ad-funded business model from proscriptive statutory and regulatory moderation requirements, which in practice has allowed users to continue to upload and consume music for free. Elena Segal, Global Senior Director of Music Publishing at Apple Inc., argued that safe harbour provisions create an “unlevel playing field” in favour of YouTube:

The fact that they do not necessarily have licences for all of the music that they use and that they do not need to. Even where they do have licences the amount they pay, because of the way their business model is set up and the way the tariffs work, is less.579

As such, whereas other streaming services negotiate to license music and subsequently make that available to consumers, YouTube effectively negotiates licences for music that users are already providing through the service.580 This gives YouTube an ongoing competitive advantage when licensing music relative to other competitors that do not host UGC.581

165.The economic impacts of safe harbour provisions are twofold. First, it has a direct impact on the music industry via its own rates. Typically, YouTube pays less on average on a per-stream basis than other services, which has been observed by many academics and researchers, industry trade bodies and creators and music companies themselves.582 Second, according to MIDiA Research, despite YouTube’s dominance of streaming both in terms of use and users and “strong progress driving subscriptions in recent years”, it remains overwhelmingly ad-funded whilst services owned and operated by YouTube’s parent Alphabet rank fourth in terms of the number of subscribers.583 The confluence of these issues creates what is referred to as the value gap, whereby UGC-hosting services continue to lag behind market norms established by other services in terms of music industry remuneration.584

166.Despite these legal protections, UGC-hosting services use several tools to address piracy on its site. SoundCloud, for instance, operate a content identification system that scans content when it is uploaded against matches in a reference database and block any matches.585 YouTube similarly operates a content-matching system with several aspects:

• Public webforms that, in this instance, allow users to make copyright claims to YouTube;
• The Copyright Match Tool, which matches content uploaded to YouTube by a user to subsequent any uploads, that allows rightsholders to request removal, contact the uploader or leave the video up; and
• Content ID, which underpins the effectiveness of other tools by creating a ‘digital fingerprint’ for copyrighted works based on the video’s metadata.586

167.YouTube argues that over half of all revenue generated by the music industry from its service comes from copyright claims made through Content ID.587 We note that there is recognition amongst stakeholders (including several who have submitted confidential evidence) that YouTube’s Content ID system is effective and efficiently scalable and has set the benchmark for automated copyright enforcement tools.588 However, we have, in the context of our scrutiny of the online harms framework, found elsewhere that automated systems such as YouTube and SoundCloud’s may be prone to inaccuracies (i.e. false positives and/or negatives when searching for or evaluating infringing content) due to technical limitations, developer biases and so on.589 Our Report into ‘Misinformation in the COVID-19 Infodemic’ concluded that no technological solution is (yet) a complete substitute for human reporting and review.590 Furthermore, we have observed that tech services often do not create frictions or keep money in escrow in favour of expediting payments, meaning that copyright infringers can successfully monetise infringing content before it is identified by the system.591 Finally, the current systems place the onus on rightsholders to provide data and documentation to YouTube before it is protected, which typically is at the expense of emerging or independent performers.592 For its part, YouTube has called on policymakers to explore the possibility of creating a comprehensive musical works and sound recording database, which may have applications here.593

168.YouTube has, in response, emphasised its overall contribution to the music industry. When the issue of lower ‘per-stream’ pay-outs was posed to YouTube’s Director of Government Affairs and Public Policy, Katherine Oyama, she rejected the premise that YouTube pays less per stream than other services, claiming that “the research that I have seen that does analyse that has had us absolutely on par with them”.594 Ms Oyama further responded that “if we make any money the majority of the revenue is going out to the music industry” and that industry rightsholders, including artists and major and independent labels, have benefitted as a result.595 Addressing the criticism of remuneration, YouTube argues that it has paid out over $12 billion to the music industry as of January 2020 (including $3 billion to rightsholders globally in 2019 alone) and projects that it will “become the music industry’s number one source of revenue by 2025”.596 In the UK, YouTube argues that its creative ecosystem supports the equivalent of 30,000 full time jobs and contributes £1.4 billion to GDP.597 However, evidence from Sonstream Ltd, a UK-based start-up alternative streaming service, contextualised these figures. Sonstream notes that that, though YouTube accounts for 51 percent of music streaming per year, it only contributed seven percent of all revenue (and that this figure also only applies to music accounted through their Content ID system, which accounts for less than half of the music on the platform).598 Moreover, Sonstream Ltd argues that YouTube’s $3 billion contribution to the music industry contrasts to its $15 billion total advertising revenue.599 Finally, creators have argued that YouTube’s own policies prevents them from participating in advertising revenue until they achieve 1,000 channel subscribers and 4,000 hours of watch time, which is difficult when competing within the parameters of opaque algorithms.600 Tom Gray asserted that bringing YouTube to parity with other streaming services would positively impact creators: “if we can increase the dividend by 10 percent, 20 percent, 50 percent from YouTube or bring it in line with Spotify, which would be 10 times the value, that is an enormous amount of money for what are basically not highly paid people”.601

Impact on competitors

169.The tech companies’ safe harbour-protected business model also has an indirect impact on rightsholders through its competition with other streaming services. First, safe harbour protections for YouTube’s ad-funded, UGC-hosting service has exacerbated conditions that limit changes in price for streaming subscriptions. Several witnesses have speculated that the ready availability of free music and the dominance of YouTube has led to prices for streaming services being fixed at £9.99 per month for over a decade (which, as discussed in Chapter 2, may benefit the consumer short-term but could have long-term impacts).602 In real terms, static prices have equated to a reduction in remuneration for rightsholders of 26 percent.603 Horacio Gutierrez, Head of Global Affairs and Chief Legal Officer at Spotify, noted, “the balance that we have to strike is one in which music does not become unaffordable to consumers and we are pushing them back into online piracy scenarios”;604 however, Elena Segal argued that this applied to legitimate free services as much as illegitimate pirate sites, stating that “competing with free is always very difficult because consumers have a choice to move to free” and that “it is challenging to compete on an unlevel playing field”.605 Raoul Chatterjee, Vice President for Content Partnerships at Soundcloud, defended the free-to-use model by arguing that ad-supported sites added incremental value to the industry from users who might not be able to afford monthly subscriptions where otherwise they may have turned to piracy, and that ad-supported services often performed an additive role alongside subscriptions to premium services.606 However, whilst the services themselves may be additive, the time spent by consumers using ad-supported services over premium services would impact the number of streams that would otherwise be generated on the latter, which would subsequently impact rightsholder remuneration from relatively-more lucrative premium royalty pots.

170.Concurrently, the presence of these services has incentivised other services to introduce ad-funded services alongside their subscription models. The ad-funded model clearly presents an opportunity cost (i.e. the quantity of benefit forgone that is created by the choice of one option over another) for streaming services and rightsholders. Mr Gutierrez explained that 90 percent of revenues come from subscriptions in contrast to ten percent from the ad-funded tier,607 despite having 155 million subscribers and 199 million ad-supported users respectively.608 Explaining Apple’s position, Elena Segal argued that “we do not think that an ad-supported service can generate enough revenue to support a healthy overall ecosystem and it would also go against our fundamental values on privacy”.609 However, it should be noted that this is not solely due to the presence and dominance of YouTube in the market. Both Spotify and Amazon conceded that their services would continue to operate their ad-funded, free-to-use tiers alongside their premium services given the counterfactual without YouTube.610 Mr Gutierrez argued that “I do believe that the freemium service has value on its own”:611 this is likely both because of the industry’s recent history of digital piracy,612 as well as the fact that 60 percent of Spotify subscribers started on the ad-funded tier.613

171.Safe harbour provisions that have been transposed into UK law have profoundly impacted the market for digital music consumption. YouTube’s dominance of the music streaming market shows that the market has tipped. Safe harbour gives services that host user-generated content (UGC) a competitive advantage over other services and undermine the music industry’s leverage in licensing negotiations by providing UGC-hosting services with broad limitations of liability. This has suppressed the value of the digital music market both in real and absolute terms even as these services generate multi-billion-dollar advertising revenues.

172.We note that the CMA has developed a pro-competition framework for tech companies with ‘strategic market status’ that dominate digital markets. The CMA should consider exploring designating YouTube’s streaming services as having strategic market status to encourage competition with its products.

EU Directive on Copyright in the Digital Single Market

173.Evidence we received from the music industry often pointed to the European Union’s Directive on Copyright in the Digital Single Market as one potential solution to the issues created by safe harbour. The Directive creates a new category of service, called online content-sharing service providers, whose “main or one of the main purposes is to store and give the public access to a large amount of copyright-protected works or other protected subject matter uploaded by its users, which it organises and promotes for profit-making purposes”.614 Article 17 of the Directive provides that the limitations of liability for content hosting provided by the E-Commerce Directive do not apply where a service “performs an act of communication to the public or an act of making available to the public”.615 As such, a provider will be liable for copyright infringement on their service unless they can demonstrate that they have made “best efforts” to obtain authorisation (i.e. a license) and to remove works for which rightsholders have provided “the relevant and necessary information” to do so (known as notice and take-down), and “acted expeditiously” to remove infringing content and prevent future uploads (known as notice and stay-down).616 Whilst the Directive does therefore retain a fundamental limitation of liability for these services, it creates additional obligations for them in order to maintain it.

174.The Government’s position on the Directive on Copyright in the Digital Single Market has shifted in recent years. Prior to the UK’s exit from the European Union, the UK contributed to and actively supported the passage of the Directive. In December 2018, the then-Minister for Digital and the Creative Industries, Margot James MP, told our predecessor Committee that she welcomed the Directive,617 and in July 2019 said publicly she had met with bodies from the creative industries to discuss how best to implement it.618 In January 2020, her successor as Minister for Sport, Media and Creative Industries, Nigel Adams, reaffirmed that the Directive “contains many protections for our creative sector” but indicated that a decision had not been taken on whether to adopt it.619 Less than a week later, the Government clarified that its commitment not to extend the EU exit implementation period meant that it would not implement the Directive.620 In evidence to our inquiry, Minister Dinenage, alongside Tim Moss and the Minister for Science, Research and Innovation in the Department for Business, Energy and Industrial Strategy, Amanda Solloway MP, stated that the Government would take a wait and see approach to the Directive’s implementation but declined to provide a timescale.621

175.In response, the tech sector has welcomed the Government’s position and called for “policy certainty” from the UK.622 The Internet Association, which represents over 40 of the world’s internet companies, “encourages both the Committee and UK government to take an evidence-based, deliberative approach to considering any potential changes to the UK copyright framework in general, and in particular changes similar to those created by the recent EU Copyright Directive”.623 YouTube’s own submission argues that any changes to copyright law should not be introduced until “a full economic assessment can be made of the impact of Article 17”.624 It also claimed that its caution is shared by some in the music industry, arguing that:

some of the music rights holders have been concerned that the new laws could be so confusing that incidental rights holders—for more incidental uses in a music video such as a toy or the owner of a copyrighted design on a T-shirt—would be empowered to strike down their content and reduce their revenues. I think that is actually a legitimate concern.625

176.However, evidence we received affirms that the music industry remains broadly supportive of the Directive, as it did during our predecessor Committee’s inquiry into ‘Live music’.626 First, many in the industry support the Directive’s aim to normalise how music is licensed for UGC-hosting services.627 Second, it supports the Directive’s attempt to address the issue of piracy through the notice and stay-down requirements.628 Many musicians, both independently and via the Musicians’ Union and trade associations, have called on the UK “not to fall behind on basic rights and protections in regards to creators’ work”; others have argued that this would ensure reciprocity and a level playing field with Europe in terms of copyright protections, which will similarly safeguard the interests of creators.629

177.The Copyright Directive is not a silver bullet to issues caused by safe harbour, however. Written evidence from the Beggars Group warns against the lobbying power of the tech industry, which has for example has caused member-state implementation such as the draft German implementation to rightsholders in a worse place than the status quo ante.630 Several submissions have argued though that the Directive could go further, in order to tighten obligations on services.631 Sonstream, for example, argues that the burden of enforcing the obligations described in the Directive must fall on services rather than rightsholders.632 Dr Hayleigh Bosher, Senior Lecturer in Intellectual Property Law at Brunel University, similarly argues that “the main limitation of Article 17 of the Directive is the wording that platforms, such as YouTube—which the law intended to capture—merely need to make their ‘best efforts’ to obtain authorisation”, which “they would argue that their current system of Content ID would be adequate to meet this threshold”, thereby potentially undermining the aims of the Directive.633 This instance could create a worse outcome, where YouTube, as an existing, dominant entity continues to operate as currently but new entrants that might compete for YouTube’s market share may disproportionately face additional barriers to entry. Alongside calling for the implementation of notice and stay-down requirements, the BPI calls for know your business customer obligations (which already exist in principle in UK law and provide require digital services to reveal the identity of their commercial partners and customers) to be adequately enforced to allow for more effective enforcement against copyright infringement and illegal content hosting with minimal burdens on legitimate businesses.

178.As we have acknowledged, the Government has repeatedly told us that it will not implement the Directive on Copyright in the Digital Single Market. However, to ensure that music creators and companies prosper in the globally important UK music market, the Government must provide protections for rightsholders that are at least as robust as those provided in other jurisdictions. As a priority, the Government should introduce robust and legally enforceable obligations to normalise licensing arrangements for UGC-hosting services, to address the market distortions and the music streaming ‘value gap’. It must ensure that these obligations are proportionate so as to apply to the dominant players like YouTube but does not discourage new entrants to the market. It must also ensure that existing obligations are being enforced as appropriate, and detail in its Response how it plans to address the recording industry’s concerns regarding the enforcement of existing ‘know your business customer’ obligations.

Payment models

Pro-rata system

179.Of the different models that have emerged to pay for streaming music, the predominant model that exists in some form for all major streaming services is the pro-rata system. Under this model, the service aggregates all net distributable revenue from a population and distributes monies according to the proportion of aggregate streams each rightsholder has achieved.634 This can be expressed as (net distributable revenue ÷ total number of streams) × pro rata share of total streams. In oral evidence, streaming services stated that revenue is pooled depending on its source, so that the subscription and advertising revenue pools are calculated separately.635 Will Page, former Chief Economist at Spotify, argues that the system is “inherently fair” as it is efficient, transparent (insofar as every stream is worth the same to the rights holder) and cost-effective to manage.636 Mr Page does acknowledge that the model “does not, however, recognise that no two consumers necessarily value their streams equally—so those who stream more would effectively be subsidised by those who stream less”.637

Alternative models

180.Many have called for revenue to be distributed by a user-centric payment system, including performers, songwriters and composers of various genres and their trade bodies, prominent academics, several record labels and publishers such as BMG, and other music businesses such as the Hipgnosis Songs Fund and Soundtrack Your Brand.638 As Will Page explains, a user-centric distribution isolates each consumer’s subscription fee and allocates it exclusively to the tracks streamed by that consumer.639 However, whilst Mr Page, AIM and others argue that user-centric distributions would increase administrative and operational costs due to increasing complexities,640 these would likely be well within the current processing limits of modern computer systems (which nonetheless continue to improve anyway). Tom Gray advocated user-centric distribution in oral evidence, arguing that it would better fund niche genres such as classical, jazz and regional and national music that would not otherwise aggregate a significant portion of total streams when considered pro-rata.641 However, user-centric payments could (only) benefit acts to the extent their listeners were more likely than average to be listening to their tracks and not those which have larger than average pro-rata market shares for streams. It would not, of course, increase the average payment, nor the share to artists; to the extent that some artists would win from such a change, others would lose out. That said, evidence we received did make the case that, regardless, many consumers did wish to see the money from their subscriptions more directly reach the artists they listened to,642 which may explain to some degree the growth of artists releasing content directly to fans on platforms like Patreon.643 The Creators’ Rights Alliance and AIM CEO Paul Pacifico have also noted that a user-centric system would also help guard against issues of fraud created by fake plays, whereby pro-rata shares of streams could be artificially inflated by fake and/or automated accounts.644 Academic research also suggests that user-centric payments could provide greater clarity and address concerns regarding the allocation of rights payments, enhance artist-audience relationships and encourage greater ethical consumption amongst users.645 Evidence from across the music industry, including performers, songwriters, composers, publishers and some independent labels, have subsequently called for user-centric payments or at least expressed positive sentiments about the system.646

181.As discussed in Chapter 2, it should be recognised that start-ups such as Resonate and Sonstream demonstrate the imaginative and dynamic solutions to artists’ issues with the pro-rata status quo. Established streaming services, including Spotify, have also expressed an open-mindedness in exploring new payment models.647 Members of the Entertainment Retailers’ Association have similarly pledged “to providing data to enable the industry to analyse the effects of adopting user-centric licensing”.648 Recently, SoundCloud announced that it would trial what it calls fan-powered royalties for independent creators.649

182.In oral and written evidence, the major music groups were relatively agnostic about the introduction of user-centric payments, though did restate several critiques of the model. We note that Universal were most open to exploring alternatives, welcoming “any proposal that maximizes fairness and transparency and supports market growth”.650 Sony, in both oral and written evidence, recommended caution, given that a user-centric approach necessarily would mean reallocating money from creators doing well through pro-rata to those that would do well through user-centric payments, and recommended “thorough and concerted impact assessments in order to establish an industry-wide support”.651 Both Sony and Warner did take the opportunity to assert in no uncertain terms that contractual agreements between industry and streaming services would not allow services to unilaterally change accounting methodologies without modifying license agreements.652

183.The debate between the predominant pro-rata payment model and alternative methodologies such as user-centric has been compelling. It is positive that new services are inventing new and creative ways to address creators’ and consumers’ concerns about the fairness and transparency of creator remuneration from streaming. We are concerned, however, that current contractual agreements between the major music companies and streaming services have the potential to stifle further innovation if they are misused. The CMA should consider in its case (recommended in paragraph 111) whether these agreements have the potential to (or indeed have already) prevented experimentation and innovation by streaming services.

Livestreaming and digital music futures

184.As has been made clear throughout our inquiry, technological development has a significant impact on how music is consumed and, through initiatives such as the WIPO Internet Treaties and EU Directive on Copyright in the Digital Single Market, provokes concurrent (international) political responses to technology in turn. It is necessary to recognise that music consumption will not remain static and is likely to evolve as digital technology develops. As Nile Rodgers observed, “as the technology changes […], we should have a way of calculating that IP. We should have a way of understanding how the industry sets a price.”653

185.One such change is already coming to the fore: the role of livestreaming as both a direct and indirect mode of music consumption. It is already becoming an area of contestation within the music industry and between the music and tech sectors. First, livestreaming offers new ways for performers to create music, given the reliance on live income. As Geoff Taylor, CEO of the BPI, posited, this has been further incentivised by the pandemic:

livestreaming was not a huge business for artists in terms of concerts and obviously artists have had to get really creative about how they create new livestreams as a business model.654

Katherine Oyama, Director of Government Affairs and Policy at YouTube, described how livestreaming has been successful for some performers:

We have been looking at livestreams. In the last couple of months, we have had livestream concerts—Blackpink is a good example. They just sold tickets to a live concert on YouTube. They sold out about 20 times the capacity of the O2 arena for one concert. I think Niall Horan did one recently in the UK from the Royal Albert Hall; he had about 150,000 customers, at maybe $20 each. It is about diversifying and looking at whether we can monetise livestreams more. A lot of artists are turning to their channels to sell their own merchandise, or even their own vinyl records. Some are experimenting with memberships on their channels. I think there will be more opportunities like that.655

Despite these opportunities, livestreaming has already provoked controversy within the music industry. In December 2020, PRS implemented a tariff on its members of eight to 17 percent on livestreams, an increase on its usual tariff of 4.2 percent for live shows, and announced flat fees for shows that generate less than £500 and £251 regardless of takings.656 The move was subsequently criticised by industry groups for penalising grassroots performers and performer-songwriters and would not deliver the desired benefit to grassroots songwriters,657 and PRS later backed down from its flat fee proposals.658 In May 2021, PRS for Music was also criticised for a ten percent backdated livestream tariff “to support the live sector during its forced closure” on livestreams with revenues of over £1,500.659 As livestreaming becomes more popular, with potential implications for the future of live music, these issues could continue to arise.

186.Second, as livestreaming continues to grow in other contexts, such as gaming, entertainment and other cultural sectors, so does the potential for copyright infringement. This could be an infringement by those creating the stream. In November 2020, for example, Twitch published a blog post responding to its own creators’ frustrations regarding “a sudden avalanche of notifications” as “representatives for the major record labels started sending thousands of [Digital Millennium Copyright Act] notifications each week that targeted creators’ archives, mostly for snippets of tracks in years-old Clips”, of which more than 99 percent were for tracks that streamers were playing in the background of their streams.660 However, this could also be infringement enabled by livestreaming (correctly licensed and legitimately used) content. As Geoff Taylor explained, this form of piracy is enabled by stream-ripping:

At the same time, illegal streaming of live content, or illegal streams, weren’t a huge part of the piracy problem. We have seen that tick up, but particularly what’s called stream-rippers. Services like YouTube, which aggregate huge amounts of content, don’t protect that content properly, and then you have these hostile applications called stream-rippers, on mobile devices, that will just turn a livestream into a download, effectively—so you have got that song for free, forever.661

187.As technology continues to evolve, the Government must ensure that copyright law is fit for purpose and that appropriate mechanisms are in place for rightsholders to enforce their rights. The Intellectual Property Office must not be a passive witness but an active player, particularly in areas of systemic contestation between rightsholders or where rightsholders believe that their rights are being systematically infringed. We recommend that the Government set out a clear position on livestreaming, both regarding remuneration of rightsholders and the live sector and explain what actions it is taking to support rightsholders in tackling copyright infringement. It should also explain what it and the IPO are doing to identify emerging threats to rightsholders enabled or caused by new technologies.