intellectual property rights in music

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Contested Collective Administra tion ofIntellectual Property Rights in MusicThe Chall enge to the Prin cipl es ofReciprocity and Solidarity

Roger Wallis, Charles Baden-Fuller, Martin Kretschmer and George Michael Klimis

A B S T R A C T

Individual intellectual property right holders in music cannot easilyenforce their statutory claims to exclusive usage and remuneration. Sincethe middle of the 19th century, composers and publishers have respondedby creating collective bodies, so-called collecting societies which monitormusical activity in a given territory, and collect and distribute feesaccordingly. These societies, rst established in Western Europe, operateon two principles: the principle of reciprocity, linking monopolistic nationalsocieties and the principle of solidarity, making a collecting service

available to all right holders at roughly the same rate. The rise of theglobal media corporation combined with new digital production anddistribution technologies has seriously undermined these principles. Thearticle reports recent trends drawing on over 30 interviews with executivesof the ve largest multinational music rms and the major copyrightinstitutions in Germany, Japan, Sweden and the UK, including theEuropean Commission, the World Intellectual Property Organization andnational and international trade bodies. We conclude that the presentstructure of music copyright is likely to collapse, skewing the distribu-tion of revenues in favour of big corporate players and global musical

Roger Wallis is Director of the Multimedia Research Group, Charles Baden-Fuller is Professor of Strategy, Martin Kretschmer is ESRC Research Fellow andGeorge Michael Klimis is Research Associate, all at the City University BusinessSchool, Frobisher Crescent, Barbican Centre, London EC2Y 8HB, UK. email:[email protected]

European Journal of CommunicationCopyright 1999 SAGE Publications(London, Thousand Oaks, CA and New Delhi), Vol 14(1): 535.[02673231 14603705(199903)14:1;535;007238]

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products if there is no institutional intervention. Policy implications arediscussed.

Key Words collecting societies, copyright, globalization, informationsociety, music

Introduction

Authors in the elds of mass communications, sociology and businessstudies have identied a set of general trends as regards the economic,cultural and technological structures of the music industry. They widelyagree that there is an increasing concentration of ownership of manufacturing and distribution on an international level, leading to asmall number of global media conglomerates (Wallis, 1990; Malm andWallis, 1992; Hirsch, 1992; Frith, 1993; Choi and Hilton, 1995;Burnett, 1996). In addition, there is an increased degree of both formaland informal integration within and between different sectors of themedia industries, including signicantly the amalgamation of organiza-tions which produce recorded music (record or phonogram companies)and organizations (the music publishers) which own the copyrights tothe music which is recorded (Wallis and Malm, 1984; Wallis, 1994). 1

These trends have shaped an increasingly consolidated industriallandscape: after a wave of mergers and takeovers during the 1980s andearly 1990s, a few multinational media corporations now own most of the superstars as well as a very large repertoire of music copyrights.Together, Polygram (Netherlands), Sony (Japan), Warner (US), EMI(UK) and BMG (Germany) account consistently for 7080 percent of

global music sales. Recent developments under the General Agreementon Tariffs and Trade (GATT), the North American Free TradeAgreement (NAFTA) and the European Union, extending the term of copyright protection to a minimum of 50 years (EU, 70 years) after anauthors death, have made such rights even more attractive as long-terminvestments (Chaudhry and Walsh, 1995). 2

In parallel to these trends of concentration and integration, therehas been a dramatic change in the channels which convey music. Duringthe 1980s, many Western governments have sought to deregulate themedia, allowing a proliferation of new local radio channels, newtelevision channels, including cable and satellite broadcasting.

At the same time the Internet, initially a US governmentsponsored network of servers (rst designed in 1963), started to expandrapidly as a communication medium. The Internet, by its nature, is

E U R O P E A N J O U R N A L O F C O M M U N I C A T I O N 1 4 ( 1 )

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largely unregulated there is no Internet Company to turn to whenseeking redress. This raises a number of, largely unresolved, issues

regarding responsibilities in cyber space including privacy, securityand copyright (Hugenholtz, 1996; Hulsink and Tang, 1997).Deregulation has fostered and been fostered by changes in

technology. At one time, television and radio transmission requiredlarge up-front investments in capital equipment. Now, a local radiostation can be set up for as little as US$50,000; a cable televisionstation need not cost much more, if the delivery infrastructure isavailable; and distribution on the Internet is virtually free. Similarly,new technology has emerged to make it easy to produce CDs and tapes,affecting both legitimate and illegitimate users: unlike analoguerecordings, material in digital form can be copied time and time againwithout any loss of quality.

These developments are signicant in the context of the changingways in which music and culture is distributed. One of the mostimportant trends concerns the structure of intellectual property right(IPR) revenues. Not only is there a general growth in the revenuestream, but there is a shift from revenues based on the physicaldistribution of tangible carriers such as CDs and tapes to income fromthe use of music in media channels. The main factors here are thegrowth of music television, the proliferation of private radio stations andthe use of music in advertising and games products. Thus, there is anincreased dependence by actors in the global media arena on immaterialrights as sources of revenue (Qualen, 1985; Roe and Wallis, 1989;Rutten, 1991). 3 The expanding electronic media are more difcult tomonitor than sales of tangible items, and this means that the structure

and collection of intellectual property rights has become a more pressingissue than ever before.Ofcials of the collecting societies, which represent copyright

holders and collect and distribute revenues generated, are the rst toadmit the challenges ahead (Petri [managing director, Swedish Perform-ing Rights Society; STIM], 1997):

Appropriate copyright laws to give us the same rights to control electronicdistribution that we have to control physical distribution, are not in

themselves sufcient if the public have unlimited access to our product.The problem is, how do you know, in a world where there are no physicalcopies, whether our music has been used, let alone who has used it?

This article does not question the fundamental premises of intellectualproperty. That has been done by others elsewhere (Vaver, 1990; Thurow,

W A L L I S E T A L . : C O N T E S T E D C O L L E C T I V E A D M I N I S T R A

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1997; Laddie, 1997; Towse, 1997). We are concerned with the ability of the existing copyright legislation, suitably adapted to new technologies,

to provide for the mix of intellectual property protection and remunera-tion systems necessary for encouraging and sustaining creativity in themusic industry. This can also be interpreted in terms of the conditionsfor the copyright institutions (the collecting societies and the legislationupon which their activities are based) to be generally accepted asperforming a useful, necessary and fair activity in society. What weinvestigate, in other words, is whether the current collection agenciescan stand the strains to which they are being subjected, from within andwithout, by the forces of global concentration, corporate integration andtechnological change.

We show that the institutional structure under which copyrightrevenues are collected and distributed has become destabilized. Ourarguments are based on a careful economic and strategic analysis of events in the market, and draw on over 30 interviews with seniorexecutives of the ve largest multinational music rms and the majorcopyright institutions in Germany, Japan, Sweden and the UK,including the European Commission, the World Intellectual PropertyOrganization, and national and international trade bodies (conductedbetween 1996 and 1998). We suggest that:

1. There is a danger that the current institutional structure of music copyright might collapse altogether.

2. There is a danger that the system will tilt away from thepreservation of national culture and tastes in favour of moreglobal cultures (particularly the Anglo-American).

3. There is a danger that the revenue distribution of IPRs willonly be safe for the most successful artists and largest recordcompanies, and that barriers to entry will be erected againstsmaller companies and less known entrepreneurs.

There are a range of remedies open to public policy-makers, some of which are far reaching and fundamental.

The distribution of property rights in music and mediaThe music and media industries have a complex provision of IPRswhich cover both the input and output stages. The structure of theserights have important economic and cultural consequences. A writer of a piece of music and in most cases a publisher to whom the author


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1. Sheet music is a minor source of income compared topublishers shares of performance and mechanical copyrights. 5

2. Many publishers have been incorporated into larger mediacorporations owning record companies as well as broadcastingand lm/video interests. 6

In recent years, there has been a considerable increase in the potentialextra revenue which can be earned from the rights, even beyond thesystem illustrated in Figure 1. For example, the sales of relatedmerchandise such a T-shirts, memorabilia and themed entertainment(such as parks or restaurants) have become important. Equally, there arepotential revenues which can be earned from interactive multimediaapplications, involving a whole host of creators whose rights have beenstrengthened or extended in recent decades (authors, photographers,performers, translators, directors, etc.).

The collecting societies

Music copyright was rst formally established in England, following acourt case in 1777. Johann Christian Bach (the youngest son of J.S.Bach, and Londons leading composer of the day) had applied for aninjunction against the unauthorized publication of one of his pieces. Itwas judged that music indeed fell under the copyright act of 1709which protected books and other writings. In Paris, a bureau forcollecting performance royalties for writers and composers of dramaticwork was instigated by Pierre-Augustin Beaumarchais in 1791. How-ever, there was no generally practicable way to turn the legal right topublic performance into economic benet until a further court case in

Artists

Record buyers

Record companies

Publishers

Composers

Radio/TV

P e r f o r m a n

c e r i g h t s

P e r f o r

m a n c e

r i g h t s

(music)

Figure 1 The origins of mechanical and performing rights


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1847. Ernest Bourget, a composer of popular chansons, refused to payhis bill at the fashionable Paris caf e Ambassadeur where one of his

pieces was being played. You consume my music, I consume yourbeverages, he argued. Though the Tribunal de Commerce de la Seinefound in favour of the composer, Bourget realized that, as an individual,he would never be able to monitor general usage of his music. With thehelp of a publisher, a collective body was set up which, in 1851, becamethe Soci et e des auteurs, compositeurs et editeurs de musique (SACEM),the rst modern collecting society (Kretschmer, forthcoming).

The ambition of modern collecting societies is to enforce acomprehensive pay-for-play principle, that is to monitor each and everyusage of music in a given territory and collect and distribute feesaccordingly. Most societies operate as de facto national monopolies. Theargument is one of convenience and practicality. It is hard for anindividual copyright holder to monitor usage of a work. Conversely, anyuser of music (e.g. a radio station or a restaurant) obviously nds itmore convenient to have one agreement covering all repertoire, ratherthan several with different competing organizations representing differ-ent catalogues of works.

One exception is the USA where a competitor to ASCAP, theoriginal national society founded in 1914, was set up during a disputewith the radio industry in 1940. Members of the National Associationof Broadcasters decided to boycott ASCAP music by using material outof copyright and commissioning new music specically for broadcastingwhich would not be assigned to ASCAP but Broadcast Music Inc.(BMI), a new collective body. By a strange anomaly, BMI today is stillowned by the US radio industry, and a third, private licensing company

(SESAC, founded in 1930) has sought to take an increasing slice of theUS royalty cake. 7 The difculties this presents for users is illustrated bythe recent case of a restaurant owner in Jackson Village, NewHampshire, USA, who only had a contract with BMI following acontractual dispute with ASCAP. The establishments bar pianistresponded to a guest request for the song Zip-a-Dee-Doo-Da,composed by an ASCAP member. An ASCAP controller was in theaudience and registered the incident an initial bill for $75,000 endedwith an out-of-court settlement for $4,000 ( Restaurants and Institutions,15 April, 1997).

Collecting societies vary in their construction. NCB (NordicCopyright Bureau) in Copenhagen collects mechanical copyrights for theve Nordic national collection societies, and is owned jointly by four of them. The UK mechanical copyright society, MCPS, was started by


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music publishers in 1924, who have a majority on the board. In 1997,a Music Alliance joint venture was formed with the older performing

rights society, PRS (founded in 1914), giving publishers a de factooverall control over both performance and mechanical rights collection(and distribution) in the UK. Germanys GEMA, Frances SACEM and

Japans JASRAC collect both mechanical and performance royalties, andare regarded as author dominated (with composers, lyricists andpublishers each accounting for one-third of executive votes).

The monopoly status of many collecting societies has beencontested under competition law since the early 1970s, particularly inEurope. In 1971, the European Commission ruled that some of GEMAspractices violated the anti-trust provisions of the Treaty of Rome. Arecent investigation by the UK Monopolies and Mergers Commissiononly conditionally accepted the monopoly status of the PRS. A 1997working paper from the European Commissions competition directoratedescribes the collecting societies as large (and, it must be said,dictatorial). After reviewing a number of previous cases regarding thebalance between the freedom of individual creators to exploit theirrights and the effective management of societies they cannot avoidjoining, this paper concludes that performance rights societies wouldbe wise to set up Community antitrust compliance programmes. TheCopyright Unit of the European Commissions internal market andnancial services directorate is now contemplating a directive on theindividual and collective licensing of rights. 8

This current scrutiny is indicative of a fundamental dilemmafacing collecting societies: in order to full a practical function insociety, they need to represent a wide range of repertoire. Yet, monopoly

or near-monopoly status leads to accusations of abuse of a dominantposition in the market. The societies prime rationale is to help registerand protect authors rights. Authors, as we have noted, often work withpublishers, who represent them in the market, in return for a percentageof incomes generated ranging from 33 percent to 50 percent. Publishersofcial function is to act as brokers, helping composers get their worksrecorded by negotiating with performers or record companies. Thus, thecollecting societies they formed together unite conicting purposesunder one institutional roof. As de facto monopolies, author-dominatedsocieties took upon themselves some element of cultural and socialresponsibility, often encouraged by the state for example in Germany,France, Japan and Sweden.

Germanys GEMA denes itself as a Schutzorganisation f ur densch opferischen Menschen, literally an organization for the protection of


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creative men, funding education, pensions and commissioning seriouscontemporary music. Similarly, Swedens STIM uses cultural funds to

promote local composers, run a Swedish MIC (Music InformationCentre) and give stipends. An international agreement between collect-ing societies, under the umbrella of the Conf ed eration Internationale desSoci et es dAuteurs et Compositeurs (CISAC) situated in Paris, allows forthe deduction of social and cultural funds, amounting to a maximumof 10 percent of incomes generated in the home territory (i.e. excludingrevenues transferred from other collecting societies for performances inother territories). Local societies can also apply their own brand of cultural policy by introducing some subsidies into the way income isdistributed, e.g. by paying more for some form of music whenperformed. The distribution formula tends to favour serious music overpopular songs (even if performances of the latter generate most incomefor the societies).

With an ever increasing amount of music performance, the task of identifying usage and providing a correct distribution has to be operatedat a reasonable level of expenses. The imbalances which selectivecultural funds and distribution policies introduce are partly designed tooffset the natural bias of sampling methods towards works andcopyright holders which enjoy the heaviest usage. In many cases, thestate guards against a misuse of the collecting societies monopolyposition. The Swedish collecting society, STIM, for instance, has boardmembers appointed by the government; in Germany, GEMA is auditedby the patent ofce and the competition authority, Kartellamt.

Enforcing intellectual property rights: the principles of reciprocity and solidarity

Two principles have been critical to the operation of the currentinstitutional regime organized along national copyright boundaries.They are the principles of reciprocityand solidarity.

Reciprocityas a principle was rst established by the Statute of Anne, worldwide the rst copyright legislation, enacted by the Englishparliament in 1709. The Statute of Anne afforded to foreign residentsand their works the same protection as to English nationals, i.e. the soleright and liberty of printing for 14 years upon registration of a book atStationers Hall, London renewable once. From Berne (1886)onwards, the international copyright conventions were built on theprinciple of reciprocity. Rather than fully harmonizing national legisla-tions, they required that each member country give the same protection


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to works created by nationals of (or published in) member countries asis afforded to works created by nationals of the country where protection

is sought.Within the collecting society system, the principle of reciprocitybecame the cornerstone of international collaboration. Since each societyoperates in a limited geographic location, it requires the services of others to collect fees outside its boundary, whenever there is aperformance by one of its artists in anothers territory. Betweencollecting societies, reciprocity came to mean: we collect and pay if your works are performed here, and vice versa if our works areperformed in your territory. This has the important consequence thatany sole, national collecting society can issue licences for the worldrepertoire it controls via reciprocal agreements with afliated societies.A piece by a minor English song-writer might be used in a Japaneseadvertising campaign and, within a year, the original composer andpublisher can receive a sizeable remuneration for a usage they couldnever have anticipated when the song rst was published. Seniorcollecting society executives have described the system as a miracle.

Figure 2 shows how the system operates in theory in the case of mechanical copyright collection and distribution. It shows how themechanical copyright societies have to deal simultaneously withdifferent record companies, composers and publishers, as well as withother societies.

It is international convention that the charges levied on collectingrevenues are not levied according to cost, but rather at a common rate.

Mechanicalcopyright soc. 1

(e.g. MCPS)

Record

company 1

Record

company 2

Publishers

Composers

Mechanicalcopyright soc. 3(e.g. STEMRA)

Record

company 1

Record

company 2

Publishers

Composers

Mechanicalcopyright soc. 2

(e.g. NCB)

Record

company 1

Record

company 2

Publishers

Composers

Figure 2 Mechanical copyright and the principles of reciprocity and solidarity


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This leads us to consider the second principle of solidarity. Solidaritycan apply in two senses: solidarity between copyright holders and

solidarity between collecting societies. Agreements linking collectingsocieties assume that no society may collect upon the territory of aforeign society to which it is afliated. This principle was challenged bythe European Commission in 1971 in a case against the then WestGerman collecting society GEMA (see note 13). The ruling has led to adegree of competition between national societies with regard to centrallicensing deals (so-called CEL [Central European Licensing] agreements).Under CEL, individual mechanical copyright societies compete for dealswith specic multinational record companies to collect revenues for salesin all European territories in return for rebates on rates.

A second version of the principle of solidarity applies betweencopyright holders. Collecting societies treat all copyright holders(roughly) alike: that is, they charge for their services to the artiststypically a at rate percentage of revenues collected regardless of thequantity. Charging a at rate percentage purposely does not reect costdifferences of collection, for it is far cheaper to collect fees for well-known artists than for the lesser known. There are xed costs in settingup the accounts; equally, the costs of identifying revenue streams fromrecord sales and performances are not in proportion to popularity.Famous artists are more likely to have bigger audiences and higherrevenues than their lesser known brethren. Popular works are morelikely to be performed on popular radio stations with a limited range of output, where the monitoring process is consequently much easier andcheaper for the society to perform.

Within the constraints of the solidarity principle, however, most

societies have made efforts to balance income and distribution withindifferent areas of activity monies from radio or television aredistributed to those who are performed on radio or television (as far asidentication allows). Where documentation of music performance islacking (e.g. in the case of, say, a hairdressing saloon, which pays anannual music licence), then distribution is by analogy. Assumptions aremade regarding the type of music source this then decides the sectorfrom which such incomes are redistributed.

The principles of solidarity and reciprocity used by the societies areakin to the principles of universal supply well known to economistsinvolved in public policy analysis. The principle of universal supply isevident in public monopolies such as letter post, electricity supply,telephones, water and transportation. It is simplest to explain it interms of letter post. The current system in all European countries is that


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there is a single charge for letters which varies by weight and class of service, but not by destination. This system ensures that all users have

access to the system. Letters posted in a town to be delivered to anearby address are charged the same fee as those posted in a remote spotto be delivered to another far away destination. It is quite apparent thatthe letter post system is biased in favour of the light users and thoserequiring non-standard treatment, and is biased against the heavy users.The system has important consequences for social structures. Forexample, those in rural communities are favoured and subsidized. Inaddition, the current EU system ensures that international users are

subsidized by national ones. The arguments which favour universalsupply provisions and uniform tariff systems include lowering of perceived transactions costs (that is the costs of organizing multi-tariff systems may not be worth the benet), the prevention of exploitation of minority groups (rural users are unlikely to have effective competitivemarkets) and perceived social justice (the feeling that country dwellersought to be subsidized as their incomes are lower and they are part of our heritage). Arguments in favour of these principles have recentlybeen extended to electronic networks. Public policy debate has stressedthe need for a new communication policy model based on freedom,access and control. Thus, the US government and the EuropeanCommission argue for the need to provide equal access to the Internet,not only to the better-off, but also in both rural and innercity areas. 9

During the 20th century, the principles of reciprocity andsolidarity in the collection and distribution of IPR revenue were widelyaccepted as long as several conditions held. First, publishers had to beseen to be independent representatives for the composers who couldgenuinely negotiate with those who exploited their works (recordcompanies, broadcasters). Second, the copyright societies exercisedmonopoly power in a reasonable way, delivering an efcient service. Athird factor related to the distribution of copyright revenues. If benetsgenerally were seen to be distributed equitably, then some distortionswould be accepted as tolerable.

Critics would argue that this state of relative stability led tocomplacency, and in some cases, a self-serving bureaucracy. Thecollecting societies of continental Europe have come under re forcharging high commission rates and cultural deductions. On a percapita measure, however, it can be seen that the European societies aremuch more effective in extracting revenues from music users than theirleaner Anglo-American cousins (see Maps 1 and 2, Appendix). 10


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Collecting societies represent copyright owners against users, eventhough record companies or broadcasters (i.e. users) may be part of the

same media group as the publisher. A once common rule that publishershave to make printed copies of a work commercially available beforethey can collect their share of rights revenue is no longer enforced inpractice by most societies. The institutional system based on solidarityand reciprocal collection is suffering pressures from within the popula-tion of societies, from certain copyright holders (particularly leadingpopular composers and publishers), from the authorities and some legalcommentators and, as might be expected, from those who exploit musicand are required to pay for the use. We now outline these pressures.

The rise of the global rm

The weakening of the principles of reciprocity and solidarity on whichthe collecting society system was built has followed a number of clearlyidentiable phases, driven in part by the rise of the global music rm.In Table 1, we give some estimates of the market share of the velargest music recording companies, and the approximate value of their

sales of physical carriers. It can be seen that the market is large, andthat the total revenues, including immaterial rights, must be sig-nicantly higher. The issues at stake are enormous. 11

Table 1 Value of world music market and shares of major players

Polygram% share

Sony% share

Warner % share

EMI% share

BMG% share

Market valueUS$ billions

USA 13 14 22 10 12 12.1 Japan 13 18 7 14 8 7.6Germany 23 12 13 22 15 3.3UK 22 13 11 22 9 2.6France 32 25 13 19 11 2.4Canada 20 13 24 10 8 1.1Netherlands 23 14 8 15 13 0.7Australia 13 27 18 18 6 0.7Italy 19 16 17 15 24 0.6Korea 10 5 4 5 5 0.5Sweden a 20 19 13 26 22 0.3Taiwan 17 5 14 6 5 0.3World 13 13 14 16 14 35.5

a Figures for Sweden are for 1994. Source: Music Business International(1996) and Music and Copyright(1996).


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The concentration and vertical integration of music rms is both aresponse to this emerging economics, and an attempt at driving the

phenomenon. The global rm (or alliances of rms) is able to promotemusic on a bigger scale, which in turn helps to maximize the sales of the most popular pieces and assures success to those which are margin-ally doubtful. By buying up publishing rights, successful recordingsowned by the same company generate even more income via bothmechanical and performance revenue streams. It has been estimated thatsome 80 percent of cash owing through the collecting societies comesfrom and goes to the ve major music multinationals, even though theirpublishing, recording and broadcasting arms might behave as independ-ent entities in the market, using copyright societies as negotiatingintermediaries.

Not all rms, of course, want to play the same game. Some wouldlike to dominate a regional sphere, believing that their skills lie in thisdirection. Moreover, there is frequent new entry by smaller rmslooking for new trends. If successful, they grow rapidly. Yet once musicrms reach a critical size, they are inevitably taken over by the biggerplayers. When Thorn-EMI bought Virgin Records in 1992 for close to

$1 billion, it was termed the end of the independents as a force inmusic business (Breen, 1995). By 1997, a demerged EMI had itself become a takeover target for larger media conglomerates. In May 1998,potential EMI suitor Seagram (who owns the worlds No. 6 music rm,Universal) announced the surprise acquisition of Polygram in a $10.6billion cash-and-stock deal with parent Philips Electronics.

Concentration and integration, however, is not a one-way successstory. The most successful artists are holding out for ever higher shares

of revenues, and individual deals with special terms favourable to artistsare becoming common; this is reected in the common practice of paying out large advance sums to secure signatures on lock-incontracts. In addition, there is intense competition among the globalplayers for a share of the lucrative but limited market.

The threat to the collecting societies

Multinational music rms operate across international boundaries, andso have as clear an interest in exploiting favourable legal developmentsin one country or region, as they do in avoiding getting embroiled inanti-trust accusations. In the following, we list seven threats to thecurrent institutional structure of music copyright, emanating frommultinational companies.


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Mechanical Central European Licensing (CEL)

The European Commissions views on competition (and the GEMAruling of 1971) paved the way for CEL of mechanical copyrightpayments (Montgomery, 1994; Wallis, 1994). Under the principle of the Single European Market, dues paid anywhere in the Union applyeverywhere in the same trade area. In 1987, Polygram used thisprinciple to negotiate a special deal with the Dutch mechanicalcopyright society, STEMRA. Polygram Records (i.e. the record com-pany) agreed to pay in all mechanical rights dues to STEMRA forphonograms manufactured by Polygram anywhere in Europe in return

for an administrative rebate. Before this deal, Polygram paid dues ineach European country separately (or in the case of Scandinavia andFinland directly to NCB in Copenhagen, Denmark). The new deal washighly favourable to Polygram. It was also favourable to STEMRA,which beneted from reciprocity with other countries and so hadguaranteed revenues. However, the other societies lost out. They stilldistributed these incomes locally, but could only levy a small admin-istrative charge. With STEMRA breaking ranks, perfectly legally in

accordance with EU intentions, the effect was a fall in the margins of allthe other collecting societies who lost the Polygram incoming revenue,but had to pay out to relevant composers and publishers. Figure 3 shows

UK recordcompanies

Multinational recordcompany

Nordic recordcompanies

Mechanicalcopyright

society 3 (e.g.MCPS, UK)

Mechanicalcopyright

society (e.g.STEMRA,Holland)

Mechanicalcopyright

society 2 (e.g.NCB, Nordic

area)

(otherlocal/internationalrecordings)

(all recordings ofrepertoire in EUcountries less rebate)

(other localrecordings)

Dues forrecords soldin UK arealess admin.

%

Dues forrecords sold

in Nordicarea lessadmin. %

UKcomposers

publishers/ sub-publishersin UK

Dutchcomposers

Nordiccomposers

publishers/ sub-publishersin Holland

publishers/ sub-publishersin Nordic area

Figure 3 Central European licensing and the effect on reciprocity andsolidarity


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how the ows of revenues work. The STEMRA deal was followed byothers in the late 1980s now every major record company has a

CEL.

Central European publishers societies

The publishing arms of the multinational companies have shown someinterest in experimenting with similar deals deals which would allowthem to demand pecuniary favours in return for concentrating theirbusiness to a particular collecting society. In 1995, EMI Publishingproposed a deal whereby mechanical copyright incomes for songs EMIcontrolled should all be paid out via NCB in Denmark, in return for acut in commission (administration) fees. No deal was struck. EMIs nextmove was to propose organizing its own licensing organization, MusicRights Society Europe (MRSE), to collect copyright monies collected byEuropean mechanical collection societies, using Simply Reds album Lifeas a test case. After prolonged negotiations with the major collectingsocieties, EMI Publishing agreed to abandon plans for its independentagent MRSE, during a period of good faith co-operation between theCentralising Mechanical Collection Societies and EMI Music Publish-ing.12 An indication of the negotiating power of EMI Publishing overthe collecting societies is the fact that EMI demanded a contribution toits own costs for setting up MRSE. The collecting societies proposedthat this contribution should be paid out via a drop in commission feesfrom 8 percent to 3.6 percent for the Simply Red works in question onthe album Life.

Withdrawal of multinationals repertoire

A third threat to the stability of the collecting societies arises from thepossible, extensive withdrawal by the majors from the whole system.The commercial logic for this move appears irresistible when a globalmusic rm owns both the recording and the publishing rights, for asmany works it releases as possible. The multinationals vary in the extentto which their recording and publishing arms are interlocked throughsuch integrated control of rights. Polygram is thought to boast thehighest percentage of recordings where publishing is controlled by thepublishing subsidiary (in this case Polygram Music Publishing). 13 Thereis a natural temptation for such a global media company to try tobypass the system altogether, and thereby achieve considerable admin-istrative savings. This would allow the rm to avoid paying a


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considerable sum in royalties to a society for rights which another partof the same organization owned with much of the revenues being

subsequently repaid with a deduction for an administrative charge. Thethreat of withdrawal from this system materialized in 1996 whenPolygram Records achieved an agreement with the UK mechanicalcopyright society, MCPS. This agreement would have allowed copyrightmonies from Polygram songs, recorded on Polygram Records to owwith the minimum administrative costs, speedily through the MCPSand back into the publishing arm of the corporation, achieving muchlower deductions. Double commissions could be avoided and moneywould have circulated within the copyright system for a much shortertime. Polygram reported potential savings in the region of $2.5 millionper year. The consequence was to shift the burden of MCPSs costs ontominor, independent companies and the artists they had signed. We showthese revised ows in Figure 4.

Ownership strains within the collecting societies

The structure of the ownership of some of the collecting societies ishighly problematic. With publishers (who are legally represented by thecollecting societies) being tied closer and closer to recording companies,the system has become threatened from within. After all, it is hard forthe board of a collecting society which is planning a negotiatingstrategy against, say, the record industry as regards mechanical

Polygram Records

PMP (PolygramMusic

Publishing)

Contractedcomposers

Mechanicalcopyrightsociety 2

MCPSmechanical

copyrightsociety, UK

PMP owned/othersub-publishers

in other EUcountries

(Dues for all recordings.Anglo-Americanrepertoire in EU countriesless 2.5% rebate)

influence

Dues for non-Anglo-American

repertoire

Dues forAnglo-American

repertoire

publishers/ sub-publishers

UK composers PMP (other songs) publishers/ sub-publishers

Figure 4 Authors interpretation of proposed MCPS/Polygram deal 1996 (lateraborted by the Cannes Agreement, 1997)


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copyright rates, to have a smooth and open discussion if some of itsmembers are from publishers who are owned by the same conglomerates

which control the recording industry. EMI Music Publishing, forexample, is on the board of both STIM (in Sweden) and PRS/MCPS (inthe UK).

Some copyright societies are now publicly attacking each other, norare all the major publishing arms of the global music corporationshappy with the development EMI Music Publishing, despite theaborted MRSE initiative in 1996, is said to have voted against theMCPSPolygram deal when it was presented at the board of the MCPS( Music and Copyright , 1996). (The managing director of the MCPSresigned shortly afterwards.) As with the EMISimply Red proposal, sodid the PolygramMCPS deal disappear from the agenda after a series of negotiations with the European collecting societies in which a com-promise deal was agreed which provided better and faster payments topublishers of CEL material, but also involved a further departure fromthe principles of solidarity.

At the annual international music trade fair, Midem, at Cannes inFebruary 1997, Polygram Music and the other multinational publishersstruck a deal with the MCPS and major European collecting societies,originally known as the Casino agreement (named after the room wherethe negotiations took place). Later rechristened the Cannes Agreement,it guarantees in effect that collecting societies will cut administrativecharges for handling incomes from CEL from 8 percent to 6 percent bythe year 2000. In order to achieve this over the short term, somesocieties have increased commission on incomes from songs recorded bysmaller record producers almost two-fold, from 8 percent to 15 percent.

This will have a negative effect on any copyright holder whose worksare released on smaller record labels in particular individual singer-songwriters who own their own record companies. In defence, thecollection societies have pointed out that collection from such smallcompanies is a risky business and costs much more than CEL. Thedeparture from the letter post principle of universal supply, however, isclear, as is the way in which it was achieved: through the muscle of thelargest players in the music arena.

Memorandum of understanding (MoU) in South-East Asia

While CEL has been a major feature of the debate and activities inEurope, the major music rms have taken a different approach in Asia.Here, the approach has been to sign a memorandum of understanding


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(MoU) between record company and music publisher. This in effectallows the major players to collect royalties themselves without having

to support the establishment of mechanical collection societies alongEuropean lines. It seems likely that the principles of western anti-trustlegislation would hinder the use of a similar approach in Europe and theAmericas.

Transnational broadcasters

Broadcasters have complained for a long time that the societies areabusing their monopoly powers in demanding excessive licence fees.Multinational users of copyrighted materials now try to exploitcoordination weaknesses between national collecting societies. Satellitecompanies which have links in one country and distribute over cablenetworks in another country have been known to negotiate withsocieties in both countries separately to see who will give the bestrates.

The entry of new players into the deregulated broadcasting andcable markets has placed a number of strains on the system. In Sweden,the relatively new commercial television and satellite companies havebeen refusing to pay considerable sums of money claimed by STIM,maintaining that they were getting a worse deal than that offered topublic broadcasters. The Swedish competition authorities becameheavily involved. After crawling along a slow, winding route throughvarious courts and national authorities, the matter was suddenly resolvedin 1997, after a controlling stake in the national commercial channel(TV4) was taken over by Scandinavias leading media conglomerate,

Bonnier Media. Perhaps signicantly, Bonnier Media own no record ormusic publishing company, but the chief executive is a keen jazzenthusiast.

Cultural deductions

The concern for efciency, initially driven by pressures from multi-national companies and competition authorities, has led to a number of internal squabbles and disagreements between national collectingsocieties. For instance, members of the PRS have been urging theirorganization to lobby against CISACs 10 percent rule for legitimatecultural deductions (as discussed earlier) individualistic Britishwriters would rather decide themselves how to spend revenues generatedin part by their copyrights. They suspect that continental European


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societies are using the money for convenient hand-outs, such ascomfortable pensions to former collecting society employees. Similar

concerns have been voiced by the American societies.By exploiting the link between music publishing and recordproduction too actively, multinational companies can awaken the wrathof anti-trust bodies forced divestment of one or other part of theirmusic activities could well be the result (Kretschmer, 1997). In 1996, acase was brought to the Finnish Competition Authority by the FinnishAssociation of Composers of Popular Music (with the appropriateabbreviation, ELVIS) concerning record companies which require singer-songwriters to sign away their publishing rights to the record companysown publisher as an obligatory prerequisite for a recording contract. TheFinnish authorities found that this was an unacceptable practice since itputs the author/artist at a disadvantage in the market (seen as anentrepreneur). A number of other pending legal cases in Scandinavia andFinland are questioning the validity of standard publishing contractswhich automatically extend to the so-called life of copyright, i.e. thelength of life of a composer plus 70 years thereafter.

Threats to national culture and the minorities

The threats we outlined earlier, namely the CEL system, the threat of disintermediation, the refusal of some broadcasters to participate, are allbreaking down the barriers of the current order. The system is underattack from so many quarters that those who rely on IPR revenues fromthe collecting societies would do well to look to their survival.

The threats are greatest to those who earn modest royalties,

especially from companies not linked with the majors. These artists(performers and authors) will nd themselves squeezed twice. First thecollecting agencies may ignore them, as their needs are costly to service.Second, the companies which represent them will have to be moreaggressive if they are to survive.

How does this affect national cultures? Most of the internationalartists and superstars follow global trends. In music, these typicallyrepresent Anglo-American ideas and cultural biases. Global artists arethe real money spinners for the major companies, even though theartists earn high fees. In contrast, artists with only a national followingare less attractive. As national societies are squeezed, the national gureswill nd life more difcult. Local levies which support them may becut, the charges levied for collecting IPRs may rise and their incomesmay fall. National artists with some international following may do


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even worse, especially if national societies are forced to be selectiveabout reciprocity.

Paradoxically, very local interest groups may be winners. Very localgroups have never relied heavily on national collecting societies. Localradio and television stations, local halls and clubs are the main source of their income. Often these artists work in tight local communities, wheresocial ties and bonds ensure that revenues are fed back in a relativelyefcient manner. An emerging international communication infra-structure, the Internet, can provide a vehicle for promoting events andactivities which provide efcient sources of revenue (e.g. local concerts).Thus local artists may nd themselves better off, as national gures haveto retreat. The new forces of global concentration, corporate integrationand technological change may polarize competition, defeating the middleground.

Possible responses and remedies

There are three generic responses to the crisis, which are not wholly

exclusive, and these responses are outlined in only the broadest of terms.

Market forces

The rst response is for outsiders to ignore the crisis which threatens thesocieties. The old system was one that distorted the playing eld againstthe multinationals and superstars, and in the eyes of many the new

regime will right that wrong. If a few societies collapse due toinefciency, then free marketeers will argue that we are merely seeing theprocess of competition. The liberalization of many industries such astelecoms, water and gas may serve as a guide. New competition has notresulted in services disappearing, but rather new levels of charges. As inmost cases of deregulation, competition in this sector will bring newcharging structures typically favouring heavy users, making light usersand marginal users worse off. In the cultural industries of music andmedia, such reordering of charges and revenues will have very signicantadverse implications for many artists and communities. This may welleffect the ballot box, and cause politicians to take notice. Those who wishto preserve the status quo may have a powerful political lobby. Of course,for every loser there are winners. Many are only interested in mass cultureand they are likely to approve the changes, especially as it will not affect


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their favourite offerings. Moreover, to the patriotic British or Americancitizen, the emerging system can be seen as promoting Anglo-American

culture. Our interviews suggest that political forces in continental Europeare likely to move the opposite way from those in the UK and theUSA.

Whether the new order will be drastically different will depend onmany factors. While some national agencies may go out of business, mostwill be forced to retrench, merge and focus on efciency. Many haveargued that the agencies should do this anyway. In all industries,organizations can be made more efcient. The critical question is whether

efciency gains in this sector can be made fast enough and large enoughto offset the threats. It is likely that the collecting societies cannot rollback the tide. They will no longer be able to offer a general service to allparties, but will have to be selective, perhaps levying higher charges onsome copyright holders.

It is important, however, to note that the collection societies areintermediaries they can survive if society, on balance, sees them asperforming useful and necessary tasks. Even though the larger players inthe market have squeezed the copyright societies to attain advantages,they have not bypassed them totally, and would probably face anti-trustrecriminations if they did. Indeed, the prospects of decades of copyrightincomes from owning publishing shares in works suggests that thepresence of some form of efciently functioning intermediary is essential.Even the largest players can hardly afford to totally ignore the warningfrom one collecting society that:

Those who join a collective system, enjoying the accrued benets of that

system, cannot then undermine it by demanding different arrangements forhandling parts of the activity where the transaction cost is low. (Petri,1997)

An even more vital prerequisite for survival is the maintaining of theircredibility capital (Wallis et al., 1998). To function efciently, as wehave seen, collecting societies must be able to represent a large body of repertoire long term, this entails the continued, wide-ranging supportof the copyright-holder population. Without this, composers willeventually cease to sign over the protection of their works to suchsocieties. A condition for this, related to this same notion of credibility,is the perception of the fairness with which collected revenues aredistributed. Probably the most signicant group of rights owners, asregards the weight of their opinions, is the small to medium category,


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who are not supported by giant multinationals, but who enjoy stronglocal or national support. By constantly being embroiled in different

disputes with the larger players (some of whom are even members of theirown boards) collecting societies run the risk of ignoring this very criticalgroup.

Maintaining and growing credibility capital, as the term suggests,involves constant monitoring of the overall fairness of operations, both onthe revenue generating and on the distribution side. The greatest risk inthis context is that the pressure to cut transaction costs by and for themajor players will lead collecting societies to concentrate solely on the 20

percent at the top, and ignore the interests of the following 40 percent orso below them in the income tables. This will be a recipe for disaster.

Technology

There is a much heralded shining hope for the future of the collectingsocieties, and that is digital tagging. Digital tagging, along withinternational databases, offers a long-term prospect that the complex,labour-intensive system of collection (often relying on someone actuallylistening to the music of radio stations) will be substituted with a totallyelectronic system. The recording industry is introducing the InternationalStandard Recording Code or ISRC system. The international associationof performance rights collecting societies, CISAC, is attempting toimplement a universal virtual database, covering all recorded orregistered music works, the Common Information System (CIS). Suchsystems, however, rely on universal support and acceptance, similar tothat required for the success of bar-coding systems in the retail trade.There are a number of barriers to the success of these initiatives.

First there is a large body of existing recorded music which is nottagged. Unless someone is willing to pay all the radio and televisionstations to replace their existing stocks of music and lm with taggedmedia, it will take years, if not decades, for the various media to have up-to-date stocks allowing an efcient system. A half-effective system willprobably not take off. A second difculty is if every new disc or tape isto be tagged, who is to bear the costs of tagging?

With bar-coding, the situation was somewhat different. It tookmany years of negotiation to resolve the difculties, but the users thesupermarkets had a vested interest to pay. Here the problems areworse. It is obvious that there are only modest incentives for record


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companies and television stations to pay for the tagging as it is authorsnot record companies which are the primary recipient of the bulk of the

IPRs. The incentive, however, is not zero; the Rome Convention doesgive record companies (as producers) fees when discs are performed inRome countries, and some record companies and stations are owned byconglomerates which want to collect the royalties for other parts of theirgroups. Tagging could well be the only way owners of recordings candefend their interests when music is distributed digitally over networkssuch as the Internet.

A third hurdle to be overcome is transparency in the system. The

music industry might not wish all its contractual details to be stored inone large global database so that income can be divided and paid speedilyin accordance with all existing contracts for a start it would becomeeasier for some authorities to trace royalty payments to a variety of taxhavens. In a rivalrous oligopoly, information is power. No doubt thesedifculties can be resolved eventually, but new technology is rarely thepanacea to any ill, and this technology is unlikely to deliver speedysolutions.

Regulation

This leads us to be forced to consider a more drastic solution, that of regulation. The post ofce letter system, introduced by Peel in Britain inVictorian times, is seen to be an integral part of our societies. Nearlyeveryone accepts that its prices are formally regulated. So it may be thatpressure will rise on governmental bodies, such as the EuropeanCommission, to propose statutory provisions for uniform access to asystem of royalty collection. Such a system would perhaps demand thatthe major rms who did not use the system would still have to contributeto its cost. This form of novel taxation, if set on the same principle asregulated industries, could set levels of efciency among the agenciesand levels of service for the artists. Few executives in the music industrywould enjoy such forms of legislation but it may come. There is plenty of precedent among recently privatized utilities that the industry has toswallow uncomfortable rulings.

If companies which dominate this industry do not like what theyhear and see, there is a simple response. They can stop trying toundermine the national collecting agencies, and work with them toensure that they do the job they are supposed to do, more fairly, more


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equitably and more efciently. This may require a small measure of pain,but it could be much less than the costs of some of the alternatives.

Appendix

Map 1 Performance revenue per capita for 1995 selected world societies

7.0 ECUs3.5 ECUs0.7 ECUs

General performance revenue per capitaBroadcasting revenue per capita

World Countries

Source: Irish Music Rights Organisation (IMRO) Licensing Survey. George Michael Klimis


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Notes

A preliminary version of this article was presented in November 1996 at thesecond Intellectual Property Forum in London. Since then there have been aseries of critical incidents within the area of music and copyright which have

enforced our beliefs. This published version reects the structural status in early1998. We acknowledge the helpful comments of Chong Ju Choi, Robert Grantand Simon Frith. We also acknowledge nancial assistance from the Economicand Social Research Council, grant nos. L126251003 (Globalisation, Technologyand Creativity) and L325253009 (Intellectual Property and KnowledgeTransfer).

Map 2 Performance revenue per capita for 1995 selected Europeansocieties

7.0 ECUs3.5 ECUs0.7 ECUs

General performance revenue per capitaBroadcasting revenue per capita

Europe Countries

Source: Irish Music Rights Organisation (IMRO) Licensing Survey. George Michael Klimis


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1. Formal integration refers to the process of both horizontal and verticalintegration where typically larger record companies buy smaller record

companies, or record companies buy manufacturing or distribution com-panies. Informal integration refers to informal or formal agreements of mutual dependency between actors in the market. An example would be theinformal relationships which exist between record companies and radiostations now that radio stations have gradually given up recording their ownlive music and come to rely more on recorded music from the industry to llair time.

2. Whether this has served to give further incentives to creativity is open todebate (Vaver, 1990). A curious counter-trend to the forces of concentration

and integration can be observed in a new nancial instrument, developed byabsolute superstars such as David Bowie and Rod Stewart. In 1997, Bowieraised $55 million against future royalties in order to buy back part of hiscatalogue of rights. (On Bowie and Stewart, see Financial Times, 7 February,1998.)

3. Current copyright society accounts show that, in most western countries,revenues are roughly equally divided between income from mechanicalcarriers and immaterial performance royalties.

4. In the case of singer-songwriters (e.g. David Bowie, Paul McCartney),

authors and performers are the same person.5. In his autobiography, the English publisher William Boosey describes

how he gradually became aware that eventually a composers performingrights might be even more valuable than his publishing rights (Boosey,1931).

6. Dening vertical transactions include: in 1987, Warner took over theworlds biggest music publisher, Warner Chappell, and merged with TimeInc; in 1986, German media group Bertelsmann bought the US recordcompany RCA, followed by the acquisition of Italian publisher Ricordi in1994; in 1987, Sony acquired Columbia/CBS.

7. In 1952, ASCAP collected over $17 million, BMI over $5 million andSESAC about $1 million. By 1963, ASCAPs income had risen to $38million, BMIs to about $15 million, while SESACs income was still $1million. In 1996, ASCAP collected nearly $500 million, BMI about $400million, SESAC claims income exceeding $20 million. The worlds largestcopyright society, Germanys GEMA collected nearly $1 billion in 1996.Comparative international gures can be found in annual special reports,

The Collecting Societies, issued by the trade publication Music BusinessInternational (MBI) (London: Miller Freeman).8. GEMA decision: O.J. N a L 134/15, 20 June 1971; Monopolies and Mergers

Commission (1988); Monopolies and Mergers Commission (1996); TempleLang (1997); EC Internal Market and Financial Services Directorate (DGXV), pers. comm.


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9. The US government report The Emerging Digital Economy is available onwww.ecommerce.gov (April 1998); see also Van Cuilenburg and Verhoest

(1998).10. Hugh Duffy, head of the Irish collecting society, IMRO, has sharplycriticized the use of cost/revenue ratios as a measure of efciency (Duffy,1998: 1): I had some bizarre conversations with both creators andpublishers, including members of other collecting societies, where theypointed out, in response to the fact that IMRO was doubling itsdistributable revenue every couple of years, that we were still not reducingour cost/revenue ratio.

11. It has been estimated that the global value of the music industry now

exceeds the lm industry. According to media and entertainment industryanalyst Vogel (1994: 128), the music industry may be considered as themost fundamental of the entertainment businesses . . . because it is the mosteasily personalized form of entertainment, it readily pervades virtually everyculture and every level of society.

12. Press release by EMI Music Publishing, 10 April 1996.13. Music and Copyright (1996) estimates that over 50 percent of Polygram

Music Publishings revenues come from Polygram Records.

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Arthur, W. Brian (1996) Increasing Returns and the New World of Business,Harvard Business Review JulyAugust: 1009.

Boosey, William (1931) Fifty Years of Music . London.Breen, Marcus (1995) The End of the World as We Know It: Popular Musics

Cultural Mobility, Cultural Studies 9: 486504.Burnett, Robert (1996) The Global Jukebox: The International Music Industry.

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Changing Levels of Protection under GATT, NAFTA and the EU, Columbia Journal of World BusinessXXX(2): 8092.

Choi, Chong Ju and Brian Hilton (1995) Globalization, Originality, andConvergence in the Entertainment Industry, in L. Foster (ed.) Advances in

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Qualen, J. (1985) The Music Industry: The End of Vinyl . London: Comedia. Restaurants and Institutions (1997) Singing a Different Tune, 107(10): 20.Roe, K. and R. Wallis (1989) One Planet One Music: The Development of

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