The House of Commons Digital, Culture, Media and Sport Select Committee publishes a report on their inquiry into the economics of music streaming

What economic impact is music streaming having on artists, record labels and the sustainability of the wider music industry?

08.09.2021

This article first appeared in the Intellectual Property Forum journal, published by the Intellectual Property Society of Australia and New Zealand. Simon Clark and Roosa Tarkiainen, ‘Current Developments – Europe: United Kingdom: The House of Commons Digital, Culture, Media and Sport Select Committee Publishes a Report on their Inquiry into the Economics of Music Streaming’ (2021) 125 Intellectual Property Forum 108.

Introduction

The House of Commons Digital, Culture, Media and Sport Select Committee has published a report on the economics of music streaming – the product of a 10 month inquiry during which the Committee heard from the key players in the industry, including artists, music companies, streaming services, trade bodies and collecting societies, to name a few. The inquiry considers the impact of music streaming on the artists and companies that make up the music industry and “examine[s] the long-term sustainability of the industry itself”.[1] According to the report, “streaming needs a complete reset”.[2]

The report comes at a turbulent time in the music industry: lockdown restrictions as a result of COVID-19 have caused a severe decline in revenue streams from live performances and touring and associated revenue such as merchandising. As a result, and due to issues with distorted royalty rates predating the pandemic, artists are suffering from poor remuneration and struggling to make a living from their art. Meanwhile, music companies are reporting historic profit margins in parallel to the overall growth in global recorded music industry revenues. Music streaming has also picked up and is more popular than ever, overtaking other forms of music consumption and helping the industry recover from over a decade of decline due to piracy. The legal underpinnings of the industry are also at the forefront of the legislative agenda internationally, with the European Union having recently legislated the new Directive (EU) 2019/790 of the European Parliament and of the Council of 17 April 2019 on copyright and related rights in the Digital Single Market (“EU Copyright Directive”) and with Member States currently in the process of transposing its provisions into national law. The United Kingdom, somewhat controversially, elected not to adopt the EU Copyright Directive’s provisions, including those on artist remuneration and liability of services hosting user generated content.

While the title of the inquiry is targeted at streaming in particular, its scope is much more ambitious. The report attempts to provide comprehensive analysis of the state of the music industry and its key players in the context of streaming, and contains over 20 recommendations for legislative reform and regulatory interventions to deal with what it identifies as issues in the music industry as a whole. The report is split broadly into three areas with respective recommendations to the UK Government in each: remuneration in the music industry; market domination in the recorded music market; and issues in the streaming market, including technologies, payment systems and safe harbour protection for services hosting user generated content services.

In the context of the UK, arguably the most sweeping recommendations are the introduction of equitable remuneration for streaming, review of liability and safe harbour provisions for user generated content hosting services (“UGC services”), and recommendations to address market dominance by the major labels, including a referral to the Competition and Markets Authority (“CMA”). This update will analyse the main recommendations of the report, particularly through the lens of copyright law.

1. Equitable remuneration for streaming

Perhaps the most radical reform proposed in the report is the extension of the equitable remuneration right to streaming in the UK. The report highlights the impact the growth of streaming has had on the music industry, stating that “between 2015 and 2019, the streaming-led recovery boosted UK major label turnover by 21 percent and operating profit margin increased from 8.7 percent to 11.8 percent”.[3] What the evidence in the inquiry showed, however, is that while record labels have profited from this growth, artists have not received proportional benefits.

One of the reasons for this is that the streaming of a recording is exploited by the exclusive making available right in the UK, which means that the share of revenue paid to performers is dictated by the terms of their individual publishing and recording contracts. The predominant type of deal that a performer is likely to be signed to with a record label is the “advance and royalty” deal (or “standard record deal”) in which the performer’s royalty rate is likely to be between 20-24 per cent of recording revenues, including those obtained from streaming (of which the label is likely to keep the performer’s advance and any negotiated recoupable costs).[4] On the other hand, public performance, communication to the public and rental of commercially published sound recordings are subject to equitable remuneration.[5] The report explains that current industry norms dictate that corporate and creative partners divide revenue from the exploitation of those rights in half, which means that artists are guaranteed a greater share of revenue from equitable remuneration for rental, for example, than from streaming.[6]

The solution recommended by artists, and echoed by the Select Committee, is to extend the right to equitable remuneration to streaming. The idea is that revenue paid from streaming of the recording would then be split according to the industry standard rate at 50:50 between the label and the performer, rather than set by individual recording contracts which, most of the time, result in much lower shares of recording revenue to the artist. One of the benefits of equitable remuneration identified is that it is non-waivable and non-transferrable, and it could therefore not be transferred in instances where artists are negotiating with labels, who are often the more powerful party. Furthermore, equitable remuneration would not be subject to recoupment, so that the artist would be guaranteed a payment from streaming, whether or not the recording has earned out the initial investment by the record label.

In their submissions, record labels and their trade associations unsurprisingly argued against the classification of streaming as anything other than making available.[7] In their view, a stream should be treated more as a sale, as users have a choice of how, when and what track to listen to, with high interactivity enabled when creating their own playlists. A stream is therefore unlike a broadcast due to the interactivity and user control, which is unavailable in radio, for example. More broadly, the labels have also argued that the status quo allows more flexibility in negotiations, and that artists already have a plethora of options of different types of recording contracts available to them, or indeed the option of self-releasing their content without a separate deal with a label. Streaming services themselves posited that streaming is more akin to a rental,[8] or to passive listening such as broadcast, due to their auto-play functions and algorithmically pre-selected playlists for users.

The report concludes that the labels’ classification of streaming does not take into account the complexities of streaming and ignores the rental and broadcast-like characteristics of this mode of consumption of music.[9] The report therefore recommends a legislative intervention by the Government to amend the Copyright Designs and Patents Act 1988 (UK) (“CDPA”) so that the making available right is not precluded from the right to equitable remuneration and additional “digital music remuneration” payment would be made to artists through their collecting societies when music is streamed or downloaded. The result would be a co-existence of equitable remuneration and direct licensing similar to the rental right, (and similar to the system in Spain[10]), whereby performers would benefit from a guaranteed remuneration right when the music is streamed, while the record label retains the exclusive right under the terms of their contract with the artist. This would be preferable to providing a separate classification for streaming, or to adding an exception to the definition of “broadcast” in the CDPA to include streaming. Such approaches would require the Government to proscriptively define a “stream” in legislation, whereas simply extending equitable remuneration to making available would avoid issues with future developments in streaming technology not being covered by the legislation.

On paper, the recommendation would be an effective and simple solution. In practice, however, an attempt to legislate for it would inevitably face huge push back from the labels as a shake-up of the status quo, and due to the resulting decrease in their share of streaming revenue relative to the performer.

2. Safe harbours and the EU Copyright Directive

One of the issues repeated in the evidence throughout the inquiry was the limitation of liability for content hosting services in the form of safe harbours under the E-Commerce Regulations 2002.[11] Safe harbour exempts streaming services that host user generated content (UGC services), e.g. YouTube, TikTok and Facebook, from liability for copyright-infringing content on their platform as long as they expeditiously remove that content once flagged to them, or otherwise gain “actual knowledge” of such content.

In general, the argument against safe harbours in their current form is that they create an “unlevel playing field” in favour of UGC services such as YouTube who, relying on the safe harbour protections, are able to avoid negotiating licences for all of the music that they use, and in general pay less on average on a per-stream basis than other services. This has created a “value gap”, i.e. a mismatch in the value UGC services generate from music and the revenue returned to the music industry. The report identifies safe harbours as giving UGC services – singling out YouTube in particular – a competitive advantage over other services, suppressing the value of the digital music market.[12]

The report proposes two potential solutions to the safe harbour dilemma: introduction of legally enforceable obligations to normalise licensing arrangements for UGC services, and designation YouTube’s streaming services as having strategic market status to encourage competition with its products.

The former is the product of discussions over the provisions in the EU Copyright Directive, which provides that the safe harbour provisions in the E-Commerce Directive[13] do not apply to a qualifying service which “performs an act of communication to the public or an act of making available to the public”, and that such a service will be liable unless they can demonstrate that they have used “best efforts” to obtain a license and comply with various notice and staydown obligations.[14]

Acknowledging that the UK elected not to adopt the provisions of the EU Copyright Directive, the report states that the Directive is “not a silver bullet to issues caused by safe harbour”.[15] However, it recommends that 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’”.[16] The Government must ensure that these obligations are “proportionate so as to apply to the dominant players like YouTube” but do not discourage new entrants to the market. [17]

It is not clear from the report whether the recommendation is for the Government to re-consider implementing a selection of equivalent obligations from the EU Copyright Directive into UK law, or whether it should go further and legislate its own separate obligations, thereby re-opening the discussions in the UK on UGC liability and safe harbours. The risk with the latter is that by returning to the drawing board, the UK could end up with a different legal framework from the EU, thus resulting in legal uncertainty and undermining harmonious interpretation of copyright law internationally. To that end, the report acknowledges that the Government should ensure that “creators in the UK are not worse served than they would have been had the UK remained in the EU”.[18]

There is also the question of whether the UK should be legislating provisions akin to those of the EU Copyright Directive in a vacuum without considering the ongoing developments in the EU with regards to UGC platforms – for example the recent judgment from Court of Justice of the European Union (“CJEU”) on the liability of YouTube under article 3(1) of the InfoSoc Directive[19] (the communication to the public and making available rights)[20] and an ongoing challenge to article 17 of the EU Copyright Directive in the CJEU.[21] It is still unclear at the EU level to what extent YouTube would be covered by article 17, and it is likely that YouTube would argue that it has already satisfied the best efforts requirements for authorisation with their pre-existing Content ID system.[22] At the level of the judiciary at least, the English Courts have thus far refused to depart from EU jurisprudence on communication to the public,[23] and arguably the same approach should be adopted when legislating on obligations on UGC services which operate in the borderless environment online.

3. Majors’ market dominance

The report provides an overview of the state of the music recording market, with a focus on the dominance by the major music companies – Universal Music Group and its publishing company Universal Music Publishing Group; Sony Music and Sony Music Publishing; and Warner Music Group and its publishing subsidiary Warner Chappell Music. The report explains that the majors’ market share has become increasingly concentrated, with the total global market share of the majors in 2020 set at 68 per cent in recording,[24] due to acquisition of competing services, vertical integration and a system of cross-ownership between labels (as well as between the labels and streaming services themselves in some cases). The report recommends that the Government refer a case to the CMA to undertake a full market study into the economic impact of the major record labels’ dominance in the market.[25]

The dominance of the majors means that they have greater bargaining power in negotiations with artists regarding performer advances and recoupment terms in their recording contracts. The report states that the majors have been able to acquire music from creators on terms that favour the majors at the expense of the creators, subsequently resulting in the majors benefitting disproportionately from the growth of streaming, as discussed above. It also identifies that smaller entrants to the market are often unable to compete with the majors in terms of capital and expertise, furthering the dominance of the majors. The labels argued that artists have more choice than ever before regarding the terms under which they release their music, both in terms of the types of record deals available, and the options to self-release or sign to a distribution company. [26]

However, according to the report, issues remain with the inequity in bargaining power in contract negotiations between labels and artists. To address these issues, the report recommends that the Government introduce into the CDPA a right to recapture works and a right to contract adjustment where an “artist’s royalties are disproportionately low compared to the success of their music”.[27] Both mechanisms would ensure improved rights for artists by giving them increased leverage to renegotiate record deals and the subsequent choice between more labels. A right to recapture works already exists in the United States,[28] and a right to contract adjustment is included in the EU Copyright Directive.[29]

A further recommendation to improve the negotiating position of artists is to introduce certain transparency obligations. The inquiry heard evidence criticising the lack of transparency from music companies and streaming services, with creators and their representatives “routinely prevented from seeing the terms of licensing agreements between record labels and streaming services”, especially due to non-disclosure agreements between the labels and streaming services.[30] The report therefore recommends that the Government introduce a right for performers to “have sight of the terms of deals where their works are licensed, on request and subject to non-disclosure”, as well as a requirement to notify the performers of the terms and structures of their deals and the means and methods by which the monies distributed to them are calculated.[31] The recommendation is in line with article 19 of the EU Copyright Directive which imposes similar reporting and transparency obligations on entities including record companies, collecting societies and streaming services.[32]

Conclusion

While this update only touches upon a few areas of the inquiry, the report covers a much wider range of issues and reforms in the music industry. It is unlikely that all of its recommendations will be adopted by the Government, and those that are taken into consideration will be subject to much debate in the industry. Of interest in the near future will be whether the report sparks appetite for legislative reform of the CDPA, and the extent to which legal developments covering the streaming market in the EU will be followed by the UK.

Growth of the music industry and developments in streaming technologies should be encouraged, but the underlying message of the report is that that should not come at the expense of equity in the industry. The report may be ambitious in scope, but it is perhaps reflective of the fact the copyright laws in the UK are long overdue for reform to catch up with technological developments in the industry and the need for a fair balance between the artists and creators and the businesses they work with.

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[1] House of Commons Digital, Culture, Media and Sport Committee report on the Economics of Music Streaming (“DCMS report”), paragraph 5.
[2] DCMS report, paragraph 41.
[3] DCMS report, paragraph 42.
[4] DCMS report, paragraph 44.
[5] Copyright Designs and Patents Act 1988 (UK) s.182D.
[6] DCMS report, paragraph 59.
[7] DCMS report, paragraph 62.
[8] DCMS report, paragraph 65.
[9] DCMS report, paragraph 69.
[10] DCMS report, paragraph 73.
[11] Electronic Commerce (EC Directive) Regulations 2002 (UK), s.19.
[12] DCMS report, paragraphs 164 and 165.
[13] Directive 2000/31/EC of the European Parliament and of the Council of 8 June 2000 on certain legal aspects of information society services, in particular electronic commerce, in the Internal Market.
[14] Directive (EU) 2019/790 of the European Parliament and of the Council of 17 April 2019 on copyright and related rights in the Digital Single Market, art. 17.
[15] DCMS report, paragraph 177.
[16] DCMS report, paragraph 178.
[17] DCMS report, paragraph 178.
[18] DCMS report, paragraph 142.
[19] Directive 2001/29/EC of the European Parliament and of the Council of 22 May 2001 on the harmonisation of certain aspects of copyright and related rights in the information society.
[20] Frank Peterson v Google LLC and Others and Elsevier Inc. v Cyando AG, C-682/18, ECLI:EU:C:2021:503
[21] Poland v Parliament and Council, C-401/19.
[22] DCMS report, paragraph 177.
[23] TuneIn Inc v Warner Music UK Ltd and another [2021] EWCA Civ 441.
[24] DCMS report, paragraph 109.
[25] DCMS report, paragraph 111.
[26] DCMS report, paragraph 114.
[27] DCMS report, paragraph 122.
[28] DCMS report, paragraph 121.
[29] Directive (EU) 2019/790 of the European Parliament and of the Council of 17 April 2019 on copyright and related rights in the Digital Single Market, art. 20.
[30] DCMS report, paragraph 135.
[31] DCMS report, paragraph 142.
[32] DCMS report, paragraph 141.

Roosa Tarkiainen

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Simon Clark

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