Chapter 6 Conclusions, Policy & Business Strategy Recommendations
The initial motivation to create the CEEMID databases was the need to advocate for more favourable economic policies and regulation for music, and to decrease the royalty gap as defined in Chapter 3.4 between the Western and CEE regions of the EU Single Market with better pricing. This need has not changed: the royalty gap between East and West, North and South is large. There are new candidate countries where the situation is even worse. Recently business royalty payers increased their efforts to lobby for lower royalties and content prices. The value transfer is being groundlessly trivialised, and the 60-years-old private copying exemption is under threat in those countries where it would be most needed: in Czechia, Slovakia, the Baltic states and in the South. We believe that CEEMID can provide economic evidence in the national transposition process of the DSM directive, or during the discussions of local content quotas.
Our 5-year research programme has shown that most musicians work under much financial and regulatory uncertainty in the region in very precarious working conditions. Despite these difficulties, they have a calling that they follow passionately. Even though their material conditions are worse than the average of their country, they are usually more satisfied with their lives as the majority of the people where they live.
Figure 6.1: Relative income levels: difficulty of paying bills among musicians and the general population
We believe that industry representatives and policymakers should build on these positive sentiments to make the working environment in the Central and Eastern European creative industries more favourable. The music industry has far more potential to create new jobs, new tax base and high value added in the national economy than most industries preferred by national economic policymakers, but currently this potential is largely untapped.
6.1 Support Schemes for Developing the Music Scene
Throughout Europe, national, regional and local governments subsidize cultural activities, practices, and cultural enterprises. In many CEE countries, such subsidies are almost exclusively targeted at the classical music scene, and some parts of the cultural infrastructure. In Austria, Hungary and Bulgaria a very high number of respondents applied for grants, and many of them were successful. On the other hand, in Lithuania and especially Armenia the success rate was (very) low.
Figure 6.2: Availability of Grants in Select Countries
The problem with many grants in the region is that the grant calls were either generally prepared for culture, or developed over years for classical music and jazz only. In some countries, there is no national granting for modern popular music. If some forms of corporate subsidies or local grants exist, the sponsors and granting agencies are not well informed about the needs of musicians. We hope that our Central European Music Industry Report, and the earlier Hungarian, Slovak reports helped to shape a more focused view on the popular music scene.
We recommend the use of our structured, 360-degree workshops to establish the strengths and weaknesses of a national granting system. This methodology takes into consideration all music professionals’ views: not only the musicians, the manager, and the grant writer, but also the musician’s technical staff including stage, lighting and sound engineers, the composers, the producers, the promotion/social media team, the band transporters. We usually try to make sure that at least 30-40 different roles are present. This is necessary to get a fair view of how live or recorded music is produced, what is available, what needs support, and what the pitfalls are. Unfortunately, in grant design, often only artists are asked, even though performances or recordings have obstacles much better known by technical professionals, engineers, or managers.
We are helping music granting authorities with ex ante and ex post indicators to make sure that they know what they want to change, and to measure if their grants have helped to achieve the required change.
Our detailed economic impact assessments have shown in Hungary and Slovakia11 that the music business is very unfavourably taxed. In several CEE countries it is very likely that the music sector is not a net recipient of subsidies but a net taxpayer. In fact, proportionally the music business pays far more taxes than manufacturing activities, such as car manufacturing, which is the preferred economic activity of the region.
6.2 Industry Advocacy, Economic Impact and Taxation
While classical music and national folk music have long merited public support, jazz and popular music have been seen, correctly, as market activities. Their important role in keeping national culture relevant for new generations is a relatively novel idea in the region. These well-intended, but not always yet robust support schemes usually only represent a drop in the ocean of an otherwise unfavourable market situation. In the region, the available grants are often dwarfed by taxes payable, and we believe that music businesses should place less focus on lobbying for better grants and supports systems, and more for less unfavourable taxation for musicians and generally for creative activities.
A more focused industry cooperation may be necessary in the forthcoming modernization of the EU VAT regulation which will change the VAT levels and brackets. This could be a once-in-quarter century opportunity to argue for more just taxation of music in the whole European Union.12
A more focused industry cooperation may be necessary in the forthcoming modernization of the EU VAT regulation which will change the VAT levels and brackets. This could be a once-in-quarter century opportunity to argue for more just taxation of music in the whole European Union.
Economic impact assessments are crucial parts of public policy and advocacy reports on better taxation, or in the design of better creative industry strategies and economic policies. They are also often statutory requirements for EU grant calls or increasingly for national and municipal grant calls, for example, some granting authorities for large grants often want to trace the effect of the grant for up to five years.
Our methodology enables music and other creative stakeholders to create impact assessments for economic and cultural policy consultations. For example, in the Slovak national music industry report Správa o slovenskom hudobnom priemysle we showed the relative economic impact of car manufacturing and a music festival is similar in Slovakia, however, the music business creates a many times bigger tax base (Antal 2019b). A similar argument could be made in Hungary and Croatia where the tax treatment of music is one of the biggest obstacles to growth.
CEEMID made iotables, its data processing, integration and calculation tool for economic impact assessments, open source and available for peer-review and comparison with national statistics office calculations, for example, on value-added and employment multipliers13. The use of this software requires programming skills, an understanding of input-output economics and national accounts. We are currently looking for smaller users, such as concert halls, granting authorities or individual festivals to use our data, and to create tools such as web-based apps that can make this software more user-friendly, standardised, and can help smaller players who do not employ specialists to make their own impact assessments, which is often required by granting authorities for larger funding applications.
6.3 Valuing Music
When CEEMID was founded, most of the CEE stakeholders had little or no experience in valuing their intellectual property and setting its prices. Over the years it turned out that this is not a regional phenomenon, but very typical for all smaller national market players even in mature markets. While copyright administration usually follows national jurisdictions, many prices are set outside of national markets, or the CEE region in the form of various agreements (for example, in the case of traditional mechanical licensing) or in the case of global digital platforms. The nationally set prices are often set by collective management organizations. These prices are differently regulated in the region, and often have not been changed since gaining national independence or transition to the market economy.
While all EU member states are participating in international agreements that regulate royalty setting principles, this international law does not create an unambiguous ex ante price regulation. Ex ante regulation means that prices are not freely set by music stakeholders, but there is a regulated procedure that creates clear prices before they are entering force in general terms and conditions. Certain state governments and legislation have created de facto ex ante price regulations in the region, for example in Hungary, Lithuania, Croatia, which is at least contentious in the light of higher level international and EU law, and in all cases, it is very difficult for rightsholders to work with. Such quasi-regulations politicize valuing music, and often give unfair advantage to politically better organized interest groups, such as IT manufacturers or the restaurant business.
However, in the absence of clear legal mandate for an ex ante price regulation, most price disputes go to competition authorities and special competition courts which have an EU-wide jurisdiction for ex post price reviews. Since competition law is directly applicable EU law, some cases are sent to the Court of the European Union for preliminary rulings. Because in the CEE region most music stakeholders have lower prices or revenues than would be justified, these procedures can create opportunities to decrease the royalty gap introduced in Chapter 3.4. However, competition policy is a double-edged sword. The proof of burden is very high, and litigation, which involves courts in both national capitals and in Luxembourg is very costly.
In our view, several legal precedents, which are binding now in all mature and emerging EU markets, were decided unfavourably for the music industry because of the weak evidence produced by music rightsholders.14 This jurisprudence was set out in the context of background music use in hotels, restaurants and catering, but may be applied to any licensed form of music. In these cases, the EU Court set out that royalty prices should be equal in the European single market, subject to objectively verifiable differences in social, cultural and economic conditions.]
Stakeholders in the creative and cultural sectors are micro-, small and medium enterprises, and often non-profit organizations who are lacking professional skills to fight a competition case. On the other hand, royalty payers are often large technology or media corporations who do have the expertise to enter price negotiations or competition disputes. Because the ex post nature competition disputes result only in downward price modification, the fact that competition law applies already starts a downward spiral in prices.
CEEMID has been used in competition cases, but we believe that the music industry should be more proactive, and not only react to such reviews, because they by nature can only decrease royalties. Another common problem is that in the absence of own valuations, stakeholders, if challenged in a competition court, usually rely on a comparison of market prices in the Single Market. While this is an accepted type of evidence in such cases, it brings no new information into the disputes, and it is free-riding in the few original valuations created by a handful of organizations. The current, one-sided application of competition law is a recipe for disaster, and will lead to a race to the bottom. This is not only a threat in the less developed markets, where usually both royalty levels and total royalty collections are very low, but in the richer markets like Austria, or even France, Denmark and Germany. Because of the methodologies adopted by the EU Court, royalty levels are compared across the EU and unjustified differences can be leveled out by the Courts.
The only way to close the royalty gap is to increase enforcement and increase prices. This requires investment into own, independent pricing capacities, that not only show that in an international comparison a certain price is not unlawfully high, but which also reveals if the value of music has increased in a certain use. As music stakeholders tend to be small in the region, they usually do not have human resources and financial capacities to build out financial analysis or economic analysis competences. The original idea behind CEEMID was to pool data and methodology resources and help stakeholders. CEEMID and Consolidated Independent has initiated national research consortia that aim at creating independent valuations.
There are several methods of counteraction by the music industry, but all require significant investments into data, economic and competition skills, and international cooperation among stakeholders. This is why we believe that making CEEMID open source, as a beta version of the planned European Music Observatory, would benefit the whole industry in a challenging decade. Our data in the past 5 years were used all pricing methods reviewed by IFPI’s public Valuing music document (PwC 2008).
We used the hedonic price method to review and correct tariffs for restaurants and hotels, instead of relying only on international comparison in Hungary and Slovakia;
A complex market comparator model to value broadcasting rights and private copying in Hungary and Croatia;
We used experimental methods in disputed public performance payments in Hungary;
We used hypothetical evaluations when no other data was available in Hungary, Slovakia and Croatia.
Our valuations must follow the international fair valuation principle, and must rely on objective data15. In valuations we commission surveys and collect data following Eurostat’s ESSNet technical recommendations, whenever applicable.
6.4 Private Copying
Private copying has been a very important way of spreading recorded music, books and audiovisual works in the last 60 years, and when lawfully compensated, it remains a very important source of revenue for artists, composers, writers, film writers and performers. According to our empirical research conducted in several countries, the value of private copying is far bigger these days than when most CEE private copying remuneration mechanisms were set up.
In all countries of the region, large device manufacturers and media platforms are allying with various libertarian and pirate activist groups to campaign for abolishing or lowering the private copying levies. On the other hand, according to our research, in many countries of the region it should be increased by 100-1000%, because in the absence of willingness and ability to buy content online, the private copying exemption is widely used by households.
Figure 6.3: Percentage of Online Purchasers Paying for Music or Film
As opposed to licensed music sales, where the music stakeholders have market knowledge and data to set royalty levels, devise sales strategies and monitor use, in private copying this is not the case. The private copying exemption was created first in Germany and later throughout the EU and other countries because the representatives of rightsholders’ would not be able to collect remuneration without infringing the privacy of households.
To set the level of private copying to an adequate level, home copying must be measured with the use of anonymous and representative household surveys, and such survey data must be integrated with other relevant data to set the appropriate price level. We work together with respected polling companies and use carefully adopted, standardized EU surveys following the Eurostat-ESSNet guidelines16 to create inputs for our economic models and to create hard-to-refute evidence for litigation.
Figure 6.4: The Full Market Model to Set Prices for Private Copying, Value Transfer or Broadcasting, Randomized Excerpt from Our Hungarian Model
CEEMID data were used in the modernization of the Hungarian, Slovak and Croatian private copying schemes. While most of this work is business confidential, the less detailed Private Copying in Croatia17 gives a public glimpse into our approach and methodology.
The national adoption of the DSM Directive creates a unique opportunity to review and modernize the copyright administration laws of all EU countries. This would create a good opportunity to create new private copying remuneration systems in Bulgaria and Slovenia, where there are no workable systems in place, or replace the under-performing schemes in the Baltic countries. It would also offer a good opportunity to review the two examples where member states have opted to abolish private copying levies and promised to provide rightsholders with adequate compensation from general tax revenues.
6.5 Algorithms & AI
Most music is sold in the world by automated ‘robot’ programs using algorithms. Without a thorough understanding of the working concepts behind the buzzwords of ‘big data’ or ‘artificial intelligence’ it is impossible to create workable sales strategies for recordings, particularly for exporting purposes. Machine learning and algorithms are playing an increasing role in the programming of large music festivals or planning international tours in live music, too.
Digital streaming is provided by global players who are usually present in all mature and emerging markets, and often even in very early, fledgling future markets. This has increased repertoire competition in the national markets 1000 times. Understanding market dynamics or following releases is impossible for talent managers, music journalists or radio editors without ‘artificial intelligence’ tools.
Streaming platforms are the most important platforms for ‘clean’ music streams, but because of their strong technology and business model, they are increasingly taking over mixed, spoken word and music programmes, that were traditionally dominated by radio and, in the audiovisual world, by television. The strongest radio content providers, such as the public broadcasters of the United Kingdom, the United States or Australia, are successfully expanding the audience of their radio programmes to a global level. As Netflix and YouTube are increasing their market share versus traditional and cable television, podcasts are replacing the broadcast versions of radio programmes.
In the last century, the most important music platform was radio, which was often subject to the explicit regulation of local content quotas, and by the local gatekeeper activity of music journalists and radio editors. National, regional and local radio providers played a crucial role in communicating new music to a large audience. As the radio audience is migrating towards streaming platforms, and the most valuable radio programmes are becoming podcasts, these measures need to be modernized. Our music circulation indicators and indexes were designed to foster a meaningful policy discussion on local music content regulations and support schemes.
Most music stakeholders, even on the level of national, representative bodies, are too small to successfully train algorithms, which puts small nation repertoires at a new disadvantage versus major labels and large nations. They need large, consolidated data assets and the most up-to-date know-how to successfully create sales strategies, to adopt good sales and granting goals, and to become partners of the premiere radio and audiovisual content creators to find new uses for their music.
CEEMID is driven by the principle of data integration. We have been building regional cooperation since 2014 to reach critical data masses and make emerging European markets more competitive. CEEMID has teamed up with Consolidated Independent, a leading technology platform for independent music, to create large enough data assets for creating models and algorithms for smaller European national repertoires, and we have started to initiate open, national research consortia to build innovative tools to promote these national repertoires. We hope to bring these efforts to an EU level in the coming years.
References
Antal, Daniel. 2019b. “Správa o slovenskom hudobnom priemysle.” https://doi.org/10.17605/OSF.IO/V3BE9.
PwC. 2008. “Valuing the Use of Recorded Music.” IFPI PricewaterhouseCoopers. http://www.ifpi.org/content/library/valuing_the_use_of_recorded_music.pdf.
On this important policy topic, refer to the thematic website of the European Parliament or the European Commission↩
Probably the most important, EU-wide applicable royalty setting precedents were set in the CEE region in AKKA/LAA vs Konkurences padome and Léčebné lázně Mariánské Lázně v OSA↩
The Commission Regulation (EU) No 1255/2012 adopted into EU law the International Financial Reporting Fair Value Measurement Standard, which must be used in all EU member states.↩