The value of copyrights in recorded music: terrestrial radio and beyond: with copyright regimes everywhere under threat from piracy and wide digital dissemination, conflicts have erupted over the fair market value of copyrights. What should Canadian artists and creators be paid for their work? A lot more than they are at present.

Author:Boyer, Marcel
 
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The Study in Brief

In today's digital age, copyright regimes everywhere face common piracy threats along with wide dissemination. Meanwhile, rights holders and users contest the market value of copyrights in public forums, legislatures and in the courts. Without agreement on value, there can be no fair copyright regime, leaving unprotected the livelihood of artists.

This Commentary discusses one battleground of this copyright battle--recorded music. This sector is particularly important for two reasons. First, recorded music is easily and broadly shared through digitization. Second, new technologies used to resell and distribute music such as Internet radio, webcasting and on-demand streaming raise the possibility of large-scale dissemination and customization, while Internet radio also opens markets to less known artists who may be better able to reach an audience for their works.

Whether fought in the media, public policy circles or at regulatory hearings before copyright boards, these conflicts center mainly on the proper compensation for use of copyrighted material. The root of those conflicts is the difficulty of properly valuing the intellectual property rights of authors, composers, performers and makers.

This Commentary shows that it is possible to determine the competitive value of recorded music in the terrestrial radio industry from the behaviour and broadcast choices of radio operators. This value can help implement a fair copyright regime. It can also be extended to Internet radio webcasting to assess the payments due to rights holders in this competing sphere.

The author's analysis determines a competitive value of recorded music about 2.5 times greater than the current level of copyright payments. In 2012, this would have meant that royalty payments should have been about $440 million compared to the estimated $178 million.

The world of intellectual property (IP) is in turmoil. In today's digital age, copyright regimes everywhere face common piracy threats along with wide dissemination.

Meanwhile, rights holders and users contest the market value of copyrights in public forums, legislatures and in the courts. Without agreement on value, there can be no fair copyright regime, leaving unprotected the livelihood of artists.

IP rights, including in the music industry, attempt to balance users' and creators' interests. But commerce requires that the products sold have efficiently set prices. In the absence of functioning markets, prices are set through administrative bodies such as copyright boards.

This Commentary discusses one battleground of this copyright battle--recorded music. This sector is particularly important for two reasons. First, recorded music is easily and broadly shared through digitization. Second, new technologies used to resell and distribute music such as Internet radio, webcasting and on-demand streaming raise the possibility of large-scale dissemination and customization, while Internet radio also opens markets to less known artists who may be better able to reach an audience for their works.

Among broadcasters using recorded music, commercial music-format (1) terrestrial radio is of particular interest. The commercial radio industry packages recorded music together with other content, mainly "talk" in different forms, to generate an audience of interest to advertisers. Each radio station finds its niche, by selecting both a music type and a talk type.

The Issues

Costly conflicts between users and creators: Whether fought in the media, (2) public policy circles or at regulatory hearings before copyright boards, conflicts centre mainly on the proper compensation for use of copyrighted material. The root of those conflicts is the difficulty of properly valuing the intellectual property rights of authors, composers, performers and makers.

In this Commentary, I will show that it is possible to determine the competitive value of recorded music in the terrestrial radio industry from the behaviour and broadcast choices of radio operators. This value can help implement a fair copyright regime. It can also be extended to Internet radio webcasting to assess the payments due to rights holders in this competing sphere.

There are three reasons why terrestrial radio is a useful subject for determining royalty rates: (a) it is a well-defined, well-developed and mature industry with extensive data on revenues and costs; (b) it involves different rights and groups of rights holders; and (c) the observed music royalty rates and payments in that industry are often used as a proxy to determine the music royalty rates and payments in other contexts and industries, including relatively new industries such as Internet radio webcasting, online streaming and/or semi-interactive or interactive webcasting. (3)

My main findings are:

* The approach followed by the Copyright Board of Canada to determine the competitive value of copyrights in the commercial terrestrial radio industry has deprived rights holders of significant royalty payments;

* Such undercompensation is carried over to Internet radio webcasting since royalty payments in new broadcasting technologies are based in part on the royalty regimes in terrestrial radio broadcasting; (4) and

* Failing to take into account the major differences between new broadcasting technologies and over-the-air broadcasting is detrimental to rights holders as well as to the Internet radio industry itself.

In this Commentary, I propose a compensation level that is fair and equitable for both sellers and buyers. First, I ascertain the competitive market value of recorded music based on the behaviour and choices of commercial terrestrial radio operators. I then apply this competitive value to the Internet radio industry, as both are competing for listeners.

Setting a Value on IP: In a market situation where both sellers and buyers are participating voluntarily, the seller is receiving a price the buyer has agreed to and the buyer is paying a price the seller has agreed to. Buyers and sellers will transact up to the point where marginal value of an additional unit for the buyers (demand) is equal to the marginal cost of that additional unit for the seller (supply), where relevant marginal value and cost concepts may be the short-run or all-inclusive long-run ones, depending on the context.

My core recommendation concerns the Copyright Board of Canada, whose mandate is to establish royalties when copyright is administered by a collective such as the Society of Composers, Authors and Music Publishers. I suggest that the board set royalty rates based on the marginal value, not the total value, of recorded music content. This marginal value can be determined through economic analysis of the behaviour and choices of commercial radio operators and other users.

How would marginal-value compensation work in practice? I calculate the current marginal value of recorded music from the broadcasters' mix of music and other programming, given current royalty rates, and, the compensation paid to on-air talent.

I recognize that a change to royalty rates may lead to music producers altering their production and to radio stations modifying their program mix, depending on the sensitivities (elasticities) of supply and demand of recorded music to the change in royalties.

These modifications would, in turn, affect marginal values, also impacting royalty rates. The Copyright Board's royalty rates should reflect the foreseeable change in behaviour of producers and users that will occur as a result. It must also consider the impact of the competition between terrestrial radio and Internet radio as well as their respective characteristics in setting royalty rates. In the end, the board should set royalties as a percentage of revenues in terrestrial radio and as a per-play rate in Internet radio. This is a way to ensure a fair playing field.

Copyright and Economic Growth

An efficient IP regime encourages the development of quality IP assets while maximizing their use and dissemination, thereby favouring further creativity and innovation.

Core industries whose primary purpose is to create, produce, distribute or exhibit copyrighted materials include sectors such as computer software, videogames, books, newspapers, periodicals and journals, motion pictures, recorded music, and radio and television broadcasting. Many other industries rely on copyright protection in partial, non-dedicated, or interdependent ways. Indeed, copyrights permeate the whole industrial fabric.

A recent International Intellectual Property Alliance report estimated that the value of US core copyright industries in 2012 exceeded...

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