A survey of the competition and IP law issues raised by the music industry in the EU Thomas Vinje Partner Clifford Chance LLP, Brussels

1 Overview - “Selected Issues” Copyright protection of music Digital rights management, formats and interoperability Industry consolidation Fading territorial boundaries in the Internet age

2 Copyright protection of music 2001 Information Society Copyright Directive Implementation in EU member states has been slow E.g., Spain still awaiting implementation As part of French implementation, much publicized “iTunes” legislative proposal

3 Copyright protection of music 2004 Enforcement Directive Provides strengthened means to combat counterfeiting and piracy Implementation deadline passed April 29 Significant number of member states have yet to implement New criminal sanctions directive proposal Provides criminal sanctions for intentional infringements on a commercial scale New proposal understood to be substantially similar to old one National initiatives to toughen up protection Tough German law on file sharing to enter into force next year –Categorizes the act of downloading copyrighted music or movies without permission as a felony potentially carrying a jail sentence of two years or more Initiatives in other countries, e.g., France

4 Copyright protection of music In the courts Illegal file sharing cases remain topical –E.g., French judgment December 2005 suggests uploading and downloading in the context of file sharing for non-commercial purposes not unlawful - Ministère public and SCPP / Anthony G. –Kazaa user transferred over 1,000 files –Court found user not guilty of knowingly infringing copyright Any Kazaa user can copy music files from any other Kazaa user without the knowledge of that other user User could not be expected to know that the files he downloaded were copyrighted, as Kazaa did not provide notice of their copyright status –Outcome in contradiction with earlier decision of different court month earlier in Ministère public and SCPP / Didier T –Kazaa in the meantime found to have infringed copyright law by Australian court, and was forced to remove all copyrighted music files

5 DRM, formats and interoperability Why importance of DRM, formats? EC sensitive to significance of DRM Microsoft media player case related to formats, DRM Intertrust, Contentguard investigations Interoperability so far elusive Cases in Europe and the U.S. against Apple iTunes –VirginMega (FR), QueChoisir (FR), Slattery (US) cases Impact of Microsoft interoperability case, Article 82 reforms? Industry initiatives to achieve greater interoperability –E.g., Marlin Joint Development Association (MJDA) to develop a universal DRM scheme for consumer electronic devices, such as future video and audio players –Companies behind the MJDA initiative include Sony, Philips, Samsung, Matsushita and Intertrust

6 Industry Consolidation Mergers affecting the music industry have been numerous in the past decade E.g., Seagram/Polygram, Vivendi/Seagram, AOL/Time Warner, Warner/EMI, Bertelsmann/Zomba, Sony/BMG,… Evolving on-line music markets have been a particular focus Music players and formats (e.g., AOL/Time Warner) On-line content distribution (e.g., Vivendi/Seagram) Collective dominance of the labels (Warner/EMI, Sony BMG) Market developments have proven tricky to predict in this context

7 Industry Consolidation Sony/BMG Pre-new merger regulation case, unilateral effects theory not pursued Coordinated effects –Commission had a theory but not the data – significance of data collection –Decision in certain sections reads as a prohibition turned into a clearance IMPALA appeal awaiting judgment - any day now EMI / Warner: fourth time’s a charm? Follows previous tie up attempts abandoned, notably 2000 bid, after SO based on collective dominance theory Greater hopes for clearance after Sony/BMG –Commission likely to collect more robust data sets –May investigate on basis of unilateral effects –Far more more often used than collective dominance in particular since Sony BMG

8 Territorial boundaries in the Internet age Licensing of rights Copyrights traditionally territorial Distribution increasingly transnational Justifications for maintaining territorial management of rights questioned in the context of on-line management of rights –Monitoring at a distance reality today –Auditing at a distance reality today –Alternative options exist, including less restrictive option of asking local collecting society to perform audit –Enforcement abroad part of any business

9 Territorial boundaries in the Internet age Licensing of rights IFPI Simulcasting Agreement –IFPI notified to the Commission the agreement in 2000 –an agreement between record producers’ collecting societies designed to facilitate the granting of cross-border licences to radio and tv broadcasters wishing to engage in simulcasting –A network of reciprocal bilateral agreements among collecting societies world-wide –The Commission cleared the agreement after amendment –No country-of-establishment rule within the EEA: licence can be requested in any Member State

10 Territorial boundaries in the Internet age Licensing of rights Santiago Agreement / performance rights –A group of collecting societies notified to the Commission a template reciprocal agreement (“Santiago”), designed to allow for one-stop shopping for online exploitation of performance rights –However, a licensee can obtain Santiago agreement only from the collecting society in its country of establishment –Eliminates potential competition between collecting societies –Commission issued Statement of Objections and held hearing –Possible alternatives to territorial exploitation –Model Agreement has expired Barcelona Agreement / mechanical rights

11 Territorial boundaries in the Internet age Licensing of rights RTL/Music Choice complaint against CISAC –Model reciprocal representation agreement originating in 1936 –Basis for bilateral representation agreements –Network of agreements provide for worldwide repertoire and grants of licenses for domestic territory of collecting society –CISAC model creates territorial protection from other collecting societies –Consequence: transnational operators required to obtain licenses from all the national collecting societies –SO 31 January 2006; hearing

12 Territorial boundaries in the Internet age Licensing of rights October 2005 Recommendations concerning collective cross- border management of rights –Commission backed down from earlier plan to legislate in the area –Recommendation envisages abolition of anticompetitive provisions in existing agreements between collecting societies and lays out principles for governing the relationship between right holders, collecting societies, and licensees: –Right holders and collecting societies. Right holders to have the right to appoint a single collecting society to administer their rights in multiple territories –- Right to determine which rights administered and to withdraw those rights upon reasonable notice. –Licensees and collecting societies. Collecting societies should be transparent about the repertoire they control, and about the agreements they have in place with other collecting societies. –No discrimination between licensees.

13 Territorial boundaries in the Internet age Licensing of rights New initiatives –E.g., MCPS-PRS/Gema-EMI Music Publishing deal –Pan-European licensing of EMI’S Anglo-American repertoire –E.g., MCPS-SGAE eLOS joint venture –Pan-European licensing of Latin repertoire –E.g., SABAM-BUMA alliance initiative –joint management of certain rights considered

14 Territorial boundaries in the Internet age Pricing of music recordings UK consumer organisation complaint before Office of Fair Trading December 2004 referral to Commission Apple charges 79 pence ($1.53) per song in the United Kingdom compared with 99 euro cents ($1.33) in its other European stores + said to prevent cross-border sales –Apple points to different cost structures in different member states

15 Territorial boundaries in the Internet age Membership of collecting societies Daft Punk complaint –Refusal of SACEM to admit Daft Punk on the basis that Sacem statutes do not allow members to exclude rights from management by Sacem unless they prove that they have conferred the management of these rights to another society –Commission appears to have considered this likely to be abusive as regards on-line exploitation –Sacem modified statutes, after which Commission rejected complaint (2002) –Reservation of rights possible by EEA-based members if approved by SACEM board following a reasoned request CISAC complaint –Collecting society cannot accept members of other collecting societies or rightholders having the nationality of another collecting society without consent of the other collecting society

16 Conclusion Technology is continuing to shake up the music industry In comparison with the early days of music peer to peer file sharing, stronger enforcement tools -- and more effective responses to consumer demand Licensing models will need to adapt – and are already adapting More competition law enforcement likely as industry consolidates, the need for interoperability increases and territorial borders are put under pressure by market demand