COLLECTING SOCIETIES AND COMPETITION: BETWEEN CLICHÉS AND REALITIES Brussels, 12 May 2006 Institute for European Legal Studies, Université de Liège TILEC, Tilburg University Hugues CALVET BREDIN PRAT

COLLECTING SOCIETIES The usual suspects in the music world!  First Cliché  Serial antitrust offenders since they are ugly monopolies;  Second Cliché  They are cumbersome, archaic and incapable of any modernization;  Third Cliché  If you can’t destroy them, make them compete!

WHAT THE CLICHÉS DON’T TELL YOU Monopoly in this field produces a price lower than the competitive one Exhibit A: Richard POSNER, US Supreme court Competition for the exploitation of the same works is inefficient Exhibit B: Mario MONTI, DG Markt Collecting societies have consistently updated their agreements in order to meet new needs Exhibit C: CLAs in the 80’s Exhibit D: Sydney Agreement 1996 Exhibit E: Santiago Agreement 2000

WHAT THE CLICHÉS DON’T TELL YOU Destroying the current European organization would mean multiplying transaction costs and would harm the right-owners.

ECONOMICS’ BASICS OF COLLECTING SOCIETIES Richard POSNER: “The effect [of the blanket license] is to eliminate price competition among the members of each association but at the same time to eliminate the prohibitive costs to the performing entities of dealing separately with each composer. So high are those costs that it is nearly certain that the output of the song industry is greater than it would be if the BMI and ASCAP cartels (the US collecting societies) were outlawed”.

ECONOMICS’ BASICS OF COLLECTING SOCIETIES Richard POSNER (continued): “Probably the fee is lower than the cost of equivalent rights if licensees had to negotiate with composers since the cost of negotiations would be part of the overall cost of acquiring the rights. It is an example of the case given earlier where the monopoly price is probably lower than the competitive price”. This analysis was adopted by the US Supreme Court in BMI [&] Columbia Broadcasting, 441 US1 (1979).

COMPETITION VIS-À-VIS USERS IS DAMAGING AND INEFFICIENT In this respect, Commissioner MONTI himself (answer to a written question, 12 November 1996) took a very clear position in the framework of the information society: “The Commission has always taken the important role played by collective management into account when preparing legislation. The specific characteristics of collective management therefore generally justify a position of exclusivity for management societies vis-à-vis users, so that rightholders and users alike can derive maximum benefit.”

COMPETITION VIS-À-VIS USERS IS DAMAGING AND INEFFICIENT Commissioner MONTI (continued) “In some Member States, rival societies handle the same set of rights. In practice, there are a number of instances in which this leads to higher administrative costs both for the societies and for users, and hence to a loss of revenue for rightholders and a diminution in legal certainty.”

COMPETITION VIS-À-VIS USERS IS DAMAGING AND INEFFICIENT Moreover, DG Markt in its Study on a Community Initiative on the Cross- border Collective Management of Copyright released in July 2005 stressed the inefficiencies and harm which would result from a full-blood competition between societies exploiting the same repertoire.

COMPETITION VIS-À-VIS USERS IS DAMAGING AND INEFFICIENT DG MARKT “[Competition between societies] would do little to counterbalance the disequilibrium between international media conglomerates and national CRMs. (…) It introduces competition at the level of the commercial user and thus enhances the user’s bargaining power further.”

COMPETITION VIS-À-VIS USERS IS DAMAGING AND INEFFICIENT DG MARKT “In the long term, competition would do little to maximise online revenue for rightholders and in the end even commercial users would also lose out.”

COMPETITION VIS-À-VIS USERS IS DAMAGING AND INEFFICIENT DG MARKT “This form of competition where CRMs compete to provide the same services (…) will leave 25 CRMs, some of them very small societies, competing for the pan- European licensing business across Europe.”

COMPETITION VIS-À-VIS USERS IS DAMAGING AND INEFFICIENT DG MARKT “Smaller societies may have less bargaining power vis-à-vis large commercial users and commercial users will exploit this to obtain lower tariffs at the cheapest entry point for the aggregate repertoire.”

COMPETITION VIS-À-VIS USERS IS DAMAGING AND INEFFICIENT DG MARKT “In an attempt to secure the business of commercial users, competition on the basis of the administrative fees might then lead to pressure on the tariffs, thereby creating the risk that these too are depressed. This might lead to a downwards spiral and a net loss to rightholders, especially those whose repertoire is represented by smaller societies by virtue of the reciprocal representation agreements.”

COMPETITION VIS-À-VIS USERS IS DAMAGING AND INEFFICIENT DG MARKT “The prospect of retaliation would then arise whereby larger CRMs would withdraw their repertoire from the reciprocal representation agreements, if smaller rivals attempt to attract business by applying tariffs which do not represent the market value of the larger societies’ repertoire, placing pressure on the entire system of reciprocal representation agreements.”

COMPETITION VIS-À-VIS USERS IS DAMAGING AND INEFFICIENT DG MARKT “In the short term, in such circumstances, it would be commercial users that benefit from lower tariffs and rightholders that would lose out.”

COMPETITION VIS-À-VIS USERS IS DAMAGING AND INEFFICIENT DG MARKT “But diminishing royalties would lessen the incentive to create new musical works within an industry that already faces other threats such as from piracy and declining sales in the offline environment. This could spell even more rapid decline than at present and commercial users and consumers could be faced with a repertoire that is dominated by the back catalogue but which contains no new vibrant musical talent.” DG Markt’s analysis is clear.

WHAT THE CLICHÉS DON’T TELL YOU Competition between collecting societies would lead users to deal with the most inefficient collecting society for its members. The usual argument supporting the free play of market forces does not work in the context of the collection of rights. For any user, a high-quality collecting society (because it is efficient in its role for its members) is an inefficient one!

WHAT THE CLICHÉS DON’T TELL YOU  Collecting societies do not provide services to their members as well as to the users.  The service provided to right owners (enforcing the use of the works) could almost be considered as a disservice to users.  Analogy with the taxman is obvious.

WHAT THE CLICHÉS DON’T TELL YOU Collection of rights is not a two-sided market. In a true two-sided market, there is a positive inter-dependence of demand. Ex.: Credit card - each side (cardholder and merchant) values the card appealing to the other side.

WHAT THE CLICHÉS DON’T TELL YOU This is not true of collection of rights:  Users have no demand for services provided by collecting societies.  As they are compelled to deal with one of them, they would of course most value the one providing the worst service to its members, in order to minimize their payments.

MANAGEMENT OF RIGHTS HAS BEEN CONSISTENTLY UPDATED According to some “observers”, management of rights would be archaic, cumbersome and outdated. These attacks only display a lack of knowledge concerning the evolution of management of rights.

MANAGEMENT OF RIGHTS HAS BEEN CONSISTENTLY UPDATED  First, in the off-line world, the societies put in place almost 20 years ago Central Licensing Agreements for mechanical rights with the major record companies. With these agreements, one single license covers the exploitation of works throughout Europe. CLAs were made possible by the existence of a uniform rate throughout Europe for mechanical rights (which do not exist for performing rights).

MANAGEMENT OF RIGHTS HAS BEEN CONSISTENTLY UPDATED  For satellite, the societies concluded in 1989(!) an agreement (Sydney Agreement) which allows for the clearance of rights by one single license covering the whole satellite foot print which could cover several Member States.

MANAGEMENT OF RIGHTS HAS BEEN CONSISTENTLY UPDATED  Concerning Internet, in September 2000, the societies concluded an agreement (Santiago Agreement) through which each society could grant a worldwide license covering the world music to all the users which have their economic residence in its territory.

MANAGEMENT OF RIGHTS HAS BEEN CONSISTENTLY UPDATED Santiago Agreements were groundbreaking agreements. DG COMP objected to them. DG COMP supported the view that there should be full blood competition between societies. It has to be noted that this full blood competition was precisely rejected by DG Markt in July 2005, as seen above!

MANAGEMENT OF RIGHTS HAS BEEN CONSISTENTLY UPDATED DG Markt stressed that this competition would have as a sole result a decrease in royalties and harm to the right owners. In any case, the Santiago Agreements were organized by the societies and provided a perfect answer to the needs of the on-line world.

TOMORROW?  In a few days, an important hearing will take place in the CISAC case.  At stake, the network of reciprocal agreements between societies for the so-called new exploitations (satellite, cable, Internet).  This case could unsettle a landscape which is absolutely consistent with ECJ case law (13 July 1989, Lucazeau) establishing the legality of reciprocal agreements.

TOMORROW?  CISAC case could lead to unpredictable results: No right owner could allow competition between societies for the use of his work. Imposing such a result would lead to the unravelling of the reciprocal agreements’ network and the termination of reciprocal agreements as foreseen by DG Markt.

TOMORROW? Only some big societies could enforce the use of their repertoires throughout Europe; Users would obviously need several licenses in order to be allowed to use the different repertoires which are complementary:  increase of transaction costs;  legal uncertainty;  economic irrationality;  huge efficiency losses.

CONCLUSION Competition between societies could not take place vis-à-vis users. Even in the US there is no competition vis-à-vis users. Competition between societies should take place vis-à-vis right owners. Collective management has proven its value for decades. It has proven its flexibility as well. Enforcement of competition rules here should avoid opening the Pandora box.

CONCLUSION Some years ago, a member of the Commission’s Legal Service, B. J. Drijber, wrote about competition law and collective management: “I am in favour of a cautious interpretation of Article 81 on structure and systems which have shown their value in practice”. Let’s hope that this wise approach will prevail at the end of the day!