Introduction
The "Study on a community initiative on the cross-border collective management of copyright" released in July 2005 by the EC aimed to improve the cross-border licensing for online music services (European Commission 2005a). In this Study, the EC proposed three options for the improvement of the current situation:

1. do nothing;
2. suggest ways in which cross-border cooperation between national collective rights managers in the 25 Member States can be improved;
3. give rightholders the additional choice of authorising a collective rights manager for the online use of their musical works across the entire EU.

The EC favours option 3, since first, option 3 enables rightholders to choose the collective rights manager (CRM) they want to join. Secondly, this option enables competition between CRMs, and, as a result, this would lead to the improvement of services offered by CRMs (European Commission 2005b). This competition between CRMs would result in a survival of the fittest, and, as a consequence, there would be fewer CRMs for online music services to address which would diminish the licensing costs.

Eighty-five stakeholders submitted reactions to the Study to the EC. This article examines the Impact Assessment (European Commission 2005c) conducted by the EC following the reactions submitted, as well as the ensuing Recommendation (European Commission 2005d).

Impact Assessment
The instrument of the Impact Assessment was introduced in 2002 by the EC to improve the quality and coherence of the policy development process for all major initiatives, i.e. those initiatives which are presented in the Annual Policy Strategy or in the Work Programme of the EC (European Commission 2005e). In an Impact Assessment – which should contain certain components – a systematic analysis of the likely impacts of intervention by public authorities can be found. It should be noted that an Impact Assessment is not a substitute for a political decision; however, it might increase transparency, communication and information on the EC’s proposals.

In October 2005, the EC released the Impact Assessment on the cross-border licensing of online music services, which contained 7 Chapters:

1. Problem definition;
2. Objectives;
3. Policy options;
4. Analysis of impacts;
5. Assessment and evaluation;
6. Results of stakeholder consultation;
7. Commission proposal and justification.

Chapters 1 to 3 of the Impact Assessment roughly correspond to Chapters 1 to 3 of the Study. Although their titles differ, Chapter 5 of the Impact Assessment (called assessment) generally corresponds to Chapter 5 of the Study (called monitoring). Therefore, this article will focus only on the Chapters of the Impact Assessment relating to the Analysis of impacts (Chapter 4), the Results of the stakeholder consultation (Chapter 6) and the Commission proposal and justification (Chapter 7).

Analysis of impacts (Chapter 4)
In this Chapter, the EC sets out the submissions of the stakeholders per topic, i.e. legal certainty, transparency/governance, culture/creativity, innovation and growth, competition, employment, consumer/prices, impacts outside the EU, consequences for large and medium CRMs, consequences for rightholders and consequences for online music providers. For each topic, the EC concludes by making its own evaluation. All topics gave rise to intense discussion amongst stakeholders, discussion which often centred on the question: who benefits from option 2 or option 3? With respect to this issue, the EC recognises that the basic difference between option 2 and option 3 is that option 3 would introduce competition in the relationship between rightholder and CRM (the rightholders option), while option 2 would introduce competition at the level of commercial users (the commercial user option). If, according to option 3, rightholders would be given the choice which CRM to join, CRMs must ensure their attractiveness to attract rightholders. This means for instance low transaction costs and high royalties. Option 2 would lead CRMs to ensure their attractiveness for commercial users, this means for instance offering a good repertoire and low royalties.

The EC also pays attention to the possible use of DRM by CRMs. The EC expects that rightholders will take into account the DRM solutions applied or imposed by the CRMs to protect and monitor their rights in the most efficient way. This could have an impact on the development of DRM.

Results of the stakeholder consultation (Chapter 6)
In this Chapter, the EC summarizes per category of stakeholders the favoured options. It is important to note here, that the stakeholder consultation described in Chapter 6 of the Study concerns a prior consultation round, which had been launched on 16 April 2004. Overall, the general opinion of stakeholders in the July 2005 consultation is that indeed something needs to be done, for no stakeholder favours option 1 over option 2 or 3.

Option 2 – suggest ways in which cross-border cooperation between national collective rights managers in the 25 Member States can be improved – is favoured by:

  • Author’s societies. GESAC favours option 2, but stresses that additional safeguards are indicated; first, safeguards against dumping of valuable repertoire by smaller rivals within the network of reciprocal representation agreements and, second, safeguards that enable CRMs to control the price of their own repertoire. These safeguards are needed because GESAC fears that when collecting societies all offer the same (popular) repertoire as a result of implementing option 2, this would result in a downward movement with regard to the amount of royalties being paid to authors. To attract customers, CRMs should offer customers (i.e. online music services) a good price for getting a license. Competition between CRMs for customers would thus lead to lower licensing prices. Lower licensing prices automatically lead to a lower royalty to be paid to authors. With regard to this pricing issue, some very large authors’ societies (such as the UK and French societies) are willing to withdraw from reciprocal arrangements with authors’ societies that devalue their repertoire by undercutting on the price.

  • Major record companies. Because they are licensees of authors’ rights and thus are amongst the commercial users, they wish to minimise the payment of royalties to be paid to authors’ societies. Unlike the author's societies, they favour the downwards pricing movement resulting from competition amongst CRMs to attract customers.

  • Record producer societies. Because they would like to improve governance and accountability in reciprocal agreements, they favour option 2.

  • Radio broadcasters. Since they are amongst the commercial users and they aim to serve the market at the lowest possible price, they favour option 2 with an EU wide one stop shop license.

  • Niche European cross-border television channels (e.g. MTV). MTV favours this model because it would favour competition between societies and price levels.

  • Online music providers. Like the radio broadcasters, they favour option 2 because they would like to have an EU wide license for the aggregate EU repertoire. In addition to this, they favour the introduction of a mandatory dispute resolution mechanism.

  • The European Consumers’ Organisation (BEUC). BEUC aims to establish consumer choice at attractive prices. A good price for online music services, means a good price for consumers. BEUC mentions that option 2 of the Study might have been a viable basis to address the current problems of collective management. With regard to option 3, BEUC points out the risk that commercially active CRMs might not be able or willing to support national artists on the margins of commercial viability when this option is followed. When minor, national artists are not considered, cultural diversity might diminish.

Option 3 – give rightholders the additional choice of authorising a collective rights manager for the online use of their musical works across the entire EU – is favoured by:

  • Music publisher’s community. Some music publishers already announced that, whatever the outcome of the stakeholder consultation, they will withdraw their repertoire from the existing reciprocal agreements and tender the repertoire for a single EU wide license.

  • Independent record labels. These record labels favour option 3 because this would enable them to establish their own CRM.
Two groups need to be mentioned separately here: first, the performers’ societies, because they are uncommitted to any of the proposals; and secondly, the mobile network operators, because they favour a combination of option 2 and option 3 with a dispute resolution mechanism. The mobile network operators state that commercial users should have the possibility to choose between obtaining license rights directly for the entire EU, and via reciprocity agreements for the remainder of the repertoire.

Commission proposal and justification (Chapter 7)
The different views expressed regarding the Study resulted in a proposal by the EC in which the parallel deployment of the business models in option 2 and option 3 is embedded. In addition, the EC introduces a series of fundamental freedoms that should form the basis of the relationship between rightholders, CRMs and commercial users.
According to the EC, commercial users should be able to obtain multi-territorial licenses for the entire EU irrespective of the Member State of residence or nationality of either the CRM or the rightholder; the categories of rights and the territorial scope should be defined in the license; and CRMs should enhance transparency, for instance by publishing repertoire and applicable prices.

Rightholders should be able to determine the categories of rights and the territorial scope entrusted for collective management; they should be able to withdraw rights from existing agreements with CRMs in order to join the CRM of their own choice, irrespective of the Member State of residence or nationality of either the CRM or the rightholder.

In addition to the principles mentioned above, the EC also introduces rules on governance, transparency and accountability that CRMs should adhere to. These rules include the following principles:

  • CRMs should grant commercial users licences on the basis of objective criteria and without any discrimination against users;
  • CRMs should be obliged to distribute royalties to all rightholders or categories of rightholders they represent in an equitable manner;
  • CRMs should establish clarity among themselves and vis-à-vis commercial users as to which rightholders they represent and update this information on a regular basis;
  • CRMs should specify vis-à-vis all the rightholders they represent, the deductions for purposes other than for the management services provided;
  • Management contracts between CRMs and rightholders for the EU-wide management of musical works for online use should also specify whether and if so, to what extent, there will be deductions for purposes other than for the management services provided;
  • The relationship between CRMs and rightholders, whether based on contract or statutory membership rules should comprise the principle that a CRM treats domestic and non-domestic rightholders or categories of rightholders equally in relation to all elements of the management services provided;
  • The relationship between CRMs and rightholders, whether based on contract or statutory membership rules should contain the principle that rightholders’ representation in the internal decision making process is fair and balanced namely commensurate with the economic value of their rights;
  • CRMs should report regularly to all rightholders they represent whether directly or under reciprocal representation agreements on licences granted, tariffs applicable and royalties collected and distributed;
  • Member States are invited to provide for effective dispute resolution mechanisms in relation to tariffs, licensing conditions, entrustment of online rights for management and withdrawal of online rights available to commercial users and rightholders in their territories.

Recommendation
The Impact Assessment formed the basis for releasing the Recommendation (European Commission 2005d and European Commission 2005f). It is important to note what the status of such a document is. The Recommendation, which is based on Article 211 EC Treaty and is directed at Member States and all economic operators that are involved in the management of copyright and related rights in the EU, can be interpreted as a signal to stakeholders that they will need to do something to improve the current situation in a way that will enable online music services to license music in an easier way. A Recommendation is not binding for the concerned parties. However, it does have a certain persuasive character since it forms the last possibility for the parties concerned to introduce self- regulation before the EC issues binding legislation.

The different views from stakeholders on the issue have resulted in a Recommendation which does not impose the implementation of either option 2 or 3 upon the concerned parties. Rightholders and commercial users of copyright-protected material should be given a choice as to their preferred model of licensing. To achieve a better functioning of the existing reciprocal agreements and to make option 3 a possibility, the EC proposes the elimination of territorial restrictions. In addition, customer allocation provisions in existing reciprocal representation agreements should be eliminated. Furthermore, rightholders who do not wish to make use of reciprocal agreements to manage their repertoire should be offered the additional option to tender their repertoire for EU-wide direct licensing. Lastly, the Recommendation contains a number of principles to which CRMs should adhere in order to introduce a culture of transparency and good governance enabling all relevant stakeholders to make an informed decision on the licensing model best suited to their needs. These principles correspond to the principles mentioned in Chapter 7 of the Impact Assessment and are applicable to all CRMs, irrespective of whether they manage rights according to option 2 or option 3.

A bit of discussion
Some issues resulting from the Impact Assessment and Recommendation are worth mentioning here.

Attractiveness of DRM
The statement of the EC according to which rightholders will take into account the DRM solutions applied or imposed by the CRMs to protect and monitor their rights in the most efficient way, suggests that all rightholders favour the use of DRM. One indication in support of this statement is the fact that legitimate downloading services are becoming more and more popular. However, more and more artists are publicly rejecting the use of DRM (and, more specifically, copy protected CDs which hinder the transfer of the bought CD to an MP 3 player) by their record companies. Use of DRM might thus also drive a certain artist away from the record company. In the future, more discussion between rightholders and the party applying a DRM concerning the possibilities of applying a certain DRM is needed.

Choice as an advantage
The EC wants to give rightholders a choice when joining a CRM. Do rightholders actually want to have a choice, do they have the knowledge to make a profound choice and, moreover, would they use the opportunity to join a CRM not based in their territory? Big rightholders, like record companies, are more likely to have the knowledge to make a profound decision to choose (or even establish) a CRM than individual rightholders. In addition to this, the right of the rightholder to withdraw licensed rights from a CRM at any given time does not enhance certainty amongst online music services. Only a register which is updated regularly (probably at least daily) might give a good overview of who is represented by which CRM for which rights. If there is no such on-going registration, an online music service might address a certain CRM who does not represent a certain rightholder anymore.

Reduction of costs
It remains also to be seen whether implementation of option 3 indeed does diminish the costs for online music services when offering digital music. The online music service still would have to conclude several licenses if a rightholder grants different CRMs the right to license certain rights in a designated area and when no reciprocal agreements are in place.

Bottom line
Whether one supports option 2 or option 3, it is now up to the stakeholders to implement either of those options and to improve the current situation. Whatever stakeholders decide to do, the implementation of the principles to which CRMs should adhere, will definitely improve the greater good of transparency!

Sources

About the author: About the author: Margreet Groenenboom is project researcher at the Institute for Information Law, University of Amsterdam. She specialises in copyright law, patent law, trademark law and law & information technology. Contact: groenenboom@ivir.nl

Status: first posted 24/11/05; licensed under Creative Commons
URL: http://www.indicare.org/tiki-read_article.php?articleId=156