The provision of music over the Internet can bring great benefits to musical authors, composers, performers, publishers, distributors
and consumers. Authors and other music rightholders can employ the Internet to reach broader audiences more easily, directly
and cost-effectively than they can through traditional "off-line" methods of distribution. They can also use the Internet
to build new and closer relationships with their listeners. The Internet allows both established providers of on-line music,
and new market entrants, to deliver novel competitive music offerings that are better tailored to the users' individual music
desires than those available through traditional music distribution channels. On-line music delivery also brings significant
cost reductions and other economic efficiencies, and significantly decreases geographical barriers to music distribution.
The availability of more music at lower cost than ever would be possible within the constraints of traditional music dissemination
channels (
e.g., FM radio and record shops) also benefits consumers.
A legitimate and dynamic on-line music market can develop only if rightholders are adequately compensated for the exploitation
of their works on-line; otherwise, many will have no incentive to create new musical works and distribute them on-line.[fn1] The provision of musical works, whether by webcasting or by streaming or downloading on-demand, free or against payment,
should take place only if the music provider is authorised by the rightholder(s) to do so and appropriately compensates the
rightholder for this use.
The current situation where on-line providers arguably need to obtain rights clearance for making music available on the Internet
in all countries where the music is accessible (the country of destination principle), and where the national collecting societies
operate on a national basis offering rights licensing only for their national territory -- which effectively creates national
monopolies for licensing of rights -- prevents or makes more difficult various forms of music distribution on-line. The failure
of collecting societies to adapt to new technology and new opportunities for providing music on the Internet also results
in an unfulfilled and constantly growing consumer demand. To a large extent, this failure results from the fact that current
practices rule out any possibility of competition between the different national collecting societies.
Below we explore different possible ways of correcting this situation. One possibility may be to enact, at least for the European
Union, harmonizing legislation making the granting of rights for on-line music exploitation subject to the country of origin
principle. Another, and perhaps more difficult to achieve, way is to change the practices of collecting societies. One limited
and far from perfect solution to this territoriality problem that has been put forward is the web of reciprocal "Santiago"
agreements, which provides for co-operation between collecting societies on a bilateral basis as regards authors' performance
rights.
Rights Involved
To understand which rights are involved and which licences are required for on-line music delivery, one must distinguish between
two types of protected subject matter: (a) the underlying musical work and, (b) the sound recording, and two categories of rightholders: (a) the author (composer, songwriter, arranger and the like), and (b) the performer and producer.
The copyrights of authors include the right of reproduction, or right to control reproductions of performances embodying protected musical works by mechanical, electro-acoustic or electronic
means ("mechanical rights"), and the right of communication to the public/making available, which in many Member States is part of a broader performance right and includes the right to authorise transmissions or other on-line deliveries of the work (hereinafter cumulatively
referred to as "performance rights").
The performing musician and producer hold neighbouring economic rights in the sound recording that are analogous to the rights
of the author in the musical work. Thus, the performer and producer have a right of reproduction, a communication/making available
right, a distribution right and a right of rental in the sound recording.
The perhaps most common ways of distribution of music over the Internet (the on-line sale of CDs disregarded) are downloading
and streaming. Downloads of digital music imply (1) that the musical work as composed by the author and the sound recording
as performed by the performer(s) and recorded by the producer, is made available to users over the Internet, and (2) that a copy of that musical work and sound recording is stored (i.e., reproduced) both on the music provider's server, and on the end-user's storage device. Collecting societies (and perhaps others) argue that music downloads require a clearance
of: (a) the mechanical and performance rights of the author in the musical work, and (b) the mechanical and performance rights of the performer and producer in the sound recording. However, the scope of these rights and their relevance
to the different forms of on-line music provision vary somewhat from Member State to Member State and may still be subject
to unsettled law in many Member States.
Streaming involves the making available (interactively/on demand or non-interactively/by broadcasting) of music, and requires
a performance licence from the author's performing society and from the performer and producer or (more likely) the record company.
Authors and performers seldom retain their rights in any musical work or sound recording. Professional composers and songwriters
generally transfer their economic rights to a music publisher, who in turn usually entrusts the management of these rights to a collecting society. Therefore, on-line music providers
usually have no alternative source other than collecting societies for the performance rights of authors.
The Role of Collecting Societies
De Facto Monopoly
Authors and (legitimate) providers of on-line music delivery services in practice cannot avoid dealing with collecting societies.
Collecting societies enter into exclusive licences with their members pursuant to which the members entrust to the collecting
society the administration and enforcement of their rights of copyright. While artists might prefer the opportunities for
auto-management and direct licensing of their rights over the Internet to content users, the restrictive membership conditions
of the collecting societies to which they already belong typically prevent them from reserving the management of on-line rights
for themselves or withdrawing them from the management of the collecting society. In general, each national collecting society
for authors' rights holds a de facto monopoly in its territory, with practically all significant composers and song writers being members of the organisation.
To ensure that the rights relating to a work belonging to the repertoire managed by one collecting society are observed in
the exploitation of that work in other countries, the collecting societies have concluded amongst themselves bilateral reciprocal
agreements, giving each other the right, within their respective territories, to grant the required authorisations for any
use of the work.
Thus, the European collecting societies together have a firm grip on the music market. Through their membership conditions,
their practices and bilateral agreements, they have basically eliminated competition between each other. This has benefited
only them, to the detriment of providers of music on-line, of the on-line music market in general as well as, ultimately,
collecting societies' members, the artists themselves.
The most harmful of these practices is the imposition by the societies of exclusivity requirements on their members. Currently,
a member of a collecting society is effectively prevented from managing on-line usage of her repertoire through several collecting
societies, from self-managing her on-line rights, and from delegating on-line rights management to any entity other than a
collecting society. This means that on-line music providers have no source for on-line music rights other than collecting
societies, which reduces significantly the opportunity for on-line music providers to obtain competitive and innovative licence
terms.
Competition Law Concerns
The market for the on-line distribution of digital music is a small but important market in Europe already worth millions
of Euros. As more people are connected through the Internet, particularly through high speed connections, this market may
be expected to grow. Potentially, the on-line music market presents new opportunities for more artists to break through and
make available their music to more people at lower cost, and to obtain greater rewards for their intellectual creations and
performances, and for consumers to enjoy more and more varied music at affordable prices.
However, the on-line music market will only grow to the benefit of artists if the music consumers' demand is satisfied lawfully
at competitive prices. Currently, this is not the case. As a result, the on-line music market has so far failed to expand,
which results in the exchange of free, pirated copies of music without remuneration to artists. The two main causes for this
situation are the strangely parallel resistance of the majors to accept the replacement of their highly profitable traditional
business models by a new business model where competition is tougher and the power of artists and consumers is greater. Only
recently have the majors slowly started to make parts of their commercially attractive repertoire available on-line, although
mainly only through distribution channels owned by them and under terms unattractive to the average consumer of music.
However, one may also fault the collecting societies for their collective unwillingness to recognise the benefits rather than
the dangers of the Web. As a result they have prevented the development of a competitive on-line music market, by charging
high administrative fees and failing to offer licenses for on-line music on reasonable terms. The high license fees and restrictive
conditions imposed on on-line music providers have meant unsustainable fees for on-line music services and the lack of innovative
and appealing on-line music services, which in turn results in consumers turning to unlawful music swapping. Legitimate sales of music on-line have not reached the volumes they could have achieved had competitive pricing and reasonable
terms been available to on-line music provides -- and this has been to the detriment of artists. Artists have missed significant
opportunities for greater income streams generated by a higher number of on-line transactions and a greater number of distribution
outlets through which these transactions can be made on the Web.
The overwhelming majority of consumers of digital music may well prefer lawfully provided music over infringing music, if
such music is competitively priced and available in attractive ways from a lawful provider. Currently, relatively few legitimate
providers are on the market, and their offerings are not attractively priced, partly due to the unreasonable terms the collecting
societies demand for licenses required for lawful distribution. The above-described problems could, at least partly, be solved
through the replacement of the current system of national licensing by the establishment of a system of competitive multinational
licensing, obtainable from any European collecting society. The collecting societies themselves have made an attempt to deal
with this problem by the adoption of the model Santiago Agreement, but this model approach is fundamentally flawed in particular
insofar as it creates insurmountable walls to competition among collecting societies.
The Santiago Agreement
Introduction of a "One-Stop Shopping" Principle for Clearance of Performance Rights
The Santiago Agreement is a template bilateral agreement, to be concluded between performing rights societies, and which will
amend the existing bilateral agreements between these societies. With respect to the authors' rights to permit or prohibit
public performances of their works, the Santiago Agreement applies to licensing of authors' performance rights and the distribution of resulting royalties for on-line music provision through downloading and streaming of music over the Internet with the exception of simulcasting. [fn2]
The Santiago Agreement seeks to address a dilemma posed by the current practices of collecting societies in the on-line context.
As noted above, on-line music providers are required, for each country in which their service is available; to obtain a performance
right licence for the music they wish to distribute legally. As noted above, it is currently not possible to obtain world-wide
(or even Europe-wide) rights from a single source. This has left on-line music providers in an untenable situation.
The Santiago Agreement tries to address this dilemma by establishing "one-stop shopping" with respect to licences for public
performance rights (right to publicly perform, make publicly available and communicate to the public) of the authors of music (such as composers and songwriters), which is one of the key elements necessary for on-line music provision. This
form of "one-stop shopping" could facilitate the development of a legitimate and innovative on-line music market, resulting
in greater choice and cost benefits for consumers of on-line music.
In other words, the model Santiago Agreement has the potential of expanding the territorial reach of performance licences
granted by collecting societies for on-line music to the entire world, such that only one licence is required from a single
collecting society.
However, the way in which the Santiago Agreement has been formulated raises very serious concerns. It contains customer allocation
and other provisions that infringe Article 81 of the EC Treaty and that cannot be subject to any exemption.
Competition Law Concerns
While the Santiago Agreement does allow an on-line music provider to obtain one world-wide licence from one collecting society
for the repertoire of all the collecting societies with which the licensing society has concluded a Santiago Agreement, it prevents the provider (as a result of Article II of the Santiago Agreement) from obtaining this licence from any collecting
society other than the collecting society of the country where it is deemed to be established under the terms of the Santiago
Agreement. For example, if the provider is established in Sweden, it can only obtain a Europe-wide license for a particular work from
the Swedish collecting society and not from any other collecting society in Europe. The planned system would exclude competition
between collecting societies for Europe-wide licenses of the same repertoire. Furthermore, if a provider offered music on-line
from several local establishments, each of these establishments would be required to obtain a separate Europe-wide license
from the collecting society of the Member State of their establishment.
In other words, the Santiago Agreement will eliminate any competition among collecting societies with respect to the terms
and conditions of on-line music licensing. As a result of the Santiago Agreement, each national collecting society will have
a de facto monopoly over on-line multi-national music licensees in its own country, and it need not fear competition on licence terms
and with respect to administration fees with regard to these customers from collecting societies in other countries. This
lack of competition will not only delay the development of the on-line music market and technology, it will damage authors
(the collecting societies' members). The structure established by Article II of the Santiago Agreement clearly constitutes
an unlawful market sharing arrangement between collecting societies, in the form of customer allocation on the basis of a
"licensee country of establishment" criterion.
For on-line music companies with subsidiaries established in different Member States, the customer allocation of the Santiago
Agreement is particularly harmful: Article II.8 of the Santiago Agreement provides that, for purposes of determining which
collecting society has the authority to license, each company of a multinational group of companies is to be considered (and
licensed) separately, regardless of where the website's content is hosted or distributed from. Therefore, each subsidiary
will be required to obtain a separate licence from a different country's collecting society. Such a provision strengthens
the division between customer groups among collecting societies.
Furthermore, there is no justification for the anti-competitive provisions in the Santiago Agreement, and these provisions
surely cannot qualify for an Article 81(3) exemption. The benefits of the "one-stop shopping" approach embodied in the Santiago
Agreement can be achieved without any customer allocation or "most favoured nation" provisions. Indeed, these restrictive
provisions meet none of the prongs of Article 81(3): on the one hand, they neither (a) contribute to improving the production
or distribution of goods or promote technical progress nor (b) provide any benefits to consumers. And on the other hand, they
(c) impose restrictions that are not indispensable to attaining the benefits of the Santiago Agreement and (d) allow collecting
societies to eliminate virtually all competition amongst themselves for on-line music licences.
Finally, the full extent of the anti-competitive impact of Articles II and VII of the Santiago Agreement can only be understood
in light of the collecting societies' existing anti-competitive practices discussed below, which aggravate the anti-competitive
effects of the customer allocation provisions. [fn3]
The Anti-Competitive Effects of the Santiago Agreement are Aggravated by the Collecting Societies' Membership Conditions
In order to fully understand the economic consequences and the anti-competitive effects of the Santiago Agreement, it is necessary
to examine them in the light of the membership conditions imposed by European collecting societies.
As noted above, collecting societies generally require authors to grant exclusivity to the collecting society with regard
to all forms of use of the author's entire repertoire. The author does not have the possibility to license his rights in parallel
with the collecting society or to remove certain musical works or certain forms of exploitation (e.g., on-line exploitation) from administration by the collecting society within a reasonable time period. [fn4] Therefore, on-line music providers generally will be required to obtain the requisite rights from the relevant collecting
society rather than from the author himself, under the terms set forth by the collecting society. As a result, there is no
competition on licence terms for a particular music repertoire. As earlier noted, most composers and songwriters are members
of a performance rights collecting society. To obtain necessary performance rights, on-line music providers simply have nowhere
else to turn than to the collecting societies.
In the 1970s, the European Commission handed down several decisions requiring certain collecting societies to modify the rules
governing their relationships with their members. [fn5] These decisions established the basic principle that collecting societies enjoy a dominant position vis-à-vis their members
under Article 82 of the EC Treaty.[fn6]
In its 1971 decision relating to the statutes of the German collecting society GEMA, the Commission found GEMA to have abused
its dominant position. [fn7] At the time, GEMA required as a condition of membership, inter alia, that its members grant to GEMA a blanket exclusive licence covering all the members' rights for all categories of their
works throughout the entire world.
The Commission condemned this practice as an unjustified abuse of GEMA's dominant position. The GEMA II decision established that GEMA must allow a prospective or existing member either a) to assign to GEMA all works for all
countries, and to withdraw his rights at any time, and for all works and all countries, but only with respect to seven categories of use defined in the decision and/or with respect to specific
countries, or (b) to assign works to GEMA in whole or in part for any type of use (not necessarily those specified in the decision) or for specific countries, but allowing withdrawal of rights
with respect to those works only at the close of every three-year term and with six months prior notice. GEMA opted for the
latter approach, and thus its members are allowed to withdraw their rights with respect to any type of use -- but only at
the end of every three-year term, only subject to six months prior notice (i.e., notice at the latest in June if the three-year term ends on December 31). Most other European collecting societies have
opted for the same option, if they allow the withdrawal of certain rights at all.
The GEMA II decision does not allow a member of a collecting society to withdraw his rights for any type of use at any time. Moreover,
the Commission's decision did not prevent the collecting societies' practice of requiring exclusivity for those categories of rights that they continued to manage.
At the time, the GEMA II decision may have represented an appropriate balance between the enforcement of EC competition law and the exploitation of
IP rights. However, the world has moved on since 1972, and the lawfulness of the membership conditions imposed on their members
by collecting societies should be re-evaluated in light of new (on-line) technology. The EC and national legislators should
consider whether the membership conditions permitted in GEMA II should apply to on-line rights. In particular:
- the three-year withdrawal term is extremely long in the on-line context; allowing withdrawal of on-line rights only every
three years and only with long notice periods, which effectively might prevent authors from withdrawing their rights at all;
- the collecting societies' practice of requiring exclusivity from its members is no longer justified with regard to on-line
exploitation of rights.
The Commission applies the following rules when deciding whether practices by the collecting societies are lawful:
"in an examination of a collecting society's statutes in the light of the Treaty competition rules, the decisive factor is
whether they exceed the limits absolutely necessary for effective protection and whether they limit the individual copyright
holder's freedom to dispose of his work no more than need be" [fn8]
Because many of the on-line music providers are at least as well if not better able to distribute royalties quickly and accurately,
as well as being better placed to police rights on-line, and because in many respects collective management may be less efficient
and less beneficial to rightholders than direct management by artists, it cannot be argued that it is
absolutely necessary for collecting societies to manage on-line rights
exclusively. Therefore, it is essential to evaluate the anti-competitive consequences of the Santiago Agreement in light of such exclusivity.
In particular, when examining the anti-competitive effects of the Agreement, it is important to note that currently on-line
music providers have no source for on-line music performance rights other than collecting societies. This heightens the anti-competitive consequences of the customer allocation provisions of the Santiago Agreement, insofar
as any allocation of customers among competitors has especially detrimental effects when there is no other source for the
product offered by those competitors. The allocation of customers among collecting societies therefore effectively eliminates
all competition with respect to the licensing terms.
In any event, it must be kept in mind that the Agreement is limited in scope in that it only applies to performance rights.
As stated in the beginning, one alternative solution to the territoriality problem could be the application of the country
of origin principle to rights clearance in the on-line context.
Possible Application of the Country of Origin Principle to On-Line Activities
Another possible way of correcting the current situation is to apply the country of origin principle to the licensing of on-line
music rights, which would facilitate the establishment of an internal market in such rights.
Even though national legislation on copyright protection in the information society was partly harmonized under Directive
2001/29/EC of the European Parliament and of the Council of 22 May 2001 on the harmonization of certain aspects of copyright
and related rights in the information society,[fn9] no harmonized rules exist within the European Union governing clearance of copyrights and remuneration in the field of on-line
services.
Today, the act of communication to the public of the copyright protected work in the field of on-line services, such as webcasting,
is considered to take place in every reception state. Therefore, as discussed above, providers of such services need to obtain
a license covering the copyrights involved in each country where the services are accessible via the Internet. Moreover, remuneration
is due in all these countries in accordance with the tariffs laid down by the collecting society in each country.
This so-called country of destination principle is inconsistent with the fundamental principles of the Internal Market, and
indeed it prevents the development of an internal market in rights required for on-line music services.
Application of the country of destination principle also results in restricted competition between collecting societies in
the sense that each collecting society is able to freely set the licensing fees it wishes to apply to service providers seeking
to obtain a license covering the rights in the territory of that society. Thus, the fees can be kept on a higher level than
if unrestricted competition existed between collecting societies, the lack of competition prevents the development of innovative
conditions for licenses for on-line rights.
The development of cross-border transmission of on-line services within the EU in accordance with the principle of free movement
of services, and thereby the creation of an internal market with undistorted competition, would be facilitated if the country
of origin principle were applicable to these services. An amendment of the current practices would to a large extent eliminate
the existing obstacles to such development. In order to apply the country of origin principle to interactive services, the
current definition of where the act of communication to the public takes place should be redefined so that the act of communication
should be considered to take place in the country of emission only.
Conclusion
Collective management should embrace new technologies and adapt to the new opportunities of music on the Internet. If collecting
societies were to do so, and to accept the legitimacy of competition with respect to the collective management of on-line
music rights, they would no longer hinder the development of the on-line music market, ultimately enabling more people to
obtain legal music more cheaply and easily on-line. Competition would encourage collecting societies to be more efficient
as organisations to lower their administrative fees, and to explore innovative ways of licensing music rights and disseminating
music. Moreover, the overall effect would be a net increase in creators' and performers' incomes, as more licences would be
granted to more on-line music providers and new and innovative music markets would be developed (instead of free, peer-to-peer
file sharing systems that provide no remuneration whatsoever to creators and performers).
In addition to making collecting societies subject to competition through a system of Europe-wide licenses obtainable from
any collecting society, and not just the collecting society where the potential licensee is established, as required by the
template Santiago Agreement, membership conditions of collecting societies should be made more flexible for collecting societies'
members, so that they can more easily withdraw from the management of the collecting society certain types of rights, certain
forms of exploitation or certain works.
This would allow artists to self-manage some forms of exploitation where collective management is not appropriate for their
needs, as often may be the case in the on-line context where digital rights management systems facilitate direct management
of rights. It would also give authors an effective bargaining tool to ensure that their collecting societies properly manage
their rights.
Contrary to what the collecting societies may claim, the introduction of such competition would not lead to a reduction of
income of their members. Instead, as noted above, competition would make licenses for on-line music distribution more widely
and easily available at more affordable and more reasonable terms, which would lead to a greater demand for such licenses,
and finally unlock the potential of a huge market with significant revenues for authors. Whereas currently few if any licenses
for on-line music distribution have been granted due to the onerous terms imposed by collecting societies, more competitive
terms would attract more potential on-line distributors to sell music over the Internet, and more users away from illegitimate
services to paid services that actually remunerate artists. More music available on more platforms benefits both artists and
users.
Finally, one reason for the reluctance of collecting societies to change current practices might that many of them are un-transparent,
bureaucratic organisations influenced by their status as quasi-governmental entities. Transparency would increase if collecting
societies were subject to comprehensive, intelligible and detailed disclosure and reporting requirements. For example, the
collecting societies could be made subject to the accounting principles applicable to public undertakings. One key principle
is that the accounts "should show the distinction between different activities, the cost and revenues associated with each
activity and the methods of cost and revenue assignment and allocation.[fn10] While supervision by a governmental body of collecting societies is vital to safeguard the interests of artists, such supervision
should, unlike the situation today, be truly independent. Further, collecting societies should be non-political bodies serving
the needs of their members rather than the interests of collecting society officers and employees.
Footnotes
1: One cannot deny, of course, that many music-makers make music purely for the joy of doing so, and that many music-makers
are happier to see wide dissemination of their music than they are to obtain remuneration for it. But one also cannot deny
that many music-makers are dependent on their music for their livelihoods and obtaining remuneration for their musical creations
and performances is very important to them.
2: The "mechanical rights" collecting societies, which administer the authors' reproduction rights, and which usually are
either closely linked with (or indeed one and the same organisation as) the performance rights societies, are not involved
in the Santiago Agreement. However, they have devised a similar arrangement, the so-called Barcelona Agreement.
3: We note in this context that the Directive on the harmonization of certain aspects of copyright and related rights in
the information society of 9 April 2001 provides in Recital 17 that "[i]t is necessary, especially in the light of the requirements arising out of the digital environment, to ensure that collecting
societies achieve a higher level of rationalization and transparency with regard to compliance with competition rules."
4: A widely publicized example is the popular French band Daft Punk, which is currently in a dispute with the French performance
rights society SACEM. Daft Punk wants to manage its on-line rights itself; SACEM is withholding license revenue from traditional
sales until Daft Punk agrees that SACEM and not Daft Punk itself has the authority to manage the on-line rights of the band.
5: Commission Decision 82/204/EEC of 21 December 1981 [1982] OJ L94/12; Commission Decision 72/268/EEC of 6 July 1972 (GEMA
II) [1972] OJ L166/22; Commission Decision 71/375/EEC of 9 November 1971 [1971] OJ L254/15; Commission Decision 71/224/EEC
of 2 June 1971 (GEMA) [1971] OJ L134/15. See also Case 127/73, BRT II, judgment of 27 March 1974 [1974] ECR 316.
6: Article 82 prohibits as incompatible with the common market any abuse by one or more undertakings of a dominant position
within the common market or a substantial part thereof in so far as it may affect trade between Member States.
7: Commission Decision 71/224/EEC of 2 June 1971 (GEMA) [1971] OJ L134/1.
8: Commission Decision 82/204/EEC of 21 December 1981, at 36, applying Case 127/73, BRT II, judgment of 27 March 1974, supra, note 4.
9: Directive 2001/29/EC of the European Parliament and the Council of 22 May 2001 on the harmonization of certain aspects
of copyright and related rights in the information society, OJ L 167/10 of 22.06.2001.
10: Commission Directive 2000/52/EC of 26 July 2000 amending Directive 80/723/EEC on the transparency of financial relations
between Member States and public undertakings, OJ 2000 L 193/75.
