GOWERS REVIEW OF INTELLECTUAL PROPERTY

CALL FOR EXTENSION OF SOUND COPYRIGHT TERM IN UK IS REJECTED

The timing could hardly have been better. On the day of our last London Meeting (26 November) the press reported that the Gowers Review had rejected the call by major record companies to increase the present term of sound copyright in Britain from 50 to 95 years, and that this should apply retrospectively. This news was announced at our meeting, and it was greeted with cheers and sustained applause. The immediate threat to many of our independent record companies had been removed.

The music industry had mounted a national campaign, with extensive coverage in the press and on radio and television, and it seemed that their arguments were going to persuade the Government to act in their favour. Reporting by the media had been biased and one-sided, with the strong arguments against such a move receiving scant or no attention.

Our concerns were heightened by the fact that the Government was believed to be in favour of giving in to the record companies. One of the singers clamouring for change was Cliff Richard, and the Prime Minister had enjoyed holidays at his villa in the West Indies.

There is no point in going back over old ground once again, but if any readers would like to refresh their memories on the issues involved they are invited to refer to the article in Journal Into Melody for June 2006 (JIM 168). This is also posted on our website.

The Gowers team took each of the record industry’s submission point by point, and found that most of their arguments were unfounded. Their deliberations are available for everyone to read free of charge on the internet (just type in "Gowers Review of Intellectual Property" on a search engine). The Review covers many aspects of copyright, but the part that is of particular interest to us commences on page 48, and some of the main findings are given below.

"Sound recording term

The European Commission is reviewing the length of copyright protection for sound recordings in 2007 as part of the review of the body of Community copyright law. Some members of the UK record industry have called for the Commission to increase retrospectively the term of copyright from the current 50 years to 95 years. That is, that the term of protection should be extended for existing works that are already in copyright as well as future works. This extension would also apply to works that have fallen out of copyright, but which would still be in copyright if the longer term existed when they were created (the ‘retroactive’ revival of copyright). Some companies and trade bodies in the UK record industry have called for the UK Government to support their submission to the Commission that copyright term on sound recordings should be extended.

The Review consulted widely and has considered this proposal in some detail, both for a retrospective change in copyright term and for a prospective change in term that would only affect future recordings rather than those already in existence. As part of its research into the question of term extension the Review commissioned an economic analysis from the Centre for Intellectual Property and Information Law (CIPIL) at Cambridge University.

A number of reasons were advanced in the Call for Evidence from some groups in favour of extending the term of protection: (1) parity with other countries; in the USA, sound recordings are protected for 95 years. In Australia and Brazil the term of protection is 70 years; (2) fairness; currently composers have copyright protection for life plus 70 years, whereas performers and producers only have rights for 50 years. Such a disparity is unfair; (3) extension of term would increase the incentives to invest in new music; the ‘incentives argument’ claims that increasing term would encourage more investment, as there would be longer to recoup any initial outlay; (4) extension of term would increase number of works available; copyright provides incentives for rights holders to make works available to the public as it gives rights holders a financial incentive to keep work commercially available; and (5) maintain the positive trade balance; the UK has an extremely successful music industry. The UK industry has between a 10 per cent and 15 per cent share of the global market. In 2004, the UK sector showed a trade surplus of £83.4 million, earning £238.9 million in export incomes. The Review has carefully considered each of these arguments in turn.

Extension achieves parity with other countries It is important to note that the term of protection is only one factor determining the royalties that artists and recording companies receive. The breadth of protection is also important. In the EU, the term of protection for sound recordings and performers’ rights is harmonised at 50 years. During this period, rights holders receive royalties for almost all public performances of their work. In the USA, the term of protection is 95 years, but under the Bars and Grills Exception around 70 per cent of eating and drinking establishments, and 45 per cent of shops, do not have to pay royalties to performers. In the USA, performers only receive royalty payments when their music is played on digital radio, while in the UK all radio performances carry royalties. If the system in the USA was the same as that in the EU, estimates suggest that European rights holders would receive royalties of $25.5 million per annum for the broadcasting of their recordings in the USA. It is therefore possible that the total royalties received in the EU is no less than, and may even be more than, those received in the USA. The argument has also been put forward that the longer length of term in the USA encourages artists from the UK to sign to US recording companies, thereby remitting profits to the USA. However, the Review has seen no evidence of UK bands choosing to sign to US labels based on copyright term. If musicians are indeed signing to labels in the USA, there may well be other reasons for doing so, such as the size of the market. In fact, there is anecdotal evidence that bands from the USA are signing to UK labels to develop in a vibrant music scene.

Performers and composers should have equal protection Performers argue that the incentives to perform are no less than those required to write lyrics or compose a score, and that the performance itself is a work of art. The distinctive voice and aesthetic of the performer adds value to the composition and is vital to making a song a commercial success. But the fairness argument applies to society as a whole. Copyright can be viewed as a ‘contract’ between rights owners and society for the purpose of incentivising creativity. As MacCauley argued in 1841, "it is good that authors should be remunerated; and the least exceptionable way of remunerating them is by a monopoly. Yet monopoly is an evil. For the sake of the good we must submit to the evil; but the evil ought not to last a day longer than is necessary for the purpose of securing the good". If the exclusive right granted by copyright (or indeed any other form of IP right) lasts longer than it needs to, unnecessary costs will be imposed on consumers. Economic evidence indicates that the length of protection for copyright works already far exceeds the incentives required to invest in new works. Boldrin and Levine estimate that the optimal length of copyright is at most seven years. Posner and Landes, eminent legal economists in the field, argue that the extra incentives to create as a result of term extension are likely to be very small beyond a term of 25 years. Furthermore, it is not clear that extending term from 50 years to 70 or 95 years would remedy the unequal treatment of performers and producers from composers, who benefit from life plus 70 years protection. This is because it is not clear that extension of term would benefit musicians and performers very much in practice. The CIPIL report that the Review commissioned states that: "most people seem to assume that any extended term would go to record companies rather than performers: either because the record company already owns the copyright or because the performer will, as a standard term of a recording agreement, have purported to assign any extended term that might be created to the copyright holder". The British Phonographic Industry (BPI) submitted a report by PricewaterhouseCoopers (PWC) to the Review. Using the maximum revenues predicted in the PWC report, CIPIL estimated that the net present value (NPV) of a prospective change in term would be 1 per cent or lower for performers. The report noted that distribution of income would be highly skewed, with most income going to the relatively small number of highly successful artists whose work is still commercially available after 50 years.

Extension will increase the supply of new music Investment decisions are typically based on the expectations of future returns. Therefore, in order for the incentive argument to hold, it must be shown that prospective extension of copyright term for sound recordings would increase the incentives for record companies to invest in new acts. In an amicus brief to the Supreme Court in the challenge to the Copyright Term Extension Act, seventeen economists, including five Nobel Prize winners, estimate that extension for new works creates at most 1 per cent value for a twenty year prospective extension (using NPV calculation) and they conclude therefore that extension of term has negligible effect on investment decisions. Furthermore, they noted that the then term of protection in the USA had nearly the same present value as perpetual copyright term. As such, many economists suggest that increasing copyright term beyond 50 years does not provide additional incentives to invest, as monies earned so far in the future fail to impact on current spending decisions. The incentives argument is sometimes applied to artists as well as to record companies. That is, if musicians were to receive royalties for an additional period of time, they would have more incentives to make music. This seems highly unlikely given there are a large number of bands already creating music without any hope of a financial return. Dave Rowntree, drummer with Blur and The Ailerons, commented that: "I have never heard of a single one [band] deciding not to record a song because it will fall out of copyright in ‘only’ fifty years. The idea is laughable." Evidence suggests that most sound recordings sell in the ten years after release, and only a very small percentage continue to generate income, both from sales and royalty payments, for the entire duration of copyright.

More music would be available to consumers Extension would impact on all recordings. It would keep works in copyright even when they are not generating any income for rights owners. One study found that parties without legal rights have made more historic US recordings available than have rights holders. Furthermore, rights holders reissue recent works while largely ignoring earlier music. Of the sound recordings published between 1890 and 1964, an average of 14 per cent had been reissued by the copyright owner, and 22 per cent by other parties. These statistics suggest that the costs of renewing copyright, or reissuing copyrighted material are greater than the potential private return, but that these works may have enduring social and cultural value. The lack of commercial availability impacts upon consumers and users, but it is also worth noting the impact this has for all creators and musicians. Chapter 2 noted the increasing prevalance of licensing and the complexity of rights clearance. If works are protected for a longer period of time, follow-on creators in the future would have to negotiate licences to use the work during that extended period. This has two potential implications: first, the estates and heirs of performers would potentially be able to block usage rights, which may affect future creativity and innovation; and second, this would make tracing rights holders more difficult. Thus extending term may have negative implications for all creators.

The UK’s trade balance would improve The argument that the balance of trade would improve makes two assumptions; first, that increasing term is necessary to receive longer terms in other countries; and second, that because the UK is a net exporter of music, more money will flow in from foreign markets. The CIPIL report argues that this is not the case. Firstly, the term of protection depends on where a recording is played, not on where it was produced; therefore term extension would only be beneficial to the balance of trade if UK copyright owners were able to benefit from longer terms in other countries. However, most countries outside Europe, including the largest foreign markets for international repertoire – the US and Australia – do not apply a ‘comparison of terms’ to the protection granted to sound recordings. This means that the term of protection offered in a foreign country is not dependent on the country of origin of the sound recording. UK copyright owners already benefit from the longer term offered in the USA and Australia where royalties are collected from those countries, and the CIPIL report notes that changes in British law would not now affect the term granted to British phonograms. Secondly, the CIPIL report show that the US market, which is worth $12,153 million, comprises only 5 per cent of international repertoire. In comparison, the UK market, worth $3,508.7 million includes 43 per cent of international repertoire. Thus whilst the UK music industry is extremely successful, the UK is a substantial importer of sound recordings, and therefore the extra revenue from 43 per cent of international sound recordings sold would be remitted overseas. In combination, extension to UK sound term would cause little additional in-flows, but would increase remittances abroad. Therefore, as the CIPIL report concludes, "increasing copyright term at home from 50 to 70 or 95 years is likely to have a disproportionate, negative effect on the balance of trade." Increasing the length of sound term increases the length of time during which royalties accrue. Once copyright in a sound recording ends, no royalties are due for that recording, and fewer licences are required to play those songs (copyright in the composition would continue, and therefore would continue to require a licence). PPL collects monies to remunerate rights holders whenever their sound recordings are played. In 2005 PPL collected £86.5 million from venues, premises and broadcasters to remunerate rights holders. The majority of this was collected from UK organisations and broadcasters. Because the cost of the licences reflects the royalties payable on the copyrights, as those copyrights expire, so the cost of the licences will fall. Term extension would keep the cost of sound recording licences higher for longer. Extension would increase costs for all businesses that play music, for example hairdressers, old people’s homes, local radio and internet service providers (ISPs). The impact of extension would therefore be felt throughout the economy.

In conclusion, the Review finds the arguments in favour of term extension unconvincing. The evidence suggests that extending the term of protection for sound recordings or performers’ rights prospectively would not increase the incentives to invest, would not increase the number of works created or made available, and would negatively impact upon consumers and industry. Furthermore, by increasing the period of protection, future creators would have to wait an additional length of time to build upon past works to create new products and those wishing to revive protected but forgotten material would be unable to do so for a longer period of time. The CIPIL report indicates that the overall impact of term extension on welfare would be a net loss in present value terms of 7.8 per cent of current revenue, approximately £155 million.

Retrospective changes to sound recording term As discussed above, changes to the length of IP protection can be made retrospectively or prospectively, and the Review has considered the evidence for both forms of extension. The principal argument that is put forward to increase sound term retrospectively is that many recordings from the 1950s are beginning to fall out of copyright and that this will lead to a loss of revenue, therefore impacting on the incentives to invest in newer artists. As discussed earlier, investment decisions are made on the basis of expected future returns rather than those already received. Furthermore, if music companies have access to capital markets future investment decisions will be entirely unaffected by the length of protection of current works.

Recommendation: Policy makers should adopt the principle that the term and scope of protection for IP rights should not be altered retrospectively."

Apparently the UK Government’s original call for submissions to the Gowers committee resulted in a far greater response from the public than any similar proposal in the past. All of the submissions are included in the report, and they reveal that the messages sent by individuals (as opposed to the vested interests in the music industry) were almost 100% against a change in the existing term of 50 years.

We have to await the outcome of the European Commission’s investigation into the question of copyright, but it is believed that they are not sympathetic to an extension of the current period. There are even suggestions that the USA may have a rethink on its own decision around ten years ago to raise their copyright period to 95 years.

The conclusion reached by Gowers is good for composers whose works are reissued by the small labels because royalties will start flowing again after 50 years, and not have to wait for considerably longer.

It has been argued that the record industry’s case was weakened by the experience in the USA where very few historical recordings have been reissued. In fact some US collectors rely upon the independent British companies to make their older recordings available to them.

A few days after the Gowers Review was published, the record industry placed an advertisement in the press supposedly signed by thousands of its artists pleading for the findings of the review to be ignored. One reporter dryly commented that at least two of the ‘signatories’ had died several years ago.

This article appeared in ‘Journal Into Melody’ March 2007