Government and CMA respond to DCMS report on reform of music streaming industry, but action to be taken remains uncertain

On 22 September 2021, the UK Government and the Competition and Markets Authority (“CMA“) published their response (the “Response“) to the Digital, Cultural, Media and Sports Committee (“DCMS Committee“) report (the “Report“) on the economics of music streaming. The Report was published in July 2021 (see our previous blog post here) and set out a number of recommendations to address issues identified following the DCMS Committee’s related inquiry (see our previous blog post here for background and further details).

In its Response, the Government acknowledged the invaluable insights into the streaming environment gained from the DCMS Committee’s inquiry and accepted the need for reform of aspects of the industry. However, it suggested that further research is required to fully understand the complexity of issues faced by music creators / rights holders and, in turn, the impact of the DCMS Committee’s recommendations on the wider music sector. There is therefore unlikely to be further clarity on any proposed action the Government intends to take (including whether to take forward legislation in the key areas considered) until spring 2022, at the earliest.

In addition to the Response, the Government supported the DCMS Committee’s recommendation for the CMA to undertake a market study into competition-related concerns raised in the inquiry, including “the possible market dominance of the major music groups and the potential for contractual agreements between them and the streaming services to stifle innovation in the streaming market“.  Following discussion by the CMA Board at its October meeting, the CMA announced on 19 October 2021 that it intends to launch the proposed market study as soon as possible. Andrea Coscelli, Chief Executive of the CMA, stated in a letter to the DCMS Committee that the market study “supported a strategic goal of the CMA to foster effective competition in digital markets, ensuring they operate in a way that promotes innovation and the consumer interest”. This follows the CMA’s ongoing investigations relating to digital markets, such as those on Google’s ‘privacy sandbox’, Facebook’s use of ad data, Apple’s AppStore and Sony’s acquisition of AWAL, a music distribution company.

The Government Response: Further collaboration with industry is key

The Response suggests the Government will work closely with the industry to establish a three-point work programme, to further investigate the issues set out in the Report. The work programme is due to commence in autumn 2021, with progress updates expected for each of the three work streams in both spring and autumn 2022. The work programme consists of:

  1. establishing a music industry contact group (the “Contact Group“) to meet regularly over the next year and examine stakeholder views on key issues including equitable remuneration, contract transparency and platform liability rules introduced by the EU;
  2. launching a research programme alongside stakeholder engagement; and
  3. establishing two technical stakeholder working groups which will (a) agree standards for contract transparency and establish a code of practice for the music sector, and (b) address data issues and develop minimum data standards for the industry, respectively.

Responses to key DCMS Committee recommendations

The Response also outlined the Government’s approach to the key issues flagged by the DCMS Committee, a summary of which is set out below.

  1. Fair remuneration for creators and performers
  • The Government recognised the complexity of artists’ remuneration (which is compounded by lack of transparency) and that contractual arrangements between performers, labels and platforms appear to “disadvantage some players in the streaming environment” (particularly lesser-known artists). The Government plans to assess the possibility of further action (including potential legislation) relating to the fair remuneration of artists as part of the Contact Group.
  • In the meantime, it stated the DCMS Committee’s proposed legislative right to equitable remuneration of artists “might not be in the interests of all performers and could result in lower revenues for some“. The Government similarly noted that the DCMS Committee’s recommendation that the Government expand creator rights under the Copyright, Designs and Patent Act 1988 (by introducing a right to recapture works and a right to contract adjustment), are “uncertain and warrant further analysis” and may have “little impact in practice“.
  • Given the uncertainty on the impact of these two potential solutions, the Government also intends to undertake further research in this area, particularly in relation to countries with similar measures already in place (such as the US, Germany and the Netherlands).
  1. Transparency
  • The Response acknowledged issues of transparency regarding the exploitation or licensing of artists’ works and the revenue generated as a result. This follows concerns expressed by the DCMS Committee around the Government’s decision not to implement the EU Directive on Copyright in the Digital Single Market (the “Copyright Directive“), including Article 19, which imposes a transparency obligation on entities, like music companies, to provide creators with transparency reports in relation to the modes of exploitation of their work, all revenues generated and remuneration due.
  • In terms of next steps, the Government confirmed that transparency in the streaming sector “is an issue that the industry can, and should, seek to fix itself“, and it noted that the Intellectual Property Office (“IPO“) will convene a related industry-led technical working group to consider this further (see above). The Government may consider legislative intervention if the output from the working group is not satisfactory.
  • The DCMS Committee’s recommendation that all publishers and collecting societies should publish royalty chain information to provide transparency to creators about how much money is flowing through the system, was not taken forward by the Government. It questioned whether this approach would be “feasible or practical“, as parties were unlikely to have oversight over the whole chain to put themselves in a position to publish such information.
  1. Data
  • The Government accepted that issues with the availability and quality of data currently inhibit the ability of artists to be remunerated.
  • In order to combat issues around insufficient metadata (containing information about the creators of a music track), which also leads to delayed or misallocated creator royalties, the Government proposed improving awareness within the music industry around the importance of data through a number of initiatives. This will include the IPO and DCMS working together with a cross-industry technical working group (see above).
  • The Government has stated that it will not be taking any action in relation to royalties placed in so-called ‘black boxes’ (where the related income cannot be directly attributed to the recordings of a specific artist), explaining that the use of black box revenues by collective management organisations is already sufficiently regulated by the Collective Management of Copyright (EU Directive) Regulations 2016.
  • The Government also noted that it will request that the Centre for Data Ethics and Innovation conduct research into the impact of streaming services’ algorithms on music consumption.
  1. User-generated content platforms (“UGC platforms“)
  • The DCMS Committee previously recommended protections for rights holders against the so-called “value gap” (from the artist’s perspective) between ad-funded streams on UGC platforms, such as YouTube, and subscription-funded streams on streaming platforms. In particular, the Committee drew parallels with Article 17 of the EU Copyright Directive, which seeks to prevent the unauthorised distribution of copyrighted material for which rights holders have not been fairly remunerated.
  • In its Response, the Government determined that licensing negotiations between rights holders and platforms are private commercial matters between the parties. However, it agreed that rights holders should be able to enter into licensing negotiations with platforms on mutually agreeable terms.
  • Whilst the Government re-iterated that it does not intend to implement the EU Copyright Directive, it noted there is an “opportunity to learn lessons from EU Member States that have implemented the Directive, as well as approaches taken by other countries” to understand the issues better, particularly in respect of Article 17.

The CMA response: YouTube to have SMS?

The CMA response to the Report addressed the DCMS recommendation that “the CMA should consider exploring designating YouTube’s streaming services as having strategic market status to encourage competition with its products.” This recommendation relates to the proposed new pro-competition regime for digital markets which will be operated by an independent Digital Markets Unit (“DMU“) within the CMA. Under this proposed regime the DMU will be tasked with both introducing and enforcing a new statutory code of conduct which will govern the behaviour of platforms it designates as having Strategic Market Status (“SMS”) within digital markets.

In its response, the CMA remarked that the DMU has not yet been finalised and pending legislation, there is currently no mechanism to designate a company with SMS. As a result, the CMA noted that at this stage it could not consider designating YouTube’s streaming services as having SMS. However, the CMA will re-visit this point when the new digital market framework comes into force, drawing on the related evidence which the DCMS Committee presented.

Commentary: Watch this space

On the whole, those industry stakeholders campaigning for changes to the current music streaming model (including greater protections for music creators / rights holders), will welcome the Response as a step in the right direction, aligning with the DCMS Report on the need for reform. In a joint statement, the Musicians Union, The Ivors Academy and Tom Gray, Founder of #BrokenRecord Campaign welcomed that the Government had “recognised the importance of ensuring that the UK’s artists and songwriters are fairly rewarded for their talent and work“.

However, in the meantime, potential remains for disparity between the protections afforded to music creators / rights holders in the UK versus more robust provisions in other jurisdictions (particularly the EU Member States under the EU Copyright Directive).

The joint statement (and others in the industry) also highlighted the vagueness in the Government Response around timeframes for any legislative reforms. The Government intends to look to industry, through the Contact Group, to explore some of the issues raised in the Report and also to learn from the successes or failures of those EU Member States implementing the EU Copyright Directive. However, there may well be a substantial wait for the Government to gather the evidence it requires to decisively determine the most appropriate course of action; the Contact Group is due to meet over the next 12 months and several Member States have been slow to implement the Directive (despite the 7 June 2021 implementation deadline), reflecting the complexity (and controversy) around some of the provisions in the Directive.

Although this ‘wait and see’ attitude may disappoint those campaigning for immediate intervention to ‘fix’ music streaming, the approach is likely to be a consequence of the complex issues the Government is also grappling with.

Over the course of the next 6 to 12 months we should learn more as to whether the Government’s fact gathering mission will transpire into a new legal framework for the UK music industry.

Hayley Brady
Hayley Brady
Partner
+44 20 7466 2079

Claire Wiseman
Claire Wiseman
Professional Support Lawyer
+44 20 7466 2267

James Balfour
James Balfour
Senior Associate
+44 20 7466 7582

Rhianne Murray
Rhianne Murray
Associate
+44 20 7466 2874

Sara Lee
Sara Lee
Trainee
+44 20 7466 2942

The DCMS calls for a complete reset of the music streaming industry

Following a wide-spread inquiry, the Digital, Cultural, Media and Sports Committee (DCMS) published a report which has called for a complete reset of the music streaming market. The proposed reform of legislation and regulation is aimed at addressing the:

  1. ‘pitiful returns’ that creators receive from streaming;
  2. disparity in power between creators and companies;
  3. major music companies unfairly dominating the music streaming industry;
  4. lack of regulation around streaming, such as playlist algorithms; and
  5. lack of transparency in the industry.

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Digital, Culture, Media and Sports Committee launches inquiry into the impact of streaming on the music industry

In response to the growing popularity of music streaming, on 15 October 2020 the Digital, Culture, Media and Sports Committee (“Committee”) announced the launch of an inquiry into the impact of the business models operated by platforms such as Spotify and Apple Music on the wider music industry. The Committee notes that whilst music streaming in the UK brings in revenue of more than £1 billion, artists can be paid as little as 13% of the income generated.

In 2019, UK consumer spend on music streaming surpassed the £1 billion spending mark, while spend on physical forms of music equated to just 17% (£318 million) of total spend on recorded music according to the Entertainment Retailers Association. However, with the leading music streaming service Spotify paying artists between £0.003 and £0.0038 per stream and its closest competitor Apple Music paying around £0.0059 per stream, there have been increasing calls from within the industry for fairer distribution of revenue. This sentiment appears to be shared by the public, with a recent YouGov survey finding that 77% of consumers believed that streaming services underpaid artists.

In exploring this issue as part of the new inquiry, the Committee will consider the following questions set out in the Committee’s terms of reference:

  • What are the dominant business models of platforms that offer music streaming as a service?
  • Have new features associated with streaming platforms, such as algorithmic curation of music or company playlists, influenced consumer habits, tastes, etc.?
  • What has been the economic impact and long-term implications of streaming on the music industry, including for artists, record labels, record shops, etc.?
  • How can the Government protect the industry from knock-on effects, such as increased piracy of music? Does the UK need an equivalent of the Copyright Directive?
  • Do alternative business models exist? How can policy favour more equitable business models?

The Committee has called on industry experts, artists, record labels and streaming services to submit written evidence by 16 November 2020, with the inquiry itself beginning in November.

Algorithmic music curation

Use of algorithms has become standard practice in streaming platforms, for example:

  • algorithms which take into account a consumer’s behaviour compared against the rest of the user base to suggest music; or
  • algorithms which analyse musical track data, such as pitch and tempo, to suggest comparable tracks.

Such algorithms can be viewed as a positive for the industry, increasing consumer choice and introducing them to artists and tracks they may not otherwise come across.

However, Committee Chair Julian Knight MP has been critical of streaming services’ use of algorithms stating that  “algorithms might benefit platforms in maximising income from streaming but they are a blunt tool to operate in a creative industry with emerging talent risking failing the first hurdle.” This may be the case where opaque algorithms exhibit bias (conscious or unconscious) in favour of more established artists.

Piracy and the Copyright Directive 

The advent of music streaming led to a change in the way the recording industry operates and individuals consume music. In the early 2000’s, peer-to-peer networks such as Napster and LimeWire enabled the widespread sharing of pirate .mp3 files causing severe disruption to the revenues of the music industry. Pioneer music streaming service Spotify and eco-system brands such as Apple Music, Amazon Music and Google Play have capitalised on technologies which, like the peer-to-peer networks of the early 2000’s, make music more accessible to the masses, however unlike the peer-to-peer networks, these new streaming business models have led to a reduction in music piracy. That said, platforms which facilitate and encourage user-uploading and sharing of content (such as YouTube and SoundCloud) still present a major piracy risk to the music and other content industries.

The Committee is attuned to the need to continue to protect the music industry from instances of piracy and poses the question of whether the UK should implement an equivalent of the EU Copyright Directive (which the UK has stated it will not implement). This could prove controversial, especially amongst the content sharing platforms mentioned above. Currently, platforms are not responsible for copyright infringement when users upload infringing material, but must remove the content when notified by the rights holder. However, under Article 17 of the Copyright Directive the EU is attempting to redress the balance for rights holders by preventing the unauthorised distribution of copyrighted material which they have not been fairly remunerated for. The Copyright Directive would require platforms such as YouTube and SoundCloud to obtain a licence from rights holders (subject to some exceptions) to avoid liability for copyright infringement. If the UK were to implement similar legislation it would have significant implications for streaming services and the wider media and technology industry.

Equitable business models

Spotify, Apple Music and most other streaming services pay music rights holders via a pro rata model. This means that all revenues of the streaming service are pooled and divided based on the popularity of the artists: artists with higher streams are paid a higher proportion of the revenues.

Some however have pointed at the potential unfairness of the pro-rata model, for example where a subscriber may listen only to a niche genre or artist, a proportion of the revenue generated by that subscriber would still go towards more popular artists the user has never in fact listened to. This has led to critics of the current prevalent music streaming business model advocating for a more “user-centric” payment system where if a subscriber listened to 100% of a certain artist that artist would get 100% of the revenue generated by that subscriber. This user-centric model is being trialled by streaming service Deezer. However, an issue with the widespread adoption of this model will be that it cannot be unilaterally imposed: a transition to a user-centric model would necessitate the re-negotiation of licensing deals between the streaming platforms and the record labels. This is unlikely to be straightforward. Record labels were early investors in streaming services like Spotify, shaping the streaming payment model system with their licensing deals. As record labels tend to possess large back catalogues, the pro-rata payment model has been extremely beneficial for them. It is possible that a transition to a user-centric model may have an adverse impact on record labels’ revenues under these agreements, in which case they are likely to be reluctant to agree to the new model.

In any case, the Committee can be expected to look at any payment model which may seek to address what is perceived as an imbalance between streaming platforms and artists by remunerating artists in a more “equitable” way.

Hayley Brady
Hayley Brady
Partner, Head of Digital and Media, London
+44 20 7466 2079

James Balfour
James Balfour
Senior Associate, London
+44 20 7466 7582

Rhianne Murray
Rhianne Murray
Trainee Solicitor, London
+44 20 7466 2874