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SGEUR13-1037Daniel ANTAL (Visegrad Investments) Budapest SeminarBudapest, 27/11/2013 – 28/11/2013Source language: English

Value added by music in public performance and home copying: economic theory and empirical

applications in tariff setting

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Private copying: blank carriers, technology-driven challenges Characteristic devices, blank carrier life-cycle and tariff setting methods

• Quantity of private copies is easily quantified (on a minute basis)• Technology well understood and homogenous.• Minute-based compensation easy to quantify and objective. •Small private collection are recorded at home

• Number of private copies greatly enhanced by technology.•Relatively homogenous technology.• Quantity can be estimated and adjusted for minute• Large collections and online distribution

• Blank media rewritable, capacity is not fixed. • Number of private copies cannot be directly estimated from blank carriers.• Complete repertoires can be copied at home easily.

In 1993 the ten years old Hungarian private copy levy covers 90% of the data carriers.

By 2000 only 82% of data carriers are covered, but tariffs do not represent the shift from minutes to megabytes.

By 2007, the Hungarian private levy scheme included only 33% of the data carriers used globally, because of the exclusion of digital devices, especially hard disks.

In Hungary, PC hard disks are not subject to private copying levy.

There is not physical connection between blank capacity since digital compression algorithms such as mp3 are available on affordable hardware

CD and DVD, frist fixed capacityHardware enables expanded capacity

Analóg korszak Optikai disks. SD memory

Cloud?

Private copying from Germany Hungarian private copying levy InfoSocEC law in Hungary

New directive

Audio- and video cassettes with fixed capacity

SSD memory, embedded in hardware – no real blank media

Padawan

Source: Hilbert, M – López, P. 2011: The World’s Technological Capacity to Store, Communicate, and Compute Information, Science, Vol. 332 no. 6025 pp. 60-65.

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-14,9%

-19,4%

-34,0%

-54,8%

-20,7% -19,4%-21,7%

-49,9%

43,5%

-62,9%

17,3%

-37,7%-38,2%

-29,0%

15,1%

-49,5%

3,4%

-42,0%

-8,8%

-45,3%

-14,4%

-31,5%

-14,4%

-49,8%

-80,0%

-60,0%

-40,0%

-20,0%

0,0%

20,0%

40,0%

60,0%

2008/2009 2009/2010 2010/2011 Négy éves dinamika

AT

HU

SK

CZ Intergram

HU + SK

All

Technological changes coupled with arbitrage opportunities on the Single Market undermine revenue collection in some jurisdictions

*Based on ARIMA times series model of monthly data collected by Artisjus for the time period 1 January 2008 - 3 June 2012.

Hungary CD and combined disc time series

Regional dynamics and other information suggests illegal

arbitrage trade between AT, SK, HU

*Estimates based on collection society revenues, tariffs and manufacturer prices of CD-R for AT, CZ, HU, SK.

Even though Stichting de Thuiskopie v. Opus Supplies Deutschland GmbH makes the territorial cherry-picking of favorable private levy illegal, enforcement is extremely difficult.

This situation creates well-measurable loss in all three countries. Estimates could be used for country-to-country analysis and proposals.

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• The Single Market doctrine, if applied in a simplistic way, creates an incentive to crossborder (illegal) arbitrage trade that undermines the revenues of collection societies with higher compensation levels, as witnessed by Stichting de Thuiskopie in Netherlands or as witnessed by Artisjus in Hungary.

• The cherry-picking of jurisdictions that do not provide a fair compensation for authors set a race to the bottom that is reinforced by simple benchmarking. Benchmarked compensation will partly reflect the true value of the intellectual property and partly the result of arbitrary low tariffs that are attracting trade to low-levy territorial jurisdictions where collecting societies or governments compete for a bigger slice in the decrease pie of compensation revenues.

• Instead of using a simplified ‘Single Market approach’ collecting societies should have a clear understanding of the economic analysis required by competition laws to use the relevant product and geographical market concepts when evaluating the fair balance between benefits of private copying to consumers and compensation revenue for intellectual property (or copyright) owners.

• Instead of simple benchmarking of fees, basic market variables such as quantities (number of tracks copied in homes), price variables, artist incomes should be compared in an economically meaningful way .

Benchmarking breaks down if race starts to the bottomYou can adjust your tariffs to the neighbor without in-depth analysis as long your neighbor charges the right amount.

Data: from Stichting de Thuiskopie-WIPO survey, private copy revenues per capita taken from InfoSoc private copy exception countries.

Data: Artisjus monthly revenue in nominal and real terms, adjusted for post-litigation settlements.

Private copy levy per capita

0

0,5

1

1,5

2

2,5

3

3,5

0 Ft

50 000 000 Ft

100 000 000 Ft

150 000 000 Ft

200 000 000 Ft

250 000 000 Ft

300 000 000 Ft

350 000 000 Ft

400 000 000 Ft

450 000 000 Ft

Folyóáras korrigált bevétel Mai értéken Lineáris (Folyóáras korrigált bevétel) Lineáris (Mai értéken)

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Estimating quantities, methodology, survey designConsumer surplus estimate requires reliable quantity estimates that can be best collected on an international basis

Data source: ProArt-Gft survey, MAHASZ Association of Hungarian Record Companies.

Tracks copied to various carriers, millions of tracks 2011 2011 2012 2012

DVD 2209,84 45,67% 3318,55 59,69%

CD 94,60 1,96% 149,28 2,69%

Pendrive 2,16 0,04% 2,16 0,04%

Blank memory cards 0,36 0,01% 0,64 0,01%

Portable device 1432,97 29,62% 586,41 10,55%

Multimedia telephone 623,73 12,89% 671,71 12,08%

External hard disk 474,71 9,81% 830,74 14,94%

Total, #private copies 4838,37 100% 5559,48 100%

Deriving quantities from survey results

s

Consumer surplus based on TNO multiplesConsumer surplus: (Q2-Q1)*158Ft/2

Q=25 million tracks Q=125 million tracks

p= HUF 158per track

Estimated tradedvalue

Estimated value of private copying

Consumer surplus based on raw survey dataConsumer surplus: (Q2-Q1)*158Ft/2

Q=25 million tracks Q=4838 million tracks

Estimated traded value

Estimated value of private copying

p= HUF158

Without thorough research and analysis and using data sources other than consumer surveys, consumer surplus estimates can be very unreliable. Several data sources must be reconciled in a consistent manner.

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Private copying: various challenges make economic assessment unavoidable

• Value of intellectual property changes: technological and cultural changes modify the use of private copies. Economics deals with subjective value that is not indifferent of use. Compensation estimates must be updated when you blank carriers or copying technology enters the market.• Technological changes make gradual tariff adjustment impossible, as minute-based averaging becomes gradually impossible due to digitization and data compression. The same data carrier hold different minutes of music or number of track in each user’s home collection due to different compression rates applied by different devices. • Judicial or regulatory intervention changes the assumed fair balance between intellectual property right holders, direct or indirect payers of the compensation for private copying and private persons or consumers enjoying the benefits – such as the ECJ Padawan case and its aftermath (DE VG Wort/Kyocera Mita; Hewlett Packard, Fujitsu Siemens and others; AT Amazon.com; DK Copydan/Nokia; NL ACI Adams/Stichting De Thuiskopie.)• Gradual tariff adjustment and benchmarking reaches its limits because it uses outdated information that does not reflect the new technology, consumption patterns and legal situation. In the European Economic Area the use of a simplified Single Market doctrine can create a race to the bottom, because especially small countries are motivated to offer lower-than-fair value tariffs to attract more blank carrier trade and VAT base. (This also affects other collecting societies outside the EEA who use EEA data for benchmarking.)

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Value added in public performance – survey design for valuing the use of music and improving customer satisfaction

Collecting societies value proposition must better reflect market conditionsPrinciple of competitive

marketsNeither collecting society

or payer has market power

Willing buyer willing sellerSurveys to test willingness to

pay

Marginal utility principleEvaluate incremental value of

more music performed

Marginal cost principleVery low in public

performance, still not necessarily negligible.

Marginal value for intermediaries / resellers

Value proposition for restaurants, bars, etc.

1. Choice modeling using survey representing the adult population of Hungary,connected to private copying survey. Conclusion: consumers generally well appreciate music in public places.

2. Hedonic pricing cc. 500 restaurants, clubs and bars, mainly collected by Artisjus staff. Conclusion: better understand value added.

3. Willingness-to-pay survey with hypothetical offerings to payers. Conclusion: better understanding the different business risks and potential value creation for more just and competitive customer segmentation.

4. CVM surveys conducted in DIY store and fast-food restaurant. Conclusion: In case of dispute, collecting societies and intermediaries can go back to customers and check in controlled environments the actual value added by music.

A well-designed analysis can also identify at-risk royalty payers and prepare for competition with royalty-free music or cheap repertoires offered by non CMOs.

Royalties sharing principle

Risk sharing principleRestaurants, night clubs, etc fixed costs and investments..

Conceptual framework based on Marcel Boyer’sEquitable Remuneration for Performers and Producers of Recorded Musical Works: Underlying Principles.(SERCIAC presentation), interpreted for tariff review in Hungary.

Restaurants, hotels are often unaware of the value added by music, seeing it as a little ingredient. We can show that it is like salt: a small ingredient that can destroy customer experience if it is missing. Very well designed surveys are needed to understand value for customer and then value added by retail unit paying for public performance. Comprehensive analytical framework necessary to translate survey results into competitive royalty tariffs.

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CVM, choice modeling and hedonic pricing resultsWell designed economic estimates not only justify tariffs, but can create better value proposition for royalty payers.

Source: Various surveys designed by Visegrad Investments, conducted by Gfk Hungary, Universitas and Artisjus territorial representatives.

CVM surveys result in well-behaved demand curves for music in public places. Tariffs can be

directly validated.

Choice modeling reveals that consumers demand music and are rather insensitive to its price. Tariff levels are generally approved.

Hedonic pricing reveals the different value added by different restaurants, bars, etc. – crucial for good value proposition and risk sharing with differentiated tariffs.

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Econometric analysis differentiates high- and low-willing-to-pay customers

Source: Hedonic pricing survey conducted by Visegrad Investments (associated with Candole Parnters) and Artisjus.

Economic analysis helps to create better tariff differentiation that is more accepted by payers without changing the average level of royalties, leading to less loss to royalty-free or cheap repertoire alternatives.

Willingness-to-pay survey based on new hypothetical offerings reveal that better differentiated tariffs can significantly improve value proposition.

Improving existing tariff differentiation can lead to a win-win situation. The same amount of royalty can be collected with less pain and less risk of loosing royalty payers, or even increase the number of customers who can experience high-quality music with royalties.

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Public performance: changes in the restaurant, entertainment, retail outlet industry makes periodical tariff review necessary

• The structure of restaurant, leisure and retailing changed significantly over two decades, creating chains of restaurants or retail outlets that have significant bargaining power and professional purchasing management. • Traditional collecting societies are facing new competitors with royalty-free or low-royalty repertoires and they must understand the value of music to prevent market loss for market share loss of their quality music repertoires. • Understanding the role of music in creating value for the customer during restaurant and bar visits, shopping or waiting experience is important in a well-functioning market for the seller and the buyer of music. Collecting societies have the experience, data and customer base to analyze better the economic value of the music experience than their emerging competitors who offer cheaper or lower quality repertoires. • While collecting and manipulating economic evidence is time-consuming and costly, it can greatly increase the value proposition to existing customers, defend the customer base with highlight at-risk paying customers, or even identifying new ones. Economic analysis helps increasing the royalty income base. •Traditional collecting societies can use economic analysis to improve their tariff structure and gain valuable market insight that maintains their competitive edge vis-à-vis new (background) market players.

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From tariffs to strategy: know your customer and understand the role of music better than new market players

Based on surveys conducted on a very large customer base, we can even measure the value of different repertoires and qualitative differences in music

1. Collecting societies with a large customer base can significantly increase the value of their offering and prepare for competition.

2. Customer knowledge makes tariffs more competitive with a double gain: gives less incentive for regulatory intervention and can further improve the market position of a full-fledged collecting society facing new market players that usual compete price and quality.

3. Collecting societies still have unrivalled experience, better repertoires, customer base and human resources compared to low-cost competitors.

4. Developed economic analysis can add significant insight on the value of repertoires. Our research can be as specific that we can show to restaurants how quality repertoires can increase the customer experience to a level where customers are willing to pay 13.3% more for coffee or beer holding other variables constant.

5. Hedonic pricing techniques not only create better tariffs, but give significant insight into value created by business partners and can strengthen various strategic partnerships with other business entities.

To prepare for competition with lower quality repertoires, on the basis of economics of intellectual properties, existing Artisjus customer data and survey data we can calculate the value of quality music. This data can be shared with professional users who do not have the same resources to precisely measure the benefit of quality music to their business.

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Thank you for your attentionDaniel Antal MSc Economic Regulation and Competition Policy

Pricing and economics consultant for Artisjus Senior consultant for Candole Partners that provides policy, market

and transaction analysis in central and southeast Europe with access to qualitative as well as quantitative local information.

Further questions:antal.daniel@visegradinvestments.com, daniel.antal@candole.com