COMMISSION STAFF WORKING DOCUMENT

IMPACT ASSESSMENT

Accompanying the document

Proposal for a Directive of the European Parliament and of the Council

on collective management of copyright and related rights and multi-territorial licensing of rights in musical works for online uses in the internal market

TABLE OF CONTENTS

1........... Introduction, policy context, procedural issues and consultation........................................ 5

1.1........ Introduction.................................................................................................................... 5

1.2........ Policy context................................................................................................................. 7

1.3........ Procedural issues and consultation of interested parties.................................................... 8

2........... Background.................................................................................................................... 9

2.1........ Collective rights management.......................................................................................... 9

2.2........ Collective rights management of rights in musical works for online use............................ 12

3........... Problem definition......................................................................................................... 14

3.1........ Insufficient checks and balances on the functioning of collecting societies........................ 15

3.1.1..... Problem 1: Rightholders – in particular non-domestic ones – are not always able to exercise their rights, notably because of poor governance and transparency standards applied by collecting societies.. 15

3.1.2..... Problem 2: Poor financial management: royalties collected by societies on behalf of rightholders accumulate, pending distribution, with little oversight......................................................................... 19

3.1.3..... Consequences.............................................................................................................. 20

3.2........ Difficulties in the supply of multi-territory licences and the aggregation of the repertoire of the musical works 21

3.2.1..... Problem 1: Authors' collecting societies are not sufficiently prepared for online multi-territory licensing which is demanding and costly.................................................................................................... 25

3.2.2..... Problem 2: Online multi-territory licensing by authors' collecting societies is subject to legal uncertainty 26

3.2.3..... Consequences.............................................................................................................. 27

3.3........ Baseline scenario.......................................................................................................... 27

3.4........ Does the EU have the right to act?................................................................................ 29

3.4.1..... Legal basis................................................................................................................... 29

3.4.2..... Subsidiarity and proportionality..................................................................................... 30

4........... Objectives.................................................................................................................... 32

5........... Policy options on transparency and control in collecting societies.................................... 32

5.1........ Option A1 – Status quo................................................................................................ 32

5.2........ Option A2 – Better enforcement................................................................................... 32

5.3........ Option A3 – Codification of existing principles.............................................................. 32

5.4........ Option A4 – Beyond codification: a governance & transparency framework for collecting societies 32

5.5........ Comparison of policy options........................................................................................ 32

5.5.1..... Impacts on the Internal Market..................................................................................... 32

5.5.2..... Impacts on the degree of competition............................................................................ 32

5.5.3..... Impacts on stakeholders: in general............................................................................... 32

5.5.4..... Impacts on stakeholders: SMEs, micro-enterprises........................................................ 32

5.5.5..... Effectiveness and proportionality................................................................................... 32

5.5.6..... Efficiency...................................................................................................................... 32

6........... Policy options on multi-territory licensing for online use of musical works........................ 32

6.1........ Option B1 - Status quo................................................................................................. 32

6.2........ Option B2 – The European Licensing Passport.............................................................. 32

6.3........ Option B3 – Parallel direct licensing.............................................................................. 32

6.4........ Option B4 – Extended collective licensing combined with a country of origin principle.... 32

6.5........ Option B5 – Centralised Portal..................................................................................... 32

6.6........ Comparison of policy options on multi-territory licensing................................................ 32

6.6.1..... Impacts on the Internal Market..................................................................................... 32

6.6.2..... Impacts on the degree of competition............................................................................ 32

6.6.3..... Impacts on stakeholders: in general............................................................................... 32

6.6.4..... Impacts on stakeholders: SMEs, micro-enterprises........................................................ 32

6.6.5..... Effectiveness and proportionality................................................................................... 32

6.6.6..... Efficiency...................................................................................................................... 32

7........... Comparison of the combinations of G&T and "licensing" options.................................... 32

7.1........ Combination of options................................................................................................. 32

7.2........ Other impacts............................................................................................................... 32

7.3........ Policy choice................................................................................................................ 32

8........... Choice of instrument..................................................................................................... 32

9........... Monitoring and evaluation............................................................................................. 32

10......... Annex A: Report from the hearing on collecting societies, 23 April 2010........................ 32

11......... Annex B: Short summary of main stakeholders views..................................................... 32

12......... Annex C: Governance and transparency in the acquis.................................................... 32

13......... Annex D: Major EU online services............................................................................... 32

14......... Annex E: Digital music revenue...................................................................................... 32

15......... Annex F: Economic dimension of Collective Rights Management in Europe.................... 32

16......... Annex G: Cross border royalty flows............................................................................ 32

17......... Annex H: Transparency: accounting, reporting and performance indicators..................... 32

18......... Annex I: Data processing and databases........................................................................ 32

19......... Annex J: Music publishing............................................................................................. 32

20......... Annex K: Licensing practices for online use of music...................................................... 32

21......... Annex L: Implementation of the Commission Recommendation of 2005 and Overview of national regulatory frameworks.................................................................................................................. 32

22......... Annex M: Overview of licensing in the US..................................................................... 32

23......... Annex N: Summary and analysis of impacts of options on transparency and control in collecting societies 32

24......... Annex O: Summary and Analysis of impacts of options multi-territory licences for online use of musical works 32

25......... Annex P: Compliance cost of Option A4 – Beyond codification: a governance and transparency framework in collecting societies........................................................................................................ 32

26......... Annex Q: Compliance cost of Option B2 – The European Licensing Passport................ 32

27......... Annex R: Comparison of the combinations of G&T and "licensing" options..................... 32

28......... Annex S: Monitoring indicators..................................................................................... 32

29......... Annex T – Glossary...................................................................................................... 32

1. Introduction, policy context, procedural issues and consultation

1.1. Introduction

The protection provided by copyright and related rights aims at ensuring that authors, performers, record and film producers, etc., i.e. those who have created or invested in the creation of works or other protected subject matter (literature, music, films, etc.) can determine how these works and other protected subject matter can be used and be remunerated by it. These rights therefore aim at providing an incentive to create, to invest into creative activities and to disseminate works and other protected subject matter to the public. Copyright protection in the EU needs to be seen within the context of the Single Market and the underlying principles of free movement of goods and services. Copyright protection in the Digital Single Market needs to work so that more content and more services become accessible to European citizens, including across borders.

Copyright is also a factor for growth with significant economic and social importance.[1] In 2008 the creative industries[2] accounted for 3% of EU-27 employment (i.e. 6.7 million people). The employment rate increased by an average of 3.5% a year in the period 2000-2007 compared to 1% a year for the total EU economy.[3] On a global scale, the contribution of these industries to the GDP and national employment varies significantly in different countries but reaches 5.4% and 5.9% on average.[4] In Europe, the value of the EU recorded music market is around € 6 billion (representing around a fifth of the total music market which is worth approx. € 30 billion),[5] book publishers in the EU and the EEA have annual sales revenues of some € 23 billion,[6] and the audiovisual industry was worth some € 96 billion in 2008.[7] Copyright is also an important factor in so-called non-core copyright industries, which include architecture, toys, games, production of computer equipment, TV sets or DVD players. It is estimated that non-core industries contribute to 2.34% of GDP and 2.53% of employment in developed countries.[8]

The distribution of goods and services protected by copyright or related rights (e.g. books, audiovisual productions, recorded music) requires the licensing of rights by different rightholders (e.g. authors, performers, producers). Individual licensing of these rights is not always practical or effective hence collecting societies ("CS") were created to manage copyright and related rights on a collective basis for some rightholders and in some sectors. CS allow commercial users to clear rights for a large number of works, in circumstances where individual negotiations with individual creators would be impractical and entail prohibitive transaction costs. From the viewpoint of many commercial users, whether active in traditional (e.g. broadcasting, cable retransmission) or new forms of exploitation (e.g. download, streaming services), the role of collecting societies is therefore essential. Moreover, CS play a key role in the protection and promotion of the diversity of cultural expressions by enabling the smallest and less popular repertoires to access the market.

Rights management exercised by CS practically always has a Single Market dimension. This is because even when CS grant licences in their own territory only, they generally license the rights of both domestic and foreign rightholders. Therefore, in order to ensure that rights from all over the EU are licensed in all Member States ("MS"), it is crucial that CS function efficiently and transparently, taking due account of the interest they represent. There is evidence that this is not always the case – recent regulatory failures in some MS indicate that there is a need for action in this area.[9] Moreover, the ability of CS to efficiently deliver their services is increasingly being questioned, leading to a loss of trust and confidence in their services. The issue is often raised by national parliaments,[10] the European Parliament[11] and national competition authorities.[12] It is the subject of complaints from rightholders and users.[13]

In addition, specific problems have been identified regarding the collective management of the rights of authors' in musical works (i.e. composers of music and authors of lyrics) for online uses. Online service providers often need to obtain multi-territory (“MT”) licences in the aggregated EU repertoire. Securing such licences proves to be a very difficult and costly exercise.[14] This complexity is specific to authors' rights in musical works.[15] This has led, in a number of instances, to a fragmentation of the European market for online music services and other online services needing to license rights in music (e.g. audiovisual services). Addressing this situation is one of the pre-conditions to stimulating the legal offer of online music across the EU, giving consumers greater choice and allowing creators of musical works, and those that invest in their creation, the possibility to reap the full benefits of the Single Market. This was underlined in the "Single Market Act"[16] which states that, in the internet age, collective management must be able to evolve towards European models which facilitate licences covering several territories.

At the same time it needs to be emphasised that complex copyright licensing processes are not the only reason for the fragmentation of the online market. Other reasons include technological barriers (limited access to high-speed networks), lack of legal certainty for service providers (differences in legislation in areas such as consumer protection or content rating), payment methods (access to credit cards), consumer trust in online transactions, illegal downloading of files (piracy) and cultural and linguistic differences. Finally, service providers sometimes take decisions to segment shops territorially and/or launch only in the more mature markets (e.g. with higher consumer online spend) due to purely commercial reasons such as, in the case of advertisement-funded services, the differences between national advertising markets.[17] Nonetheless, the relative importance of the complex licensing processes in fragmenting the market is high.

The described inefficiencies of collective rights management including the complexities related to collective licensing of authors' rights for online music services do not only hamper the exercise of copyright and related rights (which are rights of property, intrinsically individual in nature, largely harmonised at EU level and which, as such, must be protected) by their holders depriving them of due benefits and taking away incentives for creation but also limit the free movement of goods and services and prevent consumers from enjoying access to a wide diversity of content.

1.2. Policy context

The creation of a Single Market for intellectual property rights has been high on the political agenda in the last few years. This Impact Assessment ("IA") is presented within the context of the Europe 2020 Strategy,[18] which aims to boost smart, sustainable and inclusive growth in Europe, the Commission's Communication "A Digital Agenda for Europe" which includes a number of actions to address the barriers to the development of Europe's online markets,[19] the "Single Market Act" which identifies Intellectual Property as one of the key areas in which action is required and the Commission Communication "A Single Market for Intellectual Property Rights" (the "IPR Communication").[20] In addition, this Impact Assessment is presented in the context of the ambition to achieve the Digital Single Market[21] by creating conditions for thriving e-commerce and online services as set out in the Commission's Communication "A coherent framework for building trust in the Digital Single Market for e-commerce and online services" which also identifies the implementation of the IPR Communication as one of the main actions to develop the legal and cross-border offer of online products and services.[22]

In the IPR Communication the Commission, inter alia, announced its intention to create a legal framework for the collective management of copyright, including common rules on governance and transparency ("G&T") of the entities carrying out such collective management as well as specific measures to foster the development of new online services in the music sector.[23]

Against this background, this IA analyses the nature and magnitude of two specific but interlinked problems: inefficiencies associated with collective management of copyright and related rights in general and the specific complexities of the collective licensing of authors' rights in musical works for online uses. It has the objective of setting out an approach to meet two related policy objectives: improving the governance and transparency of collecting societies at large and facilitating multi-territory licensing of musical works for online services.

Whilst the IPR Communication envisages the "[c]reation of a comprehensive framework for copyright in the digital Single Market"[24], the other proposed initiatives within this IPR framework, including any measures to fight piracy as well as other measures required to remove other barriers to the Digital Single Market as mentioned in the Introduction, do not form part of this exercise.

This IA analyses the functioning of CS as such. It does not discuss the nature of rights (e.g. exclusive rights or remuneration rights) or whether certain rights should be collectively managed (e.g. compulsory collective management) as this would go beyond the functioning of CS and enter rather into the definition of rights as such (i.e. the subject matter of existing Directives). It does not analyse, for instance, the issue of compensation for acts of private copying. Discussions on this topic run in parallel as announced in the IPR Communication.[25]

1.3. Procedural issues and consultation of interested parties

In preparation of this IA DG MARKT organised wide-ranging consultations the results of which have been integrated in the IA. All interested parties - including authors, publishers, performers, producers, CS, commercial users, consumers and public bodies - were involved. The formal consultation process began in October 2009, when DG INFSO and DG MARKT undertook an online public consultation on "Content Online"[26] in order to promote a reflection and broad debate about possible European responses to the challenges of the digital "dematerialisation" of content, including easier and quicker rights clearance structures while ensuring that rightholders are remunerated fairly and adequately when their works are used on digital platforms. This online consultation was open for comments from 22 October 2009 to 5 January 2010. In response to the consultation, several stakeholders considered that the aggregation of different music repertoires would simplify rights clearance and licensing. Also, a number of authors' associations, publishers and commercial users pointed out that further reflection on measures focusing on the governance and transparency of CS would be useful. Consumers' associations deemed that regulatory intervention, for instance by means of a framework directive, was required.

On 23 April 2010, the Commission organised a public hearing on the governance of collective rights management in the EU,[27] attended by almost 300 stakeholders. The aim of the hearing was to explore how the relationships between copyright owners, CS and commercial users of copyright had evolved over time. In December 2010 the European Commission launched a closed consultation, targeted at the European CS, in order to collect further data for this IA. Numerous bilateral meetings with different stakeholders were organised between March 2010 and December 2011.[28] These consultations confirmed the need to improve the G&T of CS and to set a framework that facilitates the online licensing of musical works.

DG MARKT has closely cooperated with other DGs: between May 2010 and February 2012 DG MARKT organised seven inter-service steering group meetings, with the participation of the following DGs: COMP, EAC, ENTR, INFSO, LS, SANCO, SG and TRADE.

The Impact Assessment Board examined the IA and in its opinion of 16 March 2012 asked for the submission of a revised version of the report. Further to the Board's opinion, the following main changes have been made to this IA: the context of the addressed problems and the scope of the initiative were clarified (including the link between the two problem areas), the assessment of the need for EU action was improved (incl. by an improved Annex L on the evaluation of the 2005 Recommendation and self-regulatory approaches), the baseline scenario and the presentation of options were clarified and the analysis of their impacts strengthened, stakeholders' views have been presented more extensively throughout the IA and a glossary was added. On 22 May 2012 the Board issued a positive opinion. On the basis of the opinion, the IA report has been further improved. In particular, the IA now better explains the relative importance of the discussed issues in addressing the fragmentation of the market; it further clarifies the option on the European Licensing Passport and its impacts, adds more details on stakeholder views and MS experience.

2. Background

2.1. Collective rights management

The holder of a copyright or a related right (the rightholder) is generally in a position to choose how to exploit his or her right (see Box 1). In particular, the rightholder may opt for collective management or for individual management. The choice varies depending on the category of rightholder and the nature of the use.[29]

Box 1 - Economic rights of copyright and related rights

Copyright is vested in authors whereas related rights are vested in performers, phonogram (i.e. record) and film producers as well as broadcasting organisations. Copyright and related rights include so-called "economic rights" which enable rightholders to control (license) the use of their works and other protected subject matter (i.e. performances, phonograms, audiovisual productions and broadcasts) and to be remunerated for their use. These rights normally take the form of exclusive rights (e.g. the right to authorise the distribution of copies of a book). They can be managed directly by the original rightholder (e.g. the author of a book) or by those to whom the rights have been transferred (e.g. a book publisher). They can also be managed collectively by a CS if the society is entrusted to do so by the rightholder. For certain forms of exploitation (normally secondary forms of exploitation), rights can be subject to a "compulsory licence"[30] or simply take the form of a "remuneration right".[31]

Economic rights[32] include rights to reproduce and distribute works and other protected subject matter (e.g. in the form of books, DVDs, etc.), and rights to publicly perform/communicate to the public works and other protected subject matter (e.g. the public performance of a musical work in a concert or of a record in a bar, the broadcast of a film, etc.). With the advent of digital networks and forms of distribution, rightholders have also been accorded the "making available" right to cover internet uses such as downloads, streams, etc.

Collective management is generally carried out by collecting societies, which are organisations traditionally set up by rightholders at national level to collectively manage their rights (see Box 2).[33] Collecting societies play a valuable role in facilitating licensing of copyright and related rights and lowering transaction costs. Notably, they allow commercial users to clear rights for a large number of works,[34] in circumstances where individual negotiations with individual creators would be impractical and entail prohibitive transaction costs.[35] They allow rightholders to be remunerated for uses which they would not be in a position to control or enforce themselves, including in non-domestic markets.

Collective management has traditionally been regulated to a greater or lesser extent under the national law of each MS. There are significant differences in how MS address the activities of CS.[36] In some MS, the recent failures in the activities of some CS[37] have triggered renewed attention, in particular as regards their transparency, governance and the handling of remuneration collected on behalf of rightholders.[38] The existing EU legal framework is showing its limitations in addressing these issues: various Directives[39] contain references to management by CS but do not address the conditions of functioning of CS as such, principles stemming from Commission competition decisions are not uniformly applied,[40] the take up of the Commission Recommendation on collective cross-border management of copyright and related rights for legitimate online music services (the "2005 Recommendation")[41] has been unsatisfactory[42] and the impact of the 2006 Directive on services in the internal market (the "Services Directive")[43] on CS, though positive, has so far been limited.

Box 2 – Collecting societies

CS aggregate one or more of the rights of one or more categories of rightholders notably for licensing purposes, i.e. to grant licences to commercial users on behalf of rightholders. They also provide services such as auditing and monitoring the use of rights and collecting and distributing royalties. They provide services to rightholders, to users and to other CS. CS are historically established on a national basis: in most EU MS there are several CS representing different rightholders and, sometimes, different rights. The sum of the rights of all rightholders it represents directly constitutes the society's own repertoire, which is often limited to domestic works. However, CS in different countries traditionally grant each other the right to license their respective repertoires through a network of "reciprocal representation agreements". This way a CS can license its own repertoire and the repertoire of other CS.[44]

They are formed under different legal forms: some are limited liability companies (e.g. PRS in the UK), limited liability collective companies (SABAM in BE) or société civile à capital variable (e.g. SACEM in FR) but others may be not-for-profit associations (e.g. SGAE in ES, BUMA in the NL) or foundations (e.g. STEMRA in the NL) or even ad hoc legal forms explicitly created under national law (e.g. SIAE in IT is an ente pubblico economico a base associativa). In some MS CS are under the supervision of ministries or other authorities.[45] There are also important differences between CS as to the amount of funds they manage and the number of employees they employ.[46]

In general (but not always), there is only one CS representing all or some of the rights of a category of rightholders in a given territory. As a result, CS have often been considered by competition authorities, whether the Commission or national competition authorities, as holding a dominant position within their respective product and geographical markets.[47]

In terms of the contestability of markets, in the offline environment there is no real prospect of competition for services in a particular territory due to the need to monitor and enforce rights in physical premises (e.g. discos, bars). This creates high entry barriers (sufficient number of represented rightholders is required to spread costs). On the contrary, in the online world the contestability of the market is realistic. CS can compete as they can license they own repertoire in their territory of another CS and carry out monitoring by electronic means. Consequently, rightholders can exercise their right to choose the better performing CS.

Economic dimension of collective management[48]: collecting societies collected around € 6.1 billion in the EU in 2009.[49] The vast majority of this income fell to the 101 European CS managing authors' rights (for over one million authors) and most of this income is derived from musical creations (83% in the case of authors societies).

2.2. Collective rights management of rights in musical works for online use

The online environment has brought changes to copyright licensing. One change is that online services are not limited by national borders and can reach over to consumers in other MS. Licences for online services can also be granted and monitored at a distance. In many sectors, MT licensing of online rights is carried out directly by rightholders, or those to which the rights have been transferred, without the intervention of CS (direct MT licensing).[50] In other sectors, the MT licensing of online rights is done collectively.[51]

Box 3 – The rights required for online use of musical works: mechanical and performing rights

The online exploitation of recorded music, films and other audiovisual works, video games, catch-up TV and radio, etc. requires normally the licensing of the authors' rights in musical works. This involves a combination of two exclusive rights:

(1) the right to authorise the reproduction of the musical work (as such work must be stored prior to its communication in a computer memory and, in the case of services such as "download services", a “copy” is kept by the end user) – the so called mechanical rights and

(2) the right to authorise making available to the public of the musical work (as such work is made available on the website and accessed by end users) – part of the so called performing rights.

In the case of physical distribution of music (e.g. CDs) rights are centralised in the record producers.[52] The situation is different as regards online exploitation of recorded music (e.g. downloads) where authors do not license the rights to the record producer any longer but directly to the online service provider (e.g. iTunes). This is largely done by the CS representing the authors of musical works. Thus, authors CSs have become key players in the licensing of online services.

The development of MT licensing of online music rights by authors' societies is still on-going and seems to be evolving in a different manner than the MT licensing of online rights for other rightholders or in other sectors. This is partly because other sectors and rightholders rely far less on collective management for the licensing of online rights and partly because of the manner in which the management of rights in musical works has evolved in Europe.

The emergence of online music services created a challenge to CS which had traditionally granted only territorial licences for their own/domestic repertoire and for the repertoire managed on the basis of reciprocal representation agreements.[53] Adapting to the new market requirements has proven to be difficult for CS in terms of the required data identification, management capability and the aggregation of repertoire. The necessary improvements are often hindered by rightholders' insufficient influence over the decisions (costs, stakes and investments) taken by the CS (problems with G&T) and the lack of technological means.[54]

This was one of the reasons for the specific development which occurred since the mid-2000's whereby a number of music publishers withdrew from CS the management of those parts of the rights for online use of musical works that they control and began to license them directly through designated agents or selected CS. As a result, a number of new licensing platforms (collecting societies and publisher agents) have been created to provide MT licences.[55] Some CS also started to grant MT licences in their own repertoire to online users. While this has improved the possibilities for users to obtain MT licences, it has also led to a fragmentation of the repertoire (parts now in the hands of the CS and parts in the hands of the music publishers or their agents).

Box 4 – Anglo-American repertoire and Continental repertoire / Split copyrights

There are important differences in how rights in musical works (whether offline or online) are managed between the UK and Ireland (as well as in the US - the so-called Anglo-American repertoire) and the rest of the EU (the so-called Continental repertoire):

In the UK, Ireland (and the US), generally authors of musical works assign their mechanical rights to music publishers[56] and their performing rights to performing rights CS. This means that publishers have the mechanical rights in the Anglo-American repertoire.[57] Performing rights are managed by CS who enter into reciprocal representation agreements with CS in other MS.

In the rest of the EU, generally authors assign both mechanical and performing rights to CS while providing publishers with the right to a part of the royalties due to them.[58] CS enter into reciprocal representation agreements, on the basis of which their repertoire is represented in other national markets by other CS.

Additional complexity is added by the issue of split-copyrights: many musical works are co-written, meaning that in many cases there will be more than one author, each of whom has rights; these authors may have transferred their rights to different publishers and/or mandated the administration of their rights to different CS. Thus, clearing the rights to use one work may require several licences.

As a result, for the online exploitation of musical works, service providers need to obtain licences from a number of different licensors:

(1) Some CS which grant licences for their own repertoire on a multi-territory basis;

(2) Music publishers or their licensing agents which grant licences for the publisher's Anglo-American repertoire on a multi-territory basis;

(3) CS which grant multi-repertoire licences for their own territory (these are needed to acquire all the remaining rights that have not been licensed via the MT licences described in (1) and (2)).

Besides the licensing of rights in musical works, service providers also need to get licences from producers (record producers, audiovisual producers) who typically license their rights directly[59] (normally along with the rights of performers that have been transferred to the producer) without relying on CS and often on a multi-territory basis.

3. Problem definition

The IA identifies two layers of problems related to the collective management of rights: problems as regards the functioning of collecting societies (first layer) in general (whatever the category of rightholders they represent or the category of rights they manage) and problems specific to the supply of multi-territory licences for the online exploitation of musical works (second layer).

The two problems are interlinked. It is explained in this Chapter that in many cases rightholders do not have efficient means to control the management of their CS, including the decisions taken as regards licensing or the distribution of royalties. As indicated in Box 2, in the online environment, in theory, the possibility of rightholders to choose the best CS could lead to competition between CS. This choice however can only be effective if a) rightholders have a real choice (i.e. there is no barrier created by law or the societies' practices), b) they have access to sufficient information on the key performance indicators of the CS and c) they can exercise control over the management's strategic decisions, in particular whether they engage in multi-territory licensing and whether this is done in a cost-effective manner. Therefore, the problems related to MT licensing (subject to the restrictions explained in the Introduction) derive, to a large extent, from the inability of rightholders to access information and exercise real control over the CS. G&T layer is required for addressing these problems of MT licensing. But MT licensing is also affected by problems of a different nature such as invoicing and data processing. These require measures going beyond G&T. Whilst the problems related to the G&T of CS have a broader scope, the second layer of problems cannot be solved without addressing the first one. The identified problems are summarised in the following problem tree.

Table 1: Problem tree

3.1. Insufficient checks and balances on the functioning of collecting societies

3.1.1. Problem 1: Rightholders – in particular non-domestic ones – are not always able to exercise their rights, notably because of poor governance and transparency standards applied by collecting societies

Collecting societies are often composed of several thousand members, able to exercise voting rights[60] in general meetings to which managers and boards governing the operations of the societies are accountable. Membership of CS, to date, remains largely national. Foreign direct membership accounts for approximately 10% of the membership of CS.[61]

At the same time, a significant share of collecting societies' turnover derives from non-domestic works. A sample of 10 major authors' CS in the EU shows[62] that out of € 2.5 billion collected, € 210 million were paid to other societies: roughly 8% of all collections. If the picture is taken at the level of one country, 6.1% of the royalties received by the eight active Spanish CS in 2007 (€ 518.9 million) was collected abroad and 12.3% total revenue distributed amongst rightholders (€ 413.7 million) was assigned to members of CS from other countries.[63] These flows between CS do not take into account the entirety of the cross-border dimension, as some important foreign rightholders collect income directly from domestic societies (e.g. music publishers via sub-publishers, major record companies via their local affiliates).[64] The cross-border dimension is particularly important in the music sector; a recent study shows that the share of local repertoires in music downloads is 15% in DE, 17% in PL, 23% in NL, 28% in FR, 30% in ES and 45% in SE.[65]

The G&T of each CS is paramount not only to its members but also to foreign rightholders whose rights are, directly or indirectly, managed by that CS. Accordingly, and similarly to the situation for any legal entity with large membership, the rules on G&T could (and should) play a role in safeguarding the interests of all rightholders whose rights a CS manages as well as in alleviating the asymmetry of information of commercial partners who are facing the important market (quasi-monopoly) power that most CS enjoy within their domestic markets.

However, this is not happening in all cases. Currently, there are no EU G&T rules which apply to CS as such; although some of them, if incorporated as limited liability companies, will be subject to EU harmonised company law rules on certain transparency requirements,[66] on capital formation[67] and on disclosure of financial statements.[68] As a result, the G&T rules applied from CS result from (different) national rules,[69] self-regulation either by the society itself (e.g. statutes)[70] or through associations,[71] decisions of competition authorities (including the European Commission), case-law (including from the Court of Justice of the EU) or soft-law (e.g. 2005 Recommendation)[72]. A number of MS have intervened in recent years via legislation to address problems relating to the functioning of collective management.[73] There is however evidence that national rules and/or self-regulatory efforts are not effective in securing that important principles of governance and transparency are uniformly or properly applied across the EU.[74]

Box 5 – Cases of insufficient governance and transparency standards

Firstly, certain rightholders are unable to properly exercise their rights:

· the principle of rightholder choice[75] is not always available from some collecting societies,[76] or is difficult to exercise;[77]

· there are still occurrences of discrimination between voting members of societies and other rightholders;[78]

· some music and book publishers claim that they cannot become members of some CS which administer their rights,[79] or that their role in the decision-making of some societies is curtailed.[80] In the case of music publishers, this happens despite the fact that self-regulation[81] foresaw that membership in CS should be open to all music publishers, that publishers would be appropriately represented in the general meetings of the societies and that they would eligible to seat in the boards of the societies, where one third of the seats would be reserved for them;[82]

· some reciprocal agreements between CS seem to contain exclusivity clauses, despite the fact that the Commission's CISAC decision stated that antitrust rules prevent CS from doing so.[83]

Secondly, rightholders do not have access to basic financial information on CS:

· out of 27 major national CS, six do not make annual reports available online; eight do not have any financial statements available online and five only have incomplete or simplified financial statements online. In practice, this means that rightholders cannot obtain a verifiable indication of the income that 13 out of 27 CS have distributed in a year;[84]

· furthermore, essential benchmarks for the performance of societies (other than administration costs) are often not available from annual reporting documents: for several major societies information on how royalties are collected, the amount of royalties distributed in the year, the time taken to distribute royalties or the proportion of royalties which remain undistributed after a number of years, is not available;

· matters are often more complex when looking for and finding information on cross-border royalty flows. Very few collecting societies provide an indication of how much is collected abroad, from which societies, and how much is remitted abroad.[85]

Thirdly, some practices have the effect of discriminating foreign rightholders (non-members):

· some societies apply additional deductions (the so-called social and cultural "CISAC deductions") only with respect to distributions to foreign CS and not to their own members;[86]

· other societies place additional burdens on non-domestic rightholders or apply distribution rules which are not favourable to non-domestic rightholders.[87]

A majority of stakeholders (creators, music publishers, commercial users, consumers) share the belief that "no action" is not a solution and calls for improved G&T standards for CS. CS, however, generally argue that self-regulation would be enough to implement high standards of G&T.

The effective governance of CS should guarantee that rightholders are in a position to ensure that the society is effectively acting in their interests and, as some consulted rightholders' representatives have stressed, to control and improve their CS. However, if rightholders are not able to exercise their rights and/or are not fully informed of the activities and state of a CS, they cannot exercise meaningful control over the activities of that CS. This control is even harder to exercise for foreign rightholders, in particular where there is little clarity on cross-border flows and deductions.[88] It could be argued that rightholders have little incentives to incur the costs of monitoring and controlling management of CS anyway, given the wide dispersed membership of those CS, in particular the largest ones.[89] From this perspective, the situation would be similar to the agency problem in listed companies with dispersed ownership,[90] where there may be shareholders with particular strength who have the capacity and interest to monitor the activities of societies.[91] Also, CS having entrusted other societies the representation of their repertoire are likely to have incentives to monitor such societies, in particular when their repertoire has an important value cross-border.

3.1.2. Problem 2: Poor financial management: royalties collected by societies on behalf of rightholders accumulate, pending distribution, with little oversight

Poor governance standards and little transparency necessarily have knock-on effects on the operation of CS. This is notably shown by the poor financial management of some CS.

CS collect money on behalf of rightholders before they distribute it, generating a positive cash flow. Thus, royalties collective management implies the collection and handling of large sums of money on behalf of rightholders. However, in some cases, these sums accumulate, pending distribution, with little oversight and their handling can be poor.

Box 6 – Poor handling of collected royalties

It often takes a significant amount of time to distribute collected income to rightholders, so funds accumulate within the societies. For those societies that provide such information,[92] from 27% to 45% of collections are distributed in the year of collection. Overall, between 5 and 10% of collections are not distributed to rightholders for as many as three years after they were collected – a delay which is significant.[93] This leads to a gap between what societies collect in a given year and how much they can distribute from those amounts in the same year. This means that substantial amounts of money are kept by societies pending distribution. Thus, e.g. in 2010 major societies had accumulated € 3.6 billions worth of liabilities to rightholders and were managing € 3.7 billions' worth of available funds.[94]

Also, funds pending distribution are not always appropriately managed:

· often amounts accumulated by societies are invested pending distribution, generating significant revenues in interest, however, occasionally they may cause significant losses (which will ultimately be borne by rightholders);[95]

· the use of non-distributed income (and interest) is often not clear and varies from one society to another: for instance some societies use this income to fund their functioning[96] (a practice which could be seen as reducing the incentive to improve the efficient distribution of income to rightholders), thus giving an impression of low operating expenses,[97] while in others the money is re-distributed to rightholders. In some cases, it would seem that part of the income collected is never distributed.[98]

Members of CS are not necessarily aware of these activities or alerted to their risks. The handling of money collected but still owed to rightholders thus raises important issues regarding how and on what such funds should be used, who decides on their use and how they should be accounted for. The rules currently applicable to CS do not deal satisfactorily with these issues[99] and, as shown by Problem 1, managers of CS have no incentives to improve the situation.[100] This situation has led some creators' representatives to call for non-discriminatory distribution rules. Some rightholders' representatives and commercial users have asked for common and transparent accounting standards for CS in order to ensure the adequate flow and distribution of revenues. Finally, some commercial users have stressed that the rules on non-distributable income should be more tightly regulated.

3.1.3. Consequences

Collecting societies are service providers - they provide services to their members (and indirectly to non-member rightholders), to users and to other CS.[101] The insufficient checks and balances in the functioning of CS are, however, likely to result in underperforming CS. This impacts on rightholders in the first place. As showed above, these insufficient checks and balances may result in lower/late distribution of income. Thus it is particularly important that rightholders are now in a position to entrust the CS of their choice for the management of their rights and to influence the key decisions in the running of the CS.

Additionally, the insufficient checks and balances in the functioning of CS may result in lost (licensing) opportunities,[102] whether online or offline, for rightholders, users, and ultimately consumers. The effective governance of CS should also result in a large repertoire of EU rights being made available, by EU rightholders and through CS, for use to commercial users in all MS. Users, however, point out that insufficient transparency and accountability to rightholders leads to licensing processes which are slow, unpredictable and too costly[103]. Difficulties in licensing result in fewer or more expensive products and services reaching consumers. The existence of performing and efficient CS is of particular relevance as regards the licencing of rights for the use of musical works in the online environment, as shown in the next section. In the online environment – contrary to the offline world where markets are less contestable – CS may more easily be competing against each other in order to attract repertoire (i.e. provided that rightholders can effectively choose their CS, can make an informed choice and can effectively exercise control over the CS) and in the licencing market. This situation also leads to lost opportunities in so-called non-core copyright industries.[104]

3.2. Difficulties in the supply of multi-territory licences and the aggregation of the repertoire of the musical works

The online environment offers a wide range of opportunities to develop new and innovative services. In the music sector, on-line music services to consumers range from à la carte download to streaming services or cloud-based matching services; and from pay-per-download to subscription or advertising-funded services. These services often have a multi-territory reach or are launched in several territories at the same time. Another important feature of these services is that the current prevailing business model lies in being able to provide access to the widest possible repertoire of recorded music.

On-line distribution of music is becoming widespread. IFPI, the international federation of the recorded music industry estimates[105] that digital music revenues to record companies grew by 8% globally in 2011 to an estimated US$5.2 billion; that 3.6 billion downloads were purchased globally in 2011 (an increase of 17%); and that digital channels now account for an estimated 32% of record company revenues globally.[106] Some markets see now more than half of their revenues derive from digital channels: e.g. US (52%), South Korea (53%). But developments in the EU are slower: access to a wide range and types of music services on offer is unevenly spread across the EU.[107] There are more than 300 different online services in Europe, offering a digitised catalogue of more than 13 million tracks.[108] However, only one mainstream music service is available in 27 MS. In some MS, the vast majority of mainstream services are available while other MS (e.g. in Eastern Europe) are served by only a few major providers.

|| iTunes || 7 digital || eMusic || Deezer || Nokia Music || Vodafone || YouTube || Last FM || Sony Music Unlimited || Spotify || Orange || Jamba || MySpace || Zune || Amazon MP3 || WimP || Napster || Total

MT || 1 || 1 || 1 || || || || || || || || || || || || || || || 3

LU || 1 || 1 || 1 || || || || || || || || || || || || || || || 3

CY || 1 || 1 || 1 || || || || || || || || || || || || || || || 3

SI || 1 || 1 || 1 || || || || || || || || || || || || || || || 3

HU || 1 || 1 || || || || 1 || || || || || || || || || || || || 3

EE || 1 || 1 || 1 || 1 || || || || || || || || || || || || || || 4

LV || 1 || 1 || 1 || 1 || || || || || || || || || || || || || || 4

LT || 1 || 1 || 1 || 1 || || || || || || || || || || || || || || 4

BG || 1 || 1 || 1 || || || || || || 1 || || || || || || || || || 4

EL || 1 || 1 || 1 || || || 1 || || || || || || || || || || || || 4

RO || 1 || 1 || || || || 1 || || || || || 1 || || || || || || || 4

DK || 1 || || 1 || 1 || || || || || 1 || 1 || || || || || || 1 || || 6

SK || 1 || 1 || 1 || || 1 || || 1 || || || || 1 || || || || || || || 6

CZ || 1 || 1 || 1 || || 1 || 1 || 1 || || || || || || || || || || || 6

FI || 1 || 1 || 1 || 1 || 1 || || || || 1 || 1 || || || || || || || || 7

PT || 1 || 1 || 1 || 1 || 1 || 1 || || || || || || 1 || || || || || || 7

BE || 1 || 1 || 1 || 1 || 1 || || 1 || || || 1 || || 1 || || || || || || 8

PL || 1 || 1 || 1 || || 1 || || 1 || 1 || || || 1 || || 1 || || || || || 8

SE || 1 || 1 || 1 || 1 || 1 || || || 1 || 1 || 1 || || || 1 || || || 1 || || 10

IE || 1 || 1 || 1 || 1 || 1 || 1 || 1 || 1 || 1 || || || || 1 || || || || || 10

NL || 1 || 1 || 1 || 1 || 1 || 1 || 1 || 1 || || 1 || || 1 || || || || || || 10

IT || 1 || 1 || 1 || 1 || 1 || 1 || 1 || 1 || 1 || || || 1 || || || || || || 10

FR || 1 || 1 || 1 || 1 || 1 || || 1 || 1 || 1 || 1 || 1 || 1 || || || 1 || || || 12

DE || 1 || 1 || 1 || 1 || 1 || 1 || || 1 || 1 || || || 1 || || 1 || 1 || || 1 || 13

AT || 1 || 1 || 1 || 1 || 1 || || 1 || 1 || || 1 || 1 || 1 || 1 || 1 || 1 || || || 13

ES || 1 || 1 || 1 || 1 || 1 || 1 || 1 || 1 || 1 || 1 || 1 || 1 || 1 || 1 || || || || 14

UK || 1 || 1 || 1 || 1 || 1 || 1 || 1 || 1 || 1 || 1 || 1 || || 1 || 1 || 1 || || 1 || 15

Total || 27 || 26 || 25 || 16 || 15 || 11 || 11 || 10 || 10 || 10 || 7 || 8 || 6 || 4 || 4 || 2 || 2 ||

Table 2. Availability of online services in EU MS (January 2012, source: pro-music.org).

A number of factors contribute to the territorial fragmentation of online music offerings. Complex copyright licensing processes are not the only reason for the fragmentation of the online market,but they play a part in it. Other reasons include technological barriers (limited access to high-speed networks), lack of legal certainty for service providers (differences in legislation in areas such as consumer protection or content rating), payment methods (access to credit cards), consumer trust in online transactions, illegal downloading of files (piracy) and cultural and linguistic differences. Finally, service providers sometimes take decisions to segment shops territorially and/or launch only in the more mature markets (e.g. with higher consumer online spend) due to purely commercial reasons such as, in the case of advertisement-funded services, the differences between national advertising markets.[109] Whilst it appears difficult to quantify the relative importance of each of the different factors for such fragmentation, there is evidence (see for instance section 3.2.3) suggesting that complex copyright licensing processes are an important factor contributing to such fragmentation, not least because without securing a licence it is illegal to provide a service.[110] As explained before, users usually need to secure MT licences in the aggregate repertoire, in order to launch online music services. Obtaining licenses from individual rightholders (e.g. record producers) does not seem to pose particular problems, and neither does licensing practices by publishers as these rightholders usually hold rights for all concerned territories and thus they are easily able to provide MT licenses. This is however not the case for authors' rights where, as explained above, the rights managed by the CS show a more complex picture. Currently, the licensing of author's rights for the online use of musical works, notably obtaining coverage for the entire repertoire (“aggregation”), is proving difficult, cumbersome and costly for commercial users, as it was also highlighted in stakeholder consultations. Even though the offer of online services involving the use of musical works has become wider in the recent years (as is shown by Table 2 above) the costs of the process of clearing authors' rights for the online use of musical works remain relatively high for the majority of users (in particular small ones and new entrants). Only few major providers can afford multiple, parallel and legally challenging negotiations. There seems to be no immediate perspective for a spontaneous, market-driven resolution of this problem.

It is also important to highlight the relation between this problem and the problems on G&T in CS, in particular the difficulties rightholders have to face in exercising their rights in a CS. Table 3 illustrates that the lack of efficient online MT licensing results in an important loss of income for rightholders. One may well assume that if they had better ability to improve the conditions of online MT licensing in their CS, they would do so.

Table 3. Potential and Actual CS digital royalty revenue (in EUR millions)

Source: MPRA: Counting the costs of Collective Rights Management of Music Copyright in Europe, Ghafele, Roya and Gibert, Benjamin, 2011, http://mpra.ub.uni-muenchen.de/34646 , p.17

3.2.1. Problem 1: Authors' collecting societies are not sufficiently prepared for online multi-territory licensing which is demanding and costly

The demands of online licensing are high. Licences are normally “transactional” (meaning that the user reports and the CS invoices on a per-use/per-work - or share of work - basis). The licensing of musical works on a MT basis for online services requires the extensive use of data processing capabilities as the scale of reported uses of music is considerable. Without adequate automated processes, the processing of those uses would not be economically viable.[111]

Box 7 – Examples of the scale of reported online uses

· one CS processed 20 million lines of data for a single online service;[112]

· another CS reported 3 million downloads from a single major service provider in 2010, and that it processed the equivalent of three billion acts (downloads or streams);[113]

· in 2008, a CS was required to process 20 million transactions (i.e. a single download or stream) per month for an active repertoire of 8.5 million tracks; in 2010, this had increased to 62 million transactions a month covering 13 million tracks;[114]

· for a major download service, 94% of downloads concerned tracks which had been downloaded less than 50 times.[115]

The qualitative nature of the data required has also changed, as licensors who previously operated on a purely national basis must now hold data on rights ownership in all the territories covered by their licences.[116] In the offline environment, the risks of conflicts as regards the ownership of the rights in a given territory were minimal. Inaccurate data was only relevant to the distribution of income to rightholders and other CS; it was largely invisible to users. In the online world, if two CS claim to own the same work, a user will be invoiced twice. The industry generally acknowledges that the data on works ownership is not sufficiently accurate – some users arguing that they receive double invoices, data on excel spreadsheets, and some CS arguing that their rights are not always clearly excluded from licences from other CS. A number of industry initiatives have been put forward (ICE, GRD)[117] to address the issue and improve the identification of the works, rightholders or even to create a comprehensive database.

At present, many CS do not have the ability to accurately identify works and work-shares licensed and to organise fully electronic data exchange with online music service providers pertaining to usages of works and subsequent invoices. Entering the market without the ability to meet these requirements can cause damage. Firstly, as explained above, it may result in inaccurate, or "double" invoicing[118] for users. Secondly, licensors' lack of accurate ownership data encourages service providers to meet the repertoire gap with a national licence which is tailored as an insurance against any claims in works not already licensed (see Problem 2). Furthermore, as a consequence of deficient electronic data exchange, some users are receiving invoices from some licensors with significant delays, and some rightholders are experiencing even longer delays in receiving their payments.

3.2.2. Problem 2: Online multi-territory licensing by authors' collecting societies is subject to legal uncertainty

National legal frameworks applicable to CS[119] are designed for licensing activities which take place on a national basis. In this regard, some large CS argued that national regulation hinders their multi-territorial licensing activities. At the same time, CS are service providers which benefit from the free movement of services and the EU acquis relating to this principle, notably the Services Directive. While the application of the existing acquis should address some of the uncertainties faced by CS wanting to provide MT licences,[120] considerable uncertainty remains as regards the application of the acquis and the possibility for CS to provide licences covering several EU countries and/or to licensees established in other MS. Doubts also arise as to whether existing rules applicable to CS apply to new licensing entities.[121] This means that the entities or societies which carry out MT licensing do not necessarily know if or to what extent a particular legal framework is applicable to the MT licences they grant. This uncertainty acts as a deterrent to entering the MT licensing market in the EU. It also deters the local CS from entrusting their rights to an existing multi-territory licensor as they would be venturing into unknown territory.

Another symptom of the existing legal uncertainty is that in certain cases, commercial users who want to provide online services in several MS seem to be obtaining MT licences from CS representing major repertoires; but they also obtain multi-repertoire licences limited to the national territories of each of the countries they want to cover. Such mono-territory multi-repertoire licences are offered by local CS under existing reciprocal agreements with other societies. They are essentially used to cover repertoire which is not already licensed on a multi-territory basis by a CS.

As a result, online services are often licensed through a combination of MT licences and national licences. This not only brings up the number of licences required but may also limit the territorial reach of the service to the lowest common denominator, i.e. those territories which are covered by both MT licences and national licences. In the stakeholder consultations, online music service providers highlighted the additional costs deriving from legal uncertainty.

3.2.3. Consequences

For providers of on-line music services, when launching new services (especially where the innovative nature of the service requires new licence structures and rates), the large number of licensors - and variations as to the repertoire and rights they can licence - can be a major handicap. The numerous parallel negotiations are also time-consuming in a very fast moving market and are costly.[122] Consulted online music service providers have reported that other factors such as repertoire fragmentation, the handling and reconciliation of invoices, and the administration of a considerable number of licences, do affect costs. Such services are accordingly likely to opt to launch only in one or a few MS,[123] thus depriving themselves of the larger consumer base that the Digital Single Market has to offer.[124] Alternatively, some services might choose to launch on the basis of major repertoire only, which can be secured with a smaller number of licences. This would be detrimental to niche and local repertoire. Furthermore, legitimate service providers face the unfair competition from providers of illegal content online which provide their illegal services everywhere. Consumers ultimately have less choice and there is a loss of cultural diversity.

For rightholders (authors and publishers), the increased income that could be generated by expanding consumers' access to their works via new services throughout the Single Market, is lost. This is leading to less trust on the ability of CS to manage their rights.

3.3. Baseline scenario

In the absence of action at EU level, it is likely that the checks and balances on the functioning of collecting societies would remain insufficient (see section 3.1). As seen recently in the case of Belgium, France or Poland, MS could introduce various rules on G&T. However, it is unclear whether all MS would have an incentive to do so in the absence of harmonisation at EU level, as the current practice shows that few MS have recently taken such measures. Moreover the standards and the supervisory approach would vary from MS to MS, and so would the level of protection of rightholders.

It could be envisaged that CS could try and agree on common codes of conduct which would be applicable to all CS or to certain categories of CS and which would go beyond the existing codes to cover issues such as: participation in the decision-making process, financial reporting standards, rules on handling of funds, etc. However, additional self-regulation by CS would not necessarily lead to the improvement in G&T standards for all CS. This improvement would depend on the willingness of CS to abide by these standards. So far, the self-regulatory experience concerns essentially the societies managing music rights, partially because of the pressure made by important rightholders. Beyond this pressure, managers of CS have limited incentives to increase the efficiency of the societies' operations and, as shown in section 3.1, peer pressure (by other CS) is also limited. In any case, experience shows that the current codes are not fully respected anyway. As a result, self-regulation would only address governance inefficiencies to a limited extent and consequently rightholders' control over CS would not be significantly improved. Moreover, due to the lack of appropriate incentives, it is unlikely that solutions implemented by MS or CS themselves will take sufficient account of the specific problems raised by the cross-border dimension of collective rights management. A number of organisations representing CS however deem that rules on G&T have already been sufficiently addressed in other EU instruments.

The value of the 2005 Recommendation is somewhat limited because its scope is limited (it only covers the online music sector and it only contains a limited number of recommendations) and its principles have only been partially respected by CS. This is not surprising since the persuasion value of the Recommendation is limited[125] and there are no incentives for CS to respect it.

If insufficient access to information and little oversight over collected royalties continue, rightholders' mistrust and lack of confidence would most likely persist. This may cause major rightholders to seek to withdraw their rights from the CS when a credible alternative exists.[126] Users would also continue to suffer from the lack of transparency and the related problems in the licensing process. Moreover, some societies would continue to operate under significantly lower G&T standards than others. This would not create the trust needed in the cooperation between societies when a society represents the repertoire of another one.

Lack of improvements in the G&T rules would also have knock-on effects on the licensing of musical works to online services. The problems identified in the licensing of musical works need to be addressed by those parties who licence their works online, including all CS which control repertoire which is required for online services. Without appropriate G&T rules, improvements in licensing would only be achieved by a small number of CS, while others stay behind. For these societies, their members would have neither access to enough information to assess how this market should be addressed, nor means to clearly influence the decision of their CS as to how to meet demand.

Improved G&T rules would not be enough, however, to improve the situation with respect to the problems identified as they do not all derive from the insufficient check and balances in CS but have a different nature. E.g. the problem of double/incorrect invoicing derives from the incorrect or lack of identification of the repertoires.[127] Without intervention, it is unlikely that the market would address this problem. Some societies will continue to grant territorial licences which "absorb" all the repertoire which has not been properly identified by others and would have limited incentives to licence themselves on a MT basis or to allow another entity to aggregate their rights. Consulted user organisations have stressed that it is important that CS are fully transparent as regards repertoires they represent and the rights they are mandated to manage for those repertoires.

The IM would remain fragmented: rights licensing for online services would remain complex and the roll out of online services across MS would remain patchy. New emerging online services (and commercial users in general) would continue to struggle with multiple licensing practices,[128] operating on a different geographic scale (national or multi-territory) and at a different level of aggregation (repertoire specific or multi-repertoire). In this context, a number of music publishers pointed out that the traditional mass usage model of CS fails vis-à-vis new business models. MS may try and address the issue but they are unlikely to be able to do so due to the inherently cross-border nature of multi-territory licensing. Users would continue to run the risk of receiving overlapping invoices from their various licensors.

Societies would, in some cases, continue to lack the technical ability to process multi-territory, multi-repertoire licences. Their repertoire would be cut off from the market for multi-territory services, or would be licensed without adequate technical support.[129] In both cases, this would lead to lost revenues for rightholders (lost opportunity, or inaccurate and delayed payments).[130] Other societies would invest heavily in "upgrading" their systems[131] even though the value of their repertoire makes such an investment unsustainable,[132] without sufficient rightholder control resulting in significant costs for them.

A good number of small and medium sized CS would continue to experience difficulties in licensing their rights on a MT basis. To some extent, they would continue to grant multi-repertoire licences limited to their domestic territories on the basis of remaining reciprocal agreements with other societies. Larger CS would continue their efforts to licence their rights directly on a multi-territory basis. All CS would continue to be active in the administration of rights other than online rights (e.g. licensing broadcasts, public performances, etc.).

3.4. Does the EU have the right to act?

3.4.1. Legal basis

The EU's right to take action to facilitate the functioning of collective rights management in the internal market (IM) follows from Article 50(2)(g) of the Treaty on the Functioning of the European Union (TFEU) which constitutes the specific IM legal basis for freedom of establishment, and Articles 53 and 62 of the TFEU which constitute the specific IM legal basis for services.[133] Firstly, the coordination of key governance and transparency standards in CS could make safeguards equivalent throughout the Union and protect the interests of members of CS, rightholders and users. These safeguards could facilitate and encourage the provision of collective management services across borders, in particular as CS usually manage the rights of foreign rightholders and cross-border royalty flows.

Secondly, the proposed action is instrumental to achieving a better functioning IM and facilitating the free movement of services. CS are service providers who often provide their services to rightholders and other societies on a cross-border basis. Rights are also increasingly licensed to users on a cross-border basis. In a broader perspective, addressing the fragmentation of rules applicable to collective management of rights across Europe will facilitate the free movement of all those services which rely upon copyright and related right-protected content. In particular, taking action to facilitate the granting of MT licences to online service providers is expected to substantially ease the distribution of and the access to music content online.

Further, CS administer rights which are protected as property rights under the Charter of Fundamental Rights of the European Union[134] and which are largely harmonised under secondary EU legislation.[135]

Finally, Article 167(4) of the TFEU provides that the EU shall take cultural aspects into account in its action under other provisions of the Treaties, in particular in order to respect and to promote the diversity of its cultures. All proposed options take into account the implications of EU action for cultural diversity.

3.4.2. Subsidiarity and proportionality

The subsidiarity principle (Article 5(3) of the Treaty on the European Union (TEU)) requires the assessment of the necessity and the added value of the EU action.

As regards the necessity of the EU action in this area, Chapter 3 explains that the existing legal framework (at national and EU level) is insufficient to address the identified problems. National laws regulate CS in divergent ways and clearly have not been able to solve the identified problems. Due to the different national regimes CS are subject to, it is unlikely that in the future MS would uniformly ensure the transparency necessary for rightholders to exercise their rights. As regards EU law, competition decisions and the case law is binding only in a given case and have a limited scope. The 2005 Recommendation does not only have a limited scope (cross-border licensing of rights for online music services) but it is also neither binding nor uniformly applied.[136]

The objectives of the proposed action could not be achieved sufficiently by MS and could be better achieved at Union level due to the trans-national nature of both problems. With respect to G&T, as it was explained in Chapter 2, all CS represent and license the repertoire of other CS through reciprocal representation agreements, in their own territory. Therefore the scale of licensing of the works of foreign rightholders depends on the efficiencies of these other CS. As the problems related to the discrimination of foreign rightholders show, the general "principal-agent" problem in CS is intensified with respect to foreign rightholders. As they are not the members of the relevant CS, they have little insight in and even less influence on the decision-making process of the CS. As a consequence of the reciprocal representation agreements, a significant share of collections derives from non-domestic repertoire. These cross-border royalty flows are relatively varied, reflecting demand for cultural diversity and some regional cultural affinities. On average, close to 17% of the collections of authors' societies are either distributed to or received from other EU societies.[137] The protection of the interests of EU rightholders requires that all royalty flows, and in particular cross-border flows, are transparent and accounted for. EU intervention is the only way to ensure the exercise of rights and in particular, the collection and distribution of royalties in a consistent manner across the EU.

Table 4: Share of EU trade in royalty turnover of EU societies (source: Annex G).

Multi-territory licensing for online uses of musical works is, by definition, a cross-border situation. As explained in section 3.2, commercial users often need to secure a number of MT licenses from CS established in different MS and CS established in different MS also need to conclude agreements between themselves to aggregate repertoire. Rules intended to ensure the smooth functioning of multi-territory licensing are accordingly better achieved at EU level if they are to meet their objective. In particular, sections 3.2 and 3.3 showed the need for action in order to enhance the technical capability of collecting societies as regards the licensing of online rights. Action at EU level would secure a minimum capacity is ensured across the EU, thus facilitating the dealings with commercial users across borders. It may also facilitate the emergence of consolidated back-office solutions (e.g. multi-territorial multi-repertoire databases) for CS, thus avoiding duplication of investments and therefore achieving savings. MS could not, by themselves, draw up rules which consistently address these cross-border situations, nor could they sufficiently encourage the development of multi-territory databases. E.g. none of the proposed options could be achieved by MS alone, unless MS were to simultaneously adopt identical rules.

Under the principle of proportionality (Article 5(4) TEU), the content and the form of EU action shall not exceed what is necessary to achieve the objectives of the Treaties. The proportionality of the different policy options has been assessed and the result of this assessment is described in the relevant part of this IA.

4. Objectives

Table 5: Objective tree

This initiative deals with two distinct but interrelated problem areas, and reflected in the objectives (see above). The first area deals with the problems affecting collective management of rights in general by any collecting society. The general objective is therefore to drive improvements in the supply of collective rights management services by all CS. The related specific objective is to guarantee sufficient transparency and improve control over the activities of CS in relation to all revenue streams, online and offline, national and cross-border. The corresponding operational objectives are as follows: guarantee that recognised G&T standards are applied by CS so as to ensure that rightholders have access to information and are able to exercise their membership rights in their societies; and guarantee the transparent and fair handling of income by CS.

The second area deals with the specific issue of the online market for music services. The general objective is to contribute to the reduction of the fragmentation of the EU Single Market for online music services. The related specific objective is to improve and broaden MT licensing of authors' rights for online use of musical works as well as to facilitate the aggregation of repertoire, with a view to include as broad an offering of music repertoire as possible. Such licensing should be done in full respect of EU law, including competition law. It should be considered in this regard that the management of copyright and related rights is not the only factor that affects the development of the digital Single Market (see sections 1.1 and 3.2). However, other factors are outside the scope of this initiative. As regards the corresponding operational objectives, they guarantee legal certainty for licensors, music service providers and ultimately rightholders; and enhance the capability of licensors by ensuring they use licensing infrastructure (and provide licensing services) adapted to the online environment. In this connection, the operational objectives that aim, in the first area, at improving the functioning of CS (i.e. enhanced G&T standards, improved financial management) will also contribute to the enhancing of the capacity of licensors of authors' rights for online uses – as an important number of those better functioning collecting societies (the authors CS) are key players in the licensing of music rights.

A more coherent and efficient general framework for the collective management of rights in the EU as well as a specific framework for the licensing of authors' rights for online use of musical works should help to improve consumers' access to a wider variety of cultural goods and services, and in particular (but not only) in the music sector. Commercial users will gain from better functioning and more transparent CS and, in the online environment, from a framework facilitating the acquisition of licences for the provision of music services throughout the EU. Rightholders would maximise their earnings by widely promoting their works while receiving remuneration. At the same time, cultural diversity would be fostered by the availability of a large and diverse repertoire.

5. Policy options on transparency and control in collecting societies

This chapter examines and compares different policy options to solve the problems presented in section 3.1. The policy options are discussed and measured on the basis of their effectiveness (i.e. the extent to which the measures fulfil the objectives), their impact on the Internal Market, on rightholders, commercial users, the collecting societies as well as cultural diversity and their compliance costs.

5.1. Option A1 – Status quo

Description: In the absence of policy intervention, this option would rely on the market and peer pressure, including industry self-regulation, to address the problems defined in section 3.1. Such initiatives have already taken place or been advocated by industry. This is the option preferred by some organisations representing CS. Existing rules however are not comprehensive and there are problems with their implementation. Also, individual MS could introduce rules on G&T, as seen recently in some MS in some cases in reaction to certain failures of governance in CS.[138]

The summary and analysis of the impacts of Option A1 are in Annex N. Comparison of the impacts of Option A1 to the baseline scenario:

Criteria ► Policy option▼ || Effectiveness || Impact on the IM || Impact on rightholders || Impact on CS || Impact on users || Cultural diversity || Compliance costs

Option A1 || 0 || 0 || 0 || 0 || 0 || 0 || 0

"0" – no change "+" – positive impact "-" – negative impact

5.2. Option A2 – Better enforcement

Description: This option would rely in the first place on the enforcement of existing rules of EU law (e.g. Treaty provisions on freedom to provide services, concerted practices and on the abuse of a dominant position)[139] and on ensuring consistency at national level in the application of the principles (e.g. non-discrimination principle, rightholders choice)[140] emerging from the case law of the Court and the Commission's decisions. However, secondary EU legislation does not contain G&T standards for CS (the 2005 Recommendation is of voluntary application). Thus this option could mainly concern the existing national legislative framework.

In practice, the Commission would raise awareness amongst authorities supervising CS (including ministries of culture, ad hoc national bodies and national competition authorities) as to the existing case law and Commission decisions.[141]. The Commission and relevant national authorities would cooperate with each other by: (i) holding awareness meetings on the application of existing principles, (ii) informing each other of new cases and envisaged enforcement decisions, (iii) coordinating investigations, where necessary, (iv) helping each other with investigations and (v) exchanging evidence and other information.

The summary and analysis of the impacts of Option A2 are in Annex N. Comparison of the impacts of Option A2 to the baseline scenario:

Criteria ► Policy option▼ || Effectiveness || Impact on the IM || Impact on rightholders || Impact on CS || Impact on users || Cultural diversity || Compliance costs

Option A2 || + || + [*] || + [*] || + || + [*] || 0 || -

"0" – no change "+" – positive impact "-" – negative impact [*] [if enforced in all MS]

5.3. Option A3 – Codification of existing principles

Description: This option would consist in the codification of the principles[142] that have emerged from the case law of the Court and from the Commission's decisions together with the implementation of the 2005 Recommendation into binding legislation. In this option the applicable principles are binding, clearly established and visible for all. This would create a stable basis for their enforcement. MS would also be required to provide appropriate sanctions (administrative and/or civil) for breaches of G&T obligations. Therefore, the conditions of the effective enforcement would be established by legislation. The result of this option would be the following set of measures:

|| ISSUES || MEASURES ||

RELATIONS WITH RIGHTHOLDERS AND WITH OTHER CS || Membership and representation || - Non-discriminatory treatment of rightholders with regard to membership rules, and representation in the governing bodies. - Fair and balanced representation of rightholders in the internal decision-making process. ||

Rightholder choice / flexibility of mandates || - The right of rightholders to decide to entrust the rights of their choice to the CS of their choice and for the territory of their choice. - The right of rightholders to withdraw their rights from CS at reasonable notice. ||

Distribution of revenues / handling rightholders' income || - Non-discriminatory treatment of rightholders (also those represented on the basis of reciprocal agreements) with regard to the collection, distribution of income, administrative fees, etc. - The right of rightholders to be informed of administration fees and all other deductions made from the royalties. ||

Transparency / access to information || - The right of rightholders to be regularly informed by CS of licences granted and royalties collected and distributed. - The right of rightholders and users to access information on CS' repertoire, existing reciprocal representation agreements, the territorial scope of their mandates for that repertoire and the applicable tariffs (if set in advance). || RELATIONS WITH USERS

Dispute resolution || - Dispute resolution mechanism. The type of mechanism would be left to discretion of MS on the basis of principles set out by the Commission.

|| Criteria for licensing || - Fair treatment of users including as regards granting of licences.

The summary and analysis of the impacts of Option A3 are in Annex N. Comparison of the impacts of Option A3 to the baseline scenario:

Criteria ► Policy option▼ || Effectiveness || Impact on the IM || Impact on rightholders || Impact on CS || Impact on users || Cultural diversity || Compliance costs

Option A3 || ++/+ || ++ || ++ || ++ || ++ || + || --

"0" – no change "+" – positive impact "-" – negative impact

5.4. Option A4 – Beyond codification: a governance & transparency framework for collecting societies

Description: This option would build on Option A3 but provide more elaborate framework rules on G&T to address the problems described in Section 3.1.[143] The codification of existing principles would be complemented by a set of targeted but principle-based rules which would 'fill in the gaps' of Option A3, with regard to financial management and rightholders' control over the operations of the CS, adapted to the nature of collective rights management. Under this option all rules would be set out in one instrument providing for their visibility, understanding and enforceability. MS would also be required to provide appropriate sanctions (administrative and/or civil) for breaches of G&T obligations. This option would meet the expectations of a number of creators, music publishers, record producers, commercial users and consumers, who have been asking for the establishment of common and minimum G&T standards. The result of this option would be the following set of measures:

|| ISSUES || MEASURES ||

RELATIONS WITH RIGHTHOLDERS AND WITH OTHER CS || Membership and representation || AS IN OPTION A3 PLUS Additional rules on the participation of rightholders in the decision-making process and collective rights managers' accountability such as the powers of the general meeting, representation of rightholders in the decision-making bodies, control of the management and their key obligations, obligation on managers to declare interests in the society they manage, etc. ||

Rightholder choice / flexibility of mandates || AS IN OPTION A3 ||

Distribution of revenues / handling rightholders' income || AS IN OPTION A3 PLUS CS, as entities which bear responsibility for the assets of other persons, would be subject to rules which would guarantee the appropriate degree of security of rightholders' income such as rules on the separation of rightholders' and societies' assets, the obligation to account for revenues and costs separately for various revenue streams, rules on prudential investment and involvement of rightholders in decisions on distribution of revenue (including the allocation of funds for deductions). Rights of non-member rightholders would be strengthened by rules concerning the application of costs and deductions to royalties owed to non-member rightholders. ||

Transparency / access to information || AS IN OPTION A3 PLUS CS would have to draw up and publish an annual report that should include a financial statement and certain specific information such as information on royalties collected (per revenue stream), operating costs (per revenue stream), the amount of royalties distributed, the sums dedicated to social or cultural activities, the amount of non-distributed royalties, the amount of royalties paid to other CS, the amount of royalties received from other CS and information on the financial investments of the CS, as well as other important operational and financial data for a given year. The annual report would be subject to audit by an independent auditor. PLUS Obligation to publish key documents such as articles of association, membership terms, standard contracts etc. PLUS Enhanced (at least annual) information for individual rightholders on royalties and deductions made. || RELATIONS WITH USERS

Dispute resolution || AS IN OPTION A3

|| Criteria for licensing || AS IN OPTION A3

These measures correspond to a great extent to the most recent reforms introduced by some MS.[144] Recent amendments to the legislation applicable to CS, e.g. in Belgium or Poland aim at ensuring better participation and control by the members of the society, better handling of income and more transparency on the collection and distribution of royalties.[145]

Option A4 has two possible sub-options:

Sub-option A4a: Combination of legislation with industry self-regulation

The rationale behind this sub-option would be to guarantee the codification of key G&T standards (the existing principles, rules pertaining to the annual report, the handling of funds) while leaving the more detailed standard setting - specifically with regard to matters such as the internal governance structure of the CS, the decision-making process, procedural rules for holding the general meeting (GM) and meetings of other governing bodies of CS, members rights (such as the right of inquiry), accountability of managers, rules on handling of complaints, etc. - to self-regulation. These additional rules would be elaborated in a stakeholder driven process based on a number of core issues and requirements set by the Commission. The process would result in a European code of conduct which would be binding on the societies adhering to it. The code would also have to provide for its enforceability, review and monitoring. It should provide, in particular, that: (i) CS which voluntarily join the code are bound by its terms; (ii) periodical monitoring and reporting on the code is carried out by an independent third party and made public, and (iii) a periodical review process is carried out, by an independent third party and in consultation with the Commission and all interested parties, to amend the code. Should the operation of the code not bring sufficient results, or should certain societies not adhere to the code, the Commission could envisage legislation.

Sub-option A4b: Laying down a detailed legislative framework for governance and transparency in collecting societies

Sub-option A4b would establish more extensive legislation in the G&T area than the principle-based Option A4. In terms of governance, this option would entail a detailed set of provisions on the convocation of the general meeting (GM), the rights members can exercise before or at the GM (e.g. putting items on the agenda), the internal governance structure of the CS, the relation between the management and the supervisory board, procedural rules on complaints and the right of inquiry, publication of voting results, managers' liability, etc. As regards financial management and transparency requirements are concerned, this sub-option would prescribe special requirements on the structure and content of annual accounts, extensive publication and transparency requirements, a detailed set of rules on the management of royalties, the investment policy of the CS, etc. This sub-option would aim to create a level playing field for CS all over Europe by ensuring that all CS comply with the same set of legal requirements.

The summary and analysis of the impacts of Option A4 are in Annex N. Comparison of the impacts of Option A4 to the baseline scenario:

Criteria ► Policy option▼ || Effectiveness || Impact on the IM || Impact on rightholders || Impact on CS || Impact on users || Cultural diversity || Compliance costs

Option A4 || +++ || +++ || +++ || +++ || ++ || ++ || --

Sub-option A4a || ++ || ++ || ++ || ++ || ++ || ++ || --

Sub-option A4b || ++ || +++ || +++ || ++ || ++ || ++ || ---

"0" – no change "+" – positive impact "-" – negative impact

5.5. Comparison of policy options

Comparison of the options:

Objectives: ► Policy options▼ || Effective-ness || Impact on the IM || Impact on rightholders || Impact on CS || Impact on users || Cultural diversity || Compliance costs

Option A1 – Status quo || 0 || 0 || 0 || 0 || 0 || 0 || 0

Option A2 – Better enforcement || + || + [*] || + [*] || + || + [*] || 0 || -

Option A3 – Codification || ++/+ || ++ || ++ || ++ || ++ || + || --

Option A4 - Framework of G&T rules || +++ || +++ || +++ || +++ || ++ || ++ || --

Sub-option A4a –legislation & self-regulation || ++ || ++ || ++ || ++ || ++ || ++ || --

Sub-option A4b – compre- hensive G&T framework || ++ || +++ || +++ || +++ || ++ || ++ || ---

"0" – no change "+" – positive impact "-" – negative impact [*] [if enforced in all MS]

5.5.1. Impacts on the Internal Market

Option A1 would not change the current fragmented regulation in the EU. Whilst right management in some MS could be improved through national legislation the lack of coherence would not allow solving the cross-border issues (control of royalty flows, exercise of membership rights, etc.) identified in Section 3.1. Option A2 could have a more positive impact as it would facilitate the enforcement of existing principles but significant differences in the operation conditions of CS would persist (unless enforcement is equally efficient in all MS) and issues outside the scope of existing principles would remain unresolved. The codification option would ensure that certain rights of rightholders are harmonised and that they are enforceable but it would not solve the issues related to the lack of transparency of financial management of CS, thus cannot deliver on the cross-border issues. Option A4 would create a framework of clear and comparable G&T rules that would increase the possibilities of control in CS. Common framework rules could lead to convergence of practices all over Europe, thus it would have the most positive impact on the Internal Market.

5.5.2. Impacts on the degree of competition

As both under Option A1 and Option A2, rightholders would, to different degrees, continue to lack sufficient information and control over CS, they would not be able to make informed choices about CS and the competition among CS for rightholders would suffer. The situation would not be substantially different under Option A3 as despite better access to information and increased control over CS, rightholders would continue to lack comparable information on financial management of CS allowing them to compare CS on the basis of their efficiency. It is under Option A4 (and its sub-options) that rightholders would have sufficient benchmarking information on the basis of which they could exercise informed choice of CS. The harmonised transparency requirements would make it much easier both for rightholders and users to compare the level of services offered by CS and would put competitive pressure on CS.

5.5.3. Impacts on stakeholders: in general

As regards rightholders, if there were no policy change (Option A1), they would, to different degrees, continue to lack sufficient information and control over the CS and their financial management unless individual MS would decide to develop their relevant national legislation. Option A2 could have a more positive impact (but not to the extent required), provided that the limited number of existing provisions would be equally enforced in all MS. Binding legislation under Option A3 would significantly improve the position of rightholders in the CS (see e.g. non-discrimination) but it would not address the issues related to the lack of transparency and financial management. Option A4 would best address the problems that have been identified in the problem definition. Sub-option A4b would probably ensure even more benefits to rightholders but it would put too much administrative burden on CS. Sub-option A4a would be less efficient (based on previous experience with self-regulation).[146]

As regards commercial users, the status quo (Option A1) and better enforcement (Option A2) are unlikely to have any impact on their situation. The codification of existing principles would improve their situation as they would obtain access to the most important information and would have the right to bring disputes before the dispute resolution body. In addition, the codification would have indirect impact on users, i.e. if the improve