ALMA MATER STUDIORUM - UNIVERSITA DI BOLOGNA

SCUOLA DI ECONOMIA, MANAGEMENT E STATISTICA

SCHOOL OF ECONOMICS, MANAGEMENT AND STATISTICS

First cycle degree

in
BUSINESS AND ECONOMICS

The Efficiency of Copyright Collectives

in the European Music Industry

DEFENDED BY
Matteo Betti
matteo.betti4@studio.unibo.it
0000628416

Seconda sessione di laurea / Graduation session: second

Anno Accademico Academic year 2013/2014

ABSTRACT

This paper aims at analyzing the current situation of music copyright collecting
societies in the European landscape. The music sector has been strongly subject to the
radical changes brought about by technological innovations such as the Internet and
the new communication platforms and devices; the rules that once held true are now
urging to be questioned and evaluated. Following a review of the different economic
theories underlying the practice of copyright intermediation and the legal framework
currently enforced, the research progresses by providing data and evidence on the
economic performance of the major European copyright collectives assessing the
results under a comparative manner.
The objective is to evaluate whether the dynamics of copyright management comply
with the common standards of social efficiency and sustainability, drawing
conclusions and suggestions from the obtained results.

Contents

1.

Introduction

2.

The music industry

I.
II.

3.
I.
II.

4.
I.
II.

5.
I.
II.

Structure and value chain

Market and trends

Copyright: an intellectual property

Definition and anatomy
The economic debate

The intermediation: collecting societies

Overview and functions
Efficiency: theory and evidence

A comparative example: SIAE in Italy

The agency: status and role
Performance and comparisons

6.

Discussion & further research

7.

Conclusions

8.

Bibliography & references

1. INTRODUCTION
Recent technological innovations such as the Internet have had major influence on
markets like the music business. Porter (2010) notes that with the emergence of the
Web as a viable communications platform, and the introduction of sophisticated
computer technologies available to the general public, producers and users gained
significant new tools for distributing, assessing, and sharing music in new ways.
These new tools has brought major labels and publishers to believe that the constant
decline of CDs and other music supports sales since the beginning of the 2000 had to
be caused by new online platforms (Napster first, P2P networks then) that allowed
exchanges of large quantity of data between users all over the world. According to
the Recording Industry Association of America (RIAA), digital piracy explains most,
if not all, of the 10% annual average drop in the number of CDs sold in the United
States over the 2000 to 2007 period, this is due to the fact that these exchanges
included, among the others, musical works protected by copyrights, exchanges
facilitated by the emergence of new small sized compressed formats like the MP3.
With these new dynamics at play, many thought that the traditional framework, under
which copyrights were to be enforced, needed a reform.
As Stallman (2009) states:
Copyright on these musical recordings was mostly uncontroversial
as it only restricted record companies and not music listeners.
Todays digital technology enables everyone to make and share
copies. Record companies now seek to use copyright law to deny
us the use of this technical advance. The law, which was
acceptable when it restricted only publishers, is now an injustice
because it forbids cooperation among citizens.
This ongoing struggle over copyright legislation and enforcement calls for a review
2

of the way those rights are currently thought of. Wunsch-Vincent (2013) highlighted
on the annual World Intellectual Property Organization (WIPO) report that
Copyright law establishes an important trade-off between the incentive for creators
and creative industries, on the one hand, and the potential new access restrictions on
the other hand. Thus copyrights are not only a matter of legal policy, but also they
happen to bear strong economic implications to be analyzed. Given these premises,
the papers aims at going through the various aspects of copyright intermediation
while highlighting the obtained economic outcomes. The scope is restricted to the
European context, for purpose of precision and given the lower amount of studies
conducted in this landscape as opposed to the American one.

2. THE MUSIC INDUSTRY

I. Structure and value chain
Hull (1998) describes the music industry as a business having three principal
segments:
1. The industry for purchases of recorded music;
2. The industry for broadcasting recorded music;
3. The industry for attending live performances.
The stream of revenues starts with the writing process of a composer or lyricist that
givse them entitlement for five exclusive rights related to their creative output: the
right to make copies; the right to distribute those copies and to obtain payments in
consequence of that; the right to publicly perform the work; the right to create
derivative work containing elements of the original composition; the right of display.
At this stage it is also found the figure of the music publisher, entitled of dealing with
the intermediation of the original work of the authors. The role of the publisher,
despite widely observed, is not strictly necessary since the composition can also be
self published by the authors themselves. With the advent of the recording
3

technologies in the XX century, the original composition started to be accessible not

only by means of physical performance, but also through printed formats like vinyls,
evolving to cassettes, CDs and lately digital formats. The recording of an original
work gives birth to a second type of rights, called secondary copyrights. These
account for the payment due to the performers on the original recording and the label
detaining the master record. The product is then distributed and sold either physically
or, now increasingly common, digitally; this represents the principal segment of
income for the musical operators (IFPI, 2011). Broadcasting of the product and use in
commercial activities account for other types of revenues flowing upward in the
value chain under the form of royalties paid to the publishers, intermediating the
composers rights, and to the labels in possession of the secondary (or mechanical)
rights. Meisel and Sullivan (2002) provided a clear value chain that the author will
report here for the sake of clarity (Figure 1).
Figure 1

II. Market and trends

Due to the complex and multiple staged nature of the music industry, data on
economic performance and trends are difficult to come by. The most reliable source
of data is to be found in the International Federation of the Phonographic Industry
(IFPI)s annual reports. Figure 2 shows global sales of supports containing recorded
music in the period spanning from 1997 to 2011. The downward trend in sales is
easily noticeable: in 1999 the global turnover accounted to 28.6 US billions, in 2011
the figure is 16.6 US billions, a radical - 42% loss. Despite the overall market appears
to experience a steady downturn, digital sales in the mere 2010-2011 period soared
by 26%, with European countries such as the UK and Germany presenting results of
27% and 36% respectively, both above the global average (IFPI, 2011).
Figure 2

The most significant European countries in terms of share of sales with respect to the
total market are Germany (9%), the UK (9%), France (6%) and Italy (1%). The
5

European segment approximately accounts for the 25% - 30% of the total market,
making it one of the three most important sectors along with the US (26%) and Japan
(25%). For what concerns the major agents competing in the market, even ten years
ago Alexander (2002) wrote the music recording industry is a highly-concentrated
five firm oligopoly, where the major firms account for approximately 95% of sales
when measured at the distributor level. In 2013 according to Nielsen SoundScan
data, the market structure of the industry, despite the trend has been leading towards a
more concentrated market, still exhibits a picture of few so called major labels
detaining high market shares.
Figure 3

Source: Nielsen SoundScan (2013)

The percentages are based on ownership of catalogue and exhibit the segment of
independent labels (indies) aggregated. As Darius Van Arman (2013) co-founder of
independent label group Secretly Group noted, usual estimates consider the
distribution of catalogue, inflating the market shares of major labels even more,
assigning a stake of 28,3% to Universal, 27,8% to Sony, 18.8% to Warner and a low
14,1% to independent labels (aggregated). With this evidence on hand, it becomes
clear how the whole copyright discussion has been receiving constant highlights,
from the appearance of Napster to the current days of P2P platforms. Copyrights
represent in fact a major vehicle through which the whole industry can financially
benefit from its operations, from the labels, passing through the performers, the
publishers and ultimately the authors. The importance of the topic sets the need for a
thorough analysis of the whole copyright apparatus and its components.

3. COPYRIGHT: AN INTELLECTUAL PROPERTY

I. Definition and anatomy
According to specialized operators such as RightsDirect (2014) and the Copy
Clearance Center (2014), the definition given for copyright is a form of legal
protection given to content creators through the assignment of specific rights to
works that qualify for protection. The European Commission report on its official
website (2014) that:
Copyright and related rights provide an incentive for the creation
of and investment in new works and other protected matter (music,
films, etc.) and their exploitation, thereby contributing to
improved competitiveness, employment and innovation. The field
of copyright is associated with important cultural, social and
technological aspects, all of which have to be taken into account in
formulating policy in this field.
7

Thus, copyright is a form of intellectual property, applicable to any expressible form

of an idea and information. The World Intellectual Property Organization (WIPO)
defines intellectual property as the definition referring broadly to the creations of the
human mind. Intellectual property rights protect the interests of creators by giving
them property rights over their creations (2008). The definition goes further by
dividing intellectual property into two distinct branches: the segment of industrial
property (trademarks, patents, etc.) and, our branch of interest, copyright (artistic
creations such as books, music, etc.). A major distinction lies in the fact that, "unlike
inventions, copyright law protects only the form of expression of ideas, not the ideas
themselves. So copyright law protects the owner of property rights against those who
copy or otherwise take and use the form in which the original work was expressed by
the author (2008). This distinction has direct implications also on the very nature of
the legal protection enforced: since copyright law aims at preventing only
unauthorized use of ideas, the duration can be much longer than in the case of the
protection of ideas themselves, without damage to the public interest. Though not
being very clear in theory, in practice the distinction outlines an average protection of
20 years after creation for patents and industrial properties, as opposed to an average
length of 70 years for copyrighted works after authors death (WIPO, 2008).
The whole legal doctrine underlying copyrights theory and practice, stems originally
from the international Berne Convention, first signed in 1886. The decisions taken in
the original convention are now being regularly revised and developed by the already
cited WIPO, an international organization and forum where more than 160 countries
discuss the matters of intellectual property and subsequently bind themselves in a
commitment of compliance with the established rules. The European Union takes part
in the agreement and legally complies by means of directives. It is worth citing the
2001 Directive on Copyright in the Information Society, by which the provisions
taken priory in the WIPO treaties were enabled. Most copyright laws assign authors
two particular kinds of rights with respected to their creative works: moral rights and
economic rights. Moral rights consist in the right to be identified as the author of a
8

work, the right of integrity (dealing with alteration and distortion of the work) and the
right of first divulgation of the work. Those rights tend to not expire, according to
legislation, and often are not transferrable (civil law countries under definition of
authors right). It is worth citing that countries of common-law tradition, such as
the US and the UK, tend to assign a marginal or non-existent role to moral rights in
favor of a major emphasis on economic rights. These recognize the right of the holder
to dispose of an original work in a merely economic manner. Those rights consist of:
the right of reproduction (making copies), the right of distribution, the right of
communication to the public and the right of transformation (or adaptation).
The Berne convention set a minimum duration for copyrights of 50 years plus
authors life, today typically being 70 years plus authors life (UK, France, Italy,
etc.). After that protected period, the work is to be considered of public domain, and
therefore free of the rights originally assigned. Figure 4 shows the expansive trend of
copyrights length in the US, quadrupled in two centuries.
Figure 4

Source: tomwbell.com (2001)

II. The economic debate

As the economic research working paper no. 9 released by the ever-present WIPO in
2013 says, copyright law is
An instrument to stimulate the production and dissemination of
creative works. Economists qualify creative works as nonexcludable goods that can be reproduced at low marginal cost and
enjoyed in a non-rival way by many consumers. However, if
creative works were provided at marginal (and hence low) costs or
copied for free, creators and the associated industries would have
no direct incentive to undertake the investments to create works.
The supply of creative works in terms of quantity, quality or
diversity could fall below a level that is socially desirable.
Indeed, the fixed cost to produce content and the risks associated
with financing the production, marketing and distribution of
creative works tend to be high in many content sectors. The
establishment of a copyright system is seen as the solution to the
above market failure.
The legal framework of copyright law, therefore, is based on the economic theory
underlying the so-called public goods, goods that exhibit non-rival and nonexcludable features. Nordhaus (1969) however noted that there is a likely tradeoff to
be evaluated when dealing with non-rival goods. In fact while it might be the case
that weak property rights lead to a supply below the optimal level, strong property
rights may also create monopoly distortions to be evaluated. Following the Nordhaus
tradeoff, Romer (2002) reckons that the substantial markup on price over marginal
cost made possible by effective copyright protection creates deadweight losses that
[online file] sharing can avoid. He further affirms current copyright law means that
recordings are financed, in effect, by a commodity tax with the tax revenue flowing
10

directly to the producing firm in proportion of the number of copies that it sells. The
theory of optimal taxation suggests that this is not an efficient arrangement.
Lancefield and Amber (2011) infer that in practice, most creative content is neither
fully non-excludable nor fully non-rival. In this sense it is a quasi-public good.
Liebowitz and Watt (2006) add that copyright considers a social balance; the social
gain that is derived from the enjoyment of creative goods must be balanced against
the inefficiencies that pricing above marginal cost implies.
Figure 5

Source: PwC

11

Figure 5 provides a graphic explanation on the dynamics relating copyright to social

welfare. Lancefield and Amber suggest that under a regime of copyright like the
current one, consumers end up with a lower amount of surplus due to the higher price
implied by license costs. This results in a fewer quantity consumed, a higher
equilibrium price and an overall deadweight loss to society. Introducing the factor of
piracy and online sharing, the researchers affirm that file sharing has led to a
decline in revenue from selling music recordings and so has had a negative impact on
producer - although this is not clearly supported by all studies (Oberholzer-Gee and
Strumpf, 2007). Even if the conclusion is accepted, it does not mean that P2P
downloading has reduced economic welfare and stronger copyright would have a
positive impact on it. Posner (2005) states that economists essentially do not know
whether the existing system of intellectual property rights is [] a source of net
social utility, given the costs of the system and the existence of alternative sources of
incentives to create such property. WIPO, on the other hand, reports that statistics
are missing on the number of copyrights works and hence the quantity of creative
supplied which are meant to be positively stimulated, in part, through copyright law
(2013). Problems of quality evaluation of copyright works and non-monetary
incentives of artists have also to be taken into account when discussing the topic, the
WIPO adds. The rationale for the debate still lies in the tradeoff between the
incentive for supply of artistic works and the potential access of use for demanders.
Other commentators such as Andersen, Z. Kozul-Wright and R. Kozul-Wright (2000)
support the vision that without the copyright regime, and for all its flaws, a modern
music industry is simply not possible. Liebowitz and Watt, in their famous 2006
article, noted that it is becoming increasingly clear [] that in the face of digital
copying, copyright is not functioning as well as it once did, considering specifically
the example of file sharing and the music industry. In the paper, it is also encountered
the critique of Plant (1934) who noted that copyright may lead to inefficient
allocations of resources under the phenomena of rent seeking activities. Pollock
(2007) demonstrated that (a) optimal copyright is likely to fall as the production
12

costs of original decline (for example as a result of digitalization) and that (b) the
optimal level of copyright will, in general, fall over time. The researcher continues
by estimating an optimal term of copyright length for music and books to be 15 years,
which is substantially shorter that any copyright term and implies that existing
copyright terms are too long. Liebowitz and Watt (2006) summed the whole debate:
Since the true product demand, the temporal pattern of demand,
and the supply curves for creation are impossible to locate, no
fully convincing paper on the optimal level of protection has yet
been written. However, most papers that have addressed this issue
conclude that an optimal balance of the effects will imply a level
of protection that is neither infinite nor zero.
The results from the economic debate, despite being mixed, point in the direction of a
softer copyright policy in order to mitigate the market distortions endogenous in the
current model of enforcement on one hand, and to accommodate the new dynamics
brought about by recent technological innovations on the other. The author believes
that in discussing the matters, an analysis of the agents primarily responsible with the
practical sides of copyrights may be of help in rendering the whole framework of
study more punctual. This need for empirics leads us to the study of those agents,
which are the copyright collectives.

4. THE INTERMEDIATION: COLLECTING SOCIETIES

I. Overview and functions
Copyright collectives, also called collecting societies, collecting agencies and
collective rights management organizations (CRMO), are entities in charge of
licensing works subject to copyright on behalf of the original authors. The owners of
copyrights are involved in the collectives by means of a membership that entitles
13

them to receive payments for use of their licensed works through royalties. The
process of right intermediation typically deals with five distinctive functions:
1. Selling non-exclusive licenses to individuals and organizations;
2. Collecting the due royalties for the members;
3. Distributing collected royalties to the respective owners;
4. Entering into reciprocal agreements with fellow societies
5. Enforcing the rights according to law.
Scholars Towse and Handke (2007) describe copyright collectives as probably
unique economic institutions in that they provide a private solution to the
administration of statutory copyright law. The peculiar nature of these societies
makes copyright collectives a constant object of debate as most CCS [copyright
collecting societies] are supervised and regulated by public authorities. National
arrangements differ and range from direct political control [] to a simple
application of competition and contract law (Towse & Handke, 2007). A 2006 KEA
study highlighted how the European Commission [] wants to limit the
consequences of the monopolies that are inherent to collective rights management.
The report continues by advocating a harmonization of legal rules in relation to
transparency, governance and accountability in line with the Resolution from the
European Parliament adopted by unanimity on 15 January 2004. In addition to that,
the controversial character of collecting societies has resulted in activities that had
been scrutinized by many antitrust authorities (Zablocka, 2008). Regarding
governance, societies of this kind comply with the same legal requirements that are in
force for non-profit organizations, having members acting as shareholders. According
to the KEA report, half o the 25 member countries of the EU provide in their
legislation that the collecting societies should be non-profit organizations [Italy and
France among the others] while 11 Member States legally oblige collecting
societies to establish social or cultural funds or to allocate income to such aim.

14

Directives issued within the European Community alongside with the subsidiarity
principle have granted Member States a considerable degree of freedom in regulating
the activities of copyright collectives. As the KEA report states, however, the
directive on copyright and the information society (Directive 2001/29/EEC) and on
resale rights (Directive 2001/84/EC) call for greater transparency and efficiency in
relation to the activities of collecting societies(2006).
Figure 6 briefly describes the legal framework of four major Member States.
Figure 6

Source: KEA

15

II. Efficiency: theory and evidence

Zablocka (2008) correctly notes that the complex nature of potential economies
associated with the activity of CCS [copyright collecting societies] definitely makes
its economic analysis challenging and indeed the challenge is difficult. As
Lancefield and Amber (2011) claim the economic rationale for collective licensing
through the CMOs [copyrights management societies] rests on their ability to realize
important economies of scale so help to minimize the transaction costs associated
with the management of copyright. The specific costs to be identified are:
identification costs (for potential users), search costs and negotiation costs. Because
of the nature of their intermediating activity, copyright collectives have been
historically considered natural monopolies. Thus by granting copyright management
organizations monopolistic positions, either statutory or de facto, the legislator allows
for an increased volume of transactions to be conducted, due to dampened high fixed
costs. There are also economies of scope achieved thanks to the issuance of the socalled blanket licenses, licenses that permit the use of an entire repertoire after the
payment of a lump sum fee. However, the commentators Ghafele and Gilbert (2011)
pointed that
The development of digital technologies and the harmonization of
European

markets

pose

considerable

challenges

to

this

organizational framework. Digital music services on the Internet

exemplify the complexity of this shift. As the consumption of
music in Europe increasingly assumes digital forms, there is a
need to adapt regulatory frameworks so that legitimate music
services are not hindered by the complexity and cost of multiterritory licensing.

16

Hence the premises under which the whole concept of collective licensing was
conceived may not anymore hold true, given the very same developments that put
pressure on copyright itself, as it was already seen. Lancefield and Amber (2011) add
that natural monopolies in this market may not be efficiency enhancing if CMOs
exploit their monopoly position to raise prices or to tolerate inefficiencies iwthin their
organizations, following classical economic theory. Scholars progress by suggesting
that potential monopoly abuses might be mitigated by practices such as encouraging
bilateral monopolies (thus fostering the emergence of a counterbalancing
monopsony), price discrimination policies and direct regulations (price capping et
simila). Law scholars, like Riccio and Castiglione (2013), seem to share and support
the same vision. Snow and Watt (2005) developed an economic model implying that
copyright collectives do not offer their members as great a welfare benefit as they
could because there are also risk-sharing opportunities that are not currently taken.
The model stems from a cooperative game in which the Pareto efficient outcome
represents a situation in which royalties, instead of being analytically distributed, are
paid by equally splitting the final income of the collective. The authors affirm that the
strategy Pareto dominates the current learn then distribute rule. Ghafele and
Gilberts study (2011) tried to add some empirics to the whole theoretical work of
collective licensings costs. Commentators frequently remark ho the administrative
bureaucracy of CROMs (creates cost that would not occur if technologies were
adopted by artists themselves (Conley 2008; Battisti 2001; Hansen and Schmidt
Bischoffshausen 2007; Maloney 2007; Mutoro et al. 2007). In addition to that, the
monopolistic positions of the collectives risk putting scarce competitive pressure in
reaching a more efficient structure, with less overhead and bureaucratic costs. Using
demographic data on users of digital data material, Ghafele and Gilbert obtained
estimates on the potential inefficiencies on collective copyright management
organizations (CRMOs).

17

Figure 7.a
Potential and actual CRMOs digital royalty revenue (in EUR millions)
100

61,72

79,68

71,54

75

50

25

23,56
10,55

France

Germany

UK

Actual revenue

Netherlands

Sweden

Potential revenue

Figure 7.a reports the obtained data on the amount of royalties captured by collectives
with respect to the potential of the market, while figure 7.b exhibits the corresponding
shares.
Figure 7.b
Percentage of lost income for CRMO members

88%

France

84%

Germany

54%

UK

91%

Netherlands

75%

Sweden
0%

25%

50%

75%

100%

The evidence suggests there is a large market opportunity in digital music services
that is not being capitalized on. The result is a substantial loss of income to artists
Source: Ghafele and Gilbert

18

from European markets, comment the two researchers (2011). The average amount
collected from the European societies represents a 19% of the potential digital royalty
market. Hence, Ghafele and Gilbert demonstrated that:

The current structure of collective rights management is inefficient

at extracting value form the digital music market. Artists do not
receive sufficient royalties, commercial users suffer from high
transaction costs and prohibitive license fees, and individual
consumers suffer from insufficient access to legal alternatives to
digital piracy. New solutions should be sought to capitalize on the
market opportunity of digital music services in light of increasing
broadband penetration and changing consumer patterns in Europe.
This should help unlock the potential of digital music markets,
consolidate the single European market, increase competition in
the administration of collective rights, and provide better services
to European consumers.

As already mentioned, the debate surrounding copyrights and their usage, including
the specific case of collective licensing, suffer from a strong lack of aggregate data
and figures. Taking these limitations into account, still current research based on
models and estimates seem to reinforce the concerns regarding copyright practice that
previously emerged in the paper. Changing technologies and consumer behaviors
have been uncovering a growing number of economic distorsions and consequent
inefficiencies that strengthen an urge for discussion and reform on the matters.
To complete the framework, the special case of the Italian copyright collecting
society, named Societ Italiana degli Autori e degli Editori (SIAE) will be
reviewed in the next section.

19

5. A COMPARATIVE EXAMPLE: SIAE IN ITALY

I. The agency: status and role
As reported on its website, S.I.A.E. (Societ Italiana degli Autori ed Editori - Italian
Society of Authors and Publishers) is a multi-purpose society which administers
copyright related to all kinds of intellectual works (SIAE, 2014). Founded in 1882,
SIAE intermediates the authors rights under a regime of legal monopoly, formally
recognized with the adoption of law no. 633 of 1941 (Riccio and Codiglione, 2013).
Secondary rights, instead, are administered under a competitive regime due to a
recent liberalization carried out with the introduction of the law no. 27, dated
24/03/2012. SIAEs monopoly on authors rights intermediation is regulated by
paragraph 180 of the Italian copyright law (law no. 633 22/4/1941 and Italian Civil
Code of 1942, arts. 2575-2583):
The right to act as an intermediary in any manner whether by
direct or indirect intervention, mediation, agency or representation,
or by assignment of the exercise of the rights of performance,
recitation, broadcasting, including communication to the public by
satellite, and mechanical and cinematographic reproduction of
protected works, shall belong exclusively to the S.I.A.E.

The statutory nature of the society, grants SIAE a position of perfect monopoly, thus
operating in a non-competitive market and detaining a virtual 100% of the market
share regarding collective licensing. Rochelandet (2002) referred to the legal status of
SIAE as a concrete example of strongly restricting systems of collective licensing.
Despite the society is private in its legal form, there are multiple linkages with the
government, making it a semi-public entity in reality. Any statutory changes must
be approved by a presidential decree in accordance with the main government
ministries. The running of this public law association is subject to a permanent
20

control of the prime minister. The control is strengthened [] by the fact that some
government officials sit on the SIAE board (Rochelandet, 2002). The researcher
continues in an overall analysis of collectives in the European Union, classifying
them by degree of strength of legal supervision. Italy is the only country in the
classification ranked with extreme control in its practice. In a study by Menegon
(2010), SIAE is classified as the only collecting society in Europe substantially being
a statutory corporation. The unclear structure of the agency is darkened by a
governance system that largely differs from the other European fellow societies;
major decisions, in fact, concerning the behavior and activity of the collective itself
are taken in a general meeting of members where votes are to be counted in
relationship with the amount of royalties received in the term preceding the meeting
(art. 11.2 of the SIAE Statue, 2012). This peculiar form of governance, obviously has
the potential to foster a large variety of possible agency costs related to the
unbalanced position between majority and minor members, discriminated on the basis
of quantity of royalties received (one vote per euro of royalties). In addition to this,
the public image of the society has always been object of investigations and reports
(Sole 24h, Corriere della Sera, Espresso, etc.), recently culminated with an inquiry
regarding the dubious purchase of Lehman Brothers financial securities for the value
of 40 million of euros (T.a.r. Lazio, inquiry n. 04384/2011). The controversial
financial management adds further evidence on the possible inefficiencies of the
Italian collective, with 27 millions EUR of overall deficit for the fiscal year 2013
(SIAE, 2014). Another reason for debate has been the recent introduction of the socalled equo compenso (private copy), a lump sum tax levied on a variety of devices
capable of audio, image and movie storage and reproduction (Decree of Minister of
Culture, 20th June 2014). Harshly debated because of the potential negative effects on
the domestic retailing market (Moro, 2014), the tax appears to firmly declare a new
path for the society, which is deliberately adventuring in the realm of public taxation
while exiting its original task of simple copyright intermediation.

21

II. Performance and comparisons

In discussing the empirical side of the Italian case, the author notes that, if data
regarding the collective intermediation of music copyrights in Europe are hard to
come by, the situation for the Italian case makes no exception. In fact, figures on the
Italian market for copyrighted works, are practically absent in the public domain.
This section of the paper, therefore, draws implications from the only rigorous work
present on the matter: the empirical study conducted by Menegon (2010). The
researcher, departing from a thorough analysis of SIAEs financial statements,
revealed that the societys operative inefficiency may result in costs to consumers of
approximately 13.5 millions EUR per year higher than the more efficient
intermediating activity carried forward by fellow societies in Europe. The researcher
progresses by stating that the low efficiency rates exhibited by SIAE present
negative consequences on the entire Italian cultural industry and may affect the
diffusion of new information technologies in the domestic market. The examples
provided by Menegon, show that licenses produced by SIAE appear to cost
substantially more to music users than the corresponding same licenses granted by
PRS (Performing Right Society), the UK authors right main collecting society. In
fact, as shown by the researcher, a typical musical event held in the same type of
small sized venue in Italy and the UK could end up costing around 110 euros in the
first case and 26,61 (with GBP/EUR = 0,89) euros in the second. The case for a
venue holding up to 1000 guests may result in about 1000 euros of licensing costs in
Italy, and 117 euros in the UK. For radio broadcasts, Menegon continues, licensing
costs may represent 6% on gross revenues in Italy, 5% on revenues net of operating
costs in the UK. The researcher further progresses by stating that the Italian system
seems to be characterized by internal structural problems responsible for a gap of
efficiency, observable even when comparing analogous societies operating in
conditions of legal monopoly like the Italian case (Menegon, 2010). Additional
proofs of inefficiency regard the fees levied on private copies, resulting in distorted
22

double or triple forms of taxation on the same copyright. The costs brought about by
the private copy fee could result in losses for about 84 million of euros for domestic
retailers and operators in ICT industries. Moro (2014) notes that, despite the fact that
private copy fees are in theory to be sustained by producers, in presence of inelastic
demand those costs are entirely or majorly passed on to final consumers. Apple, in
fact, passed the whole 4 euros cost on their iPhones onto final consumers by means of
increased retail prices (2014). Given this evidence, the author of the paper compiled a
small table comparing some facts regarding the four major collecting societies in
Europe. The purpose of this brief research was to examine whether SIAEs already
debated inefficiency was in line with the performance sustained by its fellow
European collectives. The study only examined societies intermediating authors
rights, thus excluding phonographic rights from the analysis. Figure 8 shows the
results. All the data were retrieved from the societies official websites, with figures
on revenues and costs taken directly from 2012 financial reports. PRSs accounts
were converted to EUR currency using a EUR/GBP rate of 1,2408, the median rate in
2012 (sources used: x-rates.com). Due to differences in reporting methods, the most
usable measured the author were able to retrieve were aggregate revenues and
aggregate expenses. In order to obtain a raw measure of efficiency, the operating
expense ratio (OER) was used. The rationale underlying this choice follows
Rochelandets (2002) definition of collecting societies income, summarized in the
formula :
R=P-CF
Where R represents the total revenues, P is the amount distributed to the members,
while C and F are respectively the total operating costs and the social funds for
cultural activities. Thus, the higher the costs C, the lower the royalties distributed to
members. Hence the operating expense ratio is able to provide a measure of operating
efficiency: the higher the ratio, the less valuable the members residual claims.
23

The results show that SIAE financially performs worse than all the other studied
collectives: it collects fewer revenues and operates on higher costs, resulting in a
OER that is substantially double the other societies. One objection to the result could
be moved on the ground that there are potential economies of scale in the
intermediation activity that could affect costs for the fellow larger societies.
Figure 8

Comparison of major copyright collectives in Europe (based on 2012 data)

PRS
(UK)

GEMA
(Germany)

SIAE
(Italy)

SACEM
(France)

Number of
members

100000

64000

n/d

145000

Type of music
royalties
intermediated

Performing
rights

Performing and
mechanical
rights

Performing
rights

Performing and
mechanical
rights

Revenues
(2012)

801,44

820,29

535,76

802,60

Expenses
(2012)

90,50

127,93

179,30

125,21

Operating
expense ratio

11,3%

15,6%

33,5%

15,4%

Membership fee
applied on
writers and
authors

61
(admission)

60,84
(admission)
+
25,56
(yearly)

129,59
(admission)
+
151,81
(yearly)

127
(admission)

Average fee on
live events*

3% **

4-10% **

10% **

n/d

Financial
performance
(in millions)

Examples of
average
service costs

*Music events held in discotheques

**Fee levied on gross receipts of admission

Source: PRS, GEMA, SIAE and SACEM (2012)

Gilbert

24

Since data on the number of members could not be found for SIAE, there is room for
debate. Still, the author notes that the possibility is unlikely given the similar
demographic soze of the countries taken in consideration. The objection is further
contestable since GEMAs number of members is less than half of SACEMs
amount, but ratios do not appear to differ consequently. Another aspect that the
author wanted to include in figure 8 is an example of costs sustained both on the
members and the users side. Regarding authors, the example considered is that of
subscription and membership fees. The author thought that these amounts represent a
cost to be considered in the analysis since they are effectively entry costs (or even
fixed costs for yearly fees) that affect authors incentives in intermediating their
rights. Once more, SIAE delivers the least efficient results with subscription and
yearly costs that find no respective amount in the examined context. The sums paid
for publishers, though not shown, follow the same trend. The results may represent a
serious threat to incentives for Italian suppliers of copyrighted works. On the users
side, an example of the costs incurred by organizers and promoters of musical events
is taken from the fees the collectives levy on those events. These are to be considered
rough measures since the tariff structure appears to differ from country to country.
Since the most comparable fee scheme that the author encountered was the one
applied to clubs holding disco music events, that particular example was used. The
schemes usually differ by quantity of tickets sold, so an average of the fee percentage
was calculated. The author believes that the example is relevant since it helps
providing a measure of the economic incentives that affect music users and
promoters. Though proper studies should be conducted on the dynamics of these
incentives, the writer thinks that fees levied on music operators might be of
considerable influence on the domestic creative industries. SIAE appears to operate
fee structures that are surely evidently than PRSs and potentially higher than
GEMAs (data for SACEM were irretrievable).

25

6. DISCUSSION & FURTHER RESEARCH

Considering the theory and evidence reviewed in the paper, the situation of copyright
and its consequent intermediation appears to be controversial. In the wake of global
fast communication exchanges brought about by the web and digital revolutions,
copyright laws appear to be increasingly harder not only to enforce but also to have
reason of existing. Moreover the evidence shows a scenario where some copyright
collectives, striving to keep pace with this new speed and nature of ideas exchange,
have exited their original field of mere intermediation and started adventuring in the
realm of pure taxation in some cases (SIAE). The feeling is that the premises for
backing up transaction costs theories in copyright intermediation fail to hold validity
after a century of groundbreaking technological innovations that allow ease and speed
of information exchange at a pace once not barely conceivable. Rethinking the whole
legal and economic arena in which copyrights agents play thus represent a worth
taking challenge. The author thinks that any policy intentioned to pursue social
efficiency, defined as a situation minimizing waste of resources, is unlikely to go
through the path of monopolistic dynamics. Though the application of models
correlating legal enforcement to performance in copyright collectives was outside the
scope of the research, the inefficient outcomes of the Italian case, strongly enforced
by statue, might suggest issues to be addressed. The economic models analyzed on
the other side, suggest that with both fixed and marginal costs declining as a
consequence of new technologic developments, the overall concept of copyright may
benefit from a review of the current terms of enforcement. Excessive durations of
legal protection on creative works, if not adjusted, could put a cost burden on art and
ideas circulation, which the society as whole is unlikely to ultimately benefit from.
New legal models like the now famous Creative Commons (CC) have emerged,
tailored specifically for maximizing digital creativity, sharing and innovation
(Creative Commons, 2014). The licenses provided by CC opened up a whole new
set of ways for using and experiencing copyrighted material, by relieving the limits
26

posed by traditional moral and economic rights. The implied necessity is that of
accommodating the new dynamics of usage and sharing commanded by current and
future users. Concepts like robbery and piracy seem, now more than ever,
inappropriate in relationship with works that hardly can be treated, neither
economically nor legally, as mere goods. Further research is harshly needed in order
to add data on the logics underlying creative markets, from the incentives of supply to
better estimates of demand. The lack of statistics unfortunately puts evident limits on
a debate aiming at finding structures and policies able to maximize the overall
welfare of both producers and consumers. Researchers such as Boldrin and Levine
(2008) have started to firmly adventure in the discussion by proposing models for
radically changing the current framework, claiming that sustaining economic
progress will depend, more and more, upon our ability to progressively reduce and
eventually eliminate intellectual monopoly. Hence the topic appears to be of major
importance, both in the present and in the future.

7. CONCLUSIONS
This papers aim was to shed some light on the discussion over copyright and its
collective licensing habits. The European context, examined in this research,
provided evidence on the potential inefficient practices taking place in the current
music industry. A specific example of comparison between the peculiar Italian case
and other fellow societies further highlighted a deficit of convergence in the
intermediation practices throughout the European Union. Further researches are
welcomed in order to gain a sounder knowledge on the matter.

27

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