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volume 2
july 1999

The economic importance of music in the European Union

 





  Introduction to the music industry
by Dave Laing
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  In September 1996 the European Music Office published its report on "Music in Europe". The first part of this study, written by Dave Laing, describes the economic importance of music in the European Union. Here the author offers a short introduction to the music industry.
 
1 A complex system. In order to supply European consumers and firms with all types of music, the modern music industry has evolved into a complex system involving many different professions and organizations. This introduction to the study aims to provide a brief description of the most important areas of music industry activity.
  The music industry supplies goods and services to consumers in three main forms: sound recordings, musical instruments and concerts and other performances. In addition, music is a component part of the services supplied by broadcasters, retailers, hotels, restaurants and companies in numerous other industries.
As well as a manufacturing and a service industry, the music industry is one of the copyright and intellectual property industries. In a report on The Economic Importance of Copyright in the UK, the Common Law Institute of Intellectual Property (CLIP) includes music publishing, composers' royalties, retailing and collecting societies as among the industries which are "totally dependent" on copyright because they "could not exist without copyright protection". The CLIP report also includes musical instruments and consumer electronic goods among the industries which have an "indirect dependence on copyright". [1] Following the adoption by the Council of Ministers of a series of directives designed to harmonize copyright laws throughout the European Union, the EU has one of the highest levels of copyright protection in the world. Both the European Commission and individual national governments are also engaged in further consultations to upgrade copyright law in the context of advances in digital technology.
  Copyright protection is granted to three categories of those active within the music industry. Authors and composers have authors' rights (droit d'auteur) while performers and producers of sound recordings (usually the record companies) each have a neighbouring right (droit voisin). Neighbouring rights are also sometimes referred to as related rights.
2 The recorded music market. Figure 1 illustrates the process by which a Compact Disc (CD) or pre-recorded music cassette (MC) reaches the consumer. It traces the process from its origins in the creativity of composers and musicians to the purchase of the soundcarrier by the consumer.
  The first stage is the organization of the recording. This is usually undertaken by a record company which offers a contract to a individual performer or group of musicians. This contract normally stipulates that the company is the owner of the recording and that the recording artist will receive payment in the form of a royalty. This is calculated as a percentage of the retail price of each copy of the recording sold. The level of royalty payment is subject to negotiation between the company and the artist's representative (a manager or lawyer). For a new artist or group the gross royalty rate might be 12% while an established "superstar" can negotiate a royalty of 20% or more. In most contracts of this type, the artist is also responsible for the origination costs of the recording and for the payment of a small royalty (typically 2% or 3%) to the producer who supervises the recording process in the studio. Initially the record company covers the cost of the recording through providing the artist with a cash advance against future royalties.
 
  Figure 1: Production and sales of sound recordings
  If extra musicians are required to accompany the featured recording artist, these "session musicians" are paid a fee for their services. These fees are usually set by an industry-wide agreement between the national musicians' trades union and the representative body of the record industry. In the UK, for example, the fee for a three hour recording session is 220 ECU's for a pop musicians and 133 ECU's for the leader of a symphony orchestra.
3 Mechanical royalties. In addition to the payments to performers, the record company must pay a further royalty to the composer of the music which is recorded. Unlike the artist royalty, this "mechanical royalty" is set by national or international agreements between representative organizations of the record industry and the composers. For all European Union member states except Ireland and the UK, the mechanical royalty rate is set by a contract between the International Federation of the Phonographic Industry (IFPI) and the Bureau International des Sociétés Gerant les Droits d'Enregistrement et de Reproduction Mècanique (BIEM). The current rate is 9.306% of the published price to dealers (wholesale price) of the CD or cassette. The rates in Ireland and the UK are 7.5% and 8.5% respectively. These rates are subject to national variations and certain discounts.
  The mechanical royalties are not paid directly to the composer but to the national authors society. These societies are a unique type of non-profit organization owned by composers themselves. The authors grant the societies the power to administer most of the legal rights given to composers and other creators under copyright law. In turn, the societies act as a "one stop" for record companies, concert promoters, broadcasters and others who wish to use copyright music.
  There is only one authors' society in each European Union country and that society has reciprocal agreements with sister organizations in other countries so that it can administer the rights of foreign composers. The positive value for both copyright owners and music users of the collective administration of rights by authors societies has been recognized as beneficial by national governments and the European Commission.
  The mechanical royalty collected by the authors society is distributed both to composers and to the music publishers which act on behalf of composers. Music publishers undertake to represent composers by selling printed copies of their works, seeking recordings of compositions and finding commissions from orchestras, opera houses, orchestras, film producers, television stations or advertising companies. Each contract between a composer and his or her publisher is negotiated individually. In the popular music sphere, the publisher typically receives between 10% and 30% of the composer's earnings.
4 Manufacturing and distribution. Once the studio recording is completed, the record company makes arrangements for copies to be manufactured, for their distribution and for a marketing campaign to publicize the recording. At present, there is over-capacity in the European CD manufacturing industry and the cost of producing CD's is relatively low.
  There are various forms of distribution of sound recordings. While traditional distributors deliver to specialist record retail stores, other wholesalers or "rack-jobbers" place a selection of MC's and CD's in such places as service stations and supermarkets.
  The diagram in Figure 1 indicates the central role played by the record company in organizing the creation of the recording, its manufacture and distribution. The largest record companies will often own recording studios, manufacturing plants and distribution networks. Some are also involved in retailing, notably through ownership of direct mail companies and record clubs. All record companies have to cover the administrative costs of seeking talented artists to record and of advertising and marketing the recordings.
  The price paid by the consumer for an MC or CD can be split between a number of companies or individuals involved in the sound recording process. The Table below shows how the price of a "premium" and a "budget" CD can be split.
 
Table 0.1 Shares of retail price of CD or MC
(source: estimates)
  Retail price for 10 ECU Retail price for 5 ECU
  ECU %   ECU %  
Retailer 2.7 27   1.35 27  
Distributor 2.0 20   1.0 20  
Manufacturer 0.8 8   0.8 16  
Featured Artist 1.0 10   0.3 6  
Composer and Publisher 0.9 9   0.4 8  
Studio Producer 0.2 2   0.05 1  
Record Company 2.4 24   1.1 22  
5 Concerts and other performances. Figure 2 shows the flow of payments to those involved in the organization of concerts. The important professions in the organization of concerts are the artist's agent and the promoter. The artist's agent is a specialist who matches musicians and singers with suitable venues for their performances or with a promoter who can organize and publicize performances successfully. Musicians normally sign an exclusive contract with an agent.
 
  Figure 2: Organization and flow of payments of a concert performance
  The concert promoter is responsible for hiring the venue, for publicizing the concert and organizing all the necessary equipment needed for the concert which is not provided by the artists themselves. The artists will often provide extra musicians for concerts, a sound engineer and a "road crew" which sets up equipment on the venue stage. The promoter, in turn, may be responsible for hiring a lighting team and for the PA (public address) sound equipment. Both artists and promoters will often pay different groups of ancillary staff for a concert.
  The primary financial agreement in staging a concert is between the promoter and the agent, as the representative of the performer. This agreement can take various forms, although the key element is how far the agent can be persuaded to share the financial risk taken by the promoter. If the agent agrees to share the risk, the agreement will be based on a percentage share of the money paid by consumers for concert tickets. In general, the agent accepts a percentage arrangement but insists on a "guarantee" of a minimum amount of money which must be paid by the promoter even if the concert is not a commercial success. In smaller clubs or at festivals it is often the case that a fixed fee is agreed between the agent and the promoter. After collecting the payment for the artist, the agent takes 10% or 15% as a commission before forwarding the payment to the artist's personal manager. In turn, the manager is entitled to take a fee of between 10% and 20% under his or her contract with the performer. The promoter's other main expenses included the hire of the concert hall and the payment of a performing rights fee to the national authors society.
6 Public performance of music (live and recorded). The performing right is among the most valuable of the rights granted to authors and composers under copyright law. It gives composers the right to control the use of their works in, and to receive payment for, concert performances and any other "public performance" of music such as broadcasts, in discothèques or as background music in shops and restaurants. The authors society negotiates payments for the use of music with representatives of the various categories of music user or it publishes a tariff of payments which can be challenged at an independent tribunal. In the case of concerts in large halls, the performing rights payments made by promoters vary from 3% in the UK to 10% in Italy of the value of ticket sales.
  In all European Union countries, rights to remuneration for the public performance of recordings are also granted to neighbouring rights owners, i.e. musicians and other performers and record companies. There are national neighbouring rights organizations in each country which act on behalf of both performers and producers. In most countries the royalties paid to neighbouring rights owners are divided equally between the two categories. In Germany, studio producers are also given a proportion of neighbouring rights royalties.
  Figure 3 shows the flow of performing rights payments from music users such as broadcasters, concert promoters and discothèques. The fees are paid to the collecting societies which then distribute payments to their members.
 
  Figure 3: Performing rights payments
  As this brief description has shown, the activities of the music industry involve a chain of different professions each of whom adds value to the creative work of musicians and composers. Figure 4 summarizes the relationships of the various actors in the industry. It distinguishes between the "primary investors" which supply financial and other resources to exploit the creativity of the "originators" and those who are "secondary investors and facilitators". These include specialist professional advisers such as lawyers and accountants which provide services to both originators and primary investors.
 
  Composers/Songwriters
Performing Artists (Musicians)
  Publishers
Record Companies
Promoters
Managers
Booking Agents
Ticket Agents
Lawyers/Accountants
Promotion/Advertising
Technical Services
Studios, Manufacturers
(CD's, tapes, print)
Distribution
(Import/export, wholesale)
Retailer, Venue operators, Broadcasters
  Consumer (the audience)  
  • purchase of music (printed, sound recording), music videos;
  • "audience" at public performances venues: (a) live performance (club, concert, theatre); (b) movies, discos, karaoke; (c) background music in shops, restaurants, offices;
  • listeners to music broadcast (radio/TV)
  • subscribers to "pay" diffusion services;
  • renters, ...
  Figure 4: Relationships of the various actors in the music industry
(sources: Music Industry Advisor Council (Australia) — Report to Government Camberra, May 1993)
   
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  Notes
1. Price, Tristan (1993), The economic importance of copyright. London: CLIP, 1993. Return to text
   
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