The Value Gap in Music Markets in Canada and the Role of Copyright Law

Abstract

This paper examines a number of key questions relating to Canadian copyright law and it’s impact on the music market in Canada including:

1) Whether Canadian Copyright law has adapted well to the digitisation of content and the spread of the internet over the past 20 years? If not, how did we arrive at this outcome, and what offers a better legal approach? and

2) What are the economic consequences of any weaknesses identified in Canadian copyright law relative to the better legal approach? In particular what is the extent of the total “Value Gap” in recorded music these weakness may have generated, where the “Value Gap” refers to the disparity between the market value of creative content accessed by consumers, and the revenues received by the artists and businesses who create the content. The Value Gap occurs when third parties commercially exploit artists’ creations online without fully compensating them for their market value, or at all. And finally

3) How does the total value gap in recorded music break down by music market segment, in particular music video streaming (YouTube), audio streaming (Spotify etc.), radio, downloads (iTunes etc.) and physical sales (CD’s etc).

In short this paper identifies weaknesses in statutory copyright law in Canada, explores their adverse consequences for artists and other music stakeholders, and measures the consequent size of the value gap in the recorded music industry in Canada. The paper identifies the weaknesses in statutory copyright law in Canada in the extensive limitations, exceptions, and immunities in current statutory copyright law, and isolates a better approach. The many exceptions, limitations and immunities to copyright in Canadian statutory law have together led to the situation where the authorization of rights holders is effectively not required for use of creators’ works. As a consequence this has caused a large Value Gap to emerge that continues to grow.

The paper shows that from the outset Canadian statutory copyright law created a very weak liability regime, that was then both very slow to adapt, and further badly adapted to new technological developments associated with the Information and Communications Technology (ICT) industry revolution. Canadian Copyright law is shown to have consistently failed to adapt well to technological developments in ICT since the first use of the electromagnetic spectrum to support Radio from the 1920’s, through to the use of the internet to support the distribution music from the 1990’s.This has led to the weakening of the rights of copyright holders over time.

The analysis in the paper confirms not only that the Value Gap due to poor copyright law exists, but also that it is considerably greater than many observers have previously concluded. Furthermore, the paper confirms the Value Gap continues to increase, even with the growing popularity of music streaming services. The evidence reviewed suggests the value gap will continue to grow unless federal policymakers in Canada implement measures to prevent the unauthorized commercial exploitation of creative works and thereby ensure that creators are compensated at fair market rates. Specific solutions in terms of law reform are further identified.

The extent of the Value Gap as a result of poor copyright law is summarised in three key numbers (in CAD):

● $19.3 billion: the cumulative Canadian recorded music Value Gap over 20 years since 1997.

● $1.6 billion: the music industry Value Gap in Canada in 2017 alone. Absent this gap, 2017 revenues would have reached $2.2 billion – nearly four times the actual revenues of $570 million.

● $82 million: the average annual increase in the Value Gap from 1997 to 2017 in Canada.

A significant source of this weakness is found in the “safe harbours” in the Copyright Act that exempt active intermediaries like YouTube from paying market royalties to creators when musical works are commercially exploited on their service. This undermines the ability of right holders to enforce their rights in digital music distribution, thereby allowing these commercial intermediaries to avoid compensating rights holders, wholly or in part. I estimate the Value Gap or deficit between the market value of the music distributed by YouTube and what it pays to creators as a result is alone contributes approximately $550 million per annum to the total value gap in Canada.

Other exceptions in the Copyright Act increase the gap between the market value generated by music consumption and payments to right holders. In each case, commercial music users exploit recordings for commercial gain, but little to none of the economic value is passed on to creators. Simple examples include:

• The radio royalty exemption, which exempts commercial radio stations broadcasting sound recordings from paying royalties on their first $1.25 million in advertising revenue; and

• The definition of a “sound recording” used in TV and film soundtracks, which effectively exempts royalty payments to performers and creators (but incongruously, not songwriters, composers and music publishers) when their recordings are played in TV and film soundtracks.

Keywords: Intellectual Property, Copyright Law, Economics

JEL Classification: K11, K29