Irish Competition Authority Decisions

1. Notification was made by Mechanical Copyright Protection Society Limited (MCPS) and Mechanical Copyright Protection Society Ireland Limited (MCPSI) on 15 July 1999, with a request for a certificate under Section 4(4) of the Competition Act, 1991 or, in the event of a refusal by the Competition Authority to grant a certificate, a licence under Section 4(2) in respect of a Side Agreement between MCPS and some of its members in respect of production music.

2.1 A total of eighteen agreements were originally notified to the Authority on 30th September, 1992 by MCPSI. Two of these were membership agreements between MCPS and its own members, while the remainder were between MCPS and different categories of users of copyright in musical works, for which MCPSI acts as a royalty-collecting society. Ten of the agreements were the subject of the Authority’s Decision Nos. 569 and 570 of 8 October, 1999.

2.2 The arrangement the subject of this Decision is a Side Agreement between MCPS and those of its members who control the copyright in certain Production Music and Recordings. It is a precondition of the arrangement that the copyright owner involved is already a member of MCPS. The arrangements provide for the appointment of MCPS as exclusive agent to manage and administer the member’s Sound Recording Rights which subsist in Production Recordings, and they are supplemental to the general membership rules of MCPS.

MCPS

3.1 MCPS is a company limited by shares with its registered office at Elgar House, 41 Streatham High Road, London SW16 1ER. It is wholly-owned by the Music Publishers Association of the United Kingdom, a company limited by guarantee representing music publishers in the United Kingdom, and has operated a branch or agency in the State since the mid-1970s.

3.1 MCPSI is a wholly-owned subsidiary of MCPS, incorporated on 7 May, 1991, with its current registered office at Copyright House, Pembroke Row, Lower Baggot Street, Dublin 2. MCPSI does not have a membership in its own right, but acts as an agent for MCPS, as well as the many copyright collecting societies throughout the world who have reciprocal arrangements with it. MCPS has 371 Writer-Members and 140 Publisher-Members in Ireland. MCPSI also acts as agent for the copyright owners of musical and related literary works, in licensing the copyright in those works for mechanical reproduction on sound recordings and the synchronisation of the works to audiovisual recordings.

4.1 Production Music is music specifically written for inclusion in audio and audio-visual productions, and is normally used by facility houses and production companies . It is available on various high quality carriers, usually compact discs, for convenient and cost-effective synchronisation, or “dubbing”, into such productions. The “product” involved here, therefore, is a musical work which is exploited by means of dubbing from a Library Sound Recording containing the work, the Rights in which are directly or indirectly controlled or administered in the Territory by the MCPS Member.

4.2 The primary activity of MCPS/ MCPSI is acting as an agent for the copyright owners of musical works, in licensing the copyright in those works for mechanical reproduction on sound recordings and the synchronisation of those musical and related literary works to audiovisual recordings. In the opinion of the Authority, the relevant market in the present case is the market for the provision of intermediation services between composers and users of production music.

4.3 A wider description of copyright, and the domestic and international law which applies to it, was given in the Authority’s Decision No. 569 of 8 October, 1999 - MCPS/MCPSI/Various Agreements .

4.4 The total turnover for MCPS in the United Kingdom and Ireland for the year ended 31 December 1998 was IR£221m, compared to IR£105m in 1992. Of the end-December 1998 total, IR£4.38m (c.2%) represented revenue collected in Ireland. The major portion of MCPSI’s royalty etc. income (c.90%) is derived from commercial recording by record companies, and the proportion of its income arising from licences under the agreement which is the subject of this decision, while not known precisely, is likely to be less than 5%.

5.1 The main MCPS Membership Agreement [1] (“the Membership Agreement”) applies to all musical works, whether or not the work falls into the category of Production Music. The main agreement does not, however, cover the sound recording (or “production recording”) on which the music is reproduced for exploitation, nor does it take account of the differences in licensing which flow from the standard method by which Production Music is exploited. The Production Music Side Agreement (“the Side Agreement”) is intended to cover both of these aspects. It also makes clear that, in all other aspects, the Membership Agreement will apply.

5.2 The “sound recording rights” administered by MCPS under the Side Agreement include the right to (a) copy, and issue, rent or lend to the public copies of, the relevant production recording, (b) play the recording in public or otherwise broadcast it, including via a cable programme service.

5.3 Under Clause 2 of the Agreement, MCPS is appointed to act as the Member’s sole and exclusive agent, in respect of these production recordings. In other words, it neither owns the rights in the recording nor acts as exclusive licensee. In addition, MCPS has the same powers as agent in relation to the recording rights as it has in relation to other musical works under the Membership Agreement. These include the right to negotiate and enter into Blanket and Standard Licence Agreements with users, and to determine by negotiation or otherwise the terms and conditions (including royalty rates) of licences.

5.4 However, although MCPS generally administers all reproduction, distribution etc. rights, two specific areas are reserved to the Member as regards the production recording. One of these relates to the Discs on which the Production Music is reproduced, and which are then sent to the users of such music. The other relates to discs made and distributed for retail sale to the public, where this is outside the terms of MCPS’ Rate Card. In both of these cases, the member exercises the rights himself.

5.5 Clause 3 allows the Member to appoint his own sub-publisher or administrator outside the UK, and to be a direct member of any collecting society in any such other territory. An Irish Member may thus be a member of MCPS, while at the same time, collecting mechanical royalties for himself in Ireland.

5.6 Under Clause 4, the agreement will terminate if the member terminates the Membership Agreement.

5.6 Clause 5 disapplies, in the case of production music, the member’s (limited) right under Clause 4 of the Membership Agreement to grant licences directly himself.

5.7 The Membership Agreement generally prohibits MCPS from licensing adaptations of musical works. This is modified in the case of production music by Clause 6 of the Side Agreement. This is because the normal exploitation of production music could technically involve the making of an adaptation.

5.8 Clauses 7 to 9 apply to production music the same general arrangements for distribution of royalties and other fees, and for warranties and undertakings (and any breach of them), as apply to other musical works administered by MCPS under the Membership Agreement.

5.9 Under Clause 10 , if a Production Music Member wishes to incorporate into one of his Production Recordings music whose copyright is owned by a third party, he must get permission from the copyright owner to do this. He must also ensure that the copyright owner agrees that his work be licensed under MCPS’ standard Production Music licensing system.

5.10 Clause 11 allows MCPS to take enforcement action for copyright infringement in the Member’s name, with his consent. Clause 11 also prohibits the member from supplying production music to any user who is not party to a Code of Practice, Blanket Licence Agreement or Standard Licensing Agreement with MCPS relating to the use of such discs or the licensing of Production Music and Production Recordings.

6.1 MCPS referred the Authority to the arguments previously submitted in the context of the notification of the Membership Agreement which, it said, applied equally to the Side Agreement, given that the latter agreement could only be considered meaningfully in the context of the Membership Agreement. MCPS then focused on one particular distinguishing feature of the Side Agreement, which it felt warranted particular attention from a competition law perspective.

6.2 MCPS stated that, under Clause 5 of the Side Agreement, a Member forewent the right to direct licensing which he otherwise enjoyed under the Membership Agreement. The rationale behind this Clause was based on the unique features of Production Music. Production Music could be distinguished from commercial music since it was specifically written for inclusion in audio and audio-visual productions. These productions could be programmes or commercials intended for broadcast but could also include videos for exhibition or sale. Publishers distributed discs directly to production houses and broadcasters, who were licensed by MCPS under blanket licence, for the purpose of synchronisation or dubbing into such productions. MCPS granted licences to broadcasters and to production houses for the reproduction, transmission, broadcast, exhibition and distribution of the works and recordings. The royalty payable was set out in the rate card [2].

6.3 MCPS stated that Licensees used the production music and recordings issued to them by the Production Music Libraries themselves without the need for further authorisation, subject only to compliance with the relevant payment and reporting conditions. MCPS also issued a code of conduct to production houses [3]. The scope of the licence was more extensive than MCPS would issue for use of commercial works. For example, the user was entitled to synchronise the work without seeking specific consent and also to adapt the work - both of these aspects flowed from the unique nature of production music and its normal use. This was what users in the audio visual area wanted: a quick, easy, efficient and standard system to obtain the right to use the music, without having to wait for a licence before using the music.

6.4 Under Clause 5 of the Side Agreement, the member agreed not to grant licences directly to users and undertook to refer those seeking a licence to MCPS (or MCPSI as appropriate). The reason why the members conferred full control on MCPS of all the rights in production music and recordings was to ensure that MCPS could operate the most cost-efficient licensing mechanism for the rights; it could also ensure that there was a central operation to check that licences had been obtained and that there were no infringements. The control of the rights enabled MCPS to issue blanket licences which benefited users by giving them access to all production music and recordings in MCPS’ repertoire. MCPS submitted that, if it were possible for a member to license directly, this would undermine the value of the licence issued by MCPS and would mean that MCPS would have to seek information from its members as to whether an individual licence had already been issued. That process added time and cost to the licensing process. There were alternatives to production music, and users also used commercial music and/or non-MCPS controlled production music, depending on preference.

6.5 MCPS submitted that the purpose of Clause 5 was proportionate, in order to ensure that collective licensing of production music could take place efficiently with the maximum protection for the member, while enabling MCPS to provide the scope of licence required by users in the market. The easy access to the music provided by the system operated by MCPS had to be balanced by more central administration of the market, to ensure that such easy access did not result in large scale infringement. Finally, MCPS asked the Authority to note that infringement of copyright and non-payment of fees gave an unfair advantage against legitimate operators who respected the need for a licence.

7.1 Again, MCPS referred the Authority to the arguments previously submitted in the context of the notification of the Membership Agreement which, it said, applied equally to the Side Agreement.

7.2 On the specific issue of Clause 5, MCPS submitted that, even if it were considered that the foregoing by a member of the right to direct licensing restricted competition within the meaning of Section 4 of the Act, it improved the cost efficiency of the licensing system and enhanced the value of the MCPS blanket licence. The resulting benefits accrued to both the MCPS member and to the broadcasting and production house customers. There was no question of a potential elimination of competition because there were alternatives to production music, and users also used commercial music and/or non-MCPS controlled production music, depending on preference.

8.1 Section 4(1) of the Competition Act, 1991, states that “ all agreements between undertakings, decisions by associations of undertakings and concerted practices, which have as their object or effect the prevention, restriction or distortion of competition in goods or services in the State or in any part of the State are prohibited and void ”.

8.2 Section 3(1) of the Competition Act defines an undertaking as “ a person, being an individual, a body corporate or an unincorporated body engaged for gain in the production, supply or distribution of goods or the provision of a service ”. MCPS and MCPSI are engaged for gain in acting as a collecting society for mechanical copyright and are, therefore, undertakings. The members of MCPS are engaged for gain in creating sound recordings that are to be commercially exploited and are, therefore, undertakings.

8.3 The cumulative effect of the network of similar membership agreements established between MCPS and its “Production Music members” creates a restriction on the freedom of rights-users to purchase the global mechanical right from any supplier other than MCPSI. They also have the effect of restricting competition in the supply of rights between individual members and they involve the establishment and maintenance of uniform rates of royalty and other conditions in relation to the exploitation of the mechanical right thereby eliminating price competition. In effect, the arrangements, taken in their collective context, constitute an exclusive collective copyright enforcement system involving independent undertakings and, as such, are restrictive of competition within the State and, in the opinion of the Authority, contravene Section 4(1) of the Act.

8.4 Further, the use by MCPS of standard royalty rates in its blanket licensing system for Production Music leads to the possibility of horizontal price-fixing and, in the opinion of the Authority, contravenes Section 4(1) of the Act.

9.2 As has been noted already, the Authority’s reasoning in relation to collective copyright enforcement systems has been comprehensively set out on a number of previous occasions, most recently in its Decision No. 569 of 8 October, 1999 - MCPS/MCPSI/Various Agreements .

9.3 In summary, the Authority’s opinion is that, having regard to all the market conditions, the existence of collecting societies in the musical copyright area, and the appointment by a great many rightsowners of a single intermediary, promotes the production and distribution of services in the State , benefiting both owners and users. In the absence of collecting societies, most rightsowners would not, in the opinion of the Authority, be in a position to vigorously enforce the copyright in their work.

9.4 In the opinion of the Authority, the role that collecting societies play confers real benefits on the “intermediate” users who exploit the rights involved, and these benefits carry through to ultimate consumers of musical works. In the absence of a clear structure of rights and of mechanisms for users to safely use rightsowners’ work, many products which ultimate consumers want would not reach them, as there would always be the overhanging possibility that someone who felt his right had been infringed would injunct the user.

9.5 It could be argued that the exclusivity arrangements enjoyed by MCPS and other collecting societies might afford them the possibility of eliminating competition in respect of a substantial part of the services in question . However, the Authority considers that, while there may be other barriers to entry in these markets, the most important of them is the network externality (most rightsowners and users have large incentives to use a single firm).

9.6 The Authority is of the opinion that, in the vast majority of cases, horizontal price-fixing arrangements would not meet any of the conditions for the grant of a licence. By their very nature, such arrangements tend to lower production (and consumption) of the good or service in question and raise prices. Thus, it is clear that horizontal agreements on the terms and conditions of sale (including price) do not normally allow consumers a fair share of the resulting benefit.

9.7 The Authority does, however, recognise the very peculiar nature of this particular market. In the absence of an intermediary such as MCPS, there would be considerable transactions costs to be incurred (on the part of both users and composers) along with a concomitant risk of litigation if all copyright was not fully respected. If MCPSI was to revert to the composer in each instance as to what rates to charge, this would impose considerable transaction costs on both the rightsowner and on users - in the absence of a collecting society, the market would be characterised by frequent, costly litigation, as composers and publishers attempted to exercise their rights over their work. With this in mind, the Authority is satisfied that collecting societies fill an indispensable intermediary role between rightsowners and users. Such a regime benefits both composers and publishers (who can rely on MCPSI to act on their behalf) and users (who can legally use copyright material in a legally safe and uncomplicated manner).

9.8 The Authority considers, therefore, that the setting of fixed rates in this particular case allows users - and ultimately consumers - a fair share of the resulting benefit and does not impose on the undertakings conditions which are not indispensable . Finally, in the opinion of the Authority, the arrangements do not afford the undertakings the possibility of eliminating competition in respect of a substantial part of the products in question . The collecting society, with its crucial intermediary role, ensures that copyright can be exploited by users in a manner which increases the use of copyright material (in a manner which simultaneously gives sufficient incentive for composers to produce it). Furthermore, in the opinion of the Authority, having regard to all the relevant market conditions, the role of the collecting society does not impose on the undertakings terms which are not indispensable . As argued earlier, for MCPSI to act as intermediary but at the same time having to revert to the composer to establish the fees to be charged would defeat the purpose of the intermediation. Finally, having regard to the relevant market conditions, where for the market for mechanical rights in musical works to exist in a workable form (given the large network externality) it appears necessary that the collecting society must have the bulk of composers/publishers on its books, the possibility of eliminating competition does not, in the opinion of the Authority, arise.

9.9 As regards Clause 5 of the Side Agreement specifically, the Authority is satisfied that Production Music is a specialised intermediate product, with specific uses in relation to audio and audio-visual productions. The Authority accepts that Clause 5 is intended to facilitate users who wish to use selected Production Music pieces in their own creative processes by giving them what they want - a quick, easy, reliable and efficient standard system to obtain the right to use the music, and that it would be unnecessarily disruptive if members could, for example, grant licences themselves directly in the case of some works but not others. Thus, the Authority is of opinion that the restriction of the member’s right to license directly, which Clause 5 represents, contributes in this case to improving the production and distribution of production music, while allowing intermediate users - and ultimately end consumers - a fair share of the resulting benefit. The Authority is also of opinion that Clause 5 is indispensable to those objectives, and does not afford the possibility of eliminating competition.

10. In the Authority’s opinion, Mechanical Copyright Protection Society Limited (MCPS), Mechanical Copyright Protection Society Ireland Limited (MCPSI), and their members are all undertakings and the agreement is an agreement between undertakings. The Authority considers that the notified agreement contravenes Section 4(1) of the Competition Act, 1991. The Authority further considers that the notified agreement satisfies the conditions of Section 4(2) of the Act. It has, therefore, decided to grant a licence in respect of the agreement concerned. It considers that the licence should operate for a period of 15 years. The licence therefore applies from the date of this decision until 7 October, 2014 [4].

11.1 The Competition Authority has issued the following licence:

The Competition Authority grants a licence under Section 4(2) of the Competition Act, 1991, to the Production (Library) Music Side Agreement notified on 15 July, 1999, on the grounds that, in the opinion of the Authority, all the conditions of Section 4(2) of the Act have been fulfilled.

11.2 The licence applies from the date of this Decision until 7 October, 2014.

For the Competition Authority

Declan Purcell

Member

15 November 1999

[1] Notified to the Authority as CA/483/93E, and the subject of Decision No. 569 of 8 October, 1999

[2] Notified to the Authority as CA /487/93E, and included in Decision No. 569 of 8 October, 1999.

[3] Notified to the Authority as CA /499/93E, and included in Decision No. 569 of 8 October, 1999.

[4] This is also the date referred to in Decision No. 569 of 8 October, 1999.