On September 12, 2011 the EU Council of Ministers passed the copyright term extension in sound recordings from 50 to 70 years, which was proposed by the European Commission in 2008 and voted on by the European Parliament in 2009. The term extension was welcomed by the music industry bodies and several musicians. The newly appointed IFPI chairman Plácido Domingo called the extension great news for performing artists which “(…) reflects the important role performers play in success of songs by narrowing the gap between the protection offered to recorded performances and that offered to compositions.” IFPI CEO Frances Moore added that “The extension of the term of protection to 70 years (…) improves the conditions for investment in new talent.” In first statements U2 manager Paul McGuiness and ABBA’s Björn Ulvaeus applauded to the EU decision.
On the other hand, the extension is criticized by open access activists, but also by most of the academics in the field of intellectual property rights. In an open statement to the European Parliament the who-is-who of IP-law professors and economists, including Nobel laureats Sir James Mirrlees and Kenneth Arrow, opposed the copyright term extension as an ineffective and unnecessary extension of monopoly rights in 2008.
Thus, the question arises, what is the economic rational for such a term extension? What are arguments and counter-arguments and how they can be assessed by economic theory?
Microeconomic Aspects of a Copyright Term Extension
Copyright grants – beside the moral rights – a temporary monopoly to the creators of intellectual property as an incentive for a higher probability of financial rewards in the market place. Otherwise, in the absence of a copyright, this would result in an undersupply of creative works. However, the financial reward by copyright is a monopoly price, which is higher than the usual competition price. The monopolist can raise the price to a profit maximising level, which results in a transfer of rents from the consumers to the monopolist and a deadweight loss. The deadweight loss arises from consumers whose reservation price equals or lies higher than the competition price but lower than the monopoly price. The monopoly, therefore, results in a welfare loss.
This is textbook wisdom, but leads to the question of optimal copyright protection. The seminal work in this field is Landes’ and Posner’s “An Economic Analysis of Copyright Law”. They modelled the situation of optimal copyright at an aggregate level. This implies that an increasing level of protection does not only increase revenue, but also increases costs, since much creative work reuses previous work. Further, there is a competition of works. If the number of works increases the increased competition reduces the revenue obtained from a given work. In addition, we have to assume a variation of production costs across works as well as a variation in demand (and welfare) across work. Taking these factors into account, we can derive the following propositions: (1) Some production of creative works occur without any copyright protection; (2) supply of creative works increases with the introduction of copyright protection; (3) however, there are diminishing returns to protection and (4) eventually increasing the level of protection reduces the supply of creative works, since beyond a specific level of protection “(…) the cost of expression to marginal authors will dominate, so that the number of works will begin to fall” (Landes and Posner, 1989, p. 335).
We can now derive an aggregate welfare function, in which overall welfare depends on the sum of welfare contributed by each work and the total costs of producing works including administrative and enforcement costs. However, the welfare contributed by each (existing) work diminishes with the level of protection due to the deadweight loss associated with copyright protection. Thus, the overall welfare gain depends on the welfare deriving from new works, on the decline in welfare from existing works (because of the deadweight loss) and on production and administration costs. Since a term extension would increase the deadweight loss as well as production and administrative costs, it is intutive that overall welfare has to decline. This is supported by Landes and Posner (2003, p. 220) who state that a retrospective extension of copyright “(…) can’t affect the incentive to create new works, since a retroactive extension affects only the return on works already in existence (…). Retroactive extensions do not enhance incentives to create expressive works, so if those incentives are the only benefits from copyright, such extensions will increase transaction and access costs without generating any offsetting value.”
Hence, we can conclude that a copyright term extension has two negative effects: (1) the number of works that will be produced does not change at best, but is expected to diminish and (2) the costs of production and administration increase, since the size of public domain decreases. Therefore, we have to expect a decrease of social welfare by a copyright term extension.
Neo-Institutionalist Aspects of a Copyright Term Extension
The neo-institutional approach in economic sciences is based on the assumption that market transactions involve transaction costs. According to Oliver E. Williamson’s seminal book “Markets and Hierarchies: Analysis and Antitrust Implications” (1975) transaction costs are determined by the frequency, specificity and uncertainty of a transaction. Frequency of transactions means how often a (similar) contract has to be concluded. High specifity means that the outcome of a transaction cannot be used in alternative ways and uncertainty of a transaction is related to the extent of possible opportunistic behavior.
If we consider that transactions in the music business are very frequent, specific (a sound recording cannot be used in an alternative way) and uncertain (because of opportunistic behavior), there is a need to lower transaction costs by exlusive contracts on the basis of copyright. In the absent of copyright, an author would sell his work to a publisher, who acquires all property rights to commercialize the work in any manner he or she wanted to – even to edit the composition if it seemed appropriate. In return, the author is free to sell his or her work to other publishers if it provides additional benefit. Therefore the publisher’s advantage to commercialize the music work without any restrictions is outweighed by the potential opportunistic behavior of the authors to sell their music to others. To avoid the opportunistic multiple exploitation of music works by artists, the publishers have to include clauses of exclusivity in publishing contracts that required monitoring and were therefore accompanied by higher transaction costs (e.g. control costs), depending on the protagonists’ market power. With the introduction of copyright the system of exclusive contracts is based on solid legal fundaments. The publishers try to acquire all the rights to the full extent on an exclusive basis, since they want to control all resources of exploitation and to avoid the authors’ opportunistic behavior. However, it depends on the market power of the publisher to acquire the whole bundle of rights from the authors. Thus, we can observe that companies in the copyrighted industries tend to form large business entities by intergrating horizontally as well as vertically in the value-added chain, e.g. the major record companies own the world largest music publishers in order to control most of the commercially relevant copyrights. The result of this aggregation of market power is an oligopolitic market structure, in which a few companies own a very high market share. Oligopolistic companies tend to establish high market entry barriers in order to make it difficult for new firms to enter the market. In the music industry an important market entry barrier are copyrighted works, which are controlled by exclusive contracts with the authors, but also with performing artist in the case of sound recordings.
To sum up, the exclusive transfer of exploitation rights embodied in copyright law enables publishing and record companies to monopolize the commercialization of the authors’ and performers’ creative work, which leads to monopolistic competition in the music industry. Since the monopolization of music works creates market entry barriers, in the long run, there is a lack of competition and tendency towards oligopolization of the industry’s structure. If only a few market actors dominate the market, they will strive for stabilization of their market power by increasing the span of control. Therefore, they dictate the contractual terms against the authors and performers on the one hand, and they lobby for restrictive copyright laws at legislative bodies on the other – as it is the case in the EU copyright term extension.
The copyright term extension, therefore, conserves outdated industry structures by raising the market entry barriers. However, this is not only harmful to small firms, which want to enter successfully the publishing and sound recording market, but also to music industry as a whole, since there are not sufficient incentives to create new and innovation music. The major record companies can still rely on the revenue streams of sound recordings made 50, 60 or even 70 years ago. They are, therefore, not motivated enough to invest in new talent and in innovative music styles.
Above all there is another threat. Since new and powerful players from outside the traditional music industry’s value-added network, has entered the music markets, they might be interested in acquiring the valuable back catalogues of the economically starving record companies. However, it is very doubtful if Google, Apple Inc., Amazon, Live Nation and others intent to produce new music. They are just interested in exploiting existing and promising back catalogues. By granting a copyright term extension to 70 years, these new powerful players in the music business might enjoy a still longer period of monopolistic protection without any incentive for the creation of new music.
Neither the microeconomic analysis of copyright nor the neo-institutional approach support the EU copyright term extension to 70 years. As it could be highlighted, a higher level of copyright protection does neither increase social welfare nor support innovation and creativity in the music industry. Thus, the question arises, who profits from the term extension? The advocates for the copyright term extension argue in favor of the performers. However, in a study by Price Waterhouse Coopers (2006), which was commissioned by the British music industry body BPI, the gain of an initially suggested copyright term extension to 95 years would create between £ 8.4 million and £ 163.0 million in additional revenues in present value for the UK music industry. In the EU Commission’s impact assessment (p. 36) to the proposed directive (2006/116/EC) on the term of protection of copyright and related rights the extension to 95 would generate between € 44 million and € 843 million in additional revenues for the music industry in the EU. If we consider that 20% of the additional revenue will be delivered to a performers’ fund, the income share in the additional revenues between labels and performers will be 72:28 percent. This means that in the high scenario (€ 843 million) revenue of € 606 million will be channelled to the labels and € 236 million will go the performers. If we assume a market share of 80% for the four major labels, they would profit from the copyright term extension to 95 years by € 484.8 million. The rest of € 121.2 million will be divided among thousands of indie labels. On the performers side we know e.g. from collecting societies’ data that only a small proportion of authors and performers receive a high share in the revenues. Assuming the existence of a 20%-fund for performers, the EU Commission assesses that 77-90% (€ 181.7 to € 212.4 million) of the additional revenue for performers will go to 4,900 (20%) of the approximately 24,500 performers in all EU countries. It follows that each of top-20%-performers will earn between € 37,086 and € 43,347. In contrast, the rest of 80% of performers (19,600) will receive between € 23.6 million and € 54.3 million. This results in an additional income of € 1,204 and € 2,759 for each of the bottom-80%-performers. In the afore mentioned open statement of the IP-experts to the European Parliament (p. 11) they come to the conclusion that “(…) the bottom 80% of perfomers would each get 58 euros a year (…). Under the low scenario they would receive approximately 4 euros a year.”
Based on the assumptions of the EU Commission, the copyright term extension is much more in favour of the four major record companies and the superstar artists than indie record labels and less successful performing artists. Thus, one may wonder why the all the EU authorities – commission, parliament and council – supported the claim for a copyright term extension on sound recordings to 70 years? One answer can be found in a New York Times article. According to the newspaper the copyright term extension was passed with the minimum amount of votes required under EU rules. All member states with a considerable music industry – Germany, United Kingdom, France and Spain – supported the legislation. Whereas smaller and especially Eastern European countries – Czech Republic, Slovakia, Slovenia, Romania beside Sweden, The Netherlands, Belgium and Luxemburg – fiercely opposed the new law. This does not mean that these countries do not want to protect the economic interets of the performers. Instead, these countries fear that the copyright term extension will protect the main players’ interests on the biggest European music markets to the disadvantage of their markets. In an addendum to the Commission’ impact assessment, Sweden declared that “[e]xtending the term of protection for sound recordings as proposed is neither fair nor balanced. (…) Sweden believes there to be good reasons for measures aiming at improving the situation for those professional musicians and other artists who often operate under economically difficult conditions. Extending the term of protection will however not primarily be of benefit to this group.” The Belgian declaration also stresses that the extension will not improve the situation of the performing artists, but will only favour the record producers. For Belgium the extension “(…) will have a negative impact on the accessibility of cultural material such as those contained in libraries and archives, and will create supplementary financial and administrative burdens to enterprises, broadcasting organizations and consumers.” This argument is in line with the economic analysis of the term extension’s impact from a microeconomic as well as neo-institutional approach. Therefore, the copyright term extension is not an appropriate measure to improve the situation of the vast majority of performing artists and does not provide any incentive for creativity and innovation in the music industry.
Council of the European Union, 2011, Declaration of Sweden and Belgium to the Proposal for a Directive of the European Parliament and of the the Council amending Directive 2006/116/EC of teh European Parliament and of the Council on the term of protection of copyright and related rights.
European Commission, 2008a, Proposal for a European Parliament and Council directive amending Directive 2006/116/EC of the European Parliament and of the Council on the term of protection of copyright and related rights
European Commission, 2008b, Commission Staff Working Document accompanying the Proposal for a Council directive amending Council Directive 2006/116/EC as regards the term of protection of copyright and related rights impact asssement on the legal and economic situation of performers and record producers in the European Union
Landes, William and Richard Posner, 1989, “An Economic Analysis of Copyright Law.” Journal of Legal Studies, 18(2), pp. 325-363
Landes, William and Richard Posner, 2003, The Economic Structure of Intellectual Property Law. Boston etc.: Belknap Press of Harvard University Press
Williams, Oliver E., 1975, Markets and Hierarchies: Analysis and Antitrust Implications. New York: Free Press.
 Copyright Term Extension Statement by the Centre for Intellectual Property Policy & Management (CIPPM, Bournemouth University), the Centre for Intellectual Property & Information Law (CIPIL, Cambridge University), the Institute for Information Law (IViR, University of Amsterdam), and the Max-Planck-Institute for Intellectual Property, Competition and Tax Law (Munich)
 Since the copyright term is eventually was extented to 70 years, the revenue gains will be lower. However, the aim of the calculation should demonstrate the absolute value of the gains, but the distributive aspects.
 However, this is an optimistic calculation in favor of the indie labels, since they do not own large back catalogues. If we consider that the major companies own the vast majority of the commercially relevant back catalogues by acquiring most of the successful indies of the the decades, the majors’ revenue share is much higher.
 According to the New York Times: “Austria, which had also long opposed the extension, abstained from the vote on the grounds that there were not enough other countries in favor of blocking the law. But diplomats said abstaining was a way for Austria to continue to show its displeasure, but avoid angering other member states over the issue.” Tu felix Austria!