Affected market: Distribution of equitable remuneration due to performers from the broadcast and public performance of sound recordings on which they have performed
The OFT’s decision on reference under section 33(1) given on 2 May 2006. Full text of decision published 11 May 2006.
Phonographic Performance Limited (PPL) is a not-for profit organisation of UK record companies that grants blanket licences and collects the fees from those licences for public performance and broadcasting of sound recordings in the UK. As a collecting society, PPL distributes the fees collected to its record company membership, to performers' organisations and directly to some performers. PPL also collects revenues for and from overseas collecting societies and subsequently distributes these to some UK performers.
The Performing Artists’ Media Rights Association Limited (PAMRA) is a not-for profit organisation that collects revenue from PPL and from certain overseas collecting societies and distributes it to its members, who are performers (but who do not receive fees from PPL directly).
The Association of United Recording Artists (AURA) collects revenue from PPL and distributes it to performers who do not receive fees from PPL directly. It also has minimal trade association activities.
The collection and distribution functions of PAMRA and AURA will be fully integrated into PPL, subject to the consent of the members concerned. All current mandates for the collection of equitable remuneration held by PAMRA and AURA will be transferred to PPL, and performers will receive their remuneration generated from UK performance and broadcasting directly from PPL. It is also expected that PPL will substitute PAMRA in the agreements PAMRA has with some overseas collecting societies. Following the transfer of mandates, PAMRA and AURA will be gradually wound up.
The parties state that the transaction aims at creating efficiencies by reducing the costs involved in allocating remuneration to performers. In addition, it should facilitate the collection of overseas revenues due to UK performers, and resolve AURA’s financial difficulties.
The OFT’s administrative deadline for deciding whether to refer the merger to the Competition Commission is 2 May 2006.
As a result of this transaction, PPL, PAMRA and AURA will cease to be distinct. The OFT is satisfied that the parties are ‘enterprises’ for the purposes of Enterprise Act 2002 (the Act). The parties overlap in (i) the distribution of equitable remuneration due to performers in respect of the exploitation of recordings of their performances in the UK and (ii) the collection and distribution of overseas income to performers. Following the transaction, PPL will have almost 100 per cent of the distribution of UK income to performers and therefore the share of supply test in section 23 of the Act is met. The OFT therefore believes that it is or may be the case that arrangements are in progress or in contemplation which, if carried into effect, will result in the creation of a relevant merger situation.
Broadcasting or playing a sound recording in public in the UK requires a licence from the owner or exclusive licensee of the copyright of the relevant sound recording if the recording is still protected by a copyright. These licences attract a fee which is ultimately paid to both record companies and performers. In the UK, the obligation to pay equitable remuneration to performers is placed upon the record company rather than the broadcaster or the music user. Almost all record companies are members of PPL and have assigned their collection rights to that organisation, which in turn grants blanket licences to music users for the right to publicly broadcast its members’ music. There are a few independent record companies that are not PPL members and therefore may collect fees from music users directly.
After costs are deducted, the revenues from licence fees are distributed to the record companies and to performers at a 50:50 ratio. This split (equitable remuneration) was agreed between PPL and organisations representing performers following the implementation of the EU Rental Rights Directive (the Directive) in 1996, when equitable remuneration became payable in the UK. Remuneration was previously distributed to performers on an ex gratia basis.
PAMRA and AURA, unlike PPL, are not licensing bodies and do not collect fees from UK music users directly. They are only involved in collecting UK equitable remuneration from PPL to distribute it to their members.
Performers can either register directly with PPL to receive their UK income, or mandate PAMRA or AURA to collect their payments from PPL. Performers can also appoint managers or commercial agents to collect their performance remuneration on their behalf from PPL, PAMRA or AURA.
Both PAMRA and AURA deduct their own administrative costs (which are already net of PPL's costs) from the payments due to each of its members at a rate of 7.5 per cent and 5 per cent, respectively. Third parties suggest that the commission charged by agents or managers may be as high as 30 per cent.
UK performers are also entitled to equitable remuneration as a result of the exploitation of their performances embodied in sound recordings in territories outside the UK. These are collected from the relevant overseas collecting society, who had in turn collected licence fees from music users in their respective jurisdictions.
The parties submit that some overseas collecting societies refused to pay revenues due to UK performers because PPL was perceived to operate like a commercial business, the UK distribution system was complex, PPL was not regarded by many as being a performers’ association and some societies refused to deal with collecting societies that deducted an administration fee from remuneration due to performers. In view of this, since 2003 PPL has collected overseas revenue on behalf of PAMRA and AURA; this arrangement is known as the ‘UK Single Pipeline’.
PAMRA still collects revenues from some overseas collecting societies on behalf of its members, and a number of mostly high-earning performers collect overseas revenues directly – or through commercial agents or managers.
FRAME OF REFERENCE
The relevant activities are the distribution of equitable remuneration due to performers in respect of the exploitation of recordings of their performances in the UK and the collection and distribution of overseas income to performers.
The overlapping activities may be considered taking collection and distribution separately, or by taking UK and overseas revenue separately, or even in three separate frames of reference - distribution of domestic income, distribution of overseas income and collection of overseas income.
The OFT has not found it necessary to conclude on the precise product market definition as the competition assessment is not affected by the conclusion on this. The parties provided information on domestic and overseas activities separately.
The geographic scope appears to be the UK. Distribution of income mostly takes place within the UK and overseas income is collected by overseas agencies which are then handed to the relevant UK agency for distribution.
However, the OFT has not found it necessary to conclude on the precise geographic market definition as the competition assessment is not affected by the conclusion on this. The OFT has focused its examination of the merger on a UK wide basis.
Following the acquisition, PPL will increase its share of supply of distribution of equitable remuneration due to performers from income arising in the UK to almost 100 per cent and of collection and distribution of performer income generated overseas to over 25 per cent. However, there is no evidence that there is currently competition between PPL, PAMRA and AURA, as it will be discussed below.
The evidence received from the parties and from third parties suggests that PPL, PAMRA and AURA do not compete for performers to use them to receive fees. The OFT has not received any persuasive evidence of switching between PPL, PAMRA and AURA. In fact, a number of performers were not even aware that they could switch between the three organisations or that they faced additional costs to receive their equitable remuneration through PAMRA or AURA. This may reflect the differing profile of PAMRA members and AURA members. While AURA's bulk of members consist of high-earning featured performers, the majority of PAMRA members are non-featured artists.
PAMRA and AURA both charge a fee on top of the costs deducted by PPL, and there is no evidence of price competition between them. Although in theory performers do not receive any additional services for the extra fees charged by PAMRA and AURA, a number of performers suggested that PAMRA ensured that they were being properly and accurately paid by PPL (we did not receive comments from any AURA members during this investigation). However, there is no evidence that this constrained the level of service provided by PPL and AURA.
According to the parties, and supported by third parties, PAMRA and AURA were not established to compete with PPL but to replace it following a change in the law through the implementation of the Directive in the UK. It was assumed by the founders of PAMRA and AURA that performers would be granted the right to collect performance and broadcast income directly from music users. The OFT was told that, at that stage, performers were actively encouraged by the Musicians Union to join PAMRA on that basis. However, when the UK Government came to implement the Directive, it expressly prevented performers from collecting UK income at source themselves, whether individually or through collective organisations. Therefore, PAMRA and AURA were set up to operate as collecting societies, but effectively could not do so.
In relation to international revenues, since the UK Single Pipeline was created, any competition in the collection of overseas monies was virtually eliminated and therefore the merger will have little effect on competition in this area.
This merger does not raise any vertical issues.
THIRD PARTY COMMENTS
While a number of PAMRA members were concerned with this transaction, most other third parties – including some PAMRA members - were positive about the merger and the effects it may have on the efficiency of collection and distribution of equitable remuneration, particularly in respect to overseas collection.
The concerns raised by PAMRA members were unrelated to competition; some submitted that PAMRA protects their interests towards PPL and record companies, and a number of performers claimed that after PAMRA was created they started to receive better remuneration. However, it may be the case that the remuneration rise was due to the 50:50 split agreed in 1996 rather than by any action by PAMRA.
A number of third parties also mentioned that the merger will raise a conflict of interest since PPL is a record company organisation and will be in charge of distributing all UK remuneration to performers without having PAMRA or AURA as a counterbalance. PPL submitted that it intends to implement certain corporate governance mechanisms to ensure that performers would be adequately represented in PPL post merger, which would give performers more control over the allocation and distribution of their share of income. In any case, these concerns are not related to a lessening of competition and the merger is still subject to approval by the relevant corporate bodies of the parties.
Although this merger will remove the choice performers currently have between PPL, PAMRA and AURA, there is no evidence or concern expressed by third parties that that the three organisations are currently competing.
The considerable evidence gathered during the course of this investigation demonstrates an absence of material competition between the parties in terms of fees or customers switching (indeed many were unaware they could). Although some PAMRA members perceive that they receive a better service than they would from PPL, there is no evidence that this has constrained PPL and AURA. The parties were not established to compete with each other but to offer a service under two different legal regimes, one of which failed to materialise, and they have evolved to serve different customer groups. Furthermore, following the creation of the UK Single Pipeline, PAMRA is only marginally involved in the collection of overseas monies, while AURA is not involved in it at all.
In view of all the above, the OFT does not believe that it is or may be the case that the merger may be expected to result in a substantial lessening of competition within a market or markets in the United Kingdom.
This merger will therefore not be referred to the Competition Commission under section 33(1) of the Act.