You should be paying, yeah

The Copyright Tribunal decided yesterday that nightclubs should pay around 1303 percent more than what they are paying now for the right to play recorded performances. This left newspapers this morning scrambling for ‘dance’ related headlines; for example, The Age with “The day the music in nightclubs got dearer” or ABC with “Clubs in a spin over fee increase.”

Dramatic price rises are a bit of a worry so I thought I would take a closer look at the decision itself to see what was up. For starters, it could have been worse. The Tribunal opted for a fee of $1.05 per person instead of the claim from the PPCA for $2.32. The PPCA is the Phonographic Performance Company of Australia who handles collections for artist’s recorded works. They are usually accompanied by APRA who represents the music writer’s interests. So, if the Tribunal’s decision ends up being applied to APRA too, then the total fee payable by nightclubs will be $2.10 per person. Curiously, not much about that was said.

So how was this figure arrived at. Step 1 was to try and work out what clubbers were willing to pay to have music. So many were surveyed and through various thought experiments, it was revealed that, on average, they would be willing to pay $6.97 each for recorded music being paid. Of course, this belies the fact that some clubbers would be willing to pay more and others may be only willing to pay very little.

Step 2 was then to recognise that not all music in nightclubs was copyrighted. Perhaps 20 to 30 percent was not. So, interestingly, the Tribunal knocked another 20 percent off the $6.97 to take that into account.

While some adjustment was appropriate, it is sad to see it done this way because it provides no incentive for nightclubs to substitute away from copyrighted music. Now regardless of how much of that music they want to play, they have to pay a fixed charge. Instead, they should be able to save on fees by opting for alternatives.

Such substitution is not a ‘pie in the sky’ (if you’ll pardon the bargaining pun). It was presumed that a nightclub would either have music or it would not. But since the case was just about music from a particular performer, was this the right benchmark? If we have, oh I don’t know, ‘Barbie Girl’ by Aqua shouldn’t we compare it to ‘Barbie Girl’ recorded by someone else. The $6.97 may represent the WTP for the ‘Barbie Girl’ but doesn’t necessary represent it for Aqua. No one appears to have asked the clubbers about that issue.

And by the way, there is an easy way to get that figure; just find out what it would cost to get some other performer to perform a song on behalf of all nightclubs. They could then avoid the charge to PPCA entirely. Let’s face it, with fees in the millions, it may not be hard to find a dance band to do this. My guess is that that would deflate PPCA’s share considerably.

Step 3 was to make another adjustment; to respect competition. The PPCA’s proposed fee enshrined their monopoly position. It took the average willingness to pay and treated the whole deal as if they could just take music away from the entire nightclub industry. It would be like Coke going to all supermarkets and refusing to supply. They can’t do that and ultimately are constrained by the competition between supermarkets in the prices they can charge. So it should be for PPCA and nightclubs.

The Tribunal didn’t know what to do about this and so knocked another 20 percent off. That doesn’t seem much to me. For example, going from a monopoly to a duopoly, industry profits fall by a third in some models. Add more competitors and the profit fall is larger.

The result of these adjustments was a new figure for ‘value’ of $4.19. Step 4 was to take that figure and then work out how it would be divided amongst the nightclub, PPCA and APRA. PPCA argued for a three way split. The Tribunal, very sensibly, said that PPCA & APRA were really together on this with a joint product. They decided not to treat them as two negotiators and lumped them together. So in this case a fair division would lead them to each split a half — that is 1/4. And so we arrive at $1.05.

On that score, someone has forgotten the consumers. Shouldn’t they be part of a fair division. Add them in and the PPCA’s contribution could appropriately by 1/6 rather than 1/4.

But we are not really done yet. No one wanted to worry too much about how many patrons came through a nightclub’s doors and how long they stayed (the willingness to pay calculation didn’t really allow room for movement on that). So the PPCA proposed and the Tribunal accepted that the fee payable would be based on $1.05 multiplied by the licensed capacity of the nightclub on each night it opened.

Now the issue here is complicated. On a given night the nightclub might be below capacity or above capacity. How would the latter arrive? Well, if their patrons cycled through quickly; perhaps, ironically, because the music was bad! In actuality, the best that can be said about the capacity measure is that it is a good objective measure related to size. But that is far from simply multiplying it by some average per person value to get the fee. That relationship is quite arbitrary.

The problem, of course, is that this gives nightclubs an incentive to only be open on popular nights. This is a distortion in pricing that is unfortunate. How much more sensible might have been a price giving a year long license regardless of how open the night club was? But it is not to be and so we will see that the Tribunal “can stop the music” on marginal nights.

Finally, I think (although I could be wrong) that the Nightclubs still have to fork out money to buy the CDs they play. Talk about double dipping.

So if I were to have done these calculations I would have arrived at a figure not too far removed from the current fees but based on a yearly calculation with more going to the music than the performers.

3 thoughts on “You should be paying, yeah”

  1. I’m sure there’s no shortage of up and coming bands willing to make their music available to nightclubs for free just for the exposure.

    When will the music labels realise that their traditional business model is dead. They only have two choices – cannabilise their own business and have something left, or let someone else cannabalise it and have 100% of nothing.

    And it isn’t just the new bands that pose a threat. Even amongst established artists the smart ones are beginning to realise that the real money is to be made selling concert tickets and t-shirts and are cutting loose their record labels or are only interested in preserving their own revenue stream, not maximising returns for the artists.

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  2. As a veteran professional musician and nightclub promoter, and latterly public policy masters student, I’d like to offer some comments.

    There is no doubt this move will have some tangible effects on the industry, and there are a few more factors at play worth mentioning. Firstly, I would suggest most of the PPCA/APRA revenue collection likely comes from a) venues such as leagues clubs, which operate within regulatory frameworks and aegis of the powerful Australian Hotels Association. They want to be seen to be squeaky clean and with their massive gambling revenues have no trouble paying such fees, and b) your average boozer with a juke box or these days a purchased music video playlist service. You can tell a venue with an APRA licence by the music note sticker usually stuck in a front window.

    PPCA and APRA have historically been very lax in policing venues wihtout such licences. This is probably due to severe budgetary constraints and perhaps the influence of the AHA. Liquor licensing is a state matter and those agencies can be very gung ho, but I have never heard of a licencee being pulled up because if a lack of an APRA licence. The more cynically minded might also wonder if PPCA/APRA were too embarassed to enforce regulations that are archaic and impractical (last time I asked, about 3 years ago, about licencing costomised DJ mixes for playback in cafes, as it widespread in the UK, I was told with a straight face that this was an musical “arrangement” and would require the permission of each individual copyright holder!) As if the same thing isn’t happening every night in hundreds of clubs. I have no idea how much revenue is collected for DJ performances; I suspect very little.

    So the nighclub scene has thrived, often on the fringes of legality, often popping up and closing before APRA would even be aware they existed. DJs are usually paid cash in hand and no record is kept of what they play.

    So to substitutions. A professional covers band playing small venues pulls about $800 per gig, so $1 per in a 300 capacity venue is not going to be a huge influence – a popular 300 capacity club will take upwards of $25 000 in a weekend, and then only having to open Friday and Saturday nights. I would suggest also that live bands and dance music are complements rather than substitutes; young ‘uns these days will often go to a band in the early part of the night and dance later at a club. Also, both types of entertainment are a lifestyle for many; a dance club owner is unlikely to want to run a live band venue. Alternative version of performances, thereby bypassing the PPCA, though not APRA would not be accepted by dance music customers, who give high regard to be knowledgeable about the music.

    Price based on capacity will certainly hurt those venues which prefer non-mainstream music styles, which will often be less than full and can’t command high door prices. These venues will continue to operate outside the licence arrangements or may fold. Certainly, the cost will be passed on to consumers by increasing drinks prices or cover charge.

    No, clubs don’t buy the CDs. The DJs bring their own, or they hire a computer based video jukebox system, just load up their laptops or ipods.

    In summary: you are absolutely right, an annual licence fee would have been vastly better. Niche venues will straighten up and fly right, or go undergound. Live music will be largely unaffected, although some venues will more readily consider live bands as DJ costs rise. Poker machines will hasten the pace of their insidious, evil March. House parties will make a comeback, soundtracked by pirated music on iPods, and wreathed in cigarete smoke.

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