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.