My blog post of last week has been rewritten to become an opinion piece in today’s Age (click here). The main interest for me in doing this was to see what dance-related headline they would come up with. The subs at The Age had to go back to one hit wonder Le Barge with “Rhythm of the night fills music coffers.” I had proposed the relatively simple “Fee Fever.” 

Rhythm of the night fills music coffers

The Age, 16th July, 2007.

The music copyright fee causes some unnecessary headaches for nightclubs, writes Joshua Gans.

THE Copyright Tribunal recently decided nightclubs should pay about 1300 per cent more than they are currently paying for the right to play recorded music. Dramatic price rises are unusual, so how did a respected judicial body reach such a controversial conclusion?

First note that it could have been worse. It opted for a fee of $1.05 per person instead of the claim of $2.32 from the Phonographic Performance Company of Australia, which handles the collection of fees for artists’ recorded works. The Australian Performing Rights Association, which represents music writers’ interests, usually accompanies the PPCA.

So, if the tribunal’s decision is applied to APRA too, then the total fee payable by nightclubs will be $2.10 per person.

What the tribunal did was construct a “hypothetical bargain”. This is something economists might do to work out a fee but it is the hypothetical part that makes it a tough exercise. In bargaining, the first issue is, what is the size of the pie? What value comes from the fact that copyrighted music is being played in nightclubs? Clearly, nightclubs like it because their customers like it. So the tribunal looked at evidence on that.

The PPCA’s consultants surveyed clubbers. Not an easy task. It asked them to consider hypothetically how much they might spend to come to a club with or without music. The without music option would make it more like a bar. Nonetheless, the survey resulted in an average price of $6.97 per person per visit.

In bargaining, even a monopolist such as the PPCA couldn’t expect to claim all of that value — much as it might like to. For starters, not all music in nightclubs is copy protected. Perhaps 20 to 30 per cent is not. So, interestingly, the tribunal knocked 20 per cent off the $6.97 to take that into account.

While some adjustment was appropriate, doing it this way is problematic because it provides no incentive for nightclubs to substitute away from copyrighted music — regardless of how much of that music they 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 “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 Barbie Girl by Aqua, shouldn’t we compare it to Barbie Girl recorded by someone else? The $6.97 may represent the consumer value for Barbie Girl but doesn’t necessary represent it for Aqua. No one appears to have asked clubbers about the issue.

And, by the way, there is an easy way to get the figure; 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 the 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 the PPCA’s share considerably.

Even stepping past this for the moment, the PPCA’s proposed fee enshrined its monopoly position. It took the average value and treated the whole deal as if it could just take music away from the entire nightclub industry. It would be like Coke going to all supermarkets and refusing to supply. It can’t do that and ultimately is constrained by the competition between supermarkets in the prices it can charge. So it should be for the PPCA and nightclubs. The tribunal recognised this and so knocked another 20 per cent off the value calculation.

The result of these adjustments was a new figure for “value” of $4.19. In bargaining, parties will arrive at a fee that divides this up. But among whom? The tribunal considered its division among the nightclub, PPCA and APRA but not consumers. The PPCA argued for a three-way split. The tribunal, very sensibly, said the PPCA and APRA were really together on this with a joint product. It 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. And so we arrive at $1.05.

In the proceedings, it appears that 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.

This is a complicated issue. On a given night the nightclub might be below capacity or above capacity.

This might occur if their patrons cycle through quickly — perhaps, ironically, because the music is bad! In actuality, the best that can be said about capacity is that it is a good objective measure related to size.

But that is far from simply multiplying capacity by some average per-person value to get the fee. The relationship is quite arbitrary. What is more, the nightclubs or DJs still have to fork out money to buy the CDs they play. Talk about double-dipping.

The problem is that the fee gives nightclubs an incentive to open only on popular nights. A price giving a year-long licence regardless of how often the nightclub opens might have been more sensible.

There is some sense to the whole exercise but also some arbitrariness. A reasonable economist could easily have come up with a much lower figure and a yearly calculation to make management issues much easier.

Joshua Gans is professor of economics at Melbourne Business School. He writes on these issues at www.economics.com.au.