CISAC Good Governance Seminar 2013

1. 1
Value added by music in public performance
and home copying: economic theory and
empirical applications in tariff setting
SGEUR13-1037
Daniel ANTAL (Visegrad Investments)
Budapest Seminar
Budapest, 27/11/2013 – 28/11/2013
Source language: English

2. 2
Private copying: blank carriers, technology-driven challenges
Characteristic devices, blank carrier life-cycle and
tariff setting methods
Analóg korszak Optikai disks. SD memory
• Quantity of private copies is easily quantified (on a minute
basis)
• Technology well understood and homogenous.
• Minute-based compensation easy to quantify and objective.
•Small private collection are recorded at home
CD and DVD, frist fixed capacity
Hardware enables expanded
capacity
• Number of private copies greatly enhanced by
technology.
•Relatively homogenous technology.
• Quantity can be estimated and adjusted for minute
• Large collections and online distribution
• Blank media rewritable, capacity is not fixed.
• Number of private copies cannot be directly
estimated from blank carriers.
• Complete repertoires can be copied at home
easily.
In 1993 the ten
years old Hungarian
private copy levy
covers 90% of the
data carriers.
By 2000 only 82% of
data carriers are
covered, but tariffs do
not represent the shift
from minutes to
megabytes.
By 2007, the
Hungarian private
levy scheme included
only 33% of the data
carriers used globally,
because of the
exclusion of digital
devices, especially
hard disks.
In Hungary, PC
hard disks are
not subject to
private copying
levy.
There is not physical connection between
blank capacity since digital compression
algorithms such as mp3 are available on
affordable hardware
Cloud?
Private copying from Germany Hungarian private copying levy InfoSoc EC law in
Hungary
New directive
Audio- and video cassettes
with fixed capacity
SSD memory, embedded
in hardware – no real blank
media
Padawan
Source: Hilbert, M – López, P. 2011: The World’s Technological Capacity to Store, Communicate, and Compute Information, Science, Vol. 332 no. 6025 pp. 60-65.

3. 3
Technological changes coupled with arbitrage opportunities on
the Single Market undermine revenue collection in some
jurisdictions
Hungary CD and combined disc time
series
-14,9%
-19,4%
-34,0%
-54,8%
-20,7% -19,4%
-21,7%
-49,9%
43,5%
-62,9%
17,3%
-29,0%
15,1%
-38,2% -37,7%
-49,5%
3,4%
-42,0%
-8,8%
-45,3%
-14,4%
-31,5%
-14,4%
-49,8%
60,0%
40,0%
20,0%
0,0%
-20,0%
-40,0%
-60,0%
-80,0%
2008/2009 2009/2010 2010/2011 Négy éves dinamika
AT
HU
SK
CZ Intergram
HU + SK
All
* Based on ARIMA times
series model of monthly data
collected by Artisjus for the time
period 1 January 2008 - 3 June
2012.
Regional dynamics and other
information suggests illegal
arbitrage trade between
AT, SK, HU
* Estimates based on collection society revenues, tariffs and
manufacturer prices of CD-R for AT, CZ, HU, SK.
Even though Stichting de Thuiskopie
v. Opus Supplies Deutschland GmbH
makes the territorial cherry-picking of
favorable private levy illegal,
enforcement is extremely difficult.
This situation creates well-measurable
loss in all three
countries. Estimates could be
used for country-to-country
analysis and proposals.

4. Benchmarking breaks down if race starts to the bottom
You can adjust your tariffs to the neighbor without in-depth analysis as long your neighbor
charges the right amount.
Private copy levy per capita
3,5
3
2,5
2
1,5
1
0,5
0
450 000 000 Ft
400 000 000 Ft
350 000 000 Ft
300 000 000 Ft
250 000 000 Ft
200 000 000 Ft
150 000 000 Ft
100 000 000 Ft
50 000 000 Ft
0 Ft
Folyóáras korrigált bevétel Mai értéken Lineáris (Folyóáras korrigált bevétel) Lineáris (Mai értéken)
• The Single Market doctrine, if applied in a simplistic way, creates an incentive to crossborder (illegal) arbitrage
trade that undermines the revenues of collection societies with higher compensation levels, as witnessed by
Stichting de Thuiskopie in Netherlands or as witnessed by Artisjus in Hungary.
• The cherry-picking of jurisdictions that do not provide a fair compensation for authors set a race to the bottom
that is reinforced by simple benchmarking. Benchmarked compensation will partly reflect the true value of the
intellectual property and partly the result of arbitrary low tariffs that are attracting trade to low-levy territorial
jurisdictions where collecting societies or governments compete for a bigger slice in the decrease pie of
compensation revenues.
• Instead of using a simplified ‘Single Market approach’ collecting societies should have a clear understanding of
the economic analysis required by competition laws to use the relevant product and geographical market
concepts when evaluating the fair balance between benefits of private copying to consumers and compensation
revenue for intellectual property (or copyright) owners.
• Instead of simple benchmarking of fees, basic market variables such as quantities (number of tracks copied in
homes), price variables, artist incomes should be compared in an economically meaningful way.
4
Data: from Stichting de Thuiskopie-WIPO survey, private copy revenues per capita taken from InfoSoc private copy exception countries.
Data: Artisjus monthly revenue in nominal and real terms, adjusted for post-litigation settlements.

5. 5
Estimating quantities, methodology, survey design
Consumer surplus estimate requires reliable quantity estimates that can be best
collected on an international basis
Deriving quantities from survey results
Tracks copied to various
carriers, millions of tracks
2011 2011 2012 2012
DVD 2209,84 45,67% 3318,55 59,69%
CD 94,60 1,96% 149,28 2,69%
Pendrive 2,16 0,04% 2,16 0,04%
Blank memory cards 0,36 0,01% 0,64 0,01%
Portable device 1432,97 29,62% 586,41 10,55%
Multimedia telephone 623,73 12,89% 671,71 12,08%
External hard disk 474,71 9,81% 830,74 14,94%
Total, #private copies 4838,37 100% 5559,48 100%
Without thorough research and analysis and using data sources other than consumer surveys, consumer
surplus estimates can be very unreliable. Several data sources must be reconciled in a consistent manner.
Consumer surplus based on TNO multiples
Consumer surplus: (Q2-Q1)*158Ft/2
s
p= HUF 158
per track
Estimated traded
value
Estimated value of
private copying
Q=25 million tracks Q=125 million tracks
Consumer surplus based on raw survey data
Consumer surplus: (Q2-Q1)*158Ft/2
Q=25 million tracks Q=4838 million tracks
Data source: ProArt-Gft survey, MAHASZ Association of Hungarian Record Companies.
Estimated traded
value
Estimated value of
p= HUF158 private copying

6. Private copying: various challenges make economic assessment
unavoidable
• Value of intellectual property changes: technological and cultural changes modify the
use of private copies. Economics deals with subjective value that is not indifferent of use.
Compensation estimates must be updated when you blank carriers or copying technology
enters the market.
• Technological changes make gradual tariff adjustment impossible, as minute-based
averaging becomes gradually impossible due to digitization and data compression. The same
data carrier hold different minutes of music or number of track in each user’s home collection
due to different compression rates applied by different devices.
• Judicial or regulatory intervention changes the assumed fair balance between
intellectual property right holders, direct or indirect payers of the compensation for private
copying and private persons or consumers enjoying the benefits – such as the ECJ Padawan
case and its aftermath (DE VG Wort/Kyocera Mita; Hewlett Packard, Fujitsu Siemens and
others; AT Amazon.com; DK Copydan/Nokia; NL ACI Adams/Stichting De Thuiskopie.)
• Gradual tariff adjustment and benchmarking reaches its limits because it uses outdated
information that does not reflect the new technology, consumption patterns and legal
situation. In the European Economic Area the use of a simplified Single Market doctrine
can create a race to the bottom, because especially small countries are motivated to offer
lower-than-fair value tariffs to attract more blank carrier trade and VAT base. (This also
affects other collecting societies outside the EEA who use EEA data for benchmarking.)
6

7. Value added in public performance – survey design for valuing the
use of music and improving customer satisfaction
7
Collecting societies value proposition must better reflect market conditions
Principle of competitive
markets
Neither collecting society
or payer has market
power
Willing buyer willing seller
Surveys to test willingness to
pay
Marginal utility principle
Evaluate incremental value of
more music performed
Marginal cost principle
Very low in public
performance, still not
necessarily negligible.
Marginal value for
intermediaries / resellers
Value proposition for
restaurants, bars, etc.
Restaurants, hotels are often unaware of the value added by music, seeing it as a little
ingredient. We can show that it is like salt: a small ingredient that can destroy customer
experience if it is missing. Very well designed surveys are needed to understand value for
customer and then value added by retail unit paying for public performance.
Comprehensive analytical framework necessary to translate survey results into competitive
royalty tariffs.
1. Choice modeling using survey representing the adult
population of Hungary,connected to private copying
survey. Conclusion: consumers generally well
appreciate music in public places.
2. Hedonic pricing cc. 500 restaurants, clubs and bars,
mainly collected by Artisjus staff. Conclusion: better
understand value added.
3. Willingness-to-pay survey with hypothetical offerings
to payers. Conclusion: better understanding the
different business risks and potential value creation for
more just and competitive customer segmentation.
4. CVM surveys conducted in DIY store and fast-food
restaurant. Conclusion: In case of dispute, collecting
societies and intermediaries can go back to customers
and check in controlled environments the actual value
added by music.
A well-designed analysis can also identify at-risk royalty
payers and prepare for competition with royalty-free
music or cheap repertoires offered by non CMOs.
Royalties sharing
principle
Risk sharing principle
Restaurants, night clubs, etc
fixed costs and investments..
Conceptual framework based on Marcel Boyer’sEquitable Remuneration for Performers and Producers of Recorded Musical Works: Underlying
Principles.(SERCIAC presentation), interpreted for tariff review in Hungary.

8. 8
CVM, choice modeling and hedonic pricing results
Well designed economic estimates not only justify tariffs, but can create better
value proposition for royalty payers.
CVM surveys result in well-behaved demand
curves for music in public places. Tariffs can be
directly validated.
Choice modeling reveals that consumers
demand music and are rather insensitive to its
price. Tariff levels are generally approved.
Hedonic pricing reveals the different value added
by different restaurants, bars, etc. – crucial for
good value proposition and risk sharing with
differentiated tariffs.
Source: Various surveys designed by Visegrad Investments, conducted by Gfk Hungary, Universitas and Artisjus territorial representatives.

9. Econometric analysis differentiates high- and low-willing-to-pay
customers
Improving existing tariff differentiation
can lead to a win-win situation. The same
amount of royalty can be collected with
less pain and less risk of loosing royalty
payers, or even increase the number of
customers who can experience high-quality
9
Economic analysis helps to
create better tariff
differentiation that is more
accepted by payers without
changing the average level
of royalties, leading to less
loss to royalty-free or cheap
repertoire alternatives.
Willingness-to-pay survey based on
new hypothetical offerings reveal that
better differentiated tariffs can
significantly improve value proposition.
music with royalties.
Source: Hedonic pricing survey conducted by Visegrad Investments (associated with Candole Parnters) and Artisjus.

10. 10
Public performance: changes in the restaurant, entertainment,
retail outlet industry makes periodical tariff
review necessary
• The structure of restaurant, leisure and retailing changed significantly over two
decades, creating chains of restaurants or retail outlets that have significant bargaining
power and professional purchasing management.
• Traditional collecting societies are facing new competitors with royalty-free or low-royalty
repertoires and they must understand the value of music to prevent market loss
for market share loss of their quality music repertoires.
• Understanding the role of music in creating value for the customer during
restaurant and bar visits, shopping or waiting experience is important in a well-functioning
market for the seller and the buyer of music. Collecting societies have the
experience, data and customer base to analyze better the economic value of the music
experience than their emerging competitors who offer cheaper or lower quality
repertoires.
• While collecting and manipulating economic evidence is time-consuming and
costly, it can greatly increase the value proposition to existing customers, defend the
customer base with highlight at-risk paying customers, or even identifying new ones.
Economic analysis helps increasing the royalty income base.
•Traditional collecting societies can use economic analysis to improve their tariff
structure and gain valuable market insight that maintains their competitive edge vis-à-vis
new (background) market players.

11. From tariffs to strategy: know your customer and understand the
role of music better than new market players
11
Based on surveys conducted on a very large customer base, we can even measure the value
of different repertoires and qualitative differences in music
1. Collecting societies with a large customer base can
significantly increase the value of their offering and
prepare for competition.
2. Customer knowledge makes tariffs more competitive
with a double gain: gives less incentive for regulatory
intervention and can further improve the market
position of a full-fledged collecting society facing new
market players that usual compete price and quality.
3. Collecting societies still have unrivalled experience,
better repertoires, customer base and human
resources compared to low-cost competitors.
4. Developed economic analysis can add significant
insight on the value of repertoires. Our research can be
as specific that we can show to restaurants how quality
repertoires can increase the customer experience to a
level where customers are willing to pay 13.3% more
for coffee or beer holding other variables constant.
5. Hedonic pricing techniques not only create better
tariffs, but give significant insight into value created by
business partners and can strengthen various strategic
partnerships with other business entities.
To prepare for
competition with
lower quality
repertoires, on the
basis of economics of
intellectual properties,
existing Artisjus
customer data and
survey data we can
calculate the value of
quality music. This
data can be shared
with professional
users who do not
have the same
resources to precisely
measure the benefit
of quality music to
their business.

12. 12
Thank you for your attention
Daniel Antal MSc Economic Regulation and Competition Policy
Pricing and economics consultant for Artisjus
Senior consultant for Candole Partners that provides policy, market
and transaction analysis in central and southeast Europe with
access to qualitative as well as quantitative local information.
Further questions:
antal.daniel@visegradinvestments.com, daniel.antal@candole.com