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When Record Companies Still Had Record Profits…

Sorry for the pun. This is my final post summarizing the highlights of British 1994 report on recorded music. Here, you can find some vintage discussion of whether record companies were too profitable then:

  • In a letter dated 26 November 1993, we informed the companies of our provisional finding that they (and their subsidiaries in the UK) were members of a complex monopoly group, within the meaning of the Fair Trading Act, which engaged in one or more of the following practices: adopting similar pricing policies to each other for the various formats (CD, music cassette and vinyl) of `full-price’ albums and singles; declining to license imports of some sound recordings in which the company holds the copyright and licensing others only on payment of a fee under the MCPS/BPI import scheme; and entering into contracts with artists which include terms that restrict the artists’ ability to exploit their talent fully and restrict competition in the supply of recorded music (eg in clauses relating to the extent of copyright acquired, length of contract, exclusivity, options, obligations to exploit recordings, royalty rates, packaging and other deductions from royalties, and/or arrangements for accounting for and auditing royalties).
  • Another important difference between the two markets which affected the relative costs and risks was the higher level of advances and royalties paid to UK artists than US artists. Record companies in the USA paid lower average artist royalties than their counterparts in the UK and, as a result, lower advances. Another factor which helped to keep US advances below the level of those in the UK was that the competition for finding and signing new talent was less fierce in the USA than the UK, since the wider geographical dispersal of potential artists in the USA meant that US A&R departments were less likely than those in the UK to be bidding against rival record companies in particular cases
  • We asked the companies whether the terms of their contracts with artists amounted to an exploitation of the monopoly situation. The companies said that the contracts they had with artists did not reflect any lack of competition between record companies to secure and retain those artists’ services; although there were similarities in the legal structure of contracts, the key terms, including advances, royalties and term, were all vigorously negotiated in each case. There was nothing to suggest that the potential rewards were insufficient to attract an adequate supply of recording artists and indeed the size of advances and royalties had increased substantially in recent years, reflecting a shift in the balance of power in favor of the artist at the expense of the record company. In this sense, therefore, there was no market failure. At any one time, there was active competition for the services not only of new artists but also of established and superstar artists. The terms of artists’ contracts did not, therefore, present an obstacle to expansion by established record companies or to new entry by companies currently outside the industry. While it was true that the opportunities for buying-in established and superstar artists would be enhanced if the duration of artists’ contracts were shortened, such a development would result in a shift by established companies from their well-tried policy of developing their own artists. Moreover, only the larger record companies with deep pockets would be able to take advantage of such opportunities.
  • As to retention of copyright, there was no benefit to the public interest in a successful artist acquiring control of the copyright in his recordings. An artist’s only avenue for protecting and exploiting his copyright was to license it to a record company and this was achieved by auctioning it to the highest bidder. The consumer did not benefit because he was primarily interested in the artist and only to a limited extent in the particular label on which the recordings were released. There was a public interest in freedom of contract as well as in freedom of trade and in so far as the artist accepted contractual obligations, he or she received consideration for so doing in the shape of greater remuneration or remuneration on a more attractive basis than if those obligations had not been accepted. Where freedom of contract was abused, the law provided redress. But the expenditure by a record company on an artist represented an investment risk which would benefit both the artist and the record company if the risk paid off; if it did not, the record company would lose its money, whereas the artist would not only lose nothing but would also have received substantial advances on royalties which he or she would be under no obligation to repay to the record company. Investment in nine out of ten artists was not fully recouped.
  • Far from restricting artists’ ability to exploit their talent fully, artists’ recording contracts were precisely the means by which they were able to exploit that talent. A recording contract gave an artist not merely the opportunity of a recording career, but also the chance to earn significant income from touring, publishing, merchandising deals and public appearances. The artist could also exploit his or her talent by taking on session work, producing, remixing and soundtracks; the record company received no income from these activities, yet without the initial investment by the record company, these opportunities would not become available. If material modifications were made to the key provisions in recording contracts, dealing in particular with the extent of copyright acquired by the record company, the length of the contract and the exclusivity provisions imposed on the artist, then the companies would be forced to take a much more short-term view of their relationship with artists, which would not only be detrimental to the long-term development of those artists, but which would inevitably mean that the companies would not be able to invest as widely in new UK artists as they did at present. This would have the wider effect of reducing the numbers of artists who signed with UK record companies, to the detriment of UK artists and the industry alike. PolyGram added that the record industry could not be viewed in pure risk reward terms because, first, the services supplied by artists were not homogeneous and the industry was characterized by extremely high rewards for a few stars; secondly, the star artist was in an extremely strong bargaining position; and thirdly, other than in relation to star artists, there was an endemic oversupply of talent in the industry.
  • EMI said that record companies operated in a highly competitive environment, with intense competition on signing and retaining artists, on price, on marketing and promotion and on obtaining shelf-space for their recordings. They faced a constant threat from new entrants and were squeezed between powerful suppliers, in the shape of artists, supported by expert managers and lawyers, and powerful buyers, in the form of large retail chains. They had responded to this competitive pressure by offering consumers choice, quality and innovation at reasonable prices.
  • The industry was competitive, according to the usual criteria by which competitiveness was assessed. First, profitability was modest. Secondly, concentration in the market was also modest, particularly by comparison with the USA or France. Thirdly, all the evidence pointed to relatively low barriers to market entry; there was a vibrant and dynamic independent record sector which competed actively and very successfully with the major record companies.
  • Artists’ contracts – the practice: There was no such thing as a `standard form’ recording contract. All recording contracts were actively negotiated on an individual basis, often in circumstances where a number of companies were competing fiercely with each other to sign a particular artist. The negotiating process could take anything from six weeks to three months. Artists were almost invariably represented in the negotiations by lawyers and managers whose job it was to ensure that the terms finally agreed were the best that could be obtained. Not only were there very wide variations in the terms offered by each company, but each of them might well have a very different approach to the relationship with its artists. Moreover, it was quite wrong to suggest that the companies regarded many of their terms as non-negotiable; record companies were responsive to requests to renegotiate contracts, particularly, but by no means exclusively, in the case of successful artists.

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