'Musica Ex Machina': SCF conference, 27th October 2008

John Kennedy, IFPI

Good afternoon,

My name is John Kennedy and I am the chairman and chief executive of IFPI, the organisation that represents the recording industry worldwide.

Recorded music is a business that generates huge value for many different sectors, from retailers to restaurateurs, broadcasters to nightclubs.

Commercial third parties play recorded music for many reasons – some of them quite unusual.

In Rotterdam, for example, the public transit system plays certain types of music to disperse crowds of youths who hang around bus and train stations. It was felt these young people would think that Beethoven was too ‘uncool’ to be associated with!

Meanwhile, in the UK, a study some years ago by the University of Leicester found that farmers who played recorded music to their cattle got a better yield of milk.

However, most businesses that play recorded music use it to attract customers, improve employee productivity and drive commercial growth.

Over the course of the summer, IFPI and several music licensing companies commissioned a report from PriceWaterhouseCooper to study the rates paid by third parties for the use of music worldwide and see if the commercial value of music could be quantified.

PWC found that royalty rates are often set by government agencies, courts or tribunals. These bodies often made decisions that were inconsistent and based on flawed reference points - such as unrelated royalty payments - and failed to address how recorded music was being used in any given situation.

The study concluded that a broader view should be taken by these bodies to ensure sound recordings are valued using fair and objective criteria, based on robust economic analysis.

One area the study looked at in detail was broadcasting. In most countries, broadcasters pay a royalty for the use of recorded music, but the rates they pay do not reflect the value of recorded music to them.

The global commercial radio advertising market was estimated at US$34 billion in 2006 - yet only one per cent of advertising revenues, or just over US$190 million, flowed back to the record companies that invest in the music radio stations need.

Corporate radio is therefore squeezing incredible value from recorded music and the PWC report confirmed this analysis.

It reviewed a 2004 study of the Canadian commercial radio industry that showed recorded music accounted for 76 per cent of airtime between 6am and midnight, excluding commercials.

Compared to news and other content, conservative estimates showed that music generated around 62 per cent of advertising revenue. That suggests that music-related royalties should have represented a similar share of broadcasters’ programming costs, but, as we know, that is not so.

The PWC study also looked at the public performance of recorded music in restaurants and nightclubs.

It noted that field experiments are sometimes an appropriate way to assess the value of performance rights. Analysing the impact of the use of music on sales offers an objective way of determining a fair price for recordings.

A British study from 2002 found that playing certain types of background music in a restaurant led to customers paying an additional £2.80 per head, compared to when there was no music being played. The quantified value would have been even greater if the role of music in attracting patrons had been included.

Another methodology that can be used for setting rates is determining the end-consumers’ willingness to pay for music, even when it is not provided as a discrete product or service.

For example, the price of a drink at a bar is driven by characteristics such as size and quality, the class of the bartender’s service and the ambience of the bar, including whether or not it plays music. Statistical analysis of the effect of different product attributes on its price can show the consumers’ maximum willingness to pay for music. This in turn can indicate the level businesses are prepared to pay for the right to play recorded music.

Using this ‘willingness to pay’ framework, research in Australia found the average nightclub patron was willing to pay A$6.97 for music in a nightclub. Adjusting for the contributions of other stakeholders, the Australian Copyright Tribunal determined the price of using protected sound recordings at nightclubs was A$1.05 per person - an increase of 1,400 per cent on the previous rate for sound recording performance rights.

Other research has shown that retailers also benefit from playing commercial music. Third party studies show that playing certain music can improve consumers’ perceptions of a retail store and drive patronage.

Music can also influence the purchasing decisions.

One academic study placed French and German wines of the same quality in a supermarket and played typically German or French music on alternate days. When the German music played, German wine outsold French by two bottles to one. When French music played, French wine outsold German by five bottles to one.

Factory and call centre managers can also use music to their advantage.

Academics have undertaken studies quantifying workers’ moods in a computer assembly plant, finding that playing music employees liked led to mood ratings that were 20.1% higher than when no music was played and 14.2% higher than when “neutral” music was played.

Independent research undertaken in the back office of a UK high street bank demonstrates that repetitive, mundane or undemanding tasks will generate a better level of performance if fast music is played to the workers.

At the cheque clearing centre 72 workers were played fast, slow, and no music, over three weeks. Fast music led to 12.5% more cheques being cleared than did no music and 22.3% more cheques being cleared than to slow music. The study concluded music aids the performance of tasks as it increases the arousal levels of the workers.

There is no doubt that music is a hugely efficient tool for a huge variety of commercial businesses to use. Record companies are the drivers of the music industry. They invest up to 20 per cent of their revenues in discovering and nurturing talent. They are overwhelmingly the largest investors in artists’ careers

Many of these companies are small business themselves, others are faced with unprecedented commercial pressures as new technology means it is easier for internet users to illegally obtain music without payment.

The record business is also driven by changing public tastes and investment in any given artist is always uncertain to give a return. It is estimated that around one act in every ten signed is commercially successful.

That is why part of the revenue earned from those successful acts, through royalties or record sales, needs to be ploughed back into new talent, to ensure that consumers have enough choice going forward.

As the record industry diversifies and income from performance rights licensing becomes more and more important, it is essential to establish fair rates for the sound recording performance rights. The more widespread use of robust economic analysis should assist in establishing rates that better correspond to a fair market price for the rights in different sectors.

Record labels and music licensing companies want to work in partnership with the commercial third parties that use our music. It is in all of our interests that our corporate customers succeed in driving sales and growth. Music is a fabulous and versatile tool for them. We just want to see artists, composers and record producers get paid for the work they create.

Thank you for listening.