Berklee College of Music

Reflection Paper

Submitted in Partial Fulfillment of the Degree of Master of Science in Global Entertainment and
Music Business
Supervisor: Steffen Meister

by Randle A. Thompson

Valencia Campus, Spain
June 2019

A couple months after arriving in Valencia last summer The Orrin G. Hatch–Bob
Goodlatte Music Modernization Act was signed into law on October 11, 2018 by United States
President Donald Trump after years of lobbying from the rightsholder community including
songwriters, publishers and performance rights organizations. The discussion around the
fallout from this historical legislation continues to be widely debated in addition to the first rate
increase for songwriters in many years. As important as this legislation is for rightsholders it
stands to tighten the profit margin for streaming services who have largely been unprofitable in
spite of their importance to the earning potential of the modern music industry. The pioneer of
this streaming landscape is Spotify who in 2006, modernized music consumption with their
creation of the streaming platform in Stockholm. After years of negotiations on the terms of
the Music Modernization Act leading to an eventual compromise there seemed to be harmony
in the music industry between the streaming services and publishing rightsholders until Spotify
appealed the Copyright Royalty Board’s statutory royalty rate increase. The appeal of this rate
increase that came before the passage of the landmark Music Modernization Act put the
rightsholder community back at odds with Spotify and other streaming services that backed
them such as Amazon, Pandora and Google. They contended that the appeal is not about the
increase in statutory mechanical rates but about the rate-setting formula that was used to
calculate those rates. Regardless of their assertion that they are siding with the songwriter
community, it is highly unlikely that any change to the formula that they agree to would
increase the amount of revenue paid to songwriters.

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In the European Union a similar fight was brewing between YouTube and the
rightsholder community. It has been thought that YouTube has been utilizing provisions set in
set by the 1998 US Digital Millennium Copyright Act (DMCA) and subsequently in 2000, the EU
eCommerce legal framework which created limitations to the liability of potential
intermediaries in digital distribution platforms on the internet widely called safe harbors. As a
result of these safe harbor provisions User Generated Content (UGC) internet platforms have
been accused of extracting double value from the music industry. I the case of YouTube, music
content only makes 5% of their content but drives 20% of their views and thus a large portion
of their advertising revenue while paying approximately 800% less than Digital Service Providers
(DSPs). Considering the fact that YouTube recently reached 1.9 billion logged in users without
considering those users that visit without being logged in. With that analysis it is clear the
there is a value gap between YouTube and the music industry which drives the largest amount
of users to their platform. In order to address this clear value gap The Directive of the
European Parliament and of the Council on Copyright in the Digital Single Market (EU Directive
on Copyright) proposed a plan consisting of 26 articles to modernize copyright in the digital age
of streaming. During initial talks Articles 11 and 13 were the most contentiously debated of the
articles. In response YouTube ran many advertisements targeting specific members of
parliament as well as other users with the fear that this new legislation would remove popular
UGC such as memes. The goal of these advertisements was to lobby against Article 13 to keep
them from accepting additional liability for user content and to keep the safe harbor provisions
that have allowed them to build their competitive advantage over the years since the initial
copyright changes approximately 20 years ago. Their attempts were unsuccessful in the end

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culminating with the European Commission passing the EU Directive on Copyright moving the
fiercely debated Articles 11 and 13 officially to Articles 15 and 17 in the final text. The new
provisions of article 17 will cause platforms such as YouTube to be liable for infringing content
on the platform attempting to increase the use of services such as Content ID. YouTube has
claimed that Content ID is already an effective method of policing copyright infringement but it
is only utilizing cases that they deem necessary. As a result, I believe that these loopholes will
disproportionately affect record labels and other smaller companies who do not have the
financial bandwidth to make the changes proposed by the EU in light of these copyright
changes in the United States and the European Union.

Coming from a finance and accounting background I am always interested in the
financial implications of decisions which attracted me to the Music Modernization Act and EU
Directive on Copyright in the first place. With this curiosity I decided to analyze the potential
financial impact on Spotify’s most recent financial statement Form 20-K to further understand
why they may be appealing this ruling that seems to give more life to the creators who make
their platform viable. Additionally, I wanted to see the effect in the European Union on indie
record labels as well as the effects of piracy on the bottom lines just to analyze how impactful
the changing legislation may be going forward. The results of my financial analysis showed me
that over the five years subsequent to the CRB rate increases that Spotify stands to lose $2.6
billion in profits due to increases in content costs. A large increase in operating costs from a
historically low profitability company could spell trouble, especially as their status as a newly
publicly traded company obligates them to shareholders. With that much on the line it is not

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surprising to see Spotify appealing the CRB rate increases even if it appears to be cutting off
their nose to spite their face. Financial analysis of Beggars Group 2017 statements retrieved
from Companies House revealed that the large independent label loses an estimated 6.1% or
$475,000 of revenue through piracy which is mainly executed by stream ripping from internet
platforms such as YouTube. I estimated these totals are using a number of industry sources
including the European Intellectual Property Office’s report on the Economic Cost of IPR
infringement in the Recording Music Industry, WINTEL’s 2017 report on the Independent Music
Industry, the 2019 Global Music Report and 2018 Consumer Insight Report from the IFPI and
British Phonographic Industry’s All About Music: Recording Music in the UK Facts Figures
report. These industry reports estimate many different impactful totals and percentages
through analysis of the independent and recording music industry as a whole. Through a series
of calculations gained from these reports I was able to figure out a total of the impact of each
of the bills on Spotify and Beggars Group. It is clear that there is a financial burden that will be
placed on these companies by the blockage of this new legislation blockage in Spotify’s case or
their passage in the case of Beggars. Going forward allowing rightsholders to negotiate at an
arm-length basis common in the free market should increase revenue to individual
rightsholders for years to come.

I undertook this extensive research because believe that this information is critical to
the music industry and especially artists. At the heart of the industry is passion for music but it
is also undeniable that when the product is worth billions that it is a commercial business at the
end of the day. Although most artists begin creating for the passion of music there needs to be

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a wider understanding of the implications of large-scale legislation such as the MMA and EU
Directive on Copyright. This analysis benefits me and the industry at large because it helps me
to further bridge the gap between the commercial side that tends to be at odds with creative.
This understanding of both ends of the spectrum will allow me to be a more impactful
professional in the future because I will not only operate out of passion for music but business
awareness too. The results of this research aligned with my expectations because it gave me a
quantitative perspective of actual figures even with the limitations present in analyzing an
industry with many different variables and limited transparency. Going forward I will have a
much more in-depth picture of what is actually at stake when these large platforms battle the
factions of the industry over important subjects such as the copyright environment.

With my background I came to Berklee interested in primarily understanding the
revenue flow in the industry. Throughout my coursework I learned much more of the business
which interested me in understanding the entire legislative landscape around the ownership of
assets which are the copyrights of the musical creations. Before this research paper I did not
fully understand why this fight to modernize copyright has been ongoing for years. After this
financial analysis I was able to gain a quantitative perspective on what was at stake for each of
these individual stakeholders. This depth of knowledge will be valuable in my career even if I
do not go on to specifically work in a faction of the industry that deals in copyrights such as
licensing. Understanding the financial implications of the creative environment in which I will
work stands to inform my future business decisions and help to understand the motives behind
the decisions of others in the industry more clearly.

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