Berklee College of Music

The Copyright Environment of the Modern Streaming Industry
with Financial Analysis

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

Table of Contents
Abstract

iii

Overview of the History of Digital Copyright Law

v

- Orrin G. Hatch–Bob Goodlatte Music Modernization Act

v

- Directive of the European Parliament and of the Council on Copyright in the Digital Single
Market
xix
YouTube and Safe Harbor Provisions

xxiii

Content ID

xxvii

Spotify Financial Analysis

xxxii

Copyright Royalty Board effects on Spotify

xxxv

Beggars Group Financial Statements (Modified for Estimated Piracy Effects)

xxxvi

Exploration of Piracy Effects on the Beggars Group’s 2017 Financial Statements
Methodology

xxxvii
xxxviii

Limitations

xxxix

Conclusions

xl

References

xlix

ii

Abstract
The birth of streaming has not only changed the way the recording industry is paid for
their works but has also allowed new forms of piracy to persist. The music industry claims that
large User Generated Content (UGC) sites such as YouTube are exploiting a value gap created
by safe harbor provisions created before music streaming became the primary source of music
consumption. With stream ripping becoming prevalent on YouTube there has been increasing
pressure to change their payout rates to music rightsholders to be more in line with the costs of
other streaming services such as Spotify as they are currently paying 800% less per stream than
other Digital Service Providers (DSP). This value gap seems more apparent with music being
the most consumed form of content on their platform. While the music industry is attempting to
extract more revenue from digital sound recordings through The Directive of the European
Parliament and of the Council on Copyright in the Digital Single Market they have also lobbied
to increase the statutory mechanical rates paid on the publishing side to publishers, songwriters
and performing rights organizations through a ruling by the Copyright Royalty Board and
modified the rate setting formula among other things outlined after a multi-year fight
culminating in the passage of the Orrin G. Hatch–Bob Goodlatte Music Modernization Act.
These legal battles have far reaching effects and I will attempt to shed light on their industry
impact as well as calculate the potential financial impact of the CRBs rate increase on Spotify’s
financial statements and the piracy effects on a large UK indie label, Beggars Group. This
analysis will serve to further determine the need for this legislation. Other topics explored in this
paper will be YouTube’s Content ID system further mandated by the EU Directive on Copyright
and the argument of their misuse of safe harbor provisions in attempts to free-ride on content.

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Keywords: Directive of the European Parliament and of the Council on Copyright in the
Digital Single Market, Orrin G. Hatch–Bob Goodlatte Music Modernization Act, Copyright
Royalty Board, safe harbor, Content ID, EU Directive on Copyright, Music Modernization Act,
Spotify, YouTube, Beggars Group, statutory mechanical rates

iv

Overview of the History of Digital Copyright Law
Orrin G. Hatch–Bob Goodlatte Music Modernization Act
In 2018 the Orrin G. Hatch–Bob Goodlatte Music Modernization Act (MMA) was passed
after years of lobbying and appeals from organizations such as the National Music Publishers’
Association (NMPA), Nashville Songwriters Association International (NSAI), Songwriters of
North America (SONA), streaming services, Performing Rights Organizations (PROs), record
labels etc. This landmark bill originally known as Orrin G. Hatch–Bob Goodlatte Music
Modernization Act (US Cong. Committee on the Judiciary, H.R. 5447) stands to change many
things about the music industry which I will explore as this paper continues.

The Orrin G. Hatch–Bob Goodlatte Music Modernization Act will eliminate the need for
Notices of Intent (NOIs) for making digital phonograph deliveries of musical works. These
notices applied to the payments for works that are not registered with the Copyright Office. In
the past these NOIs had specific eligibility requirements for electronic filing. These payment
limiting requirements included the determination that the lack of a located copyright owner with
an included address as well as a deposit account on file with the Copyright Office containing
sufficient fees to pay any applicable license royalties among other thing. I have included the fees
and formatting constraints listed below courtesy of copyright.gov.

Required Documents
If you are eligible to file electronically, you must submit a:
•

Cover Sheet; and

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•

NOI consisting of an Excel spreadsheet containing the information required by 37 CFR
201.18(d) that conforms to the Office’s Excel spreadsheet template.
The cover sheet and template can be found in the Related Information box to the right.
Failure to submit either of these documents will result in rejection of your filing.

The cover sheet is a fillable PDF form provided by the Office that must be completed in
conformity with the following requirements:
•

A separate cover sheet must accompany each NOI you file;

•

All fields in the cover sheet are required;

•

All information provided in the cover sheet must match the information provided in the
corresponding NOI; and

•

The fees specified in the cover sheet must be calculated in accordance with 37 CFR
201.3(e). The current fee is $75 per NOI plus $10 per group of 1-100 additional titles. For
example, the fee for an NOI that includes 118 nondramatic musical works would be $95
(Title 1=$75; Titles 2-101=$10; Titles 102-118=$10).
The cover sheet will not be posted on the Office’s public website.

The NOI must:
•

Be created by using the Excel spreadsheet template provided by the Office;

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•

Contain all of the information required by the template, in accordance with 37 CFR
201.18(d);

•

For each nondramatic musical work designated in the NOI, contain identical information
in the first 13 columns (items A-M); and

•

Have the name of the individual actually submitting the NOI to the Office (either the
licensee or the licensee’s duly authorized agent) typed into the attestation required by 37
CFR 201.18(e)(5) (in row 3 of the template).
The NOI will be made available on the Office’s public website.

Requirements for Submitting Your Filing
Please send your completed submission to the Copyright Office via email
tolicensing115@copyright.gov. Each submission email must conform to the following
requirements:
•

Each email must contain attachments of both a cover sheet and a corresponding NOI (no
email may contain only a cover sheet or only an NOI on its own);

•

Each cover sheet and NOI pair must be emailed separately (no email may contain more
than one cover sheet or NOI);

•

The NOI must be emailed as an Excel file, and must not be converted to PDF or any
other file format;

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•

The cover sheet and NOI must not be locked or have any protections or restrictions in
place (other than what has already been locked by the Office in the template made
available on this page); and

•

All emails must be smaller than twenty megabytes. If your submission exceeds this limit,
you must split up your NOI and make multiple filings (including additional cover sheets
as necessary) (Requirements and Instructions for Electronically Submitting a Section 115
Notice of Intention to the Copyright Office.)

These strict requirements allowed for streaming services such as Apple Music and Spotify to
hold mechanical licensing revenue and avoid payments while continuing to use the content under
the guise that the NOI process will need to be completed before payment is made. It is estimated
that 45 million NOI notices have been filed to date keeping songwriter revenue with the
streaming services in perpetuity.

The Music Modernization Act calls for no more NOIs for digital content and created the
Mechanical Licensing Collective (MLC) that will serve to collect all song royalties steaming
from streaming on the Digital Service Providers (DSPs). The MLC has engaged in an RFI/RFP
search process focused on selecting the best technology to identify and match songs while
distributing royalties to ensure that songwriters and publishers are paid fairly (Songconnect).
Under this new statute DSPs are required to pay for all uses of licensed content whether they can
locate the content owner or not. This will stop the DSPs from holding on to songwriter revenue
through the NOI loophole.

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Prior to the passing of the MMA, Performing Rights Organizations (PROs), ASCAP and
BMI were allowed to set their rates in front of one appointed rate judge in case they were unable
to negotiate performance royalties with licensees. This single rate judge handled every royalty
rate dispute with every class of consumer.

To combat this the MMA stipulates that ASCAP and BMI will be randomly assigned any
available federal judge except for the judges specifically appointed to oversee the consent
decrees of the PROs’. The logic behind this decision serves to ensure that a single judge will not
be solely responsible for determining each rate for the PROs.

In the past, ASCAP and BMI consent decree rate courts in charge of setting blanket license
fees for digital services were unable to consider important market evidence regarding sound
recording rates which may be negotiated in the free market. The inability to use free market
evidence does not allow the courts to address the potentially huge disparities in free market
negotiated rates and previous rates decreed in the past. It has now been decided through the
MMA that ASCAP and BMI rate courts can now consider all market evidence when decided rate
decisions, including sound recording royalties when determining public performance rates for
musical works.
Similar to the NOI process outlined above, the MMA addressed the fact that there was no
uniform process to identify and locate the owners of unmatched copyrighted works. This
allowed the DSPs to hold on to millions of dollars in songwriter royalties due to the fact that they
were unclaimed and unmatched. Instead of allowing the DSPs to keep unmatched and
unclaimed royalties in perpetuity, the money will now go to a licensing entity, who has the

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power and responsibility to make sure the money is distributed fairly. The onus will be on the
licensing entity to match sound recordings with their musical compositions and distribute
payments in a fair manner.

A consequence of the monetary leakage in songwriter revenue is that there was no prior
requirement that songwriters received royalties for their unmatched work and sounds recordings
in which the owner of the musical work was unable to be located. Publishers were not always
obligated to share unmatched revenue with songwriters. Due to the passing of the MMA
songwriters are now obligated under law to receive at least 50% of the royalties for unmatched
works.

Before the Music Modernization Act it had been argued by the DSPs that mechanical
royalties for digital interactive streaming should not be eligible for mechanical licenses. They
asserted that streaming should not constitute the need for a mechanical license. With the passing
of the MMA it has been ruled that digital interactive streaming utilizes the mechanical
reproduction right under copyright law due to the temporary copy that is saved to devices when
content is streamed on a DSP. After this ruling DSPs will be unable to argue that streaming does
not constitute a mechanical reproduction right and subsequently mechanical royalties will not be
necessary.

With its passage the MMA also allowed audit rights for the usage of royalty payments by
digital music providers. The newly created MLC will not have the responsibility of auditing
DSPs to ensure that songwriters and publishers are receiving their proper share of royalties.

x

Copyright owners will also be able to audit the MLC to ensure that they are being paid fairly,
allowing songwriters and publishers to get accurate information on their royalty revenue.
As previously stated, Mechanical rates were previously determined by the rate judge
using a four-part formula outlined by the US Government Publishing Office section (801 (b))
listed below.

b) Functions.—Subject to the provisions of this chapter, the functions of the Copyright
Royalty Judges shall be as follows:

(1) To make determinations and adjustments of reasonable terms and rates of royalty
payments as provided in sections 112(e), 114, 115, 116, 118, 119, and 1004. The rates
applicable under sections 114(f)(1)(B), 115, and 116 shall be calculated to achieve the
following objectives:

(A) To maximize the availability of creative works to the public.

(B) To afford the copyright owner a fair return for his or her creative work and the
copyright user a fair income under existing economic conditions.

(C) To reflect the relative roles of the copyright owner and the copyright user in the
product made available to the public with respect to relative creative contribution,
technological contribution, capital investment, cost, risk, and contribution to the opening
of new markets for creative expression and media for their communication.

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(D) To minimize any disruptive impact on the structure of the industries involved and on
generally prevailing industry practices. (US CODE, 2017)
It has been argued that this four-part formula has resulted in below-market rates. The
new legislation addresses this issue by determining rates in arms-length transactions reflecting a
price that would be made by a willing seller or buyer in a free market. This will allow the
market to determine the rates, reflecting a more equitable share for content owners. This
modification was one of the main tenants of the Songwriter Equity Act which had been initially
introduced to Congress in 2014.

This outdated four-part formula also applies to mechanical royalty payment from satellite
radio services. The MMA will also allow satellite radio services to modify their rate standards to
be commensurate with arms-length transactions in a free market. Free market negotiations
should help songwriters get paid more in-line with the market value of their works.

A major tenant in the disconnect between mechanical licensing system and the songwriter
community is due to the fact that songwriters have not previously had any involvement or direct
influence in the process. The MMA seeks to solve this problem by giving songwriters positions
on three boards that will serve to govern the MLC. Self-published songwriters will have four of
fourteen seats on the licensing entity board of directors that was originally composed of
publishers. Five out of the ten seats on the advisory committee overseeing the unclaimed royalty
process will be held by songwriters. The dispute resolution committee created to resolve

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disputes over the ownership of musical works and distribution of royalties will have songwriters
holding three out of the six seats on the committee.

For years publishers and songwriters have paid commission to vendors who administer
mechanical licenses reducing publisher and songwriter revenue in the process. In the post MMA
world, DSPs will be mandated to pay all costs for the MLC, eliminating commissions and
allowing more money to be paid out to publishers and songwriters for their work.

In benefit to the DSPs, the act allows companies that obtain the blanket license from the
MLC and comply with the requirements of the license to be exempt from the liability of statutory
damages. Previously DSPs risked millions of dollars in legal liability for high statutory damages
for using songs on their service without locating the copyright owners. This section of the MMA
is a compromise that allowed for the DSPs to pay for all costs of the MLC and royalty revenue to
songwriters and publishers to avoid the multimillion-dollar class action lawsuits that occur in
connection to unpaid royalties.

The text of the MMA will also provide transparency for the copyright owners and their
copyrighted works. This will be achieved through the implementation of a free searchable
database of musical works with their mechanical rightsholders information. In contrast to the
zero-transparency system of the past, this database will help songwriters to accurately account
for the royalties due for the use of their works.
In addition to the Songwriter Equity Act, the MMA also added the Compensating Legacy
Artists for their Songs, Service and Important Contributions to Society Act (CLASSICs) which

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will give previously unprotected sound recordings between the dates of 1/1/1923 and 2/15/1972
protection against unauthorized digital use. Uses of these ‘classic’ works will need to give
copyright owners notice of its use and pay statutory royalties. Violators of this act will be
subject to the punishments set forth in sections 502-505 as an infringer of copyright. These
punishments are quoted below:

502. Remedies for infringement: Injunctions
(a) Any court having jurisdiction of a civil action arising under this title may, subject
to the provisions of section 1498 of title 28, grant temporary and final injunctions on such
terms as it may deem reasonable to prevent or restrain infringement of a copyright.
(b) Any such injunction may be served anywhere in the United States on the person
enjoined; it shall be operative throughout the United States and shall be enforceable, by
proceedings in contempt or otherwise, by any United States court having jurisdiction of
that person. The clerk of the court granting the injunction shall, when requested by any
other court in which enforcement of the injunction is sought, transmit promptly to the
other court a certified copy of all the papers in the case on file in such clerk’s office.
503. Remedies for infringement: Impounding and disposition of infringing articles4
(a)(1) At any time while an action under this title is pending, the court may order the
impounding, on such terms as it may deem reasonable—
(A) of all copies or phonorecords claimed to have been made or used in violation of
the exclusive right of the copyright owner;
(B) of all plates, molds, matrices, masters, tapes, film negatives, or other articles by
means of which such copies or phonorecords may be reproduced; and
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(C) of records documenting the manufacture, sale, or receipt of things involved in any
such violation, provided that any records seized under this subparagraph shall be taken
into the custody of the court.
(2) For impoundments of records ordered under paragraph (1)(C), the court shall enter
an appropriate protective order with respect to discovery and use of any records or
information that has been impounded. The protective order shall provide for appropriate
procedures to ensure that confidential, private, proprietary, or privileged information
contained in such records is not improperly disclosed or used.
(3) The relevant provisions of paragraphs (2) through (11) of section 34(d) of the
Trademark Act (15 U.S.C. 1116(d)(2) through (11)) shall extend to any impoundment of
records ordered under paragraph (1)(C) that is based upon an ex parte application,
notwithstanding the provisions of rule 65 of the Federal Rules of Civil Procedure. Any
references in paragraphs (2) through (11) of section 34(d) of the Trademark Act to
section 32 of such Act shall be read as references to section 501 of this title, and
references to use of a counterfeit mark in connection with the sale, offering for sale, or
distribution of goods or services shall be read as references to infringement of a
copyright.
(b) As part of a final judgment or decree, the court may order the destruction or other
reasonable disposition of all copies or phonorecords found to have been made or used in
violation of the copyright owner’s exclusive rights, and of all plates, molds, matrices,
masters, tapes, film negatives, or other articles by means of which such copies or
phonorecords may be reproduced.

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504. Remedies for infringement: Damages and profits5
(a) In General.—Except as otherwise provided by this title, an infringer of copyright is
liable for either—
(1) the copyright owner’s actual damages and any additional profits of the infringer, as
provided by subsection (b); or
(2) statutory damages, as provided by subsection (c).
(b) Actual Damages and Profits.—The copyright owner is entitled to recover the
actual damages suffered by him or her as a result of the infringement, and any profits of
the infringer that are attributable to the infringement and are not taken into account in
computing the actual damages. In establishing the infringer’s profits, the copyright owner
is required to present proof only of the infringer’s gross revenue, and the infringer is
required to prove his or her deductible expenses and the elements of profit attributable to
factors other than the copyrighted work.
(c) Statutory Damages.—
(1) Except as provided by clause (2) of this subsection, the copyright owner may elect,
at any time before final judgment is rendered, to recover, instead of actual damages and
profits, an award of statutory damages for all infringements involved in the action, with
respect to any one work, for which any one infringer is liable individually, or for which
any two or more infringers are li-able jointly and severally, in a sum of not less than $750
or more than $30,000 as the court considers just. For the purposes of this subsection, all
the parts of a compilation or derivative work constitute one work.
(2) In a case where the copyright owner sustains the burden of proving, and the court
finds, that infringement was committed willfully, the court in its discretion may increase
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the award of statutory damages to a sum of not more than $150,000. In a case where the
infringer sustains the burden of proving, and the court finds, that such infringer was not
aware and had no reason to believe that his or her acts constituted an infringement of
copyright, the court in its discretion may reduce the award of statutory damages to a sum
of not less than $200. The court shall remit statutory damages in any case where an
infringer believed and had reasonable grounds for believing that his or her use of the
copyrighted work was a fair use under section 107, if the infringer was: (i) an employee
or agent of a nonprofit educational institution, library, or archives acting within the scope
of his or her employment who, or such institution, library, or archives itself, which
infringed by reproducing the work in copies or phonorecords; or (ii) a public
broadcasting entity which or a person who, as a regular part of the nonprofit activities of
a public broadcasting entity (as defined in section 118(f )) infringed by performing a
published nondramatic literary work or by reproducing a transmission program
embodying a performance of such a work.
(3) (A) In a case of infringement, it shall be a rebuttable presumption that the
infringement was committed willfully for purposes of determining relief if the violator, or
a person acting in concert with the violator, knowingly provided or knowingly caused to
be provided materially false contact information to a domain name registrar, domain
name registry, or other domain name registration authority in registering, maintaining, or
renewing a domain name used in connection with the infringement.
(B) Nothing in this paragraph limits what may be considered willful infringement
under this subsection.

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(C) For purposes of this paragraph, the term “domain name” has the meaning given
that term in section 45 of the Act entitled “An Act to provide for the registration and
protection of trademarks used in commerce, to carry out the provisions of certain
international conventions, and for other purposes” approved July 5, 1946 (commonly
referred to as the “Trademark Act of 1946”; 15 U .S .C . 1127).
(d) Additional Damages in Certain Cases.—In any case in which the court finds that a
defendant proprietor of an establishment who claims as a defense that its activities were
exempt under section 110(5) did not have reasonable grounds to believe that its use of a
copyrighted work was exempt under such section, the plaintiff shall be entitled to, in
addition to any award of damages under this section, an additional award of two times the
amount of the license fee that the proprietor of the establishment concerned should have
paid the plaintiff for such use during the preceding period of up to 3 years.
505. Remedies for infringement: Costs and attorney’s fees
In any civil action under this title, the court in its discretion may allow the recovery of
full costs by or against any party other than the United States or an officer thereof. Except
as otherwise provided by this title, the court may also award a reasonable attorney’s fee
to the prevailing party as part of the costs. (Office, U. C.)

The MMA did not just seek to help payments to songwriters and publishers it also added
a section to the bill known as the Allocation for Music Producers Act (AMP). This act serves to
provide payment of statutory sound recording royalties to producers, mixers and sound engineers
formalizing a process that normally had producers going after artists for these royalties. Instead
of artists submitting Letters of Direction (LODs) to third party digital performance royalty
collection organizations, they will now submit those same LODs to a non-profit collection
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designated by Copyright Royalty Judges which will keep a database and oversee the distribution
of those royalties. The non-profit collective will withhold 2% from all royalties collected in
connection with the licensing of a transmission of sound recording that was fixed pre- 11/1/95.
Following the process specified by the MMA a producer/mixer/engineer can realize their prorata share of monies in the event that they were unable to obtain a reply and LOD from an
associated artist.

The payments will stop being made to applicable producer/mixer/engineer if the artist
objects. In the event that there are multiple artists for any sound recording and only one artist
objects to the payments, the producer/mixer/engineer will still be entitled to their pro rata share
of the remaining artists royalty.
Directive of the European Parliament and of the Council on Copyright in the Digital Single
Market
Across the Atlantic in the shadows of the uncertainty surrounding Brexit, the European
Commission has passed its much-debated Directive on Copyright in the Digital Single Market
featuring Article 13 (now Article 17) that looks to modernize the copyright structure around
digital music consumption for years to come. Throughout this paper I will explore the
similarities and differences between the European Union’s answer to modern music consumption
and the United States’ answer to the same problem while exploring the financial impact on large
independent label, Beggars Group in the EU and streaming service Spotify in the US.

The latest EU Directive on Copyright in the Digital Single Market has been in the works
since 2017 and will be the first copyright update in the EU since 2001. It is worth noting that

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directives are not laws but are closer to mandates allowing each country to adopt individual rules
based upon their interpretation of the directives. The main objectives of this EU copyright
directive are to allow for; 1) More cross-border access to content online; 2) Wider opportunities
to use copyrighted materials in education, research and cultural heritage; 3) A better functioning
copyright marketplace. (Sanagma, 2019)

In order to achieve their first goal of having better choices and access to content online
and across borders the Commission proposed measures to; create favorable conditions for crossborder distribution of television and radio programs online; increase the visibility of audiovisual
works on Video On-Demand (VoD) platforms and; facilitate the digitalization and dissemination
of works that are out-of-commerce.
The second objective of the Commission is to modernize the EU rules applicable to key
exceptions and limitations in the areas of teaching, research and preservation of cultural heritage
with a particular focus on digital and cross-border uses. These exceptions are related to teaching
activities, text and data mining and preservation of cultural heritage.

Their final objective was to achieve a well-functioning marketplace for copyright aimed
at creating a fairer marketplace for online content especially related to press publications, online
platforms and remuneration of authors and performers. The main elements of their proposal
were; related or neighboring right for press publishers; a reinforced position of right holders to
negotiate and be paid for the online exploitation of their content on video-sharing platforms and;
remuneration of authors and performers through new transparency rules. (Sanagma, 2019, May
21)

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When the Digital Single Market is mentioned it refers to the strategy of the European
Commission to protect consumers and data, remove geo-blocking and copyright issues to ensure
access to online activities for all users under conditions of fair competition. “A Digital Single
Market (DSM) is one in which the free movement of persons, services and capital is ensured and
where the individuals and businesses can seamlessly access and engage in online activities under
conditions of fair competition, and a high level of consumer and personal data protection,
irrespective of their nationality or place of residence”. (European Commission, 2018) The EU
adopted The Digital Single Market strategy on May 6, 2015 and it included 16 initiatives.
Completion of this strategy is estimated to contribute EUR 415 billion per year to the European
economy leading to more jobs and the transformation of public services. The three pillars of the
DSM strategy which shaped the directive are Access: better access for consumers and businesses
to digital goods and services across Europe, Environment: creating the right conditions and a
level playing field for digital networks and innovative services to flourish and; Economy &
Society: maximizing the growth potential of the digital economy. It was with this DSM strategy
in mind that the EU Directive on Copyright in the Digital Single Market was legislated to much
contention. (Proposal for a Directive of the European Parliament and of the Council on
Copyright in the Digital Single Market, 2018)

There are two large points on contention in the directive and they are Articles 11 and 13
which are now officially referred to as Articles 15 and 17 in the final approved text. I will give a
brief overview on Article 15 and will continue with a deeper analysis in Article 17. Article 15
has been referred to as the ‘’Link Tax” and will give news publishers the right to negotiate a

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license with news aggregators such as Google and Apple News. The article also allows for the
authors to receive an appropriate share of the money their publication would get from their
negotiation with news aggregators.

Article 17 (formerly known as Article 13) has caused the most controversy of all of the
statutes in the newly approved directive. This legislation stipulates that companies are liable for
hosting any copyright infringing content on their websites. The main positive of this agreement
for rights holders is that it will allow them to license content in a free market rather than the
current environment that allows sites like YouTube to pay rights holders fractions of pennies
while extracting exponentially more value from the content for themselves. This legislation is
limited to service providers that have been available for more than 3 years and have an annual
turnover of EUR 10 million and average monthly unique listeners of 5 million per month.
Online service providers are taking issue with their new liability in the posting of infringing
content on their platforms. Due to this liability they believe that they are being forced to
implement expensive content filtering systems such as content ID. For small to medium
companies the implementation of systems like content ID could be cost prohibitive. In addition
to the filtering of content, these companies must also prove that they have made their best efforts
to prevent further uploads of the infringed content. Somehow throughout the takedown process
the service providers must also not allow their measures to prevent the availability of noninfringing subject matter uploaded by users and put in an effective and expeditious complaint
and redress mechanism for users in case of dispute over takedowns. There is concern that the
requirements laid out in Article 17 will allow for large companies like Google to monopolize the
space because they are among the few companies with the financial bandwidth to further

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implement these changes even if they are made to be more responsible for the content on their
platform.

Although both pieces of new copyright legislation aim to bring updates to the copyright
environment to make them more equitable in today’s digital environment they aim to do so by
focusing on different things. The Orrin G. Hatch–Bob Goodlatte Music Modernization Act’s
(MMA) main tenant aims to pay songwriters more by increasing their mechanical royalties
through 2022 by over 44% while the Directive of the European Parliament and of the Council on
copyright in the Digital Single Market (EU Directive on Copyright) among other things focuses
on allowing digital rightsholders to negotiate with platforms such as YouTube to receive fairer
rates for their content online. I will also touch on the proposed value gap between what
YouTube receives from music compared to what they pay for the musical content and the safe
harbor provisions that they arguably hide behind. In describing the environment around these
legislative changes, I will also estimate the financial impact of the Music Modernization Act on
Spotify’s latest financial statements through the end of the rate increases in 2022. In regards to
the EU Directive on Copyright, I will estimate the financial impact on one of the largest UK
based indie labels, Beggars Group by estimating how much money is lost due to piracy which is
very prevalent on YouTube through stream-ripping and other copyright infringing uses on their
platform.
YouTube and Safe Harbor Provisions
In 1998, the US Digital Millennium Copyright Act (DMCA) and subsequently in 2000,
the EU eCommerce legal framework created limitations to the liability of potential

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intermediaries in digital distribution platforms on the internet widely called safe harbors.
Initially these safe harbor provisions over covered activities such as temporary internet storage
activities such as caching and cookies as well as domain hosting services and internet service
providers. The US version of the framework included search engine services while the EU
version did not. The main issue with the safe harbor provisions is that copyright holders are
denied monetary compensation from internet platforms for harm caused by acts covered by safe
harbors and are only entitled to sanctions as punishment.

The initial legislation attempted to protect works in digital form with technological
measures and allowed copyright owners the rights to control their digital works by either
granting or prohibiting the uses through technological protection measures (TPM) and backed by
legal sanctions if they were circumvented. As time went on, the difficulty in applying anticircumvention TPM began to be applied less frequently which widened the potential for
circumvention of this framework. With the lack of TPM, copyright holders began to gradually
lose their ability to authorize the uses of content as music became more widely available. As
technology evolved internet platforms began to widen the use of safe harbors and subsequently
hid behind them when litigated although the laws were not created to protect them in the first
place. (Ashcroft and Barker)

For a digital platform to qualify for safe harbor provisions there are several requirements
outlined in the Digital Millennium Copyright Act, one of which is requiring them to have “a
policy that provides for the termination in appropriate circumstances of subscribers and account
holders of the service provider’s system or network who are repeat infringers”. (U.S. Code 512)

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Different service providers have responded to this requirement with different forms of
punishment to meet this obligation by implementing a strike system with varying allowances for
the total of strikes allowed depending on the platform. For example, Soundcloud allows for only
one strike in any time period with any subsequent strikes resulting in termination. In stark
contrast, YouTube allows two strikes within a three-month period, with a third strike resulting in
termination. On YouTube, infringers are allowed back on the platform after three months by
taking a four-minute course on copyrights. This allows users to upload eight infringing works
per year and keep their accounts. Additionally, the filing of a counter notification allows their
strikes to be removed unless there is a lawsuit filed by the copyright owner. In this authors’
opinion, by taking a soft line against copyright infringers it seems clear that YouTube is less
concerned with curbing the uploading of infringing content and more with appearing as allies
while continuing to extract inequitable value from rightsholders and free riding on content. It is
this argument among other things that have had the recording industry clamoring for increases in
their streaming payouts leading to the recent passages of new copyright legislation. (Liebowitz,
2018)

In the years since the safe harbor provisions of the EU eCommerce legal framework and
US Digital Millennium Copyright Act there has been extensive debate over whether massive
global platforms namely YouTube hide behind safe harbor provisions to perpetually extract
inequitable value by providing free music to its estimated 1.9 billion logged in users worldwide.
(ABRIL, D.,2019) It has been said that music accounts for more than 20% of the platform’s
views and thus a large portion of its advertising revenues. These revenues however, barely
translate to the music industry because of the aforementioned safe harbor provisions. Data

xxv

suggests that an average play on a streaming service generates about $0.008 per play while
YouTube only offers about $0.001, an 800% difference in revenues. With this multiple, it is
clear to see how a negotiation with rightsholders to a per-stream rate closer to competitors in the
streaming space would generate hundreds of millions of dollars to the recording industry from
YouTube’s 1.9 billion logged in user base which doesn’t account for users who access the site
without logins. When accounting for the fact that music content only accounts for 5% of the
content on the platform but drives 20% of the traffic, it becomes clear that although music
content is shorter and thus less ad-heavy that it is a major driver of the platform’s views. They
are able to obtain these favorable rates but negotiating advertising profit split deals with artists
and labels that oftentimes are far less than they would receive if rates were calculated on a per
play basis as they are with the other major streaming music sites. Price disparities like this create
an environment where large platforms such as YouTube hold a huge competitive advantage in
operating costs compared to other players in this segment. In 2014 the IFPI stated that services
protected by the safe harbors “claim they do not need to negotiate licenses for the music
available on their platforms, or conclude licenses at artificially low rates”. (Beard, T. R., PhD,
Ford, G. S., PhD, & Stern, M., PhD., 2017) The main disconnect in licensing negotiations
appears to be that there may be multiple unlicensed copies of a particular song despite
compliance with safe harbor provisions essentially allowing online service providers to offer
access to music without paying royalties and still claim safe harbor protection from infringement.
The system of notice and takedown does not mean that the content will stay down, creating an
expensive and almost impossible legal battle for rightsholders.
Through these safe harbor provisions internet platforms have enjoyed the benefits of freeriding on content. By hiding behind safe harbors these platforms have been allowed exponential

xxvi

growth opportunities which have allowed some (namely YouTube) to yield monopoly power
over the market by allowing their costs to be much lower than competitors because copyright
consent is not explicitly required by law. Most competitors in this space i.e. digital service
providers do not qualify for safe harbor and thus are subject to higher content costs than those
that do qualify for safe harbor. These provisions have not only weakened the positions of their
more traditional opponents such as cable operators but they also give them the aforementioned
advantages over newer digital service providers. With such large advantages in operating costs
and the backing of major parent companies, large players such as YouTube can employ
predatory pricing in the event that there is a competitor that threatens to harm their market share.

Although these consequences were unforeseen when these safe harbor provisions were
outlined in US and EU digital copyright laws they have been addressed due to recent legislation
in the EU. The passage of The Directive of the European Parliament and of the Council on
copyright in the Digital Single Market comes after months of deliberation and lobbying attempts
by YouTube aimed at blocking the legislation. In the coming years we will see if this legislation
properly addressed the safe harbor concerns or will anti-lobbying efforts in individual member
states lessen their impact on their competitive advantage. (Beard, T. R., PhD, Ford, G. S., PhD,
& Stern, M., PhD., 2017)
Content ID
As chatter grew from the rightsholder community YouTube and some other platforms
accused of thriving by free riding off of safe harbor provisions created Content ID systems aimed
to remove those damages after arguing that they are as against copyright infringement as
rightsholders and will take down offending content immediately. These arguments by internet

xxvii

platforms are what led to the safe harbor loopholes that have allowed them to thrive as
technology has evolved, by absolving them from liability. Below is YouTube description of
their Content ID system:

Copyright owners can use a system called Content ID to easily identify and manage their
content on YouTube. Videos uploaded to YouTube are scanned against a database of files
that have been submitted to us by content owners. Copyright owners get to decide what
happens when content in a video on YouTube matches a work they own. When this
happens, the video gets a Content ID claim. Copyright owners can choose different
actions to take on material that matches theirs:

Block a whole video from being viewed
Monetize the video by running ads against it; in some cases sharing revenue with the
uploader
Track the video’s viewership statistics
Any of these actions can be country-specific. A video may be monetized in one country,
and blocked or tracked in another. (How Content ID works - YouTube Help, 2019)

In theory this Content ID system seems like the safe harbor solution it set out to be but
this system is not available to all rightsholders. There are specific criteria that they must meet
and also must be evaluated to determine whether or not each applicant needs the tool for their
works. Instead of making this system available to anyone who uploads their content to the
platform YouTube seemingly reserves the system for larger rightsholders leaving smaller or

xxviii

independent creators to fight this copyright battle alone. In this environment musicians not
affiliated with large companies are likely to have no proper way to prevent their work from being
exploited by YouTube without payment. With YouTube essentially having the choice to use
Content ID on works that they see fit, it puts them in the position to cherry pick the works they
choose to protect and utilize this privileged position even when negotiating rates with
rightsholders in the future state outlined by the EU Directive on Copyright. I am of the opinion
that Content ID should be an all-or-nothing proposition. (Liebowitz, 2018)

It is a bold claim to say that an algorithmic based Content ID can remove all of the
damages from safe harbor when the problem persists as well as the competitive advantages that
allowed them to thrive due to lower payments to rightsholders. These claims by YouTube are
more to escape criticism while protecting their competitive advantage. Prior to these new
legislative changes copyright owners were required to find infringements while platforms with
advanced technologies used the safe harbor to avoid liability. It is impossible to think that
rightsholders with much less financial backing will be able to find infringements within the
billions of uploads on a platform such as YouTube with nearly 2 million logged in users
worldwide. The current legal environment does not incentivize platforms such as YouTube to
have the best Content ID systems because the value created by musical content is exponentially
higher than the penalty of taking down infringing content.

When infringing content is found by a copyright owner on their user generated internet
platforms the user has to submit a takedown notice to have their content taken down if it is found
to be infringing. Once the content has been taken down the alleged violator will need to submit a

xxix

counter-notification appeal stating their case for why the content is non-infringing. If a
copyright owner cannot show that they have begun legal proceedings within ten days, the content
is then allowed back on to the website. With this being the environment, it is easy to see why it
is impossible for most rightsholders to constantly pay for litigation and the major record labels
have argued as such.

Dr. Stan J. Liebowitz’s Economic Analysis of Safe Harbor Provisions laid out a
hypothetical analysis of how easy it would be to have an infringing track on a YouTube in
perpetuity due to the current process. He goes on to say:

If it were to take 12 hours for the copyright owner to find the offending file and have it
removed by the UUC site, then it would merely take two new uploaded copies (separated
by 12 hours) per day of an infringing work for the work to be constantly available for
downloading by others. This implies that 730 uploads per year could keep a particular
infringing work virtually always available during that year. Yet, popular works seem to
be uploaded by an order of magnitude above the rate of two per day. Any website with
sufficiently many users uploading copyrighted materials in large enough numbers could,
if it desired, ensure that infringing popular songs or videos be taken down slowly enough
to keep them almost continuously available, while still appearing to remove them in a
manner that seemed consistent with the takedown provisions of the DMCA, since there
are no specific time limits.
46.Using more recent bits and pieces of information that Google makes available, we can
try to infer how many infringing files are uploaded to YouTube in a year. Google stated

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in 2016 that “The Content ID team22 has resolved millions of invalid claims [presumably
uploads that should not have been blocked by Content ID] in the last year alone.” Taking
the plural usage of ‘millions’ in the above quote to mean at least 2 million disputes
resolved in favor of the uploader, and YouTube’s statement that they only considered one
fourth of these claims valid, a minimum value for the number of Content ID disputes was
8 million per year.
47. Since Google also tells us that “fewer than 1% of the [Content ID] claims are
disputed,” the clear implication is that the minimum estimate of files (claims) that
Content ID tagged as copyright infringing was more than 800 million per year, on
YouTube alone, of which 600 million were considered to be infringing. This is a
staggeringly large number of infringing files, and given how it was calculated it is an
underestimate due to the likelihood that “millions” means more than two million and
“fewer than 1%” could mean considerably less than 1%.
48.The enormous size of this copyright infringement is generally backed up by
statements from UMG that the number of files (both from Content ID and UMG’s
efforts) thought to infringe UMG’s copyrights on YouTube, was 100,000 per day. This
works out to 36.5 million per year. Quadruple that value for the other two major labels
plus independent labels and the total rises to about 150 million. Double that value for
infringement claims from the movie industry. Then add in copyright owners from the
television and adult video industry, and the number of files that might be thought to be
infringing could easily be near a billion. (2018)

xxxi

Spotify Financial Analysis (Estimated Impact of CRB Rate Increases stemming from the
MMA)

*Courtesy of Investors.Spotify.com (Spotify Technology S.A. FORM 20-F., 2019)
xxxii

*2018 estimates based on the CRB rate increase to 22% of Total Content Costs

*Courtesy of Copyright Royalty Board (Copyright Royalty Board, Library of Congress 24th ed.,
Vol. 84, Rep.)

xxxiii

*Estimates based on CRB rate increases through 2022

xxxiv

Copyright Royalty Board effects on Spotify
During the fight to pass the music modernization act that changed the rate setting formula
for the Copyright Royalty Judges, the Copyright Royalty Board (CRB) announced a
determination that would increase the percentage of revenue received by performance rights
organizations, publishers and songwriters by 44% between January 2018 and December 2022.
Their ruling extensively states in the federal register that “For licensing of musical works for all
service offerings, the all-in rate for performances and mechanical reproductions shall be the
greater of the percent of service revenue and Total Content Cost (TCC) rates in the following
table”. (Copyright Royalty Board) I have pasted the table above for your reference. Spotify has
since appealed this ruling subsequent to the passage of the Music Modernization Act to the ire of
the songwriter community and even some of its executives who have stepped down in response
to this appeal. The CRB rate increase to 22% of total content costs would have costed Spotify
$859 million in profit this year based on the increase in their costs of revenues. As a company
who is now publicly traded they have an obligation to shareholders which may be at odds to the
relationships of creatives. These pressures may be at the heart of the reason Spotify is appealing
this rate increase. Over the four-year period from 2018-2022 I have estimated an approximate
loss of 2.6 billion over the four-year period based on the Computed Annual Growth Rate
(CAGR) and yearly rate increases of approximately one point a year set out by the CRB’s ruling.

xxxv

Beggars Group Financial Statements (Modified for Estimated Piracy Effects)

*Courtesy of Beggars Group found on Companies House

xxxvi

Exploration of Piracy Effects on the Beggars Group’s 2017 Financial Statements
In my analysis of the changing copyright environment led me to explore the effects of
piracy on one of the largest indie label groups in the world and especially the UK due to a track
record of success from artists such as FKA Twigs, Jamie XX and the rights to the early catalog
of megastar Adele. According to the British Phonographic Industry’s (BPI) 2017 “All About
Music Report”, The Beggars Group accounted for 3.6% and 2.1% of chart eligible album sales in
the years 2015 and 2016 respectively. (BPI, 2017) In the interest of not being too optimistic I
estimated the percentage of chart eligible sales at 2.5% rather than 2.85% which would’ve been
the average of the two years. After multiplying the percentage of chart eligible sales by the total
sales revenue in the UK, I then multiplied the country level estimates of lost sales by country by
5.7% which was calculated in a study by the European Union Intellectual Property Office
(EUIPO) on The Economic Cost of IPR Infringement in the Recorded Music Industry. (European
Union Intellectual Property Office, 2016) This series of calculations led me to an estimated
piracy effect of 431,775 Euros which is 5.7% of their reported profit of 6,971,644 Euros. This
estimate seems modest but there cannot be a true estimate of piracy effects due to the lack of
credible information about displacement and understanding of whether these pirates contribute to
the music industry in other ways such as concert attendance or word of mouth marketing to their
friends or social network followers who in turn could financially contribute where they may not
have previously.

xxxvii

Methodology
In order to compile these estimates, there was extensive research on industry reports
focusing on the holistic music industry and the independent music sector. These industry reports
consist of multiple reputable sources such as the 2016 EU IPO the Economic Cost of IPR
Infringement in the Recorded Music Industry, WINTEL’s 2018 Worldwide Independent Market
Report, the 2019 IFPI Global Music Report, 2018 IFPI Consumer Insight Report and lastly the
BPI 2017 All About Music Report. These reports consist of extensive research from a variety of
sources that have looked at sales data from their members to compile estimates of a variety of
industry factors.
In estimating the effects of the Copyright Royalty Board’s latest rate increases to 22.0%,
23.1%, 24.1%, 25.2% and 26.2% of Total Content Costs (TCC) from 2018-2022 and 11.4%,
12.3%, 13.3%, 14.2% and 15.1% of total revenue over the same period. (Copyright Royalty
Board) I first computed the Computed Annual Growth Rate (CAGR) in order to estimate the
income statement figures from 2019-2022. Once I estimated the CAGR for each of the relevant
years I then multiplied the costs of revenue by the published rate off TCC as well as the total
revenue by the outlined rates to determine which was greater. In the CRB’s rate determination
the total amount to publishers etc. would be the greater of those two totals each year. I repeated
this method for each total and unsurprisingly the percentage of Total Content Costs turned out to
be higher each year. These rate increases would have had a $859 million negative effect on
Spotify profits in 2018 and approximately $2.6 billion negative effect over the five-year period.
With potentially billions of dollars in extra content costs and an already tight margin, it is no
surprise that Spotify has appealed these rate increases.

xxxviii

My method of computing the piracy effects on the Beggars Group began with the British
Phonographic Industry’s (BPI) 2017 “All About Music Report”, that concluded that The Beggars
Group accounted for 3.6% and 2.1% of chart eligible album sales in the years 2015 and 2016
respectively. (BPI, 2017) In the interest of conservatism, I estimated the percentage of chart
eligible sales at 2.5% rather than the average of the years which would’ve totaled 2.85%. After
multiplying Beggars’ estimated percentage of chart eligible sales by the total indie sales revenue
in the UK which totaled 7,575,000 Euros, I then multiplied that total by 5.7% which is the
estimate of lost sales to piracy in the UK computed by the European Union Intellectual Property
Office (EUIPO) in their study titled The Economic Cost of IPR Infringement in the Recorded
Music Industry. This series of calculations led me to an estimated piracy effect of 431,775 Euros
which equates to 6.1% of their 2017 reported profit of 6,971,644 Euros.
Limitations
As with any market estimates or studies there were limitations to these calculations. In
calculating the Spotify specific effects of the Copyright Royalty Board’s rate increases I realized
that I did not have their specific content costs which likely did not constitute the total costs of
revenue which is the multiple I used to compute the effects of the rate increases. I was also
limited by the fact that I estimated four years’ worth of financial statements by computing the
CAGR which has limitations in and of itself. The CAGR estimates the future by using the past
which cannot consider future market conditions and changes to the legislative and regulatory
environment that will now allow arms-length negotiations with rightsholders which will
undoubtedly modify their costs of doing business. With Spotify’s continued push to convert free
users to paid subscribers as well as their entry into emerging markets their revenue should be
drastically different in the years to come.

xxxix

Estimating the effects of piracy on a large indie such as Beggars Group comes with its
own set of challenges. There are many factors that make estimating piracy hard due to the fact
that although someone may pirate content that does not mean that the pirate does not contribute
to Beggars Group in a different way such as attending concerts or providing old school word of
mouth marketing to their friends in person or over social networks. To give a personal example I
pirated thousands of songs in the early 2000s but I also attended multiple concerts per year and
spread the word about lesser known artists to my friend group which I continue to do to this day.
In the past the European Union Intellectual Property Office (EUIPO) estimated piracy losses to
be 170 million euros ($190 million dollars) in 2014 which computed to 5.2% of all music sales
revenue. (European Union Intellectual Property Office, 2016) That figure was met with
skepticism in the music industry due to the fact that 170 million euros is a relatively small
percentage of a multi-billion-dollar industry that still considers piracy to be a strong threat to
sales. In the 2018 IFPI Music Consumer Insight Report it was stated that 38% of users obtain
their musical content through copyright infringement. (IFPI, 2018) A hypothetical calculation of
38% of a modest one billion in sales would equal 380 million alone. This year the global music
industry hit 19 billion in revenue which would indicate that the sales lost to piracy would be
much higher than estimated.
Conclusion
In researching the changing copyright environment encompassing the largest territories in
the music industry it is clear to see why these topics were so widely debated. As my research
concluded due to the Copyright Royalty Board’s rate increases, Spotify stands to lose
approximately $2.6 billion in profits due to the increases in revenue that they will be mandated to
pay to songwriters, publishers and PROs. As a result of the subsequent Music Modernization

xl

Act these statutory rates will be able to be negotiated on an arm length basis which should allow
them to be more equitable in the future. I believe that fair negotiations are the only way to
ensure that one party isn’t being strong-armed into a deal that they didn’t at least get the
opportunity to negotiate. As we speak Spotify is continuing its lawsuit against the CRB’s rate
increase and it is unclear what the result of this lawsuit will be. It is impossible to determine the
ramifications if Spotify is successful in this lawsuit but it is clear that the rates will never be as
low as they have in the past due to the subsequent passage of the MMA. This dispute has
divided the music industry back into the factions that they were in during the intense negotiations
for the MMA throughout the years. It is putting the creator community against most of the
streaming community except Apple, Tidal and others who accepted the rate increases without
dispute. I will be paying very close attention as there are new developments in this case.
Even more difficult, is determining the impact of piracy on the revenue of an individual
independent label. Estimating the displacement of music as a whole is very difficult because
unlike other forms of content, piracy cannot replace live concerts which is why a study on the
displacement rates of various media estimated the rate for music to be 0% with a large margin of
error. (Van der Ende, M., Poort, J., Haffner, R., De Bas, P., Yagafarova, A., Rohlfs, S., & Van
Til, H., 2015) I can personally attest to this fact as I pirated many albums but still consistently
attended concerts and provided guerilla marketing through word-of-mouth. Another limitation to
estimating the effects of piracy is the complexity of the licensing deals in the music industry and
the relative secrecy of their terms. It is not safe to say that each recording label has the same
deal with each streaming service and there is also a difference in the payouts from the paid
subscriber tier and the free tier. Add in the fact that subscription prices are not the same in each
territory and the formula becomes too complicated to estimate with any significant certainty.

xli

The European Union Intellectual Property Office (EUIPO) estimated that the recording industry
lost 170 million Euros to piracy while other authorities such as the International Federation of
the Phonograph Industry (IFPI) later asserted that 38% of users obtain their content through
copyright infringement. In an industry that generated revenues of $19.1 million (21.4 Euros) it is
hard to fathom piracy estimates in the 200 million Euro range. With these limitations it is not
surprising that the 2016 study was the only time the IFPI has attempted to break piracy effects
down into financial terms. Broadly, it is a large problem that is very difficult to quantify.
Landmark legislation such as the Orrin G. Hatch–Bob Goodlatte Music Modernization
Act, Directive of the European Parliament and of the Council on Copyright in the Digital Single
Market as well as the historical rate increase legislated by The Copyright Royalty Board are
setting out to make payouts to rightsholders more equitable to the value that the music industry
provides. The developments that stem from this legislation will be ongoing as each member
state of the EU has to implement its own version of the European Commission’s directive which
could have its own ramifications worth monitoring. I am particularly interested in how smaller
companies will implement Content ID due to their new liability for infringing content on their
platform. Content ID is very expensive to implement and could possibly create an environment
similar to Amazon Cloud Services where competitors are forced to license the technology from
giants such as Facebook or YouTube, preserving the competitive advantage that they already
have due to their size. Spotify’s legal fight against the CRBs rate increases are just beginning
and will have consequences that reverberate throughout the streaming landscape by either
drastically effecting their operating costs or reputation going forward. Similar to the EU
eCommerce legal framework and US Digital Millennium Copyright Act approximately 20 years
ago that created the often-exploited safe harbor provisions, these changes to digital copyright

xlii

acts will create unforeseen consequences that will need to be continually monitored as
technology evolves over time.

xliii

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