Out To Sea: Safe Harbors & the Unmooring of the Foundations of a Healthy Online Music Marketplace

by Neil Turkewitz

Stan Liebowitz has produced a ground breaking report that underscores a critical and oft-overlooked aspect of the impact of a dysfunctional digital marketplace on music creators. Most studies examining the harm of piracy look to examine the substitutional effects of illegal downloading on sales, or the variance between licensing rates between fully licensed sites (e.g. Apple Music or Spotify) and their competitors that rely on safe harbors for user uploaded content (otherwise referred to as “UUC sites” such as YouTube). However, this misses what may be the most important distortion — the impact of licensing rates by some actors who rely on safe harbors (sub-market) on licensing writ large, and how sub-market rates in one arena affect the entire ecosystem. The impact of piracy and non-market licensing is truly fundamental — indeed, given the scale of unauthorized access to music, it is fair to observe that there are no existing licensing arrangements which reflect market forces free of distortion.

In recognition of this market reality, Liebowitz poses a broader formulation to examine harm: “we must compare current payments by both UUC sites and permission based sites to the higher payments that each group would have made in the absence of safe harbors, and calculate the amount of shortchanged copyright payments on that basis.”

In other words, YouTube’s safe harbors affect services like Apple Music and Spotify which operate without regard to such safe harbors. And of course, this makes eminent sense: there is competition for users, and advantages enjoyed by one competitor will affect the entire ecosystem. Just as piracy undermined (and continues to undermine) the ability to effect a market-based transition to digital services, sub-market licenses undermine the ability to generate revenue on basic economic principles of supply and demand. Liebowitz’s examination of this dynamic is overdue and greatly appreciated.

Interestingly, it was foreshadowed in some sense by an article written four years ago by Professor Eric Priest entitled: COPYRIGHT EXTREMOPHILES: DO CREATIVE INDUSTRIES THRIVE OR JUST SURVIVE IN CHINA’S HIGH-PIRACY ENVIRONMENT?

The extreme hardships of China’s music marketplace allowed Priest to observe the impact of negotiating asymmetries that are mirrored in a less extreme, but more generalized fashion, in global music markets in which the perceived value of music has been driven to zero, or near zero, and content owners are then required to license “legitimate” businesses on the basis of such perceptions. Priest correctly observed that these were not freely negotiated licenses even though they were consensual, but rather “reluctant interim concessions from desperate rights owners…[Lack of effective copyright protection left rightholders] vulnerable to severe bargaining asymmetries in negotiations with powerful distributors, who are free to overreach and extract unconscionable fees because copyright owners lack the leverage to negotiate a better rate or enforce the existing terms of their agreements.”

Priest continued:

What happens when copyright owners are unable to monetize their works at the points where consumers derive value from them? The experience of the film and music industries in China illustrates three ways in which the diminishment of potential revenue streams harms producers: (1) monetization opportunities for smaller and independent producers are drastically reduced, (2) market signals sent to producers are reduced and distorted, and (3) producers are disproportionately exposed to the idiosyncrasies of peculiar markets and exploitation by intermediaries.

China’s experience with monopsony intermediaries that pay miniscule royalties to copyright owners provides a glimpse into our own possibly dystopian future, in which a few legitimate digital distribution platforms become dominant while piracy remains unchecked online.

If, or when, the “winning” platform or platforms in this space emerge, become ubiquitous and reach monopsony status, they will have little incentive to maximize royalty payouts and it will be difficult for copyright owners to withhold content and reject their terms. While no United States service provider, even a monopsony, is ever likely to pay out the absurdly low percentages that the Chinese mobile companies pay, the potential for unfair treatment of and harm to creative industries exists. This result seems likely if we reach a point where a very limited number of monetization models co-exist with widespread piracy.”

So there we are. Undervalued inputs in one part of the music ecosystem impact all parts of the ecosystem, creating systemic dysfunction and prejudicing creators. Not exactly rocket science one would think, but somehow remarkably hard for many to grasp. Hopefully Professor Liebowitz’s report will resonate, and governments around the world will take the necessary steps to establish the conditions for a heathy online marketplace which will sustain creators and drive investment in culturally diverse production. It’s time. It’s past time.