UMG Files Complaint with the EC Concerning the Mechanical Royalty Rate in Europe

UMI, the international division of UMG, has filed a complaint with the Competition Authority of the European Commission (EC) concerning mechanical reproduction rights in Europe.

Although the complaint was filed by only one of the major international record companies, were UMI to be successful all record companies selling their product in Europe would benefit. Indeed, observers have described the complaint as an attempt to secure something they have been unable to achieve through negotiation, a lower mechanical rate for the record companies, by regulation from the Competition Authority.

The centre of the complaint is economic. UMI argues that the E593m ($ 577m) it calculates was paid by record companies in mechanical royalties in Europe in 2001 was too much. Previously the majors have argued that they pay over $ 100m a year in mechanical royalties on revenues that they do not receive because of discounts they have to make with retailers (see M&C 186/11). Accordingly UMI is seeking that the EC declare that the mechanical rate as set out in the Standard Contract agreed between IFPI, acting on behalf of the record companies, and BIEM, on behalf of the mechanical collection societies of Europe, is too high. UMI is further seeking that the EC declare that three specific clauses, relating to mark ups and discounts, minimum royalty levels, and the maximum number of tracks on a recording, infringe European competition law.

In support of its position UMI alleges that the agreements previously negotiated between IFPI and BIEM constitute an abuse of a dominant position by a body (BIEM) with which record companies have to deal if they are to sell their product in Europe. Furthermore, UMI argues that by refusing to accept the actual realised price (ARP) a record company receives from the sale of a recording as the basis of the mechanical royalty rate rather than the published price to the dealer (PPD), BIEM is unwilling to accept present-day commercial realities. In effect UMI argues that ‘BIEM members are in a position whereby they can determine how record companies must run their businesses’.

The mechanical rate was last agreed between IFPI and BIEM at 9.009% of the published price to the dealer (PPD). However, there has been no agreed rate in place since June 2000, following the breakdown in negotiations between IFPI and BIEM and mechanical royalties have been collected on the basis of the old rate or on the basis of (slightly) modified national (rather than Europe-wide) agreements. The negotiations foundered on IFPI’s desire for the rate to be based on ARP (see M&C 186/1).
UMI argues that that the recent consolidation of retailing has resulted in retailers being able to demand far higher discounts from record companies than in the past and that the record companies are having to fund these from their own revenues. As a result, argues UMI, whereas music publishers, composers and collection societies share a fixed 9.009% of the PPD of a recording, the margins of the record companies that take the risk of financing recordings are far lower because of the discounts they have to offer. In response BIEM has argued that if a record company wants to promote albums through discounts, composers, who have no say in such promotions, should not be required to fund them through lower royalty rates.

BIEM also notes that both IFPI and BIEM notified the EC of their past agreements and that, although the EC began an investigation into the mechanical rate in 1997, the EC never indicated that it found the agreements anti-competitive.