Royalty Setting

The copyright and neighboring right royalty is the wage-like earning of the music performer, the composer and producer. In popular music performers usually play their own composition and sing their own lyrics. If the musician is self-published, all the three royalties directly pay the artist’s work. If a professional publisher is helping the artist as a composer, or a record producer as a recorded performer, they usually share the respective royalty revenues. In emerging markets fewer, in mature markets more composers are represented by publishers and performers by record labels.

International Comparisons

The CEEMID international comparison models are based on the implicit econometric model set out in the AKKA/LAA vs Konkurences padome case which goes far beyond the regional comparison suggested by the earlier Czech Léčebné lázně Mariánské Lázně v OSA case for comparing royalty tariffs in the European Union.

The EUCJ declared that “it is appropriate to compare its rates with those applicable in neighbouring Member States as well as with those applicable in other Member States adjusted in accordance with the PPP index, provided that the reference Member States have been selected in accordance with objective, appropriate and verifiable criteria and that the comparisons are made on a consistent basis.”

In our view, setting a royalty tariff, especially when comparison of other market prices is taken into consideration, should follow the principles of the IFRS 13 Fair Value Measurement international accounting standard. This accounting standard was endorsed as an official interpretation of accounting principles by the EU Commission Regulation Regulation 2012125, which is in turn a binding interpretation in the light of the directly applicable 11262008 EC Regulation. This document gives a practical guidance on how to use objective data in valuations. Although the language of the standard is mainly aimed at large corporation with heterogenous balance sheets, as a canonical, cross-country reading of sound accounting principles it is applicable for establishing the fair value of an assets or liabilities, including intangible assets such as royalty-earning copyright and neighboring rights.

On the top level of the hierarchy we find publicly observable prices in frequently traded assets, which is not applicable in our case. The second level of the hierarchy contains more reliable, publicly verifiable data sources and the third level of the hierarchy non-public information that is objective. Whenever possible, publicly available and verified information should be used.

The structure of the music and audiovisual industries makes the use of Level 1 input data almost impossible in a European context, because the vast majority of the industry players are microenterprises and sole solicitors, and even larger entities such as collective management societies and TV stations usually fall in the scope of the EU small- and medium size enterprise category. With few exceptions, this is the case with HORECA tariff payers, i.e. restaurants, pensions, hotels and other similar establishments. Micro-, small and medium sized enterprises are usually subject to simplified and limited financial reporting, tax reporting rules and mandatory official statistical reporting rules. Most of the EU economic statistics are created from tax and financial reports, and in other cases from mandatory statistical reports. Because creative and cultural enterprises usually do not fall into the threshold set for most enterprise statistics data collection, and because of the simplified tax and accounting reports, less official statistics can be created.

In the absence of high-level valuation input data, we must use level 2 (public) and level 3 (private) data sources that are by nature subject to interpretation. Such interpretation is subjective in the language of the standard because it is personally made by an objective analyst. The reliability of the valuation depends not only on the quality of the data, which is the case with level 1 data, but on the sound analysis of a competent analyst.

CEEMID made a large effort in the last 5 years to use high quality, publicly observable data and private data to create meaningful and objective social, economic and cultural indicators as set out in the EUCJ preliminary decision.

Market Comparators

The best models are based on market data and use information on prices and quantities agreed by independent, arms-length contractual partners. Our market comparator models process all collectively managed and estimated individually licensed uses of music and audiovisual content in a country. It is than possible to compare private copying values, value transfer to media platforms, or individual uses such as radio or television to the total market value of music listening per hour or film watching per hour. These models require the most data input.

We used such estimates in the Slovak Music Industry Report, in the calculation of private copying benefits to consumers and value transfer to YouTube in Hungary and Croatia.

Direct Estimates & Hypothetical Evaluations

Direct estimates are measuring quantities of unknown uses and they relate them to known market prices. Hypothetical evaluations ask the willingness of users to pay for uses. These models are easier to create, require less information, but they can be more easily challenged by regulators, licensees or auditors, because they do not rely only on independent and arms-length transaction data.

Hedonic Pricing

Hedonic price models are econometric price models that establish the residua value of music in complex services like hoteling or restaurant services. We have used hedonic price modelling to establish the value of music use in the HORECA sector. Technically these models could be used to evaluate the use in television or radio but the data requirements are extensive.