An anecdote about John Lennon and 5 fallacies about IMEs

Among the beatlemaniacs there is a well-known legend about the song “Sexie Sadie”, composed by John Lennon in 1968 and included in the so-called “White Album”. The Beatles were in Rishikesh (India), on a spiritual retreat to practice transcendental meditation under the teachings of Maharishi Mahesh Yogi, along with other celebrities of the time such as Donovan, Mike Love of the Beach Boys and Mia Farrow. According to the story, Maharishi and his assistants had inappropriate behavior with Mia Farrow and other students and, when the Beatles found out, they decided to end their stay in India abruptly. John was in charge of passing on the news to the Maharishi, who expressed his surprise and asked the beatle the reason for his departure. John replied: “If you were as cosmic as you say… you would already know it”.

This anecdote serves to illustrate the first fallacy about IMEs (Independent Management Entities):

1- “The traditional collective management organisations (CMO) are natural monopolies”: like John to Maharishi, we can answer: “if they were as “natural” as they say… “. According to economic theory, natural monopoly -as its name indicates- would tend to this structure spontaneously and without external interventions, such as the legal barriers to entry that have existed for decades or anti-competitive conduct in the management of exclusive rights by some entities. In any case, it will be the market that will regulate itself and expel the new “intruder” naturally and “ex post”, but of course the natural monopoly cannot be achieved or decided “ex ante” in the abstract, nor imposed artificially. In its day, the Spanish National Markets and Competition Commission (CNMC) exposed in great detail the barriers of entry -legal, strategic and contractual- existing in this market, so it is clear that there has been little natural monopoly in the collective management of exclusive rights. 

2- “The IMEs increase management costs”: we believe that collective management today is no longer -as it used to be- a management of rights holders, not even of works or categories of rights, but that technology and the market are pushing us towards a management of rights on specific works or fragments of them.  The rights market has been fragmented for a long time, this reality cannot be denied: an example of this is the “reporting” in the management of digital rights at a pan-European level, in which very different operators -CMOs, but also IMEs, rights holders and other licensing vehicles – manage rights licenses on musical works in a totally fragmented and detailed way before the DSPs; and increasingly also before the “user-generated content” platforms and, more residually, VODs. We insist: all of this has been technologically viable for some time and is -we believe- where the market is heading. Maintaining that, for collective management to work, we must presume that a single company manages all the works of all the owners in a given territory is a throwback to the last century. On the contrary, economic theory confirms that more competition means better service for the end customer and more efficiency for the market as a whole.

3- “The IMEs have a different business model than the management entities”: we particularly disagree with this statement. In its 2004 Communication, the European Commission stated that “the efficiency of a collecting society is not linked to its legal form.”. In the same spirit,, Recital 15 of Directive 2014/26/EU on collective management states that “independent management operators carry out the same activities as collective management entities”. Without entering here to discuss mandatory collective management rights, the business model in the strict sense is the same: rights are collectively managed (by virtue of contracts or by legal imperative), authorising the use of a repertoire through a non-exclusive license to users, in exchange for a commission (management discount). The rest is accessory, as a business model.

4- “Since the IMEs are for-profit, the rights holders are going to get less”: this statement seems especially striking to us. Like the CMOs, the IMEs finance their activity through the administration fee, so they are strongly incentivized to achieve the best results for their clients. Due to the historically monopolistic market structure itself, IMEs are forced to try to be more efficient than their traditional rivals, competing in management discounts and services to gain market share against operators with great market power; otherwise they will be expelled from the competitive contest. If, as a result of the efficiencies obtained, the administration discount is lower, this will have a positive impact on rights holders.

5- “The IMEs impose effective use in their rates and harm collective management”: simply not true. Whoever affirms this is unaware that 164 of the Spanish intellectual property act establishes a clear priority of criteria on which the CMOs must build the tariffs, placing effective use as the central and main concept. Paradoxically, this precept applies imperatively to collective management entities, but not to IMEs. Additionally, many of the CMOs are in a dominant position and must therefore comply with antitrust rules. The jurisprudence of the CJEU, the Spanish supreme court and the decisions of the competition authorities have repeatedly and very clearly established the need for CMOs tariffs to be equitable, so it is legally required that, when possible and feasible, said rates are based on -or at least, take substantially into account- the effective use. In other words, the CMOs must establish fees for effective use due to a legal imperative -regulatory and competitive- regardless of what the IMEs do or do not do.

Eric Jordi, Head of Legal & Business Affairs at Unison

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