Reframing the Economic Rationale of Music Publishers’ Relationships with Rights Management Entities – Shifting to a Systematic Approach

In general, a sourcing strategy describes the options, decisions and measures in sourcing internal (make) or external (buy) goods/services – determining the boundaries of a firm. The foundation for questions of this type is seen in the transaction costs theory. Williamson (1991) theorised the transfer of goods and services across interfaces as transactions. He distinguished between market-based transfer (external procurement) and transfer within internal corporate hierarchies. Moreover, he characterised transactions in terms of three cost-determining dimensions: asset specificity, frequency and uncertainty. McIvor (2000) developed a practical framework for strategic outsourcing that highlights three aspects influencing the sourcing strategy: the company's value chain, its core competencies and its supply base. We will focus our elaboration on these.

The core competencies of music publishers depend largely on the rights assigned to them by the authors they represent. Traditionally, publishers conclude contracts with authors for royalty shares. In return, the management activities undertaken by the publisher on behalf of the author range from its historical task – the printing of sheet music – over the licensing of music rights for recordings to the adaptation of the works into film or commercials (Tschmuck 2009); the latter of these are also referred to as synchronisation rights.

For example, if the core competencies of a publisher lie in acquiring and arranging synchronisation deals, the publisher focuses on front office activities, which consist of direct contact with potential licensees and negotiation efforts (Friedrich & Klingner 2017). On the other hand, depending on the scope of the repertoire represented, the publisher might focus on back office activities with direct interface to regular licensees – for the most part OMSPs (Towse 2020) – and achieve economies of scale in this area. On the bridge between the economies of scales achieved with OMSPs and individual synchronisation deals, micro-synch deals in the social media area gain traction.

Our interviewees perceived the following as the most market-defining trends:

As the interviewees pointed out, the most important innovation accelerator for music publishers in recent decades has been the decline of the physical recording market. Music publishers have been forced to reinvent their value chains to make up for the losses.

While shifting efforts to other traditional licensing channels was certainly a valid option, today music publishers need to think outside the box. Some of them sought cross-sector roles (recording, distribution, etc.) to achieve economies of vertical integration (Mol et al. 2005).

However, once all internal management areas have been analysed, opportunities in RME relationships (supply base) can be explored. In 2020, more than half of the music publishing royalties of German publishers were administered by CMOs, which indicates that this is a high value segment (DIW Econ GmbH et al. 2020: 47). With regard to outsourcing to other RMEs, a heterogeneous picture appears, between positive and negative valuation, trust and the desire for more control. Four of the respondents answered that they execute rights management outside their area of economic residence through SPs – a fairly traditional practice (Towse 2017). Others have diversified the management of their catalogues in hybrid ways, combining sub-publishing with direct memberships in various CMOs. One interviewee used SPs in core regions as well as publishing administrators. Direct relationships with CMOs were utilised as well, although to a lesser extent. Depending on the RME, the relationships were set at a tactical/operational level, e.g. to receive royalty payments more efficiently, or at a strategic level, e.g. in the expectation of creative services for the publisher's catalogue:

4.1.1

Excursus: Outsourcing business models

Evaluating sourcing strategies is a challenging task – one with many parameters. Although models are far from being able to represent reality completely, they can be helpful in building a better understanding of the complexity of reality. For example, Kulembayeva et al. (2022) proposed a form of study in which outsourcing business models were represented as graphs. To apply this idea for RMERM, we conceptualise RMEs as vertices and relationships between them as edges. In doing so, we can assign weights to the edges as either costs or profits. For illustration purposes, we introduce the following subset of RMEs that were considered in the business models of our interview partners:

{SP: sub-publisher, PA: publishing administrator, C: CMO}

For simplicity, we take a cost-based view and assume that all of the above RMEs manage the categories of rights in an equivalent way from which they deduct different shares or fees. We model a possible case based on the sourcing models described by our interviewees (see Figure 2). Note that RMEs with uni-territorial mandates are coloured, while multi-territorial RMEs are bordered and white.

Figure 2

Given that the fixed costs f (infrastructure, staff, etc.) are spread over each managed RME relationship, assuming that each of n relationships that a music publisher P manages on its own has the same administrative overhead and considering ν to be the shares or management fees that an RME k deducts from the royalty stream, then we can calculate the total royalty loss for P as follows: ∑k=0nvk+fn \sum\nolimits_{k = 0}^n {{v_k} + {f \over n}}

Note that each RME has its own RMERM system. Thus, v_k must be calculated recursively to determine the total royalty loss: vk=w+∑lmvk,l {v_k} = w + \sum\nolimits_l^m {{v_{k,l}}} where m is the number of RMEs {l,…,m} managed by k, and w is k’s own share/commission fee deducted from the royalty stream.

Assuming the above, disintermediation through an additional direct relationship (make or buy

The “make” is establishing a direct relationship, the “buy” (or more likely “keep”) is relying on an intermediary to manage it.

) becomes profitable for a music publisher if:

∑k=0n+1(w+∑lm−1vk,l)+f+αn+1<∑k=0nvk+fn \sum\nolimits_{k = 0}^{n + 1} {\left({w + \sum\nolimits_l^{m - 1} {{v_{k,l}}}} \right) + {{f + \alpha} \over {n + 1}} < \sum\nolimits_{k = 0}^n {{v_k} + {f \over n}}}

Notice that we have adjusted the recursive formula for v_k so that m − 1 is the number of RME relationships managed by k, reduced by one for P. This is the case as CRM mandates are usually exclusive. Also consider that α denotes all additional fixed costs recurring for P after it expands to meet the requirements of an additional RME relationship. Please note that these formulas ignore market entry costs, as they can be considered marginal in the long run. Instead, it is assumed that recurring fixed and variable costs have a greater impact on the publishing business.

Clearly, the model presented here is limited in many respects. However, this formal introduction may illustrate that this is a non-trivial issue from an economic optimisation perspective. It could also serve as a good introduction to more complex considerations, such as those following in the next section.

Relationships with RMEs should be regularly reviewed for profitability. This question goes beyond the comparison of alternative RME services. Rather, it is about the impact of alternative outsourcing constellations on the costs of business networks, as shown in the previous section. However, the model in the previous section ignores a range of factors with additional influence.

Table 2 highlights two core questions, each with aspects to be considered in three dimensions. The decision-influencing factors presented in the table are based on the empirical results derived from the interviews (see also Klingner et al. 2021). These can be posed in connection with the evaluation of RME relationships by music publishers. For existing relationships with RMEs, publishers can access historical data and thus review the royalty payments of the RMEs for amounts, and time and cost efficiency (hard facts). A prerequisite for checking this data is, of course, its availability and cross-compatibility – key aspects for the success of the service activities “Service Control” (Section 3.5) and “Performance Control” (Section 3.6).

Other factors that should also be included in the analysis of the current status are more difficult to quantify, but are also of central importance to promote publisher loyalty (soft facts), e.g. the experience in communicating with the RME, or the transparency and service portfolio it provides. Progressive RMEs may provide additional services that support publishers in covering other parts of the cultural value chain, allowing for economies of scope/vertical integration. Other soft facts may be the support of certain industry standards, or binding inter-RME dependencies. This review can be carried out at different levels of granularity, e.g. to determine for which territories or categories of rights the representation by an RME is particularly profitable or inefficient.

However, some CRM options are only accessible for music publishers under certain market conditions (see Section 3). Since there are few restrictions on who can become a member or principal, CMOs and IMEs are arguably the most democratised options.

In evaluating and selecting RMEs as new providers for a particular combination of selected territories and categories of rights, reviewing publicly available data for analysis would be practical. Among other things, this can help determine whether external coordination by an intermediary RME is truly deficient, or whether the weaknesses lie deeper in the copyright management chain (see Section 4.1). Since direct relationships add fixed costs, this should be considered when deciding whether direct relationship efforts are truly worthwhile. If competing RME options exist for a defined combination of categories of rights and territories, the options can be weighed against each other.

Several KPIs can be used for the analyses. To explain this in more detail, we will look at the use case of assessing external CMO data. As outlined in Section 2, CMOs still often hold historically induced monopolies for territories and categories of rights. Rochelandet (2003) examined the efficiency of CMOs by quantifying the performance (Table 3) of three European CMOs between 1991 and 1998 using several metrics. Rochelandet (2003) also reviewed the relevance of these metrics. The performance metrics with the highest relevance are listed in Table 4:

To obtain an aggregated KPI, Rochelandet (2003) proposed three different combinations of KPIs using data envelopment analysis (DEA), each tested once with the functional objective of output maximisation and once with input minimisation.

While Rochelandet (2003) analysed the performance for entire repertoires managed by the CMOs, a narrow analysis may be of interest for publishers’ concerns – i.e. depending on the category of rights or managed territories. From a practical point of view, however, it should be noted that not all data are publicly available in order to even enable carrying out such a specific analysis. As our research focuses the European Union, for which the 2014/26 EU Directive defines a harmonised legal environment and where CMOs are obliged to publish transparency reports, the public availability of certain key figures and ratios is mandatory. This applies to:

The revenues per category of rights (Article 22 (2) Annex 2. (a); Px)

That said, for a market-wide analysis, the relevant factors include not only the availability of data but also the comparability and the clarity of the information; however, the latter of these features are often not to be found in the data made available (Reguera et al. 2016). These are requirements for the technical controllability and connectivity of the data. While prototypes for an aggregated and interactive assessment of the CMO market exist, these can only be drawn up for a limited sample period and range of CMOs, and thus only show a snapshot of the zeitgeist under investigation (Klingner et al. 2021).

With our interview partners, we found the evaluation of existing and potential cooperation with alternative RME options to be based primarily on their own or other publishers’ experience from working with RMEs. A purely external evaluation of the RMEs, as just described in more detail for CMOs, was rather absent. Possible reasons for this are the associated aggregation effort of the data and the lack of assessability due to the quantity of parameters.

In the preceding section, we outlined the aspects to be considered when publishers take an aggregated look at RME relationships. In this way, publishers can identify current RMERM weaknesses from internal, interfacial and external perspectives. However, trust and effective communication are key interfacial aspects with RMEs, too. This is an area that the publishers interviewed had a good sense of. In particular, openness, friendliness and promptness were cited as predictors of high engagement in RME relationships:

However, when it comes to initialising a new RME relationship, it can be difficult to estimate these factors. Requests for information

Article 20 of Directive 2014/26/EU requires CMOs to provide, upon duly justified request, information on the subject-matter they represent and on where they can and cannot determine the uses of that subject-matter.

RME relationships must be clearly defined in the design of any underpinning agreement that a publisher negotiates with an RME. Depending on the RME, this is done on a bilateral basis or within the limits set by the other contracting party.

When RMEs share risks and meet as equals, such as with co-publishers, there is more room for individual approaches to the design of the underlying contracts, e.g. in the services to be provided or the data formats to be used. However, RMEs handling large repertoires, such as CMOs, are in a different position, since they can’t achieve economies of scale without standardising their services and thus their contracts.

Should a publisher decide to apply for a direct relationship with a CMO or revise an existing one – by expanding or narrowing the subject matter to be managed – several process steps need to be initiated. In a previous study (Klingner et al. 2021), we analysed these process steps. This involved modelling the user journey of rightholders interested in direct membership with five European CMOs. We found that the steps, data and documents required for membership application and works registration are very different, resulting in a very cumbersome process with a lot of manual work and little generalisability.

It is hard to imagine, as manual as the procedures for applying for membership are, that adjustment to the management of categories of rights and territories could be less complex. While we do not have specific evidence on the admissions and withdrawals of this matter, we expect similar results. However, different observations might apply to negotiations with more technology-driven RMEs.

At first sight, it might seem contradictory for the need to arise to formulate and institute a mechanism of control to evaluate whether RMEs are properly licensing, registering and accounting for exploitations of music works, given that these tasks constitute their essential job. However, this is indeed the biggest challenge that rightholders and publishers face: RMEs cannot monitor every use and unambiguously map the usages to musical works (Lyons et al. 2019: 67). In CMOs, members can exercise direct influence to improve the services by using their voting rights. However, even if CMOs are aware of the problems, they have to make compromises in order to keep administrative costs within tolerable limits. Thus, certain licensees, especially those with low turnover, cannot be monitored directly by the CMOs (Butler 2020). Therefore, provided this is done responsibly, it is a great relief for CMOs if part of the monitoring is carried out directly by the respective rightholders or licensees. As a result, they are often closely involved in the reporting process.

If publishers are involved in the monitoring activities, it is sensible for them to cross-check the royalty statements from the CMOs with their internally recorded usage data. Since publishers as well cannot record every use of the repertoire they manage by themselves, they rely in part on sources of information they deem trustworthy.

However, it seems that in some cases more control is desired and carried out:

The sources of usage data used for comparison with the royalty statements are diverse. A good start for cross-validation may be provided by so-called inquiry lists, published by CMOs when certain uses could not be matched to the managed repertoire due to incomplete data:

In the preceding section, the transfer of audio files from the publisher to the RME was discussed. In this case, the monitoring service was contracted on the RME's side. Professionalised monitoring services using audio fingerprinting, however, work for CMOs as well as for single rightholders and licensees. Due to high administration costs on the RME's side, it is not uncommon for publishers to commission monitoring services themselves.

Just as the use of monitoring providers requires collaboration between labels supplying recordings of the creative works, working with performing artists, organisers or booking agencies brings its own business challenges: dealing with different channels of communication, digital and analogue, structured and unstructured, as well as their sensitivities and subtleties.

Especially in the area of live performances, some publishers become proactive and create or submit usage reports themselves. However, this is only possible in the constellation that the publisher represents an author of the works who is also the performing artist or if the publisher has a close relationship with the artist's label or booking agency. This is therefore an edge case, which is, however, associated with a high administrative effort on the part of the reporting publishers. In addition, this practice lies in a legal grey area and is not unconditionally accepted by the CMOs.

The AKM obliges event organisers to ensure that the performers at their events submit the setlists. The submission of usage reports by third parties, such as publishers, is only accepted under certain conditions and requires consultation with the competent AKM department [see AKM (2021)].

The information on the work usages varies largely in transparency and form depending on the communicating parties. The same applies to royalty statements. This is making validation, consolidation and cross-checking of data more difficult.

Complaints are also handled in different formats and procedures. For example, the lists generated by monitoring service suppliers may be sufficient for some RMEs. Other RMEs require the submission of the complaints in their own specified formats. The most structured procedure would be to cross-check the usage data and the royalty statements and create a complaint on that basis.

The degree of automation involved in matching the usage data with the royalty statement data, as well as the subsequent complaint generation and submission, depends on whether a mapping of the data formats is possible. However, as the data formats differ significantly, the design of new interfaces is always laborious and long-term success cannot be guaranteed, e.g. if RMEs decide to change their accepted data formats. Thus, technical tools are not available for every data format.

The question of whether RMEs provide the agreed services was addressed in the previous section. When it comes to how RMEs deliver their services, publishers can use the agreed-upon service levels and expectations as a review reference. Performance monitoring can be done using a variety of indicators. These were discussed in Table 2, can include both value-based and cost-based metrics, and can initiate a new Improve phase (Section 3.2). Among the interviewees, the value-based view dominated:

If there were considerations with regard to the cost-based view, then these tended to be on the publishing side, i.e. whether the administrative effort is worthwhile or whether it is better to save process costs, e.g. by implementing a minimum threshold for complaints:

While the influence of publishers on the activities of RMEs is limited, especially if they do not have voting rights, they can exert pressure in indirect ways. This is where, as shown in the foregoing interview response, the value-based perspective comes into play. For example, complaints can initiate a reform process within the RMEs’ organisation.

Although the publishers had some intuition of performance control in their relationships with RMEs, a systematic approach for continuous monitoring has not been described. Still, there is potential here, e.g. by setting up KPIs and integrating them into a system of goals and measures in a balanced scorecard (Kaplan & Norton 1992; Weinstein & Bukovinsky 2020).

Publishers are limited at several stages in their dealings with RMEs. For example, different RMEs set different interfaces, making the transition to a direct relationship unnecessarily complicated. Surely it is reasonable for commercial RMEs to create lock-in effects. However, in the case of CMOs, where reciprocal networking is the main focus, all efforts should be exerted in terms of full harmonisation of activities. Indeed, there are harmonisation efforts – there are data standards such as CWR or CRD, and there are common databases – but there is still a lot to be desired in the implementation by the CMOs. The Music Data Dilemma 2025 report, a study commissioned by the U.K. Intellectual Property Office (IPO), finds that the problems of data inconsistency in the music sector can be addressed through education, interoperability, governance and collaboration (Lyons et al. 2019).

In particular, with respect to the final point, regulation should establish more stringent rules for the implementation of common practices among RMEs. To enable such rigorous improvement practices as described in Section 4.2, data must be regularly updated and historicised, either by professional analytics providers, the umbrella organisations for RMEs (e.g. CISAC, BIEM), or in a decentralised manner by enforcing a standard for structured reporting by RMEs and offering technical tools for automatic consolidation and analysis of data.

However, as long as data is not equally available for all rightholders, publishers who gain a clear picture of the CRM system will leverage their competitive advantages and provide the highly demanded transparency to their rightholders. To do this in an economically viable way, these publishers focus on technology-enabled orchestration of data flows in the management of RME relationships. In this context we find three scenarios for the use of technology:

Use of an RME's proprietary software through a contractual relationship with it;

As a result of the above options, publishers may position themselves more as providers of RME services or more as procurers of RME services. Thus, RMERM can be considered as a service integration and management (SIAM) problem (Goldberg et al. 2015). Since even the largest CMOs are only able to manage all relevant categories of rights and territories of the mandating rights owners in networks, they naturally have their own RMERM. However, comprehensive RME networks are no longer managed only by CMOs. Publishers implement SIAM functions to suit their needs and capabilities.

However, a thorough introduction of RMERM is only possible for those publishers who have the appropriate capabilities, especially financial resources. Thus, larger publishers take advantage of RMERM far ahead of SMEs.

Although this paper cannot address the inequality caused by economic constraints, this is a point that should be given more consideration in regulation: If dominant CRM options are to prevail solely on price and quality, information asymmetries and market entry barriers should be eliminated as best as possible to prevent unfair competitive advantages. Otherwise, large publishers or mergers will use their resources to rationally manage their RMERM, and SMEs will inevitably have to live with the most affordable, but not necessarily best, options. This means that competition and thus incentives for innovation in the CRM market will inevitably be set only by the former, and predictably for their own benefit maximisation rather than that of all rightholders.

Why should a publisher give up the opportunity to enter into direct relationships if they offer him attractive conditions? Why should he care about the CMO, which will have to operate at higher costs after he withdraws lucrative repertoire? Why should he act in the interest of solidarity with low-income rightholders and promote cultural diversity?

If maximising one's private property is the key to success in the current economic system, all the above questions are negligible. In fact, they are ideological issues. That being said, Rochelandet (2003) points out that a self-centred approach to reviewing the performance of CMOs may not do justice to them: it is not the purpose of a CMO to differentiate services for delimited scopes of repertoire to maximise profits for certain groups of rightholders – as it may be the case with certain RMEs. It may also be seen as “socially inefficient”. Or as Adam Smith said: “No society can surely be flourishing and happy, of which the far greater part of the members are poor and miserable.” (Smith 1827: 33)

Watt (2016) introduced the concept of optimal collective size, arguing that average profit per member decreases with additional members above a certain threshold. While the average profit optimum is at the point where there is the largest gap between the price the marginal licensee is willing to pay and the cost per work, the “social optimum” is at the point where the marginal costs equal the price.

The above arguments are diluted if the assumption that quality, price and marginal demand per work are the same, does not hold. Licensee demand varies greatly depending on the repertoire managed by an RME. Competition in the CRM market is highly dependent on the managed repertoire. This can be to the detriment of low-income rightholders and cultural diversity.

Another point that reinforces this tendency is that most regulatory incentives have been set for the MTL market, which is heavily dominated by large-scale businesses. If infrastructure in traditional CRM markets is increasingly neglected, traditional CMOs will eventually be unable to offer attractive prices to licensees and viable administrative costs to rightholders. In both cases, cultural diversity would increasingly suffer: Either licensees would turn away all the more from the economically unattractive repertoire offered by traditional exploitation options, or niche authors would no longer have the financial incentives they need for their creative activities.

And this is where the “direct membership” system might have a knock-on effect: in the short term, it leads to increasing administrative costs for CMOs, but in the long term, it could boost their business when they provide competitive services. Greater attractiveness to authors can lead to an increase in members, which can bring positive effects for a CMO, such as greater visibility and market power. The challenge is that the CMOs would need to find measures to reduce their administrative costs through innovation.