A Perspective On Article 13 Solution To The Value Gap

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Guest post by Jason Peterson, Chairman & CEO of GoDigital Media Group

I recently wrote a paper about the Value Gap. This paper connects the general principles of solving the Value Gap with the Article 13 copyright directive.

Efficient Market Hypothesis:

If we put our econometrics hat on and look at the music market of the future, the “efficient frontier” would by definition create maximum value for all players in the value chain (based on their respective risk profiles). However, online service providers who do not pay free market rates for their content supply usage are able to arbitrage and shift a disproportionately higher amount of value to them while taking a disproportionately lower amount of risk. This is not fair. It is a distortion of the market caused by some unintended consequences of regulation.

Large Sites Disproportionate Value in Current Paradigm:

As of 2018, YouTube, according to multiple sources, drives at least $15B a year in worldwide revenue for Google. Google is vertically integrated, so each video impression on YouTube has margin captured by Google upstream at DoubleClick, AdWords, Google Display Network and AdSense. As a conglomerate, Google has, according to SEC filings, an average gross margin the last five years of 60.08% Content suppliers are paid up to 55% of revenue recognized at the YouTube level. This means YouTube’s gross margin asymptotically approaches 45%, with a 15.08% or more delta in margin captured by upstream ‘off the top’ fees charged by other Google companies. YouTube likely comprises $96.75B in Google’s stock market value at its current 43 price to earnings ratio (assuming a 15% EBITDA margin). This is expected to trend to $27.4B in revenue by 2020 according to analysts at financial firm UBS. That means an enterprise value of more than $176B at current margins – and EBITDA margins likely higher because overhead is largely fixed. In short, YouTube is en route to a $200B enterprise value. It and others such as Facebook can and should pay market rates for the usage of content. It’s a win-win for both the platform and the content suppliers while being sustainable for everyone.

Regulation Required to be Efficient:

That said, regulation is required in any industry where the output of investment is in the form of intellectual property. Intellectual property is not tangible and durable. It cannot be locked up or fenced in for its own protection. The only way to create value for authors and inventors is to incentivize their creation and reward them. It is for governments to grant and protect a basket of rights for such new works. Updated regulation is therefore required to rebalance the relative risks and rewards attained by each party in the value chain. This will enable many more to achieve a market living on the efficient frontier.

Music Is the Stakeholder in Regulation, Being The Most Popular Format:

Outside of China, Facebook is historically probably the most egregious non-payor for the use of copyrighted intellectual property. That said, we will use YouTube as an example of how a major content exhibitor can flourish in an Article 13 world. YouTube has more than 2B monthly active users consuming more than 5B+ video streams a day from a library of 1.3B+ videos that are a mix of professional and user uploaded content. Every minute more than 400 hours of content are uploaded to YouTube. These statistics are salient for the music industry because in 2018, 95% percent of the most-watched videos were music videos.

The Right Regulation(s) Creates a Win-Win:

We should be grateful to Chad Hurley and Steve Chen for founding one of the world’s greatest music services and to Google for creating one of the greatest content consumption interfaces ever devised. Now it is time for us to come together in a win-win situation. Legislation like Article 13 provides a legal framework that takes away ambiguity for collaborating content creators and content exhibitors. We use contracts when we care about the other side. We use contracts when we care because they address expectation on both sides. People are happy when reality meets or exceeds their expectations and unhappy when reality falls short. Therefore, the contract of the law provides clear expectations so everybody can meet or exceed them, and everybody can be satisfied.

Negative Results From An Inefficient Market:

Let’s get rid of this winner take all mentality. YouTube, like Facebook, are involved in creating an inefficient frontier. Regulation here is required to produce an efficient frontier and a free market. YouTube, doesn’t have to pay market rate, being protected by outdated laws that exclude them from having to pro-actively filter site content. It is true that YouTube has the best content filtering system in the world. But the onus to operate it is on the content owner. That shifts the leverage and advantage to YouTube in determining the rates that will be paid. For example, content owners who have been able to get wholesale rate floors and equity in other streaming services as part of their license negotiations have not been able to get either with YouTube (with rare exception in countries like India). With a free YouTube as a near-perfect substitute for paid streaming like Spotify and Apple music, we now have hundreds of millions of consumers who otherwise might pay into the system enjoying the content for free. The linked advertising pays content owners as little as a few pennies per thousand streams. The real cost of this “free instead of paid” model is billions of dollars a year in uncaptured revenue.

Blocking UGC is Good Policy as UGC is Becoming Less Valuable:

Now if YouTube feels it needs to block user-uploaded content because it cannot allow it on the site and be compliant with the expectations of the law that is completely permissible  I don’t think any professional content creator has a problem with blocking unlicensed uses. In fact, beginning in January 2007, we were the first organization identifying tracking and clearing rights on the YouTube platform. We have seen vast sets of data from all types of content, from nearly every corner of the world. Our observation shows that user-generated content is becoming less and less valuable. We are returning to an environment of premium content. Advertising rates continue to drop in proportion to vast increases in ad inventory supply outstripping advertiser demand. Premium content captures an increasing share of advertiser spend both because of premium brand association but also brand safety and relative scarcity of ad inventory. We live in an environment of too much choice. Everything ever produced is available on demand, yet leisure time and money aren’t increasing very fast. Certainly not as fast as the proliferation of content. A return to professional content is most likely good for everybody.

Facebook:

Facebook has taken advantage of the flawed regulatory system one step further. For fifteen years they have free-loaded on the backs of content creators, paying almost nothing. It wasn’t until 2018 that music companies began to get paltry fixed settlement payments from Facebook, acknowledging they cannot yet police their own service to pay content owners for the value created on the platform.

Content Recognition Technology:

It has been said that Article 13 would require online service providers to use content recognition technology. That it would be to expensive, to difficult to develop and implement, save for the largest companies. This is simply not true. There are companies like Audible Magic and Auditude (Adobe) that for ten plus years have been providing content filtering technology worldwide. There is, in fact, a marketplace for such services, and if the law provides for such a requirement more players will enter the space and prices for such services, based on supply and demand, will decrease

Related Issue of Fingerprint Ownership:

The issue of who owns the content recognition fingerprints is salient. In the future, the fingerprint itself could be as or even more valuable than the content itself because content without the ability to identify its use is very difficult from which to extract value. I would propose an amendment to the law in the United States, Europe, and other major countries providing for a mathematical representation of a copyrighted work to be derivative of the copyrighted work, and therefore subject to control by the original author.

Counter Arguments:

Opponents of any new laws suggest updated regulation will discourage online activity, especially in the areas of social media and free speech. Observation of the evidence shows this to be objectively untrue. Google, the owner of YouTube, has engaged in the world’s leading content recognition and filtering program called Content ID for 12 years and the velocity of content upload on the site has increased more than tenfold. In the same period, their monthly active user base has increased more than threefold. The no MEME movement is irrelevant. MEME’s are a recent phenomenon the world has survived without for thousands of years. It is in effect an Astroturf tactic, paving over the real issues. If someone wants to speak, do so, just don’t use other people’s content to do it. Yes, fair use may be hard to determine but content recognition and filtering systems can set new thresholds and business rules., For example, a 30 second or less use of a song or video clip to be permissible and certain users whitelisted if they are respected news agencies or educational organizations.

Don’t be confused, the solutions to the issues raised by discouragers of Article 13 are technical, not legislative.