On June 23rd 2016, the U.K. voted in favor of leaving the European Union. The referendum put the majority at 52%, with England and Wales in favor and Scotland and Northern Ireland against. The turnout of 72%, at 30 million, was the highest in a UK-wide vote since the 1992 general election. The hashtags #Brexit and #EUref trended on Twitter, with celebrities and artists weighing mostly against Brexit. It is good to reflect here on Brexit’s impact on the British and European music industry.
Trade and Copyright
The economic consequences of Brexit start with trade. It is early to guess what new agreements the U.K. will forge with Europe. Intra European trade between the British Isles and the Continent might eventually revert to normal if the Kingdom gets, although this is far from being guaranteed, an accommodation within the European Economic Area (EEA) –such as Norway currently enjoys. This would take at least three years to negotiate and will be expensive, with the British Treasury expected to contribute sizeable sums to the EEA for the privilege of continuing to access European markets in the most favorable terms. Such payments would be less than the U.K pays to Brussels now, but not by much and Great Britain would have to recognize the free movement of people within the area, a difficult proposition after the Brexit vote.
Without continuity in trade, Brexit’s impact on the music economy would be severe. The U.K. is always among the top four music markets in sales of recorded music product, and typically it is one of the highest spending per capita countries. Last year, British musicians accounted for over 17 percent of album sales in Germany, France, Sweden, Italy, Spain, and the Netherlands. A third of all sales in the UK were in domestic recorded product. Physical sales, which typically produce higher royalties for artists and labels, tend to be more popular in Europe, so the U.K.’s exit from the EU has the potential to bruise the market and artists.
To see this in context, many years ago, before Great Britain entered the European Common Market, there were tariffs on goods coming into the U.K. If a record was bought in France and then brought into the U.K., it had to be declared and a tax was levied. With the European Union, U.K. businesses stopped paying import taxes of any kind when trading with other E.U. companies. This could likely change now, raising wholesale prices and causing labels to charge more to compensate. For example, the majority of the vinyl in the U.K. is made in plants in European countries, and the acquisition cost of these recordings is bound to escalate for both labels and consumers.
Law is the chaperone of trade and Brexit has also raised concerns about how copyright is going to be protected and enforced throughout Europe. The European Commission is currently reviewing copyright legislation, including safe harbor provisions, as part of its Digital Single Market strategy, aimed at opening up digital opportunities for people and business, and enhancing Europe’s position as a world leader in the digital economy. The current state of the E.U.’s digital landscape is somewhat fragmented, housing twenty-eight separate digital markets, one for each member country. The Digital Single Market strategy is more pro industry than its equivalent U.S. legislation, embodied by the current regulations of the U.S. Digital Millennium Copyright Act (DMCA). In the U.S., the safe-harbor provisions of DMCA allegedly allow platforms like YouTube to get away with certain forms of copyright infringement not allowed in Europe. Recently, fifty-eight members of the European Parliament signed a letter to the European Commission urging them to give consideration to fair artist payments in Digital Single Market legislation, making it harder for Internet Service Providers to claim ignorance of piracy.
The U.K. stood to benefit from these regulations, let alone having a say in their proposal and implementation. This now seems lost. In fact, Brexit may well reduce British independent artists’ negotiating power in both domestic and international copyright reform. And if the Digital Single Market strategy is not actively supported by the British government there is a real possibility that a different, less punitive, set of copyright measure will replace the initiative, with local artists losing even more. Moreover, with Great Britain’s departure, Brexit would seem to undermine artists’ collective bargaining advantage in Brussels.
Largely because of this, on June 29th U.K. Culture Secretary John Whittingdale, MP, released a statement pledging support for the creative sector, including musicians. After arguing that it was one of the strongest and fastest growing sectors of the U.K. economy, contributing 16% of total gross value added, the minister pledged to work closely with intellectual property owners and others, “[making sure] they have a voice as the U.K prepares for the negotiation to exit the E.U.” Mr. Whittingdale added that he would “support [and seek] new arrangements which will maintain our trade relations and encourage [the creative community] to look for new opportunities across the world.” At this stage, the sentiment is unlikely to allay suspicion of a bumpy road ahead, for Great Britain’s priorities in securing a new deal with Europe may not lie with cultural workers.
Moreover, the E.U. gives more than £1 billion to the creative industries, and U.K. applications for arts funding and various venues around the U.K. benefit from it. This would be lost. Although the U.K. music industry has not relied on E.U.’s funding as heavily as other member countries, the benefits of these monies are considerable, even if they are not always obvious to the general public. Venues such as The Village Underground, a 1000-capacity warehouse venue in east London, currently benefits from two E.U. programs. LivEurope, an initiative supporting concert venues that promote up-and-coming European artists, pays to slot emerging European bands on bigger bills. Another E.U. funded project is Creative Lenses, a four-year investigation into new business models for the cultural sector that is meant to back such new models financially. The British Phonographic Industry (BPI) and PRS for Music (the new amalgam of the Performing Right Society and the Mechanical-Copyright Society that collects on performance rights for songwriters and publishers) already help British artists fund tours, and do not depend on E.U. handouts. But these are more limited funds and BPI and PRS mostly award artists with a strong fan base in the UK and Europe, not aspiring talent.
Better returns in recorded music and the intellectual property collections go hand in hand, in the music business, with more touring. Touring musicians are rarely afforded the friction-free entry into a country that ordinary tourists enjoy. Before the Leave vote, British touring artists could travel freely and perform throughout the major markets in Europe. Now, it is increasingly likely that they will need to acquire separate working visas for each country in the E.U. they wish to visit, as limitations could soon be placed on British nationals’ ability to live and work there. At the very least, the extra work and cost involved in procuring a visa to tour Europe might crowd out the smaller, marginal, bands. This, incidentally, would also apply to European acts wishing to play in the U.K.
Another trade related issue that might have an impact on European touring into Great Britain, is the purported reintroduction of ‘carnets’, documents that were in existence before the E.U. Carnets detailed every single piece of equipment on deck and were required to move product across borders so the customs authority at the border could keep track. Gear had to be declared, imports identified for tax purposes, and domestic goods checked for payment of the Value-Added Tax. Once this was done, the equipment could travel and clear British ports on exit and entry. A carnet would cost between £1000 and £2000 (approximately $1400 to $2900), and would last a year.
Clearly, these new trade regulations would make tours more complicated to run and finance – and interfere as well with crew and freight travel. Underlying all of this, of course, is the decline of sterling, making touring artists and their labels prone to pay higher expenses, not least for chartered flights and sundries.
The devaluation of the British pound since Brexit has been very much in the news, and its continuation has the potential to affect many parts of the U.K. music industry. It may not all be bad news, as we observe below.
Days after the vote, two trillion dollars in value was wiped off the global stock markets. The British pound took the biggest hit of all asset classes and fell sharply against the U.S. dollar, falling below the $1.30 mark for the first time since 1985. Traveling abroad, as noted for touring gigs, will definitely become more expensive. But in the classical economic model, a weak currency can boost economic growth because it makes exports cheaper to foreign countries. This applies to all manner of music earnings abroad.
Record labels, publishers and artists that export music may grow in tandem with a weaker pound. They incur most of their costs of recording and creating music in weaker British pounds but will get paid with more valuable currencies. PRS, the largest performing rights organization in the UK, reported in their latest annual report that their biggest source of revenue, at 36% of the total, came from international royalties. International royalties were more important to PRS domestic public performance and broadcast collections (of the 196 million pounds that PRS collected last year in international revenues, 61% came from Europe, 21% from North America, 10% from Asia Pacific and the rest came from less established markets).
Where imports are a consideration for record labels or music product retailers, the majority of expenses would come from highly liquid currencies with similarly low interest rates where hedging is cheap. Hedging the British pound against the Euro costs roughly 0.25% compared to the 14% cost of hedging the Euro against a currency like the Brazilian Real. Exchange risk exposure, where it arises, should be manageable.
It should be realized too that foreign companies are seeking out new investment opportunities in Britain as a result of the devaluation of sterling. Unlike a domestic exporter, who prefers a weak currency, a foreign investor wishes for weakness in the currency before the acquisition and then hopes for a rebound after the investment is made. Peter Hemington, head of M&A for BDO United Kingdom, said he was seeing more interest in the wake of the Brexit vote from private equity firms looking to acquire new companies in the UK. Indeed, AMC Entertainment made it clear recently that the cheaper pound pushed them towards making a $650 million acquisition of European movie theater operator Odeon & UCI Cinemas; the deal became 10% cheaper for AMC according to Leo Kulp of RBC capital markets in the week after the Brexit vote, and the company saved more than 65 million pounds.
Investors in the music industry will also be looking for opportunities to buy music companies that once looked expensive. And one of the purest ways to take advantage of the drop in value of sterling might be to invest in music publishing catalogues. This is because publishing royalties behave more like bonds and have predictable cash flows. In general, currency fluctuations have a more meaningful impact for bond type investments than equities, which are much more volatile (equity investments are dependent, above all, on beating earnings expectations and/or successful exit strategies). Veteran management executive Darren Michaelson (Smashing Pumpkins and Elton John) announced a £100 million ($130 million) investment fund early in July. Music, he said, was one of only two industries in the entire commercialized world that operated on royalties, the other being mining. Old-fashioned intellectual property rights were at least as alluring to Michaelson in the days after Brexit as ever.
Finally, a cheap pound has the benefit of attracting tourists because goods and services become cheaper than back home. In fact, a weak British pound could mean that concert tickets, accommodations, food and other expenses are now cheaper for tourists. This is far from being neutral to the U.K. music industry and the U.K. economy. A research piece by UK Music claims that music tourism generated £3.7 billion ($4.8 billion) in total direct and indirect spending in the U.K., with as many as 10.4 million music tourists making up 38% of the whole live music industry in the last twelve months.
Whereas the impact of Brexit on trade and copyright is uncertain, and potentially harmful to the music industry, there may be short and medium term silver linings in the devaluation of the U.K. currency. Analysts seem pessimistic about the long-term prospects of Brexit for the domestic economy, which would affect all music revenue. If live music continues to be the main source of income for most musicians, new travel restrictions and higher expenses there could hurt touring and the livelihood of performers. There may be some compensation with music tourism revenues picking up in the British Isles, but audiences today are more global than ever and artists look to promote themselves abroad. Moreover, better copyright enforcement under the tutelage of new E.U. initiatives can no longer be taken for granted.
In short, Brexit is a mixed bag for the industry. In the meantime, uncertainty rules because its unraveling will take time. The first rule of playing a new game is, of course, to understand it. This will not happen soon enough.
By Alex Stewart and Ryan Stotland
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