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Paving the Way for Future Innovations: The Music Industry as a Case Study

· April 15, 2015

David Balto and Matthew Lane, antitrust attorneys, have authored a guest paper for DisCo on innovation in the music delivery sector.  David previously served as Policy Director at the Federal Trade Commission’s Office of Policy and Evaluation, and attorney advisor to the FTC chairman.

There is no doubt that we live in exciting times.  New technologies are constantly emerging that promise to change our lives for the better.  These disruptive technologies give us an increase in choice, make technologies more accessible, make things more affordable, or give us a voice.  However, disruptive innovations do not hit all areas of our lives equally.  There are some industries that are controlled by companies that don’t want to be shaken up and have the power to prevent it.  These consolidated industries are an anathema to disruptive innovation.  So how do we enable disruptive competition in these industries?

One answer is found in our competition enforcement agencies and the oversight they can achieve through antitrust enforcement and consent decrees secured when cases are brought.  The important role of consent decrees is often overlooked.  A properly constructed consent decree between the government and a company accused of anticompetitive behavior can restore competition and foster new competitive entry.  Permitting entry is vital to disruptive innovation because much of this innovation comes from start-ups and new entrants.

The music industry provides an excellent example of the vital role of government enforcement actions and consent decrees.  Over a half century ago the Justice Department brought enforcement actions against Performing Rights Organizations (“PROs”) for anticompetitive behavior in  the licensing of performance rights for musical works.  Because of these cases, the licensing of performance rights by the two biggest PROs – ASCAP and BMI – are now governed by consent decrees.  These decrees ensure that new entrants can obtain licenses, that those licenses will be set at fair rates, and that there won’t be discrimination between similarly situated music users.  Now the DOJ is looking to revise those consent decrees in a proceeding that began late last year.

The DOJ should proceed with due caution.  The music industry is extremely consolidated.  A handful of music publishers own and administer most musical works, and the performance rights to those musical works are currently licensed through only three organizations: ASCAP, BMI, and SESAC.  If not properly regulated through consent decrees these organizations could exercise market power, increase costs and stifle new forms of competition.  These threats are real and ongoing.  Just last year the courts responsible for administrating parts of the decrees prevented actions that would have harmed music users.

Our new paper examines the impact of these decrees on disruptive innovation.  The paper discusses how the consent decrees were recently used to prevent anticompetitive behavior and coordination between music publishers and the PROs.  This examination is beneficial because the consent decrees are currently being reviewed by the Department of Justice.  Any modification they make should continue to foster disruptive innovation and competition.  Therefore, the paper also examines how the consent decree may be modified and improved.  The paper suggests that any modifications include complete transparency and an examination of what similarly situated music users means regarding digital music users.  The paper also states that any change to music publishers’ ability to negotiate better rates outside of the PROs with respect to digital music users should be counterbalanced by an equal opportunity for these music users to also negotiate better rates outside of the PROs.

Competition

Some, if not all of society’s most useful innovations are the byproduct of competition. In fact, although it may sound counterintuitive, innovation often flourishes when an incumbent is threatened by a new entrant because the threat of losing users to the competition drives product improvement. The Internet and the products and companies it has enabled are no exception; companies need to constantly stay on their toes, as the next startup is ready to knock them down with a better product.

Intellectual Property

The Internet enables the free exchange of ideas and content that, in turn, promote creativity, commerce, and innovation. However, a balanced approach to copyright, trademarks, and patents is critical to this creative and entrepreneurial spirit the Internet has fostered. Consequently, it is our belief that the intellectual property system should encourage innovation, while not impeding new business models and open-source developments.