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Music Licensing Explainer, Part III: The Uncertain Impact on Antitrust Law

· April 19, 2017

This post assumes you’ve read the previous two, if you haven’t you can find them here and here.

It is indisputable that the performing rights organizations (“PROs”) have played an important and procompetitive role in making the music industry what it is today. The benefits that PROs provide are mainly that they offer “unplanned, rapid, and indemnified” access to the songs in their catalogue. Nearly all music users, until recently, have been able to get immediate access to public performance licenses for the music they need simply by taking blanket licenses from the major PROs of the time.

The full work licensing question has never definitively been answered, but it has at the very least historically been assumed by the DOJ, Supreme Court, and music users that the PROs effectively offer full work licenses. The language the Supreme Court uses to describe the service provided by the PROs – “unplanned, rapid, and indemnified access” – implies full work licensing. However, the reason why there is still even room for debate is that it’s never really mattered. Most music users take licenses from the three major PROs (ASCAP, BMI, and SESAC) and pay these PROs based on fractional market shares. In exchange, these music users have never worried that they do not have the rights to play the songs in these PROs’ catalogues. The question only becomes relevant when music publishers wish to fragment music licensing and move rights out of the PROs.

For the purposes of this post, I will assume that – despite the findings of the DOJ – it is debatable whether the PROs have offered full work licenses to date. Even still, the historical assumption of a full work licensing environment has great implications for how the courts and the DOJ have treated the music industry under the antitrust laws.

Will fractional licensing re-open PROs to antitrust challenge?

The licensing practices of ASCAP and BMI have long been under antitrust scrutiny. Challenges from the DOJ led to the consent decrees at issue now. There were also a number of private antitrust challenges that culminated in the landmark case Broadcast Music, Inc. v. Columbia Broadcasting System, where CBS accused the blanket music license as being per se illegal under the antitrust laws.

The BMI v. CBS case is taught by virtually every antitrust professor for one important reason: the case showed that the Supreme Court was unwilling to rigidly apply antitrust laws to strike down behavior that benefits consumers and competition. The language the Supreme Court uses is interesting. After admitting that the blanket license is literally price fixing, the court states “[t]he Court of Appeals’ literal approach does not alone establish that this particular practice is . . . ‘plainly anticompetitive’ and very likely without ‘redeeming virtue.’ Literalness is overly simplistic and often overbroad.” The Supreme Court found that the blanket license was necessary to create a new and valuable product that was desired by the market and beneficial to music users.

The BMI v. CBS case put to bed most private antitrust challenges of the PROs licensing activities. Private plaintiffs would find it too difficult and expensive to win an antitrust suit without being able to argue that the blanket licenses were illegal price fixing, and the Supreme Court’s description of the PROs’ procompetitiveness made it even more challenging.

However, virtually every defense of the blanket license by the Supreme Court appears to assume a full work license. The Supreme Court describes the blanket licenses as “allow[ing] the licensee immediate use of covered compositions, without the delay of prior individual negotiations, and great flexibility in the choice of musical material” which provides “unplanned, rapid, and indemnified access” to the works in ASCAP and BMI’s catalogues. The DOJ significantly relied on this decision in its closing statement as a reason why the DOJ determined that the consent decrees do not permit fractional licensing.

The question is whether the BMI v. CBS decision survives a decision that the PROs can pursue fractional licensing. If music users can’t rely on the PROs for “unplanned, rapid, and indemnified access” and must instead seek out co-owners in the market, then the PROs don’t offer the same procompetitive benefits that the Supreme Court describes. The PROs will no longer offer a new and valuable product through its blanket license, instead offering a product that is like every other music licensor – just with more market power. If the BMI v. CBS decision does not survive, then licensing through PROs will have significantly more antitrust risk.

Were past merger enforcement decisions wrong?

It’s not only the courts that may have to reassess antitrust enforcement in a fractional licensing world. The DOJ will have to start rethinking merger enforcement if fractional licensing is upheld. There have been several big music publisher mergers over the past few decades. While they’ve passed through U.S. enforcement with barely a comment, the same is not to be said for our E.U. counterparts. In the E.U., where fractional licensing is common, antitrust enforcers have heavily scrutinized music publisher deals.

A good example is the Sony/EMI merger, which closed in 2012 to create the world’s largest music publisher. The Federal Trade Commission voted 5-0 to close its investigation of Sony/EMI and the deal was allowed to proceed without comment or remedy. Things did not go as smoothly in the E.U., which required Sony to divest several catalogues before approving the merger. A chief concern of the E.U. was the control shares of the merging companies. These control shares take account of fractional shares on an equal basis as full publishing rights. As the E.U. explained, “the bargaining power of a publisher is the same if that publisher holds 100% in nine songs or a 25% interest in the same amount of songs.” The E.U. had the same concerns in the Universal/BMG Music Publishing merger five years prior. Measuring market power through control shares showed far higher market shares than measuring through other means.

U.S. antitrust enforcers simply did not have the same concerns as the E.U. during these mergers, presumably because the U.S. licensing market operated as if (if not in fact) the PROs offered full work licenses to the songs in these publishers’ catalogues. If the U.S. starts down the road towards fractional licensing, that may mean that past merger enforcement decisions were wrong.

Potential impact of antitrust laws on the market

The market could look significantly different if past judicial and antitrust enforcer decisions no longer apply due to a change in facts. The biggest impact would be a potential reversal of the Supreme Court’s decision in BMI v. CBS. If the Court’s reasoning no longer applies and we are just left with price fixing, then the blanket licenses offered by the PROs could be held to be per se illegal. This could mean an end to PROs as the primary way licenses are sold.

In addition, the music publishers themselves may be under far more antitrust scrutiny. The music publishing industry is now heavily consolidated, and the consent decrees do not protect music users and consumers if the publishers operate outside of the PROs. Fractional licensing would only increase their market power, and any action they take that leverages that power could be called into question. The rate court proceedings between ASCAP and Pandora show the significance of this. In her decision, Judge Denise Cote commented on the coordination between competitors in obtaining high licensing rates from Pandora – noting that “ASCAP, Sony, and UMPG did not act as if they were competitors with each other in their negotiations with Pandora.”

These changes will introduce uncertainty that will be bad for all parties in the music industry. The simplest solution will be a reversal of the district court’s decision that the consent decrees allow fractional licensing. Otherwise, the music industry could be spending the next few decades figuring out the new antitrust rules that govern their business.

Matthew Lane is a lawyer and policy advocate who has spent his career tackling the interesting issues that occur when competition and intellectual property law and policy collide.

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