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Music Licensing—La Plus Ça Change?

· June 24, 2014

The French have a wonderful saying, la plus ça change, plus c’est la même chose, which roughly translates to “the more things change, the more they remain the same.” That’s an apt description of current, high-profile wrangling in the United States about music licensing under federal copyright law. Despite all the jarring changes to the recording industry over the past decade — remember Tower Records? — it’s the same issues and (mostly) the same players as always, arguing over a Rube Goldberg-like system of arcane complexity.

Tomorrow the House of Representatives (specifically the Judiciary Committee’s Subcommittee on Courts, Intellectual Property and the Internet) will hold a second round of hearings on music licensing. This inquiry coincides with a recent announcement by the Justice Department that it will review — and solicit public feedback on — the 73-year-old antitrust decrees that govern ASCAP and BMI, two groups which act as licensing clearinghouses for a range of outlets that use music, including radio stations, websites and even restaurants and doctors’ offices. As the New York Times has observed, “billions of dollars in royalties are at stake, and the lobbying fight that is very likely to unfold would pit Silicon Valley giants like Pandora and Google against music companies and songwriter groups.”

According to the consent decrees, which were instituted in 1941 after federal antitrust investigations, ASCAP and BMI cannot refuse licenses to music outlets that request them. These two “performance rights organizations” (PROs) have operated under this structure for decades, but in recent years have lost important legal cases having to do with licensing. Earlier in 2014, for instance, ASCAP lost a rate-setting case against Pandora in which several prominent music publishing executives were criticized harshly by the presiding federal judge. In response, major publishers like Sony and Universal Music Group have begun to openly discuss withdrawing from ASCAP and BMI, a move that would further complicate the licensing process.

So what’s the rub now? The issue, as you may have surmised, is one of money. The PROs argue that the structural changes in the music industry mean they face a more concentrated group of larger buyers, rather than a disparate collection of small radio stations, and believe that songwriters aren’t being paid market value because of “outdated laws and antiquated government oversight.” (For example, publishers feel the royalty for reproductions in CDs and digital downloads, currently 9.1 cents, is a depressed rate compared to what publishers and songwriters could command on an open market.) The suggestion is, therefore, that Comcast, Apple and Pandora have enough power to negotiate licensing deals on their own and do not need the protections of a federal judge on license prices.

Yet that’s not really the point. First, as I’ve noted before, antitrust settlements can and often do extend beyond practices otherwise illegal to restrict conduct that contributed to the violation. So a consent decree is inherently broader than the antitrust laws themselves. The ASCAP decree provision allowing the court to determine a reasonable license rate in the event of a dispute is a perfect example; even in price-fixing cases, antitrust law traditionally leaves setting the “right” price to the marketplace, not federal judges. Second, most economists would say that where a seller has monopoly power, the adverse effect on consumer welfare is not mitigated by so-called countervailing market power on the “buy side.” Having two sets of participants with market power duke it out over prices can yield results that shift the costs of the battles onto third parties — in this case end users.

Third, even if they were correct, the PROs seem to have forgotten the reason the decrees were entered in the first place. ASCAP and BMI are essential to any firm, large or small, wanting to broadcast, webcast, stream, sample or just play music publicly for profit. They collectively hold the rights to every CD and MP3 produced since 1972, the date after which a performance royalty is legally owed to the rights holder in addition to the artist or band. Whether for those or older songs, the PROs are literally the only game in town.

DOJ periodically revisits most antitrust consent decrees as a matter of best practices. That doesn’t necessarily mean the Justice Dept. is going to, or should, change or withdraw the ASCAP decrees. The same underlying market power and distribution problems still exist in music licensing, just as they did in 1941. DOJ itself explains that the decrees resulted from “the market power each organization acquired through the aggregation of public performance rights held by their member songwriters and music publishers.” As district judge Denise Cote ruled in March, the fact is that there is no (and never has been) a fair, competitive market for music performance rights. The ASCAP and BMI repertories are not substitutes for one another because a music service that needs a blanket license to program a compelling playlist must have licenses for all of them. The PROs thus not only have “very considerable market power that each of them holds,” Judge Cote emphasized, but that power “was magnified” by the way “they coordinated their activities with respect to Pandora.” Those bait-and-switch, collusive tactics are strong evidence that the ASCAP and BMI can and will exercise market power resulting from the inherent lack of licensing competition. Which is why, contrary to the claims of the PROs, the consent decrees and their unusual “rate court” provisions remain needed.

There are lots of other, and more even more complex, questions on the table before the House Judiciary Committee. Rights owners, performing artists and their trade groups have long been pushing for a performance royalty obligation for terrestrial radio, which by virtue of historic anomaly only pays license fees to artists, not rights holders. That in turn makes the legal definition of “radio” key. The statutory distinction between interactive and non-interactive services, created in 1995, means that “non-interactive” digital music services are eligible for a compulsory licensing fee set by the Copyright Royalty Board (CRB), made up of special copyright judges appointed by the Library of Congress, while interactive services must independently negotiate rates for music licenses. And that, in turn, has created more price dislocations among different distribution methods for music. The CRB decided that the market for sound recording rights was materially different from the market for public performance rights, and set compulsory license fees at rates many times higher than prevailing prices for performance rights. As a result, Pandora pays about half of its revenue to record companies for sound recording rights, and only 4% to PROs for performance rights. The disparity between rates for the public performances versus recorded music does not exist for most of ASCAP’s revenue streams since the need to acquire recording licenses only applies to services that transmit digital audio. Yet because only new media music services must acquire sound recording licenses, the PROs end up receiving far more money from performance rights fees than do the record companies.

These are obscure issues that would almost completely be ignored by most lawmakers and the general public were it not for the content involved. Music has been a central part of the human experience for millennia. The difference today is that with the increased importance of copyright and licensing in our digital age, music is distributed and priced very differently depending on the technology, identity and longevity of the provider. That’s an inherently unstable state of affairs, but one likely to persist for a long, long time, if only because the universe of people who fully understand all its complexities is so small. La plus ça change!

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.