In a non-precedential summary order on December 19, the Second Circuit affirmed a decision interpreting the BMI consent decree, which governs Broadcast Music International, a performance rights organization (“PRO”) that gathers music rights together to be packaged in a single blanket license. The details of the music battle and its implications are discussed in my previous posts [1, 2, 3, 4]. The affirmance means that BMI can not only fractionally license, it can do so under the consent decree as it is currently drafted. This decision will be terrible for the music industry, enabling new forms of market power that could be abused by license holders to increase prices.
On August 31, the Department of Justice made an interesting strategic move that turned a fight over consent decree language into an epic standoff. In its reply brief, the DOJ called BMI’s bluff and almost completely turned BMI’s legal strategy on its head. Reading the brief, one could almost imagine the DOJ reciting Dirty Harry’s famous line “You have to ask yourself, do I feel lucky?”
The fight is over fractional licensing, or the licensing of only a portion of a song’s copyright. Fractional licensing does not give a licensee the rights to play a song, because the licensee must first contract with all other fractional owners to assemble 100% of the rights. Fractional licensing can be a drag on the use of music, so Congress set the default rule as full-work licensing – meaning each copyright owner can license the full work but owes each co-owner their share of profits. While parties are free to change the default rule by contract, the DOJ argues that the antitrust consent decrees that govern ASCAP and BMI contain restrictions on the use of fractional licensing. BMI disagrees.
If that explanation seems vague, it’s because it is now clear that what we all thought the DOJ was arguing is dramatically different from their actual position. It all started with BMI’s attempt at a strawman argument. BMI thought the DOJ was taking the position that fractional licensing is completely barred by the consent decrees. BMI argued that under current law on consent decree construction, the DOJ can’t get all the way there, due to the way the consent decree is drafted. BMI argued that if you only take DOJ’s plausible arguments, you get the result that fractional licensing is not regulated under the consent decree at all. Perhaps believing that this could not possibly be what the DOJ wants, BMI then advanced its interpretation where it gets to engage in fractional licensing but under the antitrust restrictions of the consent decree.
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.MORE »
What Do Licensing, the Rhine, and the Silk Road Have In Common?
In my last post I explained the history of the music fight, and in this post I wanted to look forward to the problems music users fear if they can no longer get full work licenses from ASCAP and BMI. The biggest issue is from what law professor Michael Heller described as the tragedy of the anticommons. This tragedy might sound complicated, but it’s actually a simple way of describing a wide range of coordination breakdowns that can come from too much ownership of a single resource.
The Bloody History of the Anticommons
The tragedy of the anticommons is not merely academic: it actually has a very interesting and sometimes bloody history. The tragedy has been developed by a number of economists and scholars to describe a wide range of modern problems, like hold-up, double marginalization, patent thickets, and submarine patents. However, one of the clearest examples of the tragedy comes from toll collectors along the Rhine River in medieval Germany.
The Rhine River was the commercial superhighway of Western Europe from around 800 AD. As such, the Holy Roman Empire closely guarded the tolling rights along the river and kept tolls low to promote trade. However, local German leaders, usually low-ranking nobility, erected unsanctioned castles along the Rhine River to collect tolls without permission. These “robber barons” would stretch chains across the river to prevent passage without payment. As the total cost for traveling the Rhine went up, merchants started to avoid the Rhine entirely. Each baron was acting in their own self-interest by taxing a resource common to all stakeholders: the commerce along the river. In the aggregate, however, these individually rational decisions turned out working to everyone’s disadvantage. It actually became cheaper for merchants to take much more difficult land routes to their destinations. This of course had a disastrous effect on trade and the income from sanctioned toll collection.
The solution came in the form of the Rhine League, which actually led military campaigns against the robber barons and destroyed their castles. Today, the oldest surviving international organization – Central Commission for Navigation on the Rhine – was actually formed in part to coordinate fees and duties among the countries along the Rhine River.
The Rhine is not the only place in history where the tragedy appears. It seems that the prosperity that came from the trade of goods and culture between Europe and China starting in the early 1300s was due to the consolidation of lands by Genghis Khan under the Mongolian Empire. Prior to Genghis Khan, the route from Europe to China went through many countries that were unsafe and demanded tribute from merchants transporting goods. These taxes and dangers cut into the profits of traders and the trip was not especially attractive. Genghis Khan’s conquest greatly diminished the amount of tribute gatherers and, along with the prioritization of safety, led to the rise of the Silk Road. The trade that resulted introduced Europeans to a wide variety of goods, spices, and gunpowder. Important ideas were also exchanged, leading to the introduction of bills of exchange, deposit banking, and insurance to Europe.
As DisCo has covered before, a major legal battle is being waged in the music industry. The battle concerns the intersection of music copyright and antitrust law, and it could dramatically change how consumers interact with music. On May 18, the Department of Justice (“DOJ”) is expected to file its opening brief in an appeal of a district court decision rejecting its interpretation of a consent decree entered into in 1941 (and amended since). The outcome of this appeal could have major and long lasting repercussions for Internet radio and music streaming.
How the Music Industry Historically Worked Out Its Issues
The music industry joins a handful of other industries, like major league sports, which have a unique relationship with antitrust laws. These industries all have very significant and unique problems that are solved through competitor coordination, but competitor coordination is normally illegal under the antitrust laws. These industries generally operate under some kind of exception to the antitrust laws, because the problems outweigh the competitive concerns in a limited coordination. In the case of the music industry, a complicated basket of rights extended across millions of songs would make it nearly impossible for music services to exist without some market intervention. Every recorded song is covered by two copyrights, one for the recording and one for the composition, and every copyright can have any number of owners. This leads to a counter-intuitive relationship between buyers and sellers where buyers want the smallest number of sellers possible, as long as those sellers are required to play fair. This leads to the lowest search cost and the easiest way for buyers and sellers to find each other.
Enter the performance rights organizations (“PROs”). These PROs gather many composition licenses together and offer them at a blanket rate to music buyers. This is, of course, called price fixing in antitrust terms. However, the DOJ recognized the benefits of PROs and negotiated a settlement that would allow the PROs to continue to operate unchallenged by antitrust laws as long as they were bound by certain rules that ensure the PROs played fair and didn’t abuse their immense power. This assessment of the PROs was later endorsed by the Supreme Court. The set of rules the PROs operate under is called the consent decrees, which cover the two largest PROs in the music industry – ASCAP and BMI. These consent decrees provide a floor of protections for music buyers.
Today, virtually all music services take blanket licenses from the major PROs. The PROs in turn gather composition rights primarily from large publishing houses like Sony and Universal Music Publishing Group.
Less than a week after agreeing to pay $1.75 million to the Department of Justice to settle an investigation into antitrust misconduct, the American Society of Composers, Authors and Publishers (ASCAP) was on Capitol Hill yesterday, asking lawmakers to roll back the consent decree to which the performing rights organization is bound.
On May 12, DOJ had asked a federal court to hold ASCAP in contempt, stating that the PRO had “undermined a critical protection of competition” and violated its federal commitments. Concurrently, DOJ and ASCAP filed a settlement relating to the alleged misconduct.
As DisCo has previously covered, two federal courts found “troubling coordination” among ostensible competitors in the music publishing industry, which contributed to Justice’s recently concluded investigation. The 7-figure settlement is a stark reminder of the continuing need for antitrust protections, even as Congress is being asked to relax those commitments.
Yesterday Billboard wrote that the Department of Justice was reportedly taking a position against a major source of gridlock in music licensing: so-called “fractional licensing.”
As readers of DisCo may recall, the Department of Justice has been investigating alleged anticompetitive activities by the nation’s performance rights organizations (PROs). Two of the major PROs, ASCAP and BMI, are already governed by long-standing consent decrees originating from previous antitrust cases. In the course of efforts to update those consent decrees, DOJ has reportedly said that it will look disfavorably on contractual terms that gridlock musical compositions.
This is a crucial development, because gridlock is one of the greatest impediments to more viable options for music delivery, and, one federal judge has already found, has been used anticompetitively in an effort to extract supra-competitive prices.MORE »
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.MORE »
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.”MORE »
Are copyright holders allowed to decide without legal constraint to whom they will license their content and on what terms? That is the issue facing Pandora and other new streaming radio firms, for whom music and its associated licensing fees represent the biggest hurdle to commercial success against more established broadcast radio competitors. The answer lies in the sometimes obscure interface between the Copyright Act and antitrust law in the U.S.
In Pandora Media, Inc. v. American Society of Composers, Authors & Publishers, an antitrust case currently pending in federal court in New York, the streaming company is suing ASCAP and some of the major record labels for “withdrawing” their content from the ASCAP joint licensing venture, thus forcing individualized negotiations. It’s a leading-edge dispute, scheduled for trial by year-end, that may help catalyze a new approach to the old question of whether — and if so to what extent — owners of copyrighted digital content are permitted to refuse to deal with competing distribution channels on dramatically different commercial terms.
Most Project DisCo readers likely know about Pandora, a prominent start-up in the Internet radio space — one of the hottest markets around these days, especially given the launch of iTunes Radio by Apple. What is less understood is that streaming music on the ‘Net is fraught with legal issues surrounding copyright, constraints that effectively function as a barrier to the more widespread adoption of such disruptive technologies.
That’s not a lot different from the case of streaming Internet television pioneer Aereo, which as Ali Sternburg points out is caught in legal limbo between different rules (from conflicting judicial decisions) in different regions of the county: and a whopping legal defense bill as well. Copyright in addition plays a key role in the current exemption of traditional over-the-air radio stations from licensing music, an implicit subsidy the recording industry has been lobbying to change for years.
The Pandora-ASCAP fight represents a tricky issue at the intersection of intellectual property (IP) and antitrust. The ASCAP litigation actually dates to 1941, when the government entered into a consent decree settling a complaint that alleged monopolization of performance rights licenses. The settlement, still in place more than 60 years later, requires the organization to license “all of the works in the ASCAP repertory.” A month ago, presiding District Judge Denise Cote (who also issued the decision finding Apple’s e-book pricing deals a violation of the antitrust laws) entered summary judgment for Pandora. She reasoned that the consent decree gave Pandora the legal right to a blanket license
even though certain music publishers beginning in January 2013 have purported to withdraw from ASCAP the right to license their compositions to “New Media” services such as Pandora. Because the language of the consent decree unambiguously requires ASCAP to provide Pandora with a license to perform all of the works in its repertory, and because ASCAP retains the works of “withdrawing” publishers in its repertory even if it purports to lack the right to license them to a subclass of New Media entities, [Pandora must prevail].