Consumers of Music May Pay More if DOJ Plays Favorites
Punishing people for listening to music is exactly the wrong way to protect the music business.
Performing Rights Organizations (PROs) control the rights to nearly every song in America generating revenues exceeding $1 Billion. The American Society of Composers (ASCAP) and Broadcast Music Inc. (BMI) are the two main PRO’s in the United States.
A long history of anticompetitive behavior resulted in ASCAP and BMI entering into antitrust consent decrees with the DoJ, dating back to 1941, which allowed ASCAP and BMI to maintain their monopolies in exchange for restraints on their ability to manipulate prices through coordination and other anticompetitive actions. Succinctly stated, the consent decrees require the two largest performing-rights organizations to provide a license to licensees upon request, prohibits discrimination between similarly situated licensees, and in the absence of private-market agreements on rates and terms, provides a rate-court process to settle disputes.
Recently, ASCAP and BMI have attempted via a variety of methods to weaken the consent decrees, allowing them to use monopoly power to extract higher fees for music licenses. These methods have the not only caught the eye of the DOJ, but have resulted in $1.75 million fine and a loss in Federal Appeals court in favor of Pandora.
Pandora VS ASCAP
Pandora was entitled to a rate-setting proceeding thanks to a 1941 consent decree that settled an antitrust lawsuit brought by the government alleging monopolization of performance rights licenses. Pandora’s case against ASCAP had been precipitated by publishers withdrawing digital rights to their catalogs, a move that forced Pandora to negotiate directly with the publishers, and resulted in higher royalty rates. That led to a court fight, and in 2013, U.S. District Judge Denise Cote determined that that the consent decree required Pandora be given a license to stream despite the move from ASCAP’s publisher members.
ASCAP appealed this decision and lost in a decision handed down this month.
According to Reuters:
A federal appeals court in Manhattan rejected appeals by a music licensing group and music publishers that could have forced Internet radio service Pandora Media Inc to pay higher royalties and have access to fewer songs.
In a case closely watched in the music industry, the 2nd U.S. Circuit Court of Appeals on Wednesday rejected an effort by the American Society of Composers, Authors and Publishers to charge Pandora more to license its music from 2013 to 2015.
It also said rules governing ASCAP licensing “unambiguously” barred music publishers from negotiating higher rates for their works with “new media” users such as Pandora, even as ASCAP licensed the same works to other users. Additionally, the court said it could not “rewrite the decree” to let publishers pick and choose how works are licensed.
DOJ VS ASCAP
The opening of Pandora’s box, resulted the DOJ launching a probe into ASCAP’s practices with “new media” like Pandora and resulted in additional compliance and a $1.75 million settlement.
According the Hollywood Reporter:
The DOJ was also concerned by word that ASCAP was giving advance payments to publishers in return for exclusive rights to license works. According to the DOJ, ASCAP entered into approximately 150 contracts with songwriter and publisher members with exclusivity clauses. This arguably is a violation of a consent decree that mandates that ASCAP take only non-exclusive grants, which allows publishers to cut direct deals with outlets like Pandora or Spotify if they so choose.
ASCAP has agreed to no longer insist on exclusivity. The rights organization says the exclusivity was never enforced and it had already made the change prior to the settlement by telling its publishers that it was backing away from exclusivity. But it’s this activity that has caused ASCAP to agree to a $1.75 million settlement.
By blocking members’ ability to license their songs themselves, ASCAP undermined a critical protection of competition contained in the consent decree. The Supreme Court said that ASCAP’s consent decree is supposed to provide music users with a ‘real choice’ in how they can access the millions of songs in ASCAP’s repertory — through ASCAP’s blanket license or through direct negotiations with individual songwriters and publishers. Today’s settlement restores that choice and thereby promotes competition among the songwriters, the publishers and ASCAP. This settlement also sends an important message to ASCAP and others subject to antitrust consent decrees that they must abide by the terms of the decrees or face significant consequences. Renata Hesse DOJ Antitrust Division
Although ASCAP has suffered losses in the courts and a fine as a result of a DOJ probe, ASCAP and BMI continue to press for changes to the 1941 consent decree. According to ASCAP CEO Elizabeth Matthews. “With these issues resolved, we continue our focus on leading the way towards a more efficient, effective and transparent music licensing system and advocating for key reforms to the laws that govern music creator compensation.”
Despite their ongoing anti-competitiveness behavior, Ms. Matthews has promised to continue advocating for reforms to the existing consent decrees. These reforms will increase PRO’s bottom lines, but will punish consumers through increased fees on small businesses and new media–which is the wrong way to protect the music business.
DOJ Plays Favorites
While one half of the DOJ is enforcing the consent decree and fining ASCAP for their ongoing anti-competitive behavior, there is a section of DOJ that wants to throw the record industry a crony-bone that will not only reward the music publishers but the trial lawyers at the same time.
The issue is called “fractional licensing.” The longstanding consent decrees ensures publishers cannot force radio stations, small business and now streaming companies from being charged monopoly rates on the music they play. While the DOJ is concluding a two-year review of its antitrust consent decrees, Billboard is reporting that the DOJ is considering implementing a “fractional licensing” regime for music. That means if a bar or tavern owner wants to play a song, it first needs a license from all of the owners of that song – creating a litigation nightmare for small businesses.
As Edward Woodson explains:
Today, if a restaurant wants to play music, it buys a license from the largest music collectives, also known as Performance Rights Organizations or PROs. A license from these PROs gives the restaurant the right to play millions of songs for a reasonable fee and in turn the PROs distribute the fees to all of the owners of the song. Of course, no restaurant will play millions of different songs, but these licenses are a necessary form of insurance against infringement. (Note, this insurance is particularly important because the restaurant in this case typically does not know which publisher/PRO controls the rights to which songs – but that is a topic for another day.)
Fractional licensing would upend this efficient licensing by the restaurant. The license from the PROs would have given the restaurant the ability to play any song in its catalog. Under fractional licensing, the restaurant would now have to go out and negotiate a license with any owners not covered by the PRO. Remember, we are talking about millions of songs, and in 2010 the average number one song had between three and four co-owners.
While lawyers known as Patent Troll prowl the street looking for businesses to threaten and sue, the fractional licensing scheme would open the door to the creation of the Copyright Troll, lawyers who would sue small businesses for playing music without getting the rights from every owner of the song. With fines of upwards of $150,000 per song, per play, this DOJ crony giveaway could literally put a business out of business for playing the wrong song. Congress should ensure this racket never sees the light of day.