Deciding how to pay music royalties has always been difficult – trying to figure out what permissions are necessary, who has the rights to grant such permission, and how much the rights will cost. The one place where the rights were fairly simple – paying for the right to publicly perform musical compositions – may be getting more difficult. According to an article in the New York Post, Pandora may be getting a taste of that new reality, having to pay significantly more money to Sony ATV music publishers than it had previously paid for that same music when it was licensed by ASCAP and BMI.
The rights to publicly perform musical compositions had until very recently been relatively straightforward. All a broadcaster, digital media company or other music user needed to do was to pay ASCAP, BMI and SESAC royalties (ASCAP, BMI and SESAC are often referred to as the PROs, or Performing Rights Organizations) – and the music service essentially had the rights to publicly perform virtually all the musical compositions in the world. And ASCAP and BMI were covered by antitrust decrees – so their rates were more or less known for most categories of music use – only subject to a rate court hearing once every now and then when these collection societies could not come to an agreement with the members of a particular class of music users. While SESAC is not subject to the antitrust consent decrees, and not necessarily as easy to deal with, most music services figured out a way to cut a deal with the society too.
The statutory royalty or compulsory license paid to SoundExchange is really a collective or blanket license very similar to the rights paid to the PROs. This compulsory license setting rates for the public performance of sound recordings in digital media is a right that first arose in the 1990s – and applies only where that music is used by a non-interactive service like Internet or Satellite radio. The Copyright Royalty Board sets the rates for the public performance of the "sound recording" (the musical composition as recorded by a particular artist), SoundExchange collects the fees, and the services can use every song legally released in the US without getting any additional permissions. While the rates are always subject to litigation (and often subject to debate even after the litigation is over, as is evident from the recent introduction of the Internet Radio Fairness Act), they at least provide a one-stop shop for all users. Because of this one-stop source for the rights to all music, all noninteractive digital music services (such as all Internet Radio stations) have access to any music they want simply by paying the statutory royalty. They don’t have to clear the rights from record companies or other copyright holders one at a time (see, our article as to why Internet radio, though this statutory license, had access to the Beatles catalog, while interactive services, which don’t have a statutory license, had to wait years until those rights were finally provided to certain of these interactive services).
But slowly, this collective licensing model seems to be breaking down. With Sony ATV withdrawing from ASCAP and BMI, music services have one more rights organization with whom they have to negotiate in order to play music. And this publishing company is free to set royalty rates as it sees fit, not supervised by a government agency or rate court. The music services only remedy to demands for higher rates is to stop playing the music. If more large publishing companies (and it seems as if it will be mostly large publishing groups that will be able to go out on their own, as the music services can much more easily live without rights to smaller catalogs from smaller publishing companies or individual composers) withdraw from the PROs, as some have threatened, than the process becomes even more difficult for services, as they have more groups with whom they have to negotiate. And with no rate court or CRB oversight, these music users will likely have to come up with more money that they need to pay for rights to the public performance of musical compositions.
On the sound recording side, there have been defections from the SoundExchange collective – though driven by the music services’ desire to lower rates, rather than the music copyright holders’ desire to raise rates. As we have written before, a number of large digital music users, including Clear Channel, Entercom and Sirius XM, have negotiated direct licenses with various music labels in an effort to lower the rates that these services pay for music royalties. We’ve written, here, about some of the reasons that labels may find these direct license deals attractive.
But, what this fracturing of music licensing does is to make life more complicated – especially for smaller players in the music universe. For large digital music services, they can hire the people necessary to negotiate all the agreements that they need (though, to the extent that rights like those of Sony ATV are pulled from a PRO subject to an antitrust decree – they may be at higher rates). Smaller services don’t have that luxury, and will have trouble securing all the necessary rights, and getting access to all music, if the fracturing of music rights continues. For smaller publishers who can’t hold out for higher prices, they may be left with the PROs, and end up with higher administrative costs as there are fewer rightsholders among whom those costs can be distributed. For sound recordings, a similar dynamic may play out, as smaller services are less likely to be able to negotiate favorable direct license deals, and smaller rightsholders may be less likely to secure favorable deals.
Note, in some cases, any advantages of the larger players may fade away, as marketplace agreements can often be the best evidence of what the royalties set by a rate court or the CRB should be, in which case these directly licensed rates will end up being extended to all players in the industry. For in-store business music services (sometimes called background music services, or business establishment services), this proved to be the case when one of the largest companies negotiated a direct deal with one of the largest music publishers – and those prices eventually were found by rate courts to be the best evidence of the market price, which were used to set the price that all players in the market pay to ASCAP and BMI. If that was the case for some of the cases I talk about above, we might see higher rates for music publishing, but lower rates for sound recordings over time – which depending on the timing and magnitude of the changes, might balance out and not be ultimately be too bad – but there are a lot of "ifs" in that statement that could end up harming either services, or rightsholders, or both.
From time to time in the past, there have been discussions about whether the music rights system should not move more toward more blanket or compulsory licenses, as there would be more certainty, and lower transactional costs for services, and more certainty and more transparency for rightsholders (though rightsholders often complain about the transparency of collection societies – one of the reasons companies like Tunecore have justified their existence). I hope to write more about the extension of compulsory licensing in the coming weeks. But, we all will have to watch as these trends develop to see where services, artists and rightsholders find themselves in the coming years.