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ASCAP and BMI, which are the largest of the performing rights organizations - together controlling an estimated 85 or 90 per cent of the musical compositions - are subject to antitrust consent decrees.  They can't discriminate between music rights holders, and must offer the same licenses to similarly situated services, i.e. they must charge all webcasters according to set formulas - they can't cut deals with individual webcasters and offer them better deals, unless such deals are open to all that have similar qualifications.  Moreover, the rates that they charge are subject to government oversight by a "rate court" - a Federal District Court judge who can hold a trial to determine the reasonableness of any proposed rate.  This oversight is required by the antitrust consent decrees that govern both ASCAP and BMI.

As we have written before, SESAC, the smallest of the current PROs, is not subject to rate court review for its rates, nor is it restricted from "cutting deals" on the rates that it charges.  It is a private company, not subject to any antitrust consent decree.  Some music users have, from time to time, suggested that SESAC be brought under such decrees - including a group of TV stations that filed a lawsuit a year ago seeking to impose antitrust scrutiny on SESAC.  As SESAC is often able to require royalties from users that seem higher than those that would be due to it if it was paid on a strictly pro rata basis, these kinds of concerns arise from time to time.

But SESAC is still a fairly large organization, in business for a long time, and most media companies are accustomed to dealing with it.  EMI, and any other publisher that follows its lead, would seemingly be in a position similar to that of SESAC, and not be covered by the antitrust consent decrees.  Thus, any such publisher could charge what it wanted for the public performance right to the compositions that it controls, and even charge different services different amounts.  And it may be difficult for licensees to realize that they have to deal with a new organization or organizations to license music, and it will make it harder to determine which songs a music service has licensed or which ones it already has the rights to use.  Some webcasters are still are surprised that they have to pay SoundExchange, which has been around in one form or another for a decade, so how will they get the word that they now can't rely on ASCAP, BMI and SESAC for all their public performance needs for musical compositions?  While ASCAP's amended regulations (see Section 1.12 of those regulations dealing with this New Media opt-out) provide that ASCAP will must notify all New Media services when any publisher decides to avail itself of this New Media opt-out, and what songs will be licensed directly, as SoundExchange has itself found out, such notices often don't command the attention that one might think that they would. 

Collective licensing was developed to provide a one-stop shop to clear vast catalogs of music.  Many feel that it is necessary for those users - like a webcaster - who needs acceess to a broad array of music in order to operate its business.  When the sound recording performance royalty was first established in the 1990s, it came with a mandatory collective licensing approach (the "statutory license"), so that all users could easily determine how to pay for the music that they use, without needing to deal with every rights holder - perhaps having to negotiate a different deal with each one.  As we wrote here, that is why Internet radio has had the Beatles catalog for so long, even though interactive digital music services, which don't have a compulsory collective license only recently have been able to obtain such licenses.

If music publishers associated with record labels generally start to exercise their rights to withdraw their catalog from the PROs, it's possible that they could even exert more control over the use of the sound recordings.  If, for instance, they control both the publishing and the master recording (the sound recording) rights to a particular band's music, and they feel that the statutory sound recording performance royalties set by the Copyright Royalty Board are too low for a particular recording, they can effectively block the use of that sound recording by extracting a higher price for the musical composition the next time the license for that composition becomes due.  One could even see different prices being charged for the rights to different musical compositions (in fact, most Beatles compositions are held by EMI - so it is possible that every Internet radio operator will not have access to their recordings if this combined licensing scheme goes into effect).   While the efficiencies claimed by the publisher might exist in the case of some interactive services, or in cases where you are dealing with a very limited number of songs (e.g. negotiations to use the music in video productions), for traditional Internet radio services, the efficiencies seem to diminish, not increase.

Just what digital services are affected by this move?  Broadcasters do not seem to have to worry about this development, as the amendment to ASCAP's regulations allowing this partial withdrawal from its licensing system excluded them (and the definition of "broadcaster" under the antitrust conset decree (see Section II(f)), seems to exclude cable and direct broadcast satellite as well, as indicated in ASCAP's press release on the matter.  This exclusion would seemingly include broadcaster's Internet simulcast's of their over-the-air programming.  But other digital music services that are subject to Sections 114 (webcasters), 115 ("DPD", or "digital phonorecord deliveries", i.e. copies or reproductions of musical compositions made digitally) and 106(1) (other digital reproductions by audio services), are all covered. 

This is an evolving story.  There are many questions that remain.  One unanswered question is exactly which songs are covered by this opt-out.  Another is how it will affect the rates charged by ASCAP.  Finally, the practical effect remains to be seen.  It may well be that this new system will in fact prove more efficient, or will provide benefits to users and composers - or it may impose some of the burdens that I describe above.  Until this is all sorted out, music companies will need to watch carefully to ensure that they license the music they need - from the proper places.  More on some of the other issues involved in digital music licensing can be found in our advisory - The Basics of Music Licensing in a Digital World. 

NOTE:  Corrected 5/10/2011 to note that ASCAP, and not the music publishing company, sends out the notices to the services of a New Media opt out when a publisher decides to exercise it right to opt out of the normal ASCAP licensing scheme. 

Note that these proceedings only deal with ASCAP and BMI for commercial radio broadcasters. Pure Internet radio operations do not pay under these rates. Nor do television stations, which are in their own process of negotiation or litigation over the rates that they will pay to these organizations.  Noncommercial radio also has its own process for determining rates paid to ASCAP, BMI and SESAC - through the Copyright Royalty Board.  SESAC (the third of the so-called "performing rights organizations"), which by some estimates represents 10-15% of all composers, also is not covered by these proceedings. SESAC is not currently covered by any antitrust decree requiring that their rates be overseen by a court, as are BMI and SESAC.  Thus SESAC is free, like any other business, to negotiate rates with each broadcaster, and to refuse to allow the use of their music by a broadcaster unwilling to pay their fees. While a group of TV broadcasters last year sued SESAC on anti-trust grounds, no decision has been reached in that case. 

Also, these fees only represent the fees paid for the use of the musical compositions (or musical works) licensed by ASCAP and BMI (the words and music of the song), not the song as recorded by a particular artist. As we have written many times before, while radio does not currently pay for the use of sound recordings for their over-the-air broadcasts, the issue of whether broadcasters should pay for the use of these sound recordings is still very much alive, as the recording industry seeks to impose a “performance royalty” or “performance tax” on radio. Radio already pays a sound recording performance royalty for all music streamed on the Internet, as set forth in an agreement between The National Association of Broadcasters and SoundExchange. 

Using music in any media enterprise is clearly expensive, and broadcasters need to watch carefully to make sure that they have the rights they need for the services that they provide.  For information about the rights that you need, check out our memo outlining the various music rights that you may need to operate.  And watch carefully as the rights and obligations are always changing!

The agreements for the interim rates are not currently available for public review, and there is no press release about either deal evident on the ASCAP or BMI websites.  Thus, it is unclear if the agreements will be applied to all broadcasters, or only those that have elected to be part of the RMLC negotiating group.  As we have written before, ASCAP and BMI have previously tried to get an indication from stations as to whether they are part of the RMLC negotiating group, or whether they will try to negotiate their own agreements.  We have also heard that at least one other group, the National Religious Broadcasters Music Licensing Committee, has indicated that they would represent commercial broadcasters in negotiations over new royalties.  However, it still seems to us that any other negotiating group will look first to the outcome of the RMLC process to set the royalties, and most likely will not be negotiating or litigating their own agreements, unless they have a business model that would make any RMLC deal unworkable.  This is both because ASCAP and BMI are prohibited from negotiating different royalty rates for similarly situated music users, and as the royalty litigation is very expensive and time consuming, and it is unlikely that any group would try to re-litigate any decision that RMLC reached.

 Does the decrease in rates, even if on a temporary basis, signal that there will be a permanent decrease in the rates?  In short, it should not be viewed as a guarantee.  While the fact that the Performing Rights Organizations agreed to these decreases might be seen as a sign that these companies recognize that there is a different radio economy that needs to be reflected in lower royalty rates, it could also be seen as a recognition that even a hearing on temporary rates is an expensive process.  The PROs recognize that RMLC will be holding out for a decrease in rates, and that they would be arguing for that decreased rate even on an interim basis.  Thus, to avoid the costs of litigation, and since any interim decrease in rates would be recaptured if a higher permanent rate is set, the PROs could have agreed to these rates simply to avoid the costs of litigation.  So don't start counting on these reductions being permanent - that will take significant litigation (or extensive negotiations) to accomplish.

So this is by no means the end of the story.  Watch as these events develop over time.

So what do broadcasters need to know in making a decision about which of the options offered in the ASCAP and BMI letters should be selected? First, under the antitrust consent decrees which govern the operation of ASCAP and BMI, once an entity that wants to use music notifies the PRO that it is ready to negotiate a deal, it can use the music without infringement, though the royalties ultimately adopted will apply retroactively. The process for setting a royalty starts with a negotiation period. If no deal can be reached, the parties go to rate court – usually a long, expensive hearing before a US District Court judge, which will set rates retroactively to the first use of the music.   After receiving the letters from ASCAP and BMI, some broadcasters have thought that they might negotiate their own deals.  Theoretically, that is possible.  However, most radio operators won’t be able to negotiate a separate royalty, as ASCAP and BMI are forbidden from negotiating a royalty that treats similar music users in a different manner. So these PROs cannot grant to one radio station a deal that is different than the royalty they charge to another, unless there are substantial differences in the way the stations use music that would justify a different type of royalty. Thus, if a deal is reached with RMLC, or if it arrived at through litigation, that deal will probably end up being applied industry-wide to all stations which fit within the classes of stations covered by the RMLC deal.

In the BMI letter, they offer a 4% discount off of current rates for stations who do not sign up to be included in the RMLC negotiating group.  That may be attractive to some radio operators.  Note, however, that the discount will be subject to retroactive adjustment (either as a credit or as additional liability) should the RMLC end up with different rates.  So it may be that this deal would afford only a temporary discount, but for that period it may be of some assistance to stations suffering cash flow issues.  Why was the proposed discount offered if it is only temporary and there will be a true up to whatever is arrived at by RMLC?  Perhaps the deal is intended to be used, if many stations select it, as evidence before the District Court as to what an interim rate should be if there is no voluntary agreement between the parties. The Court is charged under the consent decrees, if there is no voluntary agreement, with adopting an interim rate which stations will pay while the litigation over the permanent rate is proceeding.  While the Court can accept evidence as to what the interim rate should be, there is a presumption that the prior rate should continue to apply. So, while RMLC may argue that, because of the change in the health of the radio industry the current rate structure should be abandoned even for the interim period, the PROs might be able to use the agreement of many broadcasters to the interim deals they have offered as evidence of the continuing reasonableness of the current rates as an interim rate.

And then there is the option of signing up with RMLC to be considered part of their negotiating group.  Practically speaking, as we stated above, most commercial broadcasters will end up being bound by the outcome of the RMLC actions, unless they have some unique attributes of their business that would allow them to claim that they are not similarly situated to other radio stations and thus entitled to a different rate.  Some broadcasters have been concerned about signing on to the RMLC group, worrying that RMLC will assess them a fee.  Many broadcasters remember that there is an RMLC assessment as part of the current ASCAP and BMI agreements.  But that fee was agreed to by the Court and assessed on all stations that were subject to the settlement (essentially all commercial stations), so it was not a "voluntary" fee that came from designating RMLC as a station's agent for purposes of negotiation.  Practically speaking, the RMLC is every broadcaster's agent, as virtually every commercial station will be bound by the deal that they either negotiate or litigate.

These are complex issues that every station should review with their attorney. But broadcasters should consider all of the implications of their actions, not just on themselves, but also on the industry as a whole.  For virtually every radio station, the deal negotiated (or litigated) by RMLC will be binding on them.  So whether or not radio broadcasters sign up to formally be part of their group, broadcasters need to follow their actions closely, as their actions will dictate what stations are paying to the PROs for the next several years.