Guest post by Monica Corton (@momusing), Executive Vice President, Creative Affairs & Licensing Next Decade Entertainment, Inc.
I spent many hours fielding questions and having conversations with songwriters about the recent win by Pandora in the ASCAP rate court. Mostly, the songwriters wondered why there was a battle in the first place and why ASCAP lost. Performance rights licensing (the right to publicly play/perform a song on the radio, television, the Internet, large venues etc.) is one of those areas that songwriters love, but often know little about. They love that the check comes in the mail on a quarterly basis like a miraculous gift and some even call it āmailbox royalties.ā They rely on this money heavily even though many would not be able to describe how it is generated or what the rules are in governing the two major Performance Rights Organizations (PROs), ASCAP and BMI.
The Pandora battle revolves around this governing issue. ASCAP and BMI are membership associations which each represent over a half a million songwriters and music publishers in the field of performance rights licensing. ASCAP and BMI each function under consent decrees entered into with the U.S. Justice Department. The current consent decrees require that ASCAP and BMI must grant a license to any potential company or service that wants one. They do not have the right to say ānoā to any potential licensee.
If, after they negotiate with any licensee — in this case, Pandora — and the licensee does not like the rates proposed by ASCAP or BMI, the licensee or the PRO has the right to go to federal court in New York to set the rate. This is exactly the tack that Pandora took and what has led us to this current situation. In court proceedings, it is the PROās burden to demonstrate that its proposed rate is āreasonable,ā but the consent decrees provide no standards for determining āreasonableness.ā The ASCAP Rate Court, through Judge Cote, has been consistently ruling against ASCAP since she began her tenure as the sole judge responsible for setting ASCAP license fees in 2009, rejecting the comparable licenses ASCAP has proffered as benchmarks for gauging the reasonableness of its fee proposals and accepting instead the licenses relied upon by Pandora and other ASCAP licensees.
What is particularly upsetting about all of this is the monetary facts revolving around Pandora. The license that Pandora has been functioning under since it entered into its original agreement in 2005 with ASCAP was at a rate of 1.85% of Annual Revenue, with the combined rate for all of the PROs totaling 4.3% of Annual Revenue. This is slightly more than traditional radio broadcasters pay for their ASCAP licenses, and commensurate with what other streaming services had been paying. However, services like Spotify and the new iTunes Radio pay significantly higher rates, ranging as high as a combined 10% of Annual Revenue. Further, the rate that Pandora pays the record labels for the master rights (the artists recording of a particular song) is in the range of 50% of Annual Revenue. Yes, you read that right….the songwriters have been fighting Pandora for them to pay 4.3% of Annual Revenue when Pandora pays the record labels 50% of Annual Revenue for the use of the master recordings of those same songs.
When Pandora complains that they are paying too much in royalties, which is their constant battle cry, the problem is they are paying a huge rate to the record labels. However, they have no recourse or leverage to reduce the rate they pay to the record labels because the labels function independently and their rates for services like Pandora have been determined by another governmental entity, the Copyright Royalty Board. The only royalties that Pandora has access and leverage to reduce are the songwriter royalties because of the way the consent decrees function.
The court costs that ASCAP has paid in fighting Pandora over their streaming rate come somewhere in the range of $5 to $9 million. Pandora likely has paid equivalent legal costs in their battle. Imagine if Pandora hadnāt gone to court over the combined PRO rate of 4.3% and had put that money — at the low end, say $5 million — into paying music publishers and songwriters a fair rate, the rate other streaming services are paying. Maybe then, Tim Westergren, Pandoraās CEO, who loves telling the press how much he adores musicians and songwriters, could honestly say that he is helping them with his streaming music service rather than what he has truly done, which is to almost single handedly upend the entire structure of the performance rights licensing system.
How did Westergren affect the performance rights licensing structure? The music publishers disagree with Judge Coteās rate of 1.85% of Annual Revenue. In fact, the music publishers thought the combined PRO rate of 4.3% was also too low. The only way to get a higher rate is to pull the digital rights licensing away from the PROsā control and make direct deals with digital services. This would allow the music publishers not to be governed by the consent decree in matters dealing with digital performance rights licensing. Some of the major music publishers and independent music publishers were in this process of pulling their digital rights with the PROs and EMI Music Publishing, Sony/ATV Music Publishing and Universal Music Publishing even negotiated direct deals with Pandora as they were the first music publishers to pull their digital rights licensing from the PROs. There had been a six month waiting period before any publisher could pull digital rights from ASCAP or BMI.
This process was moving forward for many publishers and then Pandora went to the ASCAP and BMI rate courts, asking those courts to rule that the publishersā rights withdrawals did not apply to digital services like Pandora that had applied for licenses under the consent decrees. Both rate court judges ruled that the music publishers could not pull just one set of licensing rights (e.g., digital rights) from either ASCAP or BMI. The judges said if the music publishers wanted to license directly, they would have to pull all performance rights licensing from the PROs. No music publisher wants to do that.
Now, the PROs, the music publishers and others are asking the Department of Justice to agree to change the consent decrees so that it is clear that digital rights licensing can be pulled from the PROs. This will mean all digital companies, including Pandora when its current license is up in 2015, will have to negotiate with multiple music publishing companies either to get their services up and running, or to continue to offer their digital music services, because they wonāt be able to clear digital performing rights at the PROs alone if the music publishers withdraw their digital rights. It will add a whole new level of rights clearance issues and liability to the process because the lawyers for these new digital companies will have to engage in these direct deals and ensure that they are covered for all of the music repertoire in their clientās digital services.
Before this rate battle began between ASCAP and Pandora, there was no question that all of the music publishers were being represented by the PROs for digital rights licensing.
The future seems precarious to the music publishing/songwriter community. The BMI rate court has yet to take up the Pandora royalty rate issue. If the PROs and the music publishers are successful in modifying the consent decrees, they will have a business solution for getting a higher rate, but it really isnāt a solution for the health and development of building new digital music companies and services. I firmly believe none of this would be happening if Pandora had been a good player with ASCAP. They created this situation and then Judge Cote complemented their bad moves with a totally unworkable decision.
I was at a publisher meeting recently, and the presenter gave some startling figures. He said that last year, Tim Westergren took out over $15 million dollars in stock options for Pandora (the highest amount he could extract in any given year). At the same time, Pandora paid ASCAP a little over $11 million in royalties for access to the entire ASCAP repertoire for the entire year. If this is true, or even slightly exaggerated then how does the guy who owns Pandora receive millions of dollars more in money in one year than all of the ASCAP songwriters and music publishers whose music was featured on his service in that very same year? When you look at it from this perspective, you can understand why there is such an outcry from the songwriter/music publishing community.
The music publishers and the PROs want a workable solution with Pandora and all the digital companies, but they cannot sit idly by and not receive a fair market value for their songwriterās works in the digital arena. Itās a wild west in licensing right now, what I find so sad is…. it didnāt have to be.
Photo of Saxophone player by Shutterstock
Brian,
Spotify, Rhapsody, Beats, and other fully interactive music services are the next iteration of CD sales, wouldn’t you say? These services directly cannibalize the sale of physical music and downloads. Therefore, doesn’t it make sense that the royalty split between labels and publishers should be weighted the same as with physical sales in which the labels receive a much larger share of the pie?
Regarding Pandora, I understand the publishers’ concern regarding the labels’ taking a larger share of the pie. I don’t have a solution for that problem, but I do have two questions to ask:
1. Why should Pandora have to pay the PROs a larger royalty than is paid by terrestrial radio?
2. Why do no publishers have a problem with the fact that labels receive no income whatsoever on terrestrial radio play? Publishers are demanding more equality with labels on digital streams, but I don’t see publishers offering up a solution via which labels are able to monetize terrestrial streams.
Ed, the problem is the type of rights being used by each of these services and how the rates for those rights are controlled by the government. A mechanical license for a song (a physical or digital download of it) has a certain rate, but the performance rate for that same song (when it is broadcast on the Internet or via other media) has a different rate and a different set of people that determine the rate. Pandora’s service is not the same as terrestrial radio. It doesn’t function the same nor does it have the same reach. That is why it and other Internet services have their own category of rates. With regard to a performance right in master recordings, the publishers have supported this change as long as the addition of these new royalties for master performances by terrestrial broadcasters does not diminish the publishing performance royalty. It is the broadcasters that have fought over adding this new right because they don’t want to pay it.
There is so much changing in the world of digital distribution and many of the old ways of distributing music are no longer relevant. There are a lot of hands that touch artist money, however, it seems that with record sales down and digital streaming up – artists are getting the shaft. For a while, smaller labels were out maneuvering the majors, however, that seems to be slowing as well. I don’t have the solution, perhaps restructuring the system may work, but it seems that there are a lot of attorneys involved on the PRO side, label side and streaming sites and perhaps larger acts, but the smaller to middle acts can’t be doing so well with the current percentage system.
I’ve always heard that streams generate less royalties than terrestrial radio because they generally are only heard by one person, whereas a radio broadcast might be heard by thousands or more. Is this a valid argument? And if so, when looked at this way, are streaming vs. terrestrial radio rates paid to PROs still way out of whack?
This is a classic Huggies vs Pampers scenario. Who owns most of the publishing houses? The labels. All corporations like to encourage inter-departmental competition and thatās exactly what weāre looking at. Publishing vs. label divisions. Small publishers are in peril since the big boys would like to scoop them up for a bargain.
But letās be clear, the labels also have shares in any streaming or new technologies and theyāre just just as invested in the IPO as the new platforms. That is – except Pandoraā¦ Tim Wās āproblemā is that he didnāt play nice with the labels and they want their share of something they did nothing to work for (or as musicians like to call it – their MO)
To be clear, I do not mean to denounce some of the great people who work/worked for these labels, some of the finest Iāve come across, Iām referring to the corporates whoāve treated musicians like children yet let them sit in it these many yearsā¦ (to continue a metaphor;)
In this case, the labelsā share is too big – by a lot. The publishing share is too small – ridiculous!
Weāve seen some strange bedfellows since the advent of Pandora.
But no one ever defended the utterly incompetent PROs in my living memory, the same PROs who often used index cards for our title registrations into the 90s and āsamplingā long after alternative technology was available (phone company tech has been around since the middle of the 20th century to ātrackā!) Mention āPROā in a roomful of musicians and the horror stories will continue ātill dawnā¦
So, convincing musicians Pandora is the bad guy is becoming increasingly difficult. And Tim Wās genome project is one of the few true āinventionsā by tech to helps musicians. If he doesnāt want to give his income and value away to the labels for a pittance, then we have lots in common coz weāre kinda tired of that lark ourselvesā¦ And when did the labels become the victims? Theyāre notorious for Not passing along profits to musiciansā¦ ālabel talkā is off limits among musicians. We canāt even go thereā¦
The tech worlds idea that a āPlatformā that is essentially nothing short of a POP (point of purchase) and somehow their ticket to world domination is hubris indeed. POPs come and go – Borders anyone?
And the PROs had no problem with their cozy judicial haven until it stopped going their way. Let us not forget these newly anointed saints/victims had law suits against them for racketeering!
Yes, the splits are all wrong. But the pre-existing structure was egregious and anyone posing as a musiciansā advocate at this time, most especially a PRO is nothing short of suspect!
No one has more skin in the game that the musicians themselves. The music world got away with industry-wide collusion for decades. The government set a mechanical rate and Every Single Label forced us to sign away 25% by mandating 75% of statutory as the norm. Imagine! an industry got away with defying statutory rates and I mean Every Single Company. Letās not even mention the appalling failure to challenge terrestrial radioās free ride. That would be a free ride to multi-billion dollar corporations. Can you stand the uproar of silence?
Corporates view musicians apparent apathy as āmusicians being musiciansā and throw up their hands. My suggestion would be to Avoid waking that sleeping bear at all costs. Class actions might be difficult but industry-wide collusion, investigated at the congressional level – and exactly whatās in order – is unlikely to affect the Pandoras.
The encumbants would do well to stop crying wolf and suing the new competition and look to their own side of the street. And why arenāt labels developing their own platforms instead of doing their usual āriding the coattailsā routine? To think of any other industry who would throw away that kind of incumbent advantage should render them irrelevant!
The splits will get figured out – eventually.
In the meantime, it is not businessmen we object to; it is, as ever, the conmen and gross incompetence. In fact – bring on the businessman.
And we donāt need a scapegoat. We know and always have known the problems.
I empathize with small publishing houses – and good folks and music lovers in general who work in all of music. The current splits are nuts but chances are publishing will consolidate (the small houses will be scooped up) And the Huggies vs. Pampers nonsense will begin in earnest.
That said, throwing the baby out with the bathwater is what the industry has been best at. I donāt see any music advocates in this game. I see labels vs. publishers (who are likely to consolidate) and to continue the analogy – the baby getting thrown out with the bathwater.
The new tech industry business needs to fear is the one that doesnāt force musicians to use aggregators (i.e. they can apply directly); is completely transparent and shares its data with the musicians while simultaneously and quietly developing relationships with musicians where actual people are on the other end of emails.
Oh wait, Pandoraās already done that. And theyāve challenged the labels and PROs. Soā¦ theyāre my enemy? Not so muchā¦ Itās up to me; musicians organized to deal collectively with the Pandoras.
Musicians organized, with no middlemen…
Huggies vs. Pampers isnāt the commercial Iām going to watch. Organizing to deal with the folks who look competent and seem to be open to paying the musicians themselves, as opposed to the middle men; You can put me in that movie and commercials be damned!
There are three “major” publishers who are affiliated with major labels (Universal Music Publishing, Sony/ATV Music Publishing and Warner/Chappell Music Publishing) but there also are a good share of thriving independent music publishing companies, ours included and indie labels. I think the “scooping up” of indie publishers by the majors has pretty much died down. I do not agree with your assertion that “the labels want their share of something they did nothing to work for”….the labels invested and promoted the artists who are the sole source of content for all of these digital services. I would agree that maybe there was overreach and it absolutely was not transparent but even those things are being dealt with on a grand scale. The only reason the publishers did not go that route is by law (DOJ Consent Decree and the CRB hearings on mechanical rates), they are not free to negotiate in the market for similar types of licenses. The labels have a completely free market to negotiate in and the publishers are largely constrained by law from negotiating in a free market. The publishers have never had a “judicial haven”….the Consent Decree is long overdue for updating. I think the last change was in 2001….that’s all PRE-DIGITAL. It is not unreasonable what we have asked for with regard to changes in the Consent Decree. What is completely unreasonable is the DOJ’s response with 100% Licensing. As far as no middlemen….thousands of songwriters and artists benefit from the work their dedicated publishers and labels do for them. These creators need and receive strong representation in a music world that is most definitely the most complicated in my 28 year career in the music business.