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March 31, 2014 | EntertainmentFrom the blogNew YorkNews

Pandora v. ASCAP: Big Blow for the PRO

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On March 14, 2014, a federal court in New York City ruled that streaming internet radio service Pandora will pay ASCAP, a performance rights organization (“PRO”), a rate of 1.85% of Pandora’s total revenues through 2015 in exchange for access to ASCAP’s catalog of songs.  PROs and song owners aren’t happy with the decision. Some say it brings further attention to the outdated regulatory system currently in place.

As the music industry continues to undergo drastic changes, the old performance rights regime is being left behind in the dust.  Will the government step in and make adjustments to the PRO system before songwriters and music publishers make a run on the bank?

The PROs

Under section 106(4) of the Copyright Act, song owners have the exclusive right to perform their songs publicly.  This creates a business opportunity for songwriters and music publishers. You can grant licenses to others to perform your songs publicly in exchange for a reasonable fee.  As a practical matter, however, it can be extremely difficult to pick your songs out of the millions played every day around the nation (by TV and radio stations, clubs, gyms, restaurants and many more channels).

For about a century, PROs have played an essential role as intermediaries between song owners and music outlets.  PROs grant licenses allowing various outlets to publicly perform songs, take an administrative fee, and then funnel the earnings back to songwriters and music publishers.

The Times They Are A-Changin’

Under the current system, which was last updated before the iPod was introduced, PRO rate negotiations are governed by a consent decree with the Department of Justice.  Discussions to set new rates can drag on for years.  When parties can’t agree on a price for the license, a federal judge (or “rate court”) decides.

To avoid complicated court battles, and to cut out the intermediary, some big publishers are dropping their PROs and negotiating performance rights deals on their own.  In December 2013, for example, after a federal judge in NYC ruled that Universal Music Publishing Group (“UMPG”) could withdraw its digital licensing rights from PRO BMI, UMPG signed a direct licensing agreement with Pandora.

Pandora v. ASCAP

In a 136-page monster of an opinion, Judge Denise Cote reviewed the rate dispute between Pandora and ASCAP, exploring both sides of the argument in great detail.

On one hand, Judge Cote sympathized with Pandora’s tight purse strings.  She noted: “Pandora has yet to demonstrate sustained profitability.  Pandora’s payment of licensing fees for the use of music consumes a very significant portion of its revenue.  In 2013, Pandora’s content acquisition costs were close to $260 million, or over 60% of its revenue for that fiscal year.”  Pandora argued that it should only have to pay the PRO 1.70% of its revenues, which is the current rate paid by most commercial radio stations.

On the other hand, the rate court judge acknowledged that about half of Pandora’s catalog of 1 to 2 million songs consists of ASCAP-registered works.  She acknowledged ASCAP members’ arguments for the value that the PRO brings to their catalog, including one songwriter’s description of “the vital role ASCAP plays in protecting writers from the shark-infested waters of the music business.”

ASCAP sought an escalating rate structure in which Pandora would have paid ASCAP 3% of its revenue by 2015.  A percentage largely based on Pandora’s earlier agreements with Sony/ATV Music Publishing and UMPG—two publishers that withdrew their new media rights from PROs in order to negotiate their deals separately.

Judge Cote found both Pandora and ASCAP’s proposals to be unreasonable.  She concluded that “ASCAP did not show that the upshot of the negotiations conducted by either Sony or UMPG with Pandora was a competitive, fair market rate.”  In addition, although the rate court judge acknowledged several similarities between Pandora and traditional radio stations, she found enough differences between Pandora and services like iHeartRadio to legitimize holding Pandora to a different standard.  Ultimately, Judge Cote set a rate of 1.85%—the initial rate in ASCAP’s tiered proposal—to govern Pandora and ASCAP’s relationship through 2015.

Will the Government Make a Move?

In a market that has shrunk and consolidated drastically, with music companies clawing for control of new sources of revenue like online streaming, one fact is undeniable: the music industry is in a state of tremendous change.  A songwriter/publisher “run on the bank” against PROs like ASCAP, BMI and SESAC would not only be catastrophic for those companies—it would completely change the music industry’s financial landscape.

Traditionally, a songwriter and music publisher negotiate and share an ownership interest in the copyright of the writer’s song, and PROs negotiate the licensing of performance rights on their behalf.  However, music publishers now argue that because of their financial interest in a song’s success, they have more motivation in rate negotiations to get the best deal for songwriters.  Additionally, publishers say, cutting out the PRO intermediary by negotiating directly with consumers avoids the administrative fees associated with hiring a third party.

ASCAP CEO John LoFrumento noted that “recent agreements negotiated without the artificial constraints of a consent decree make clear that the market rate for Internet radio is substantially higher than 1.85%.  And [the] decision further demonstrates the need to review the entire regulatory structure, including the decades-old consent decrees that govern PRO licensing, to ensure they reflect the realities of today’s music landscape.”  Putting aside Sony’s partial estrangement from ASCAP in 2013, CEO Martin Bandier has also slammed the ruling as “a clear defeat for songwriters,” declaring that the 1.85% rate “is woefully inadequate and further emphasizes the need for reform in the rate court proceedings.  Songwriters can’t live in a world where streaming services only pay 1.85% of their revenue.”

Clearly  coming out ahead in the ruling, Pandora spokesman Will Valentine, on the other hand, made a tellingly short and sweet statement: “We look forward to working with all interested parties to ensure that consumers continue to benefit from innovative technologies such as Pandora and copyright owners receive fair and reasonable compensation for their creative contributions.”

When the Justice Department last updated the performance rights system in 2001, Lifehouse, Dido and Matchbox Twenty were topping the charts, and the digital music marketplace was just starting to roll.  Unless regulators take the time to bring this outdated system into the 21st century, it wouldn’t be surprising for more song owners to take performance licensing in-house to increase their bottom line, at the expense of PROs.  If individual publishers are allowed to leverage the market more effectively than PROs, it’s only a matter of time before more songwriters and publishers take matters into their own hands.

What do you think?  Will the government revisit its consent decree so that ASCAP, BMI and SESAC can regain their competitive edge?  Or will the PROs get left behind?

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