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Pandora faces new royalty squeeze as music industry pushes to lift longstanding rules

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It’s rare to see a Silicon Valley company preach the virtues of regulation, but that’s precisely what Pandora is doing as it pleads with the Justice Department to uphold music industry rules that date from World War II.

For the internet radio service, however, it may come down to a matter of survival: if the music industry gets its way in overturning the current rules, known as consent decrees, [company]Pandora[/company] could be crushed in a vicious circle of ever-escalating royalties.

Here’s a closer look at the consent decree fight, and how it fits into a broader pattern of Pandora becoming a scapegoat for the larger troubles of the music industry.

In praise of 70-year old regulation

The details of the music copyright system — which determines who gets paid and how much — are eye-glazing at the best of the times, and the 1941 consent decrees are no exception. In plain English, the decrees are legal orders that require two big industry middlemen, ASCAP and BMI, to follow a set of rules over how they license song rights on behalf of their songwriter and publisher clients.

The rules require the organizations to license songs to anyone who wants to perform them, and at prices fixed by a special court. (Right now, the rates are 1.7 percent of revenues for AM/FM radio stations and 1.85 percent for Pandora.)

The Justice Department imposed the consent decrees in the first place as a matter of antitrust law after finding that ASCAP and BMI had monopoly-type powers when it came to song licensing. And while ASCAP and BMI have chafed at the limits on their pricing power, the system over the years has largely worked out for everyone involved: radio stations and others have enjoyed an easy way to obtain song rights, while songwriters and publishers get an efficient way to collect royalties.

Now, however, the rights organizations are petitioning the Justice Department to make new changes to the consent decrees (the last changes happened in 2001), and are portraying them as World II era relics. In the words of ASCAP, it’s time to “update our music licensing system to better reflect how people listen to music today.”

The music industry will have an easy time finding sympathy for its position: after all, who wants to let ancient regulations stand in the way of more money for songwriters? Unfortunately, it’s not that simple. While music royalty rules desperately do need to be updated for the digital age, the proposals laid out by ASCAP and BMI are less a case for modernizing music rules than they are a means to throttle Pandora.

If a judge says no, will the Justice Department say yes?

If you’re wondering why the arcane issue of consent decrees is in the news in the first place, it’s because the Justice Department asked for public comments about whether it’s time to change to them. In response to the initial comment period, which closed last week, ASCAP and BMI offered up three suggestions — the first of which could be a death sentence for internet radio stations like Pandora.

That suggestion is to let music publishers, which control the songs licensed through ASCAP and BMI, dodge the consent decree obligations when it comes to digital song rights. For practical purposes, this would mean that big publishers like Sony or Warner could force Pandora to negotiate one-on-one for access to their song catalogs — while at the same time using ASCAP and BMI to collect royalties at the usual fixed rate from AM/FM stations, and from other companies that perform music such as restaurants, clubs and bowling alleys.

One problem with this suggestion is that excluding digital song rights from the royalty scheme is exactly what a federal court judge recently said the music industry can’t do. In a December ruling, a judge said songwriters have to be “all in or all out” when it comes to ASCAP and BMI. And, in a separate rebuke to the music industry, a different judge called attention to apparent collusion by big publishers against Pandora.

As a result of those decisions, the music publishers now appear to be hoping that the Justice Department will do what the courts would not, and give them a free hand to wring more money from Pandora.

The wrong solution to a real royalty problem

It’s hard to overstate the contempt and even outright hatred that many musicians hold for Pandora and other digital music services. Blogs like alt-rocker David Lowery’s The Trichordist, for instance, are full of diatribes that accuse the companies of getting rich from songwriters’ work while failing to pay musicians enough to make a living.

The complaints are understandable — the digital economy has been terrible for musicians’ pocketbooks — but changing the consent decrees to wring more money from Pandora is not going to help. That’s because internet music companies already pay much, much more than the 1.8 percent rate currently set under the ASCAP arrangement.

According to a Pandora spokesperson, the company paid around 53 percent ($342 million) of its total revenue in royalties in 2013, and expects to pay an even higher percentage in 2014.

The reason that this figure is so much higher than the 1.8 percent rate required by ASCAP is that digital music services must pay a king’s ransom for another type of performance royalty rights — called sound recording rights — that non-digital services don’t have to pay at all. And while the music industry has tried proposals to extend those royalties to the world of AM/FM radio, politicians have been quick to defeat such measures as an unpopular “performance tax.”

Internet radio, however, lacks the same political clout as terrestrial stations, which makes it the better (or perhaps the only) target that the music industry can hit when asking Washington for more money. And that is what the industry is gamely trying to do, through monkeying with the consent decrees and with other measures like the ill-advised “RESPECT Act.”

So what will happen? According to Andre Barlow, an antitrust expert and former Justice Department lawyer, it’s too soon to say.

“The DOJ has a lot of information to review and consider before making a decision.  Given the importance of these decrees to maintaining competition, I don’t believe that the decrees will be terminated, however, they may be modified.  The degree to which they will be modified will be determined by the DOJ’s analysis of the market.”

Stay tuned in other words.

14 Responses to “Pandora faces new royalty squeeze as music industry pushes to lift longstanding rules”

  1. Tony Hymes

    The labels are finally coming around, supporting new music services through innovative partnership models that share equity/vs revenue in an attempt to find a better place in the digital music landscape. Problem is, Pandora came about too soon, and the labels don’t have the same position with them.

    But you can’t fight against popularity, Pandora is far and away the most popular music service, they have to find a way to modernize the law without strangling Pandora to death. No one really felt bad when Napster got shut down, since everyone knew it was wrong. But the image of the major labels suffocating Pandora might have a strong backlash.

    I think the labels are just mad since they weren’t able to create something like Pandora themselves.

  2. HerIssue

    Pandora should pay higher rates because they are more like an ipod than a radio station. The Internet Fairness Act was developed to protect artists (really the labels) after everyone was getting their music for free from Napster. You cannot tune into a radio station and decide which song or artist you want to listen to at any given moment like you can on Pandora, which is directly affecting record sales. Pandora was cool with this model at first. They were on a mission to support artists. Then they went public and their board of directors has done everything in its power to reduce this overhead. They even bought an actual broadcast station to try to take advantage of a loophole and lower their rates. In regards to radio they should not have to pay higher royalties because that will hurt new artists and record sales. If an artist is not proven a broadcaster will not take the chance and pay to play their songs and thus less new artists will be heard. If an artist does have a hit record people will go buy their album or download on iTunes. The answer is to let broadcasters and the labels negotiate their own deals, and kick these middle men BMI/ASCAP gangsters to the curb.

  3. “As a result of those decisions, the music publishers now appear to be hoping that the Justice Department will do what the courts would not, and give them a free hand to wring more money from Pandora.”

    The consent decrees are an antiquated process that allows anyone to play music licensed by ASCAP and BMI without agreed-to terms in advance. It permits the entity using copyrighted material the right to appeal if they don’t like the terms, forcing both parties into protracted legal proceedings without payment until the case is resolved. This can take years and cost millions in legal fees.

    Pandora’s problem isn’t the cost of copyright, it is a lack of paid subscribers. Obviously, Mr. Roberts did not watch the recent Congressional Subcommittees Hearing where Pandora’s lawyer was brought to task by the Congressional Subcommittee Members for Pandora’s questionable dealings in regard to the IRFA bill Pandora wanted to pass in order to lower copyright compensation.

    ” And that is what the industry is gamely trying to do, through monkeying with the consent decrees and with other measures like the ill-advised “RESPECT Act.”

    “ill advised” I think not, Mr. Roberts.

    “Respect Act” Currently, Pandora pays zero, zilch, nada for all music recorded before 1972. Is it fair or reasonable for Pandora to profit from the use of this music without compensating the artists who created it? With the exception of a few countries, like North Korea, the US is one of a handful of nations who do not pay for pre-1972 music plays.

    • North Korea? Come on now, that seems a little excessive.. As for extending the sound recording payments to pre-1972, I have a hard time seeing any rationale for doing so in law, policy or morality. What purpose would this serve other than providing a straight subsidy to Sony, Warner and UMG?

      • Taylor Brigode

        Calling the RESPECT Act ill advised is nonsense. Songs recorded prior to 1972 deserve the same protection as recordings made after 1972. Pandora paid SoundExchange on pre-72 recordings for years prior to last year not wanting a legal battle. Why should services enjoy a right to profit from pre-72 recordings without participation by the copyright holders? It’s a loophole when it comes down to it. The compositions enjoy protection at the Federal level and the sound recordings should too.

        Services like Pandora or Spotify may not be profitable in terms of accounting, but there is no shortage of revenue coming in.

      • Taylor Brigode

        Worth mentioning that 50% of SoundExchange payments go directly to artists and side performers (the other 50% goes to the master rights holders) so it’s hardly subsidizing major record companies. SoundExchange puts money directly in the hands of artists.

      • “North Korea? Come on now, that seems a little excessive.” Mr. Roberts, couldn’t agree with you more.

        Rep. John Conyers (D-MI) the ranking Democrat on the HJC, cosponsor of the Respect Bill:

        “Digital radio stations that earn millions off Motown classics but fail to pay royalties to the artists who recorded them are withholding hard-earned profits from deserving musicians. Refusing retired artists royalties from digital radio stations is particularly unfair. The RESPECT Act keeps faith with these living legends of American music — the famous greats and the less known musicians who supported them — and makes sure they get a fair shake. At a minimum, that means getting fair pay from the digital radio stations who are marketing stations based solely of pre-72 music and profiting off the work of the men and women who inspired a musical revolution”.

        To make this even more compelling, it is a bi-partisan bill, also sponsored by a Republican, Rep. Howard Coble (R-NC)

        “What purpose would this serve other than providing a straight subsidy to Sony, Warner and UMG?” Mr. Roberts

        Mr. Roberts, you do realize you are using the same arguments, i.e. the record labels are the real bad guys, that the piracy movement has been using for years. “Why pay, the money just goes to the labels anyway”.

        And yes, Taylor Brigode is right: “….. SoundExchange payments go directly to artists and side performers (the other 50% goes to the master rights holders) so it’s hardly subsidizing major record companies. SoundExchange puts money directly in the hands of artists.”

  4. Nissan Thomas, Esq.

    So why do th consent decrees need to be changed to reduce the royalties for digital master performances? Shouldn’t Congress just lower the rates that labels receive for digital performances, and increase the rates paid to ASCAP/BMI for the compositions? Pandora received a tremendous amount of heat for their lobbying on the Internet Fairness Act, which all they were trying to point out are the inequities between what Pandora pays and terrestrial radio. Songwriters and publishers may be shooting themselves in the foot going down this path. Not to mention, do you songwriters receive anything from your publishers when they license their entire catalog? Whose the real enemy here!!

  5. This blog is confusing the negotiating rights of Songwriters as opposed to the negotiating rights of Record Labels.

    Songwriters are bound by consent decrees, whereas Record Labels are not.

    Songwriters are stuck to a WWII royalty rate by law. Records Labels on the other hand are allowed to negotiate a Market Rate for their recordings. As you can tell, the FIXED rate (from the 30’s & 40’s) is in no way comparable to the MARKET rate of 2014. If Publishers can negotiate a market rate it would leave less to pay for Record Labels, their rate would drop since Pandora can only pay so much. The hoard that Record Labels have been receiving will now get spread to the Publishers as it should have been.

    • Frank, it’s an interesting idea that the publishers will simply get a chunk of the record label’s hoard, since Pandora can only pay so much. But I don’t see the labels sitting quietly by as their own revenues decrease. It’s hard to see a scenario where Pandora’s fees will not increase. I don’t see this as necessarily a problem, however, as the on-demand services like Spotify pay nearly 70% of their revenue out to rights holders. I don’t see why digital radio (which uses the same subscriber/advertiser model) should be exempt from an equal royalty burden.

    • Do we want services like Pandora to exist? I do. There should be a way that all rights holders receive a share. I do think that the disparity between the songwriters and the sound recordings seems to be large here, but I do think there’s a point where they will put Pandora and its ilk out of business. Will record labels suddenly demand less if songrwiters get paid more? Doubtful.

  6. I paraphrase Quincy Jones comments on today’s recording artists and writers. If albums had more than 1 or 2 good songs on them the public would be much more inclined to buy. I know I would. This is a bit sideways of this issue, but it us true for me. I prefer to have hard copy.
    Doug in Dallas

  7. Adrian Alfaro

    I don’t feel sympathy for any liberal organisation that wants to diminish my gun rights. They’re CEO needs to retract his donation to the WA State initiative. Or else.