Artists and Publishers in a Bind

In a recent court case between ASCAP, the oldest PRO in the United States, and Pandora, the first and most storied music Internet radio station, a judge in the United States District Court in Manhattan ruled in favor of Pandora.  ASCAP was legally obliged to provide Pandora its entire catalog. Up to then, some artists and publishers had chosen to keep their work from appearing on Pandora hoping to get better terms from the streaming service. ASCAP had already agreed to provide its entire library, and the judge ruled that a breach of contract was inadmissible. Pandora, which earlier had enjoyed favor in the industry, has lately become a bête-noir of sorts for content-holders. The ruling, in fact, confirmed that there was no love lost between the streaming service and artists and their publishers.

Since 1941, ASCAP has been subject to the rulings of a rate court when the performing rights organization and a music service could not reach agreement. In July of 2005, Pandora and ASCAP began their first licensing agreement, which lasted until October 2010.  Pandora then filed for a new license to run from 2011 to 2015. As Pandora and ASCAP could not agree on a rate, a decision on that license will have to be made in the near future. The recent ruling dealt with a change in ASCAP’s rules. In April 2011, ASCAP allowed publisher members to withdraw their material from licensing consideration to digital services. However, their content was still made available to ASCAP in every other regard. Pandora was then forced to deal directly with these publishers. The court decided that when ASCAP made its original agreement, it had been for all its music—no exception.

The decision is important. For one thing, it gives creators and distributors of content less control and, ultimately, less revenue. Pandora acquires content and pays SoundExchange, which collects fees for artists and labels. But Pandora also pays licensing fees to the main performing rights organizations (ASCAP, BMI, and SESAC) in order to compensate creators for the composition copyright. Pandora was seeking to lower these intellectual property costs and the ruling gives the Internet broadcaster increased momentum.

The losers are musicians and their publishers–although Pandora’s demise on account of high content costs would not help them either in the long-term. It should be noted that, via SoundExchange, record labels have been receiving favorable rates drawing “50-70 percent of the revenue collected by internet streaming services”. This goes back to the Digital Millennium Copyright Act of 1996, when payments for the recording copyright of a song to labels and artists were first accepted in the U.S. for Internet webcasts and streaming (and in that medium and  nowhere else). Publishers, however, only get 5% of Pandora’s revenue. In the Internet, the difference between the gains to talent and their intermediaries from the composition copyright and the recording copyright could not be starker. That is why publishers have tried to pull their music out of ASCAP–and BMI and, likely, SESAC:  since a direct deal between Pandora and a publisher would not fall under certain legal provisions that exist for PROs, the publisher would be able to charge more.

Moreover, if streaming is seen as competing with recorded music, publishers will be especially hit and likely harder than the labels and the recording talent. SoundExchange collects, as said, on the recording copyright, and distributes the proceeds to the record labels and the artists (and sidemen) listed in the record production. A stronger Pandora could help labels and their talent. But if streaming erodes recorded music sales, whatever flow of copyright recognition the labels and talent receive is undermined by the overall competitiveness of streaming. Publishers, especially, are cut-off from the earnings from the sound recording, and this court decision does not help their collections on the composition itself.

The implications for the streaming industry could be significant, but should not be exaggerated.  In the past, digital streaming services have not been able to pull a profit, and they are still, it seems, a long way away from doing so.  Pandora stock does not even merit a price- earnings ratio in the markets, which means that its income sheet is still showing losses. This is because revenue from subscriptions has been meager at best, and, especially, because monies from advertisements are not sustaining the business (this could change, though).

Another consequence of this ruling is the legal precedent that it sets between publishers and performing rights organizations. Whenever a publisher has made a deal with a PRO, the publisher cannot place a limit on these PROs in regards to which media platforms can receive a license and which cannot. Now ASCAP (and, by implication, the other PROS) may have to stem a defection of disgruntled members. If, moving forward, it is deemed necessary by the content owners to avoid the strictures of the new ruling then talent and publishers will reexamine the long-term relevance of the PROs as viable collection societies for this digital age.

Ultimately, the court case puts the burden on songwriters to sacrifice pay on the composition copyright in the interest of helping a music delivery service.  Unless publishers withdraw their works from the PROs (which is complicated for the PROs deal with public broadcasts in TV and terrestrial radio, where the bulk of all performance income come from) all deals between publishers and Pandora, or Spotify and Rdio, will be rendered nil in court.

The end question is whether artists can continue to absorb these costs in order to provide music for the public at continually reduced costs. It is true that without giant streaming services like Spotify or Pandora, certain artists would suffer in obscurity and miss out on winning potential throngs of fans. But such services are only useful long-term if they can provide a livelihood to the musicians that give them their power. Right now, the balance is tilted in favor of the music providers and it is difficult to see how music makers will turn the table moving forward.

By Christian Florez

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