Conflict over Consent Decrees

In early June, the United States Department of Justice announced that it would be launching a review of the consent decrees governing the nation’s two largest performing rights organizations, ASCAP and BMI. The review, which began with the DOJ calling for comments on the efficacy of the consent decrees from industry stakeholders, has re-ignited a decades old debate over the management of publishing performance rights, and has the potential to significantly change the landscape of the music industry.

Background

America’s oldest PRO, the American Society of Composers, Authors, and Publishers, or ASCAP, was founded in New York in early 1914 by American composer Victor Herbert, after Herbert’s colleague, Giacomo Puccini (pictured above), informed him that, unlike in the United States, composers in Europe were paid for the public performance of their compositions. With a group of prominent American composers assembled, Herbert set out to collect performance royalties from venues that were performing works by ASCAP members. As is often the case when one asks someone to pay for something that had previously been free, ASCAP faced quite a bit of resistance from venues. However they received the legal backing they needed from the Supreme Court’s decision in Herbert v. Shanley Co., which reaffirmed a composer’s right to be compensated for the public performance of their work. Further, the decision in Herbert v. Shanley established the blanket license, which allows a business to pay an annual fee to ASCAP in exchange for the right to any composition written by an ASCAP member.

ASCAP continued to grow over the years, and began granting licenses to radio broadcasters as the popularity of radio increased. By the mid-1930s, ASCAP was a dominant force in both the music and broadcasting industries. Broadcasters looking for a blanket license were required to pay ASCAP a set percentage of their annual revenue, regardless of the amount of ASCAP-controlled compositions they broadcast. In 1939, following a hike in the share of revenue licensees had to pay to ASCAP, a group of broadcasters decided they were fed up and started their own PRO, Broadcast Music, Inc., or BMI, which was intended to be a lower cost alternative to ASCAP.

In 1941, the DOJ sued both ASCAP and BMI for violations of the Sherman Antitrust Act. The DOJ claimed that the unrestricted use of the blanket license constituted an illegal restraint of trade, and that there was not a reasonable degree of competition in pricing. Both of the cases ended with the establishment of the consent decrees that lay out a set of rules governing the operation of the two PROs.

The decrees allow licensees to license either through a blanket license or on a per program basis, and prohibit the issuing of a license that “discriminates in license fees or other terms and conditions between licensees [who are] similarly situated.”¹ Further, the consent decrees force the PROs to grant a license upon the licensee’s request, even if a rate has yet to be agreed to, and establishes the Southern District Court of New York as the arbiter in cases when the PRO and licensee are unable to agree on a royalty rate. Perhaps the most important provision of the decrees is the establishment of a royalty distribution system that mandates equal payment to both the publisher and the composer of a work. This split is significant because it means that half of the royalties earned from the public performance of the work go directly to the songwriter, and cannot be held against an un-recouped advance given to the writer.

The Ire of Music Publishers

Since their inception, the consent decrees have been the source of great contempt within the music publishing industry. As music sales have slowly given way to streaming, these sentiments have only grown stronger, with the publishing industry citing the rate setting procedures established by the consent decrees as the source of the exceptionally low rates paid for the public performance of a composition. As the streaming industry continues to grow, publishers have worked hard to try and secure higher rates for the compositions they control, frequently finding themselves wrestling in the courtroom.

Recently, however, Sony/ATV music publishing decided to go a different route and announced their intention to withdraw their digital rights from the PROs, opting to negotiate with digital music services on the open market. Unfortunately for them, the rate courts ruled that membership to the PROs had to operate on an all-in or all-out basis, meaning that publishers and songwriters have to grant their PRO rights across the entire spectrum of public performances, or withdraw completely. While the publishers have decried this as unreasonable, this ruling is not without just cause. ASCAP and BMI have long been subject to criticism for their lack of transparency and administrative failures. Even now it can be difficult for a licensee to understand the full scope of material covered by a blanket license from either PRO. Adding another licensing source without a standardized database would only exacerbate the confusion. Further, Sony/ATV would not be required to issue a license upon a licensee’s request like the PROs are, so new digital music services engaged in negotiations with Sony/ATV would face the very real possibility of having to launch without the Sony/ATV catalog, or waiting to launch until they can come to an agreement, either of which could risk sinking the company. The major publishers obviously weren’t too happy about this decision, and ultimately sent National Music Publisher’s Association Chairman, and former DOJ attorney David Israelite to convince his former colleagues to begin a review of the consent decrees.

Higher Rates for Whom?

Opponents of the consent decrees often like to point out the age of the decrees and suggest that there is no way that rules set in the early 1940s could still be useful today. While it is true that the decrees have been in effect for quite some time, and aren’t really optimized for the digital marketplace, the suggestion that they have been gathering dust for the last seventy years is very misleading. The decrees are in fact periodically reviewed and amended, with the last review of the ASCAP decree having occurred in 2001. The main argument offered by the major publishers in their crusade against the consent decrees, however, is that they feel the rate setting procedures established by the decrees have resulted in unreasonably low royalty rates. They feel that if they were able to directly license their catalog and use the PROs simply as a royalty collection and distribution agency that they would be able to secure far higher rates for their catalog, and they’re probably right. Given the tremendous degree of concentration in the publishing industry, no digital music service or radio broadcaster can really exist without the catalogs of the major publishers, and in a direct licensing situation they would have to pay whatever rate the publishers demanded.

While the major publishers would certainly be making more money, there’s no guarantee that the same would be true of songwriters. Without the consent decrees there would be no requirement that public performance royalties be split 50/50 between the publisher and writer, and that the writers share be paid directly to the writer. The major publishers have insisted that they would pay writers a reasonable share.  However, given that the music publishing industry has a history of unsavory behavior, and the fact that their trade group, the NMPA, inexplicably resigned from the International Confederation of Societies of Authors and Composers, a group that advocates for writers, and promotes reasonable business standards as well as data collection standards, their suggestion that they be trusted seems more than a bit suspect.²

In addition to guaranteeing the equitable payment of songwriters, the rules of operation set forth in the consent decrees help to promote a functional marketplace. The requirement that a license be granted to a prospective licensee upon their request allows small streaming startups to make available the same catalog of songs as much larger, well-established services, thereby helping to foster competition and innovation in the realm of music streaming. This rule, in tandem with the requirement that the PROs not discriminate in the terms of their license between similarly situated licensees ensures that the publishing industry does not choose the winners and losers in the streaming race.

What Happens Now?

Unfortunately, it seems unlikely that this process will end with the consent decrees existing as we know them today. In the highly concentrated music publishing industry, the major publishers wield a significant degree of power, and don’t hesitate at all to show it off.

In early July, at the beginning of the review process, Sony/ATV chairman and CEO Martin Bandier informed songwriters signed to his company that if the review process did not end in modifications to the consent decrees  that Sony/ATV found suitable, they would be more than willing to consider the “nuclear option”, i.e.  “the complete withdrawal of all rights from ASCAP and BMI.”³ One, let alone all of the major publishers completely withdrawing from ASCAP and BMI would have an absolutely disastrous effect on public performance licensing. Currently, because ASCAP and BMI primarily issue blanket licenses that cover their entire catalog, small publishers and independent songwriters receive the full licensing leverage of the major publishers’ vast, in demand catalogs. Full withdrawal by the major publishers would leave the PROs tremendously weakened, and the benefits of collective licensing would disappear, likely resulting in incredibly low rates for the already disadvantaged independent publishers and songwriters. Even worse for the independents, major publisher withdrawal would not significantly reduce the operating costs of ASCAP and BMI, and would force them to bear the full burden of those costs. Further, withdrawal would have a disastrous effect on innovation in the streaming marketplace. Streaming services would be forced to negotiate licenses with the three major publishers, and possibly some of the top independent publishers, in addition to obtaining licenses from ASCAP, BMI, and the third PRO, SESAC. The combined cost of these licenses would likely prove too great for any new startup to bear. Worse yet, the NMPA, in conjunction with the major publishers, ASCAP, and BMI, has done a frighteningly good job of convincing the songwriters they represent that the continuation of the only thing ensuring they receive equal pay for public performances of their works is in fact a bad thing. This means that the only group of people who have the ability to influence the outcome of the review in the same way the publishers and PROs can have remained silent, save for a very few.

Fortunately, all hope is not lost. There are certainly ways the consent decrees could be modified to make it such that major publishers would likely not be able to justify withdrawing from the PROs. Perhaps the easiest step toward a solution would be the removal of the requirement that the rate courts not take into consideration the rates set by the Copyright Royalty Board for the public performance of sound recordings. Though this would only influence the rates paid for digital performances of compositions, it would still most likely result in higher payouts for both writers and publishers, while still maintaining a functional marketplace for public performance licensing.

While the future of the PROs, and for that matter of the industry as a whole, is a up in the air, it is critical that we look past the rhetoric and make sure that, regardless of where we ultimately end up, the creators who are the foundation of this industry receive adequate compensation for their work.

By Griffin Davis

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