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The Problem with Pies

May 22, 2014

I’ll gladly pay you Tuesday for a hamburger today!

J. Wellington Wimpy

We recently posted an excellent piece by music publisher Monica Corton that aptly expresses the frustration of music publishers in the Kafka-esque world of government control of songwriting and music publishing.  The agita over government control has been developing for years.  The latest Pandora experience for ASCAP brings the issue front and center.

I understand the frustration and MTP readers will know that I have written about the issues extensively here, the Huffington Post, The Hill, pretty much anywhere they’d have me.  I’m not the only one, either–David Lowery has also make many convincing arguments about the problem of government control of songwriters.  It is ludicrous that in a world where Google runs roughshod over artists as well as consumers and is essentially unfettered by antitrust concerns that the government puts its fearsome boot on the neck of songwriters.

And it is the government control part that is the problem.  I believe that all the other manifestations, including low royalty rates, are just symptoms of the underlying problem.  So given that this is my view, I both agree with Monica in some ways and disagree with her in others.  In general, we are allied in music and it is possible to disagree with our friends in the songwriter and publisher community once a decade without abandoning them, which would be unthinkable.

A Burger Today:  Rate Court as Cottage Industry

The PRO rate court process is getting ridiculous.  From a licensing perspective, the PROs and SoundExchange are two of the very few examples of effective music licensing.  You go to them and you get a license for essentially the universe of music.  From a digital retailer’s perspective, this is a great result and produces a very measurable saving.  If there’s already a rate in place, then this kind of blanket licensing for songs from ASCAP, BMI and SESAC is very appealing to all concerned.

It is the setting of the rate that is the problem and it all comes down to this:  The PROs cannot say no.  Music can be used on a rateless basis during a negotiation and the fight over rates will continue.  The eventual rate essentially will be applied retroactively.  Who in their right mind would have ever agreed to that deal?  Aside from J. Wellington Wimpy, that is.

This hack is not lost on the more litigious–read, well-funded–members of the music tech community.  We are currently doing a study of the last swath of rate court decisions and an interesting trend is emerging.  The same law firms seem frequently to be representing the licensees and the fact patterns are similar.  As Monica notes, when you take into account the total transaction costs of establishing a rate, the litigants very likely end up on the losing end of the deal.  Songwriters seemingly must lose every time, but can do little about it.  Aside from the fact that the PRO consent decrees are some of the longest running consent decrees in history, why keep a system where nobody wins?

Knowing that the rate court awaits, some litigious licensees (like Pandora or the monopolist YouTube) engage in a “negotiation” with ASCAP and BMI.  Who can know what lurks in the hearts of men, but forgive me if I am highly suspicious of whether this type of licensee ever intends to actually reach a conclusion in the negotiation that precedes the rate court filing.  My hunch is that the negotiation is merely a prelude to litigation.

And that is exactly the entirely predictable behavior that the government has produced by installing an unelected judicial elite in a far away Eastern city to oversee the world’s songwriters.  And it really is the world’s songwriters, because rate court judges dictate to songwriters who are not otherwise subject to U.S. law exactly what the value of their music is to be when performed in the U.S.

So it is not surprising that a very loud rumbling is heard coming from the songwriting community that chafes against the government’s boot on their throat.  There is a desire among songwriters and publishers to dismantle the entire consent decree process.  And since getting rid of the consent decree would likely have to be ruled on by the very rate court judges who contribute to the problem, how do you think that’s going to go?  I think this will involve a long, long litigation process while songwriters suffer.  Drip, drip, drip.

In the meantime, the ASCAP rate court is doing the best it can to force the eventual disintegration of ASCAP by essentially requiring publishers to withdraw from ASCAP altogether in order to enjoy their rights in a free market negotiation.  The court is essentially calling the bluff with little regard for the aftermath.  A much weakened ASCAP will inevitably be less effective for independent songwriters and music publishers who remain out of necessity.  (Not to mention that the court is forcing the FUBAR situation of publishers withdrawing while their ASCAP songwriters remain in the organization, a result that would beggar belief.)

I think that getting rid of the consent decrees altogether in favor of binding arbitration or some other alternative dispute resolution process would be a very serviceable repair for a rate setting system that is clearly useless (in contrast to a very efficient licensing structure).  Even if one had to suffer on through the rate court process, it seems that allowing songwriters and publishers to opt out of either the blanket license or the compulsory license on any basis they chose would be consistent with the goals of the consent decree itself and would also have a very beneficial effect on rates.  I’m willing to be educated otherwise, but that seems like a relatively straightforward legislative fix that could trump the consent decrees.  (Not without controversy, to be sure.)  For PROs, that would mean allowing songwriters and publishers to opt out on a song by song, license category (i.e., all digital or all radio) and deal by deal basis.  It would reestablish the songwriter’s right to say no.

For mechanical licenses, that would mean opting out of the compulsory license altogether.  That one repair–opting out–would preserve individual liberty, allow markets to develop around rates, and would obviate the need for a rate court.  Remember–Pandora had already negotiated direct deals with publishers when they were in the very rate court that not only hammered songwriters on the rates, but set aside these freely negotiated contracts.  A truly shocking rejection of the actual free market by a court that is supposed to be divining and setting an equivalent of a free market rate.  A rate that hasn’t existed since 1941.

Get Your Own Burger

I have to gently disagree with a couple of supporting arguments that one hears more frequently:  Tim Westergren is rich and that the problem for songwriters is that services like Pandora pay too much to record companies.

I first met Tim Westergren when he was knocking around Silicon Valley with a company called Savage Beast that eventually became Pandora.  (Personally, I was not attracted to Savage Beast because I do not believe in machines making music recommendations for humans.  Can you imagine anyone saying, hmm, what new music shall I listen to?  Let me ask my robot.  I think I’m going to be right about this in the long run.)

Whether you like the idea or not, Tim put his heart and soul into this company and after years of struggling finally made it through.  He is getting a payday, and I’m happy for him to get the money.  I want all entrepreneurs to be able to reap the benefits of their efforts.  I may think they are overpaid, I may think that only and idiot would pay $x billion for that (not mentioning any names there, Ian), but I do not question the correctness of their reward.  They deserve the upside.

But so do the songwriters and artists that Pandora asks to invest in them by taking a lower royalty rate.  However, Pandora offers creators no benefit on the upside.  We are to take all the downside risk and give them all the upside benefit.  In fact, Pandora not only offers no upside, they actually want songwriters and artists to take less the more successful the one-product company becomes.  Should Pandora be surprised that this approach has not gone well for them?

Pandora has made a couple very big mistakes.  Colossal errors.  First, they got into the habit of crying poor when they were and forgot that when you get rich you can’t cry poor anymore or people think you are an…well…let’s say a hypocrite.  The other thing they did wrong in their public messaging was hitch their wagon to the percentage of their gross or net (depending on the day) that they paid for royalties.  This is not a smart move for a number of reasons.  (Even if you ignore their IPO and follow on offering.)

The main reason this is a weak argument is that it is misleading.  Pandora’s royalty rates on sound recordings are largely a fixed rate and on songs are also a fixed percentage.  Gross or net income fluctuates.  Pandora is itself in control of its gross income.  If you want Pandora’s royalty payments to be a lower percentage of its revenues–increase the revenues.  (The blend between songs and sound recordings will tend to decrease the overall percentage.)

For example, Pandora famously said that it pays over 60% of its revenue in royalties.  That sounds like it expresses a royalty rate of 60% of revenue, right?  Wrong.  On a quarterly basis, Pandora’s royalty payments as a percentage of gross fluctuates as you would expect.  The trend line of royalties as a percentage of Pandora’s revenue is down–in fact Q4 of 2013 the percentage was 47%.  That ain’t 60.

So by expressing the royalty payment in terms of percentage of gross revenues, Pandora puts its overall business strategy on the table.

If Pandora wants to compare royalty payments to a percentage of its net, the company is now putting its operating P&L on the table.  You know, for items like executive compensation.  Sure you want to do that?

Pandora Executive Comp

I really don’t object to Tim and Co.  getting rich from selling Pandora stock.  Go with God, buddy.  But don’t come crying to me about royalties.  There’s a way to negotiate these deals based on principled self interest and not scapegoating.  And of course you know who scapegoat number 1 always is?

The record companies.

Tim has done absolute back flips trying to shoehorn his troubles into being the fault of “record companies.”

This is the second place I would gently disagree with one of Monica’s supporting arguments.  The main reason that songwriters get less than artists is because the government is all up in their business and has been for over 100 years (since the 1909 Copyright Act if not before).  Songwriters fought like the dickens when the 1976 revision of the Copyright Act came around, principally in the person of one Hoyt Axton, a great songwriter and a great man.

The government had artificially suppressed the mechanical royalty rate at 2¢ since 1909.  Yes, that’s right.  Year in and year out, through two world wars and economic booms and busts, for nearly 70 years songwriters got the same rate.  In 1976, the mechanical rate was essentially indexed to inflation and gradually rose from the increase to 2.75¢ in 1978 to the current 9.1¢.

Great result, you might say.  True, better than having the government’s 2¢ boot on your neck for another 70 years.  But had the government decided to index that 2¢ rate retroactively to determine under the principle of indexing what the rate would have been in 1976 and then indexed that uplifted 1976 rate prospectively, the current mechanical rate would be closer to 50¢.  Or–perish the thought–let songwriters negotiate their own rates.

When songwriters accepted this state of affairs, it locked into place the idea that songs are to be paid a low rate.  That’s not something that artists or record companies have control over.  Maybe it wasn’t the best deal that could have been made, but it was the deal that was made with the government.

And it is important to recognize that the rates that Pandora pays for sound recordings are negotiated by SoundExchange which is comprised of artists, unions, indie labels and the majors.  That artist/union/label board has to approve the sound recording rates.  So it is really buying into Westergren’s fallacy to try to find a victim, first of all, but then to think that somehow the purported songwriter victim is victimized by the faceless “record companies” is really just factually incorrect scapegoating.

Not only do we not want to allow Pandora–of all people–to be able to get the community to turn on each other, we all want to support songwriters in getting more money but not at the expense of other members of our community or vice versa.  Whether that means supporting publishers in withdrawing digital rights from PROs, supporting songwriters in opting out of compulsory licenses and negotiating their own fair market rates, getting rid of the consent decrees or asking the songwriters to support artists in negotiating more favorable rates with digital services.

But I would hate to see the creative community allow litigious companies like Pandora, Sirius, Google and their ilk, or the National Association of Broadcasters and the Radio Music License Committee for that matter, to cause us to begin thinking that there is a single pie for music that is defined by our opponents and that they can dupe us into fighting over.

We should all be united in getting the government out of the equivalent of wage and price controls for songwriters.  Songwriters have the right to say no over sync licenses for film, TV and commercials.  That’s been in place just as long as the compulsory license and the world has not ended.  Extending that right to say no to performance and mechanical licensing is the first step towards helping songwriters get fair compensation, not fighting over an imaginary pie.

I think that if we go that route, we’ll soon be picking over each others carcasses.  And our mutual opponents would just love that to no end.

 

  1. May 22, 2014 at 13:49

    Chris, once again excellent work. You do realize you are having important, visible impact on the public’s perception of these inequities and bringing much needed clarity to the severe challenges artists are facing in their quest for fair compensation.

    Thank-you for doing the research and providing the insights that enable me to have an intelligent conversation about artists’ rights.

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