Will Senator Lee Challenge the Rate Court–an intellectual elite in a far away Eastern city?

Senator Mike Lee is presiding over a hearing tomorrow before the U.S. Senate Antitrust Subcommittee with the provocative title “How Much For a Song?: The Antitrust Decrees that Govern the Market for Music“.

There are three fundamental questions presented to Senator Lee and the Subcommittee regarding the antitrust decrees that govern two of the three U.S. performing rights organizations.

1.  How Much Longer Will The Government Throttle America’s Innovators?   Whatever the rationale once was for the ASCAP and BMI consent decrees, it is long lost in the dustbin of history.  Let’s be clear–the National Association of Broadcasters, the Digital Media Association, the Computer and Communications Industry Association, the Consumer Electronics Association and their overlapping membership and boards of directors want the Congress to think that this dispute is about “Big Music” versus innovation.

Somehow these companies with combined market capitalizations in excess of $2 trillion, companies including the richest companies in the history of commerce, are so threatened by a truly free market that they need to hide behind consent decrees that predate all of them.

Eek!  A songwriter!

That’s a straw man that just doesn’t hold up historically, commercially and certainly not logically.  First, whatever “Big Music” is, it starts with songwriters.  Songwriters are every bit as much American innovators as Google, Apple, Amazon and Facebook, a group–some might call it a cartel–that Google’s Eric Schmidt refers to as the Gang of Four.

There is no copyright that “Big Music” is charged with exploiting that doesn’t start with songwriters.  And thanks to the corrosive effects in part due to the high handed business practices of the Gang of Four, songwriters don’t stand a chance trying to negotiate individually against these multinational media corporations.  Want examples?  You can look at how Google treated songwriter and independent artist Zoë Keating a few weeks ago, not to mention Apple’s decade long refusal to license songs directly from songwriters, Amazon’s cyberlocker, Pandora and Sirius refusing to pay pre-72 artists.  Shall I go on?  There’s plenty more where that came from.

But when songwriters try to negotiate collectively through ASCAP and BMI, that isn’t good enough either.  Silicon Valley’s supposed free marketeers go running for the Nanny State and conveniently hide behind the government’s consent decrees that were never designed to address the commercial power of the Gang of Four.  And the Gang of Four call themselves libertarians?  These supposed innovators are the epitome of crony capitalists.

If there’s a need for government oversight in this industry, it clearly runs the other way.  But songwriters don’t ask for the government to protect them from multinational corporations.  They just want a free market.

2.  The Rate Courts Are Being Manipulated.   If the government must insert itself into the songwriter’s business yet again, surely it need not do so through the current rate court system.  Rate courts were intended to be a tribunal of last resort if the parties cannot reach a negotiated conclusion to a license.  Indeed, that is how the rate courts operated most of the time until the Gang of Four came on the scene.

Now companies like Pandora, YouTube and the like view negotiations as simply a box to be checked before they get to flex their litigation muscle in the rate courts.  While the Gang of Four or Pandora can simply sell a few shares of stock in the public market to cover their litigation costs in rate court, songwriters have to come out of pocket for heavy litigation costs.

You don’t have to be an economist to see that taking into account the transaction costs of rate court for a judge to set aside the negotiations of the parties not only creates moral hazard in the negotiations, it necessarily lowers the real royalty rate paid to songwriters under the terms of the rate court ruling.  The rate court system will always favor might over right.

3.  The Rate Courts are Destroying Collective Licensing.  Some songwriters and publishers have sought to escape the Kafka-esque confines of the rate court and consent decrees by licensing directly–a right that is required by the consent decrees.  But no–the rate court interprets the consent decrees so that there is no escape but the one that is least palatable to the songwriters and is most contrary to the goals of copyright and the consent decrees themselves.

The ASCAP rate court has determined that the only way for a songwriter and their publisher to enter direct licenses with music users like Pandora is for that publisher to withdraw entirely from ASCAP.  Of course, the biggest publishers are the ones that are most likely to withdraw from ASCAP and will have the greatest harm on the longevity of ASCAP (the same is true of BMI).

This arbitrary limitation on the statutory right to subdivision of the copyright bundle of rights essentially dares songwriters and copyright owners to disassociate themselves from the regulated PROs, a course that I fully believe they will eventually follow. If enough songwriters are effectively forced to withdraw from the regulated PROs in order to enjoy an actual free market for subdivisions of their rights permitted by the Copyright Act, both ASCAP and BMI surely will be diminished to the great disadvantage of songwriters.

That’s right–the consent decrees as interpreted by the rate courts are anticompetitive.

This is insane.  The one thing that is working efficiently in the Internet music economy is collective licensing through PROs (and I include SoundExchange in that group on the sound recording side).

If the point of the consent decree was to destroy collective licensing, then the government should just come right out and say that as opposed to hiding behind an intellectual elite in a far away Eastern city.

The Congress has the opportunity to chuck the whole nonsense and let the free market control.  As James Madison wrote in Federalist 44, “[government] interference is but the first link of a long chain of repetitions, every subsequent interference being naturally produced by the effects of the preceding.”

I say dump the consent decrees.  The result can’t be worse than the status quo.