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How the Rate Court Cottage Industry is Leading to the Destruction of Collective Licensing

January 19, 2013 1 comment

The news that Sony/ATV made a direct deal with Pandora produced some strangely paranoid chatter in the echo chamber.  Sony/ATV can bring Pandora to their knees, getting around the rate court, etc.  I think it’s actually much simpler than that.

What appears to have happened is quite simple–Sony/ATV opted out of letting ASCAP and BMI license their catalog (which now includes EMI so is really quite massive).  This is perfectly legal, nothing shady, although a bit unusual.  They’ve announced they intend to take some digital licensing in house, so everyone should have expected this was coming.

It is perfectly legal because of the antitrust consent decrees that ASCAP and BMI operate under.  A condition of these consent decrees is that every affiliate of ASCAP and BMI retains the right to “opt out” of the blanket licenses (and rates) offered by these societies.  No reason need be given–it is a right that all enjoy.  (SESAC is a private company that does not (yet) operate under a consent decree.)

If a publisher opts out of one license or type of license, they can remain in the blanket license for all other licenses that are in place.  So for example, Sony/ATV can opt out for Pandora, but stay in for broadcast radio or venue licenses.

Why might a publisher opt out of a blanket license?  One reason is financial–they don’t have to pay the PRO collection fee on that revenue stream.  But another reason is that if they stay in the blanket license, then they are subject to rate court proceedings brought against the PRO if negotiations with a licensee (say Pandora) fail.

Rate court proceedings were relatively rare occurances prior to the arrival of Big Tech in our lives.  They have become increasingly common and almost always involve digital services.  In fact, they almost always involve the same lawyers representing the digital services.

Rate court proceedings cost a lot of money.  Millions in legal fees.  And the twist is that if you stay in the blanket license, ASCAP and BMI pretty much have no choice but to submit to the rate court proceeding which is required by their respective consent decrees.  So in this way while the PRO licenses are voluntary–not statutory like the compulsory mechanical license–and the rates are not set by the Copyright Royalty Judges–because they are not statutory rates–the rates are set by U.S. Federal District Courts sitting as rate courts.  (For example, Judge Stanton is the BMI rate court judge in the Southern District of New York.  MTP readers will remember him as the judge in the Viacom v. Google lawsuit who handed Google a complete victory over Viacom at trial in an opinion I found meandering and bizarre, which subsequently was substantially overturned on appeal.)

Rate court proceedings are in many ways similar to the Copyright Royalty Judges and take into account a variety of economic factors, including market rate deals for the same type of license.

Blanket licenses issued by the PROs are one of the great efficiencies in music licensing.  Rate court proceedings gum up the works and undermine the benefit of lower transaction costs in collective licensing.  I wonder if at the end of the day when one takes into account the legal fees and transaction costs concerned when Big Tech fights negotiated rates whether anyone actually comes out ahead.

Meaning if you compare the position of the parties before the rate court black hole and the ultimate rate imposed by the rate court, did the Big Tech company that used its litigation budget to force songwriters into the rate court proceeding actually end up better off?  Or did they just get their jollies from dragging songwriters through costly litigation so that the next time around the PROs were more likely to acquiesce?

One thing that you often hear these Big Tech types say about their direct licenses is that songwriters are better off to not be represented by PROs because even though the direct license rate is lower, it’s more than the songwriter would get through the PRO because they don’t have to pay the PRO “commission”.

Of course, the other benefit from PRO licensing that songwriters get that isn’t discussed is that the songwriters can audit collectively under the PRO’s blanket license.  Big Tech companies hate audits.  The more direct licenses, the less likely that any one songwriter will ever exercise an audit right.  And eventually the audit right will be withdrawn (as is already happening with the YouTube indie publisher license).

So how does this effect Sony/ATV?  Recall that Pandora sued ASCAP in the rate court to try to screw songwriters right about the same time they began their campaign to screw artists in the Congress with the so-called Internet Radio Fairness Act.

If I had to bet, I would bet that Sony/ATV said enough of this BS and withdrew from ASCAP and BMI for purposes of licensing Pandora.  That takes Sony/ATV out of the rate court.  They made a deal with Pandora for a higher rate and shorter term than will ultimately come down in the ASCAP rate court.

Note:  Of course, ASCAP may be able to use the Sony/ATV deal as evidence of a significant market rate for the Pandora service in the rate court, even though Sony/ATV is not party to the case.

Pandora had the choice of excluding all Sony/ATV songs from their service or make a direct deal with the publisher.  And now that Pandora has made that deal once, they will always.

And that’s really all there is to it.

But–if Pandora had not been advised to go to the rate court, would Sony/ATV have made the same decision?

Is Pandora lucky that Sony/ATV didn’t just opt out of the ASCAP and BMI blanket licenses and not license Pandora at all?  That would probably have brought down the service.

And–given the antagonism that was heaped on Pandora by songwriters from outside the US, will the societies representing these songwriters elect to opt out of the reciprocal agreements they have with ASCAP and BMI regarding Pandora and just not license Pandora?

Will other publishers follow Sony/ATV and avoid the rate court?  Won’t that mean that the cost of the rate court will be shared by an ever smaller group of songwriters forced to litigate by Big Tech?

One thing we don’t need is less efficiency and higher transaction costs in music licensing.  Most Big Tech companies and their shills whine about fragmented music licensing, yet the same people drive up those transaction costs while enriching a small group of lawyers who undermine the benefits of blanket licensing.

Do these Big Tech companies have the right to do this?  Sure.  Does it benefit them in the long run to jack songwriters around?  Not really.  If there’s anyone who has an existential threat from Big Tech it is the professional songwriter, often overlooked yet the most important part of the equation.

Continually trying to jack these people around accomplishes one thing:  It hastens the day of full commoditization of culture by Big Tech.  This is what they may think they want, but I would suggest to you that they really don’t.

So they may have the right to do it, but that doesn’t make it smart.  But then I’m just a country lawyer and I’m not as smart as these city fellers.

You can’t blame Sony/ATV given their options.  I’d have done the same.

Trickle Down Innovation Alert: Mr. Pandora the secret censor

October 11, 2012 Comments off

“Have you seen the bigger piggies in their starched white shirts

You will find the bigger piggies stirring up the dirt

Always have clean shirts to play around in.

In their sties with all their backing

They don’t care what goes on around

In their eyes there’s something lacking

What they need’s a damn good whacking.

Everywhere there’s lots of piggies

Living piggy lives… Clutching forks and knives to eat their bacon.”

Piggies by George Harrison.

Hidden in the deceptively named “Internet Radio Fairness Act” is one of the most insidious anti-artist provisions we’ve seen in many years.  Don’t be fooled–these people are trying to silence artists and use lobbying power to cram down terms to satisfy Wall Street.  And if they can outlaw speech by the AFM and AFTRA, just think what Congress can do to the rest of our industry and beyond.

Pandora’s Big Lie

So here’s the latest milk and cookies tripe from behind the Pandora curtain according to Business Week:

“We envision a future in which Internet radio can offer more as the sector grows and innovates — but this is only possible if Internet radio can compete on a level playing field with the other forms of digital radio,” Mollie Starr, a  Pandora spokeswoman, said in an e-mail.”

The Ministry of Truth at Pandora would like you to believe that this is all for your own good, you see, and what’s good for Mr. Pandora is good for “middle class musicians” to borrow a phrase from One of the Most Influential People in the World, Tim Westergren.  (You should also read the excellent reporting by Glenn Peoples “The Truth About Pandora’s Payments to Artists” where Glenn takes apart the latest heaping serving of bunk from the 1% in Pandora’s board room.)

Westergren and Pandora’s Ministry of Truth (or Minitrue as Orwell called it) wants you to believe that Less is More.  Yes, the Chris Anderson crap pile under the Wrong Tail has returned.

This is a tough sell.  Westergren is out there touting how much they pay to specific artists in a very questionable method of calculation according to Glenn Peoples (which makes perfect sense to me) and he’s wrapping Pandora’s name around the names of these artists while he discloses what he would like you to believe they will make–under the current rates.

Here’s the argument: Pandora is so cool because Pandora pays all this money to artists.  And now Pandora is so cool because they want to cut those payments in half by spending big lobbying bucks!!  And it’s good for the artists because the benefits to Pandora (and presumably Sirius and  Clear Channel) will trickle down to “middle class artists”!

Complete mindless crap, right?  Only makes sense on Wall Street in the confines of the 1%.

This line of argumentation is less insidious than it is pitiful.  We feel for Pandora’s lifers who are now being forced to serve The Man 2.0.  It doesn’t justify being a shill for the money, but we get it.

Pandora’s Thumb on the Scales of Justice

But what is more insidious than innovation trickling down their legs is what else is in the Internet Radio Fairness Act.  The Molly Starrs of this world at Pandora’s Minitrue want you to stay focused on the glittering generalities about innovation trickling down and how less is more and so on.  She holds the bright and shiny object in one hand and hopes you are too dumb to notice the knife in the other.

Pandora wants to fire the judges that rule on their rates and reinstall them with judges who they must think will be more pliable. We discussed Pandora’s court packing plan already.  (And they must be pretty confident that they are going to win that part because if they lose those judges they wanted to fire will be ruling on them in a courtroom near them.)

Enter Pandora the Union Buster

But here’s another even more insidious part of IRFA:

Section 5(a)(1)(B): `Nothing in this paragraph shall be construed to permit any copyright owners of sound recordings acting jointly, or any common agent or collective representing such copyright owners, to take any action that would prohibit, interfere with, or impede direct licensing by copyright owners of sound recordings in competition with licensing by any common agent or collective, and any such action that affects interstate commerce shall be deemed a contract, combination or conspiracy in restraint of trade in violation of section 1 of the Sherman Act (15 U.S.C. 1).‘.

You would not necessarily catch this unless you knew about the efforts by Clear Channel and Sirius to enter into direct license agreements with record companies and bypass SoundExchange.  Direct licensing is bad because it allows the record company issuing the direct license to collect the artist’s share of revenue and apply it against unrecouped balances.  SoundExchange protects the artist from this practice and pays artists directly.  Plus, direct licensing essentially guts the ability of artists to audit Pandora and Sirius because SoundExchange conducts collective audits.  Which of course, is an innovation that Pandora and its fellow innovators do not like one little bit.

In fact, Sirius is actually suing SoundExchange and A2IM on this basis because they allege that SoundExchange and some labels had the temerity to stand up and advise their members about the bad effects of direct licensing.  (So did we: See “Clutching Forks and Knives to Eat Their Bacon: How Sirius Wants to Gut SoundExchange“.)

So what Pandora’s lobbyists are trying to accomplish here is to make it illegal with the wave of a lobbyist’s pen “to take any action [including the action of speech] that would…interfere with, or impede direct licensing by copyright owners of sound recordings in competition with licensing by any common agent or collective…”

Aside from the fact that this provision is probably an unconstitutional burden on First Amendment rights of speech and association–you know, CENSORSHIP–this provision would directly prevent artists who own their own recordings from being represented by any collective, whether it’s SoundExchange or a collective they form on their own (unions have an anti-trust exemption under the National Labor Relations Act that not even Pandora wants to touch).

And as we’ve always said, what the tech companies really want is to break up any form of collective that empowers creators and keep us all weak and alone so they can treat us how they like.  If you have any doubts about this, see the Google Books case where Google lawyer Daralyn Durie  tried to force individual authors to bring individual lawsuits against Google instead of acting as a class against the Leviathan of Mountain View.

According to Business Week:

Google attorney Daralyn Durie told Judge Denny Chin in federal court in Manhattan that authors and photographers would be better off fending for themselves because their circumstances varied widely, especially since the copyright issue for authors involves the display of small snippets of text.

Never fear, she was laughed out of court.  That time.

So you can see how the Pandora trickle down innovation approach would further this goal of weakening artists.  In fact, I’d like to hear an explanation from the Congressmen who are proudly carrying this bullying tripe, Messrs Chaffetz and Polis, as to exactly what the purpose of this section is, and what the implications are.  I think you have to be kind of sick to be proud of this obscene overreach.

This collective busting section of IFRA boils down to this formula:

[People who disagree with Pandora] + [cannot interfere or impede Pandora in what Pandora wants to do] + [and they can’t form a collective bargaining group] + [to do things Pandora doesn’t like] = [and if they do so, or conspire to do so, it may be a crime or a violation of civil law] (See DOJ Antitrust Division Criminal Enforcement Manual.)

For example, if Chaffetz and Polis are successful in passing this bit of collective busting overreach, why wouldn’t this kind of law be used by the National Association of Broadcasters to try to prohibit ASCAP, BMI and SESAC from protecting their songwriter members in negotiations?  Or empower various employer groups (public or private) to run to Congress to try to prohibit unions or collectives from advocating for their members on central commercial issues in their industries?

And like the man said:

In their sties with all their backing, they don’t care what goes on around

In their eyes there’s something lacking, what they need’s a damn good whacking.

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