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Guest Post: ASCAP and the Great Pandora Battle, by Monica Conlon

May 19, 2014 1 comment

[Editor Charlie sez: This is a guest post by Monica Conlon.  Follow her @momusing.  Used by permission, copyright held by the author, any reproductions require the author’s consent.  Monica is Senior Executive Vice President of Creative Affairs and Licensing at Next Decade Entertainment, Inc., an independent music publishing company which she has been privileged to work at since 1991. Her responsibilities include signing new writers, negotiating, drafting and licensing all works published and administered by the company as well as overseeing the distribution of royalties. Some of Next Decade’s clients include Harry Belafonte, the Pure Songs catalog (the band Boston), Gaucho/Sandbox Music (70s R&B catalog with lots of samples in rap and hip/hop), trance/dance writer Jan Johnston (hits with Paul Oakenfold, Tiesto, Paul van Dyk), Bob McGrath (from Sesame Street), Lucy and Carly Simon, Martha Redbone and Aaron Whitby (Martha Redbone Roots Project, THE GARDEN OF LOVE – SONGS OF WILLIAM BLAKE), Marcy Heisler and Zina Goldrich (lyricist/composer of the Broadway bound musical EVER AFTER and the musicals DEAR EDWINA and THE GREAT AMERICAN MOUSICAL) and Vic Mizzy (“Addams Family Theme” and “Green Acres Theme”). She has been a guest lecturer for the Copyright Society, the NMPA/HFA, the Hartt School of Music, the International Intellectual Property Conference at Fordham Law School and the Cutting Edge Music Conference.]

I spent many hours fielding questions and having conversations with songwriters about the recent win by Pandora in the ASCAP rate court. Mostly, the songwriters wondered why there was a battle in the first place and why ASCAP lost. Performance rights licensing (the right to publicly play/perform a song on the radio, television, the Internet, large venues etc.) is one of those areas that songwriters love, but often know little about. They love that the check comes in the mail on a quarterly basis like a miraculous gift and some even call it “mailbox royalties.” They rely on this money heavily even though many would not be able to describe how it is generated or what the rules are in governing the two major Performance Rights Organizations (PROs), ASCAP and BMI.

The Pandora battle revolves around this governing issue. ASCAP and BMI are membership associations which each represent over a half a million songwriters and music publishers in the field of performance rights licensing. ASCAP and BMI each function under consent decrees entered into with the U.S. Justice Department. The current consent decrees require that ASCAP and BMI must grant a license to any potential company or service that wants one. They do not have the right to say “no” to any potential licensee.

If, after they negotiate with any licensee — in this case, Pandora — and the licensee does not like the rates proposed by ASCAP or BMI, the licensee or the PRO has the right to go to federal court in New York to set the rate. This is exactly the tack that Pandora took and what has led us to this current situation. In court proceedings, it is the PRO’s burden to demonstrate that its proposed rate is “reasonable,” but the consent decrees provide no standards for determining “reasonableness.” The ASCAP Rate Court, through Judge Cote, has been consistently ruling against ASCAP since she began her tenure as the sole judge responsible for setting ASCAP license fees in 2009, rejecting the comparable licenses ASCAP has proffered as benchmarks for gauging the reasonableness of its fee proposals and accepting instead the licenses relied upon by Pandora and other ASCAP licensees.

What is particularly upsetting about all of this is the monetary facts revolving around Pandora. The license that Pandora has been functioning under since it entered into its original agreement in 2005 with ASCAP was at a rate of 1.85% of Annual Revenue, with the combined rate for all of the PROs totaling 4.3% of Annual Revenue. This is slightly more than traditional radio broadcasters pay for their ASCAP licenses, and commensurate with what other streaming services had been paying. However, services like Spotify and the new iTunes Radio pay significantly higher rates, ranging as high as a combined 10% of Annual Revenue. Further, the rate that Pandora pays the record labels for the master rights (the artists recording of a particular song) is in the range of 50% of Annual Revenue. Yes, you read that right….the songwriters have been fighting Pandora for them to pay 4.3% of Annual Revenue when Pandora pays the record labels 50% of Annual Revenue for the use of the master recordings of those same songs.

When Pandora complains that they are paying too much in royalties, which is their constant battle cry, the problem is they are paying a huge rate to the record labels. However, they have no recourse or leverage to reduce the rate they pay to the record labels because the labels function independently and their rates for services like Pandora have been determined by another governmental entity, the Copyright Royalty Board. The only royalties that Pandora has access and leverage to reduce are the songwriter royalties because of the way the consent decrees function.

The court costs that ASCAP has paid in fighting Pandora over their streaming rate come somewhere in the range of $5 to $9 million. Pandora likely has paid equivalent legal costs in their battle. Imagine if Pandora hadn’t gone to court over the combined PRO rate of 4.3% and had put that money — at the low end, say $5 million — into paying music publishers and songwriters a fair rate, the rate other streaming services are paying. Maybe then, Tim Westergren, Pandora’s CEO, who loves telling the press how much he adores musicians and songwriters, could honestly say that he is helping them with his streaming music service rather than what he has truly done, which is to almost single handedly upend the entire structure of the performance rights licensing system.

How did Westergren affect the performance rights licensing structure? The music publishers disagree with Judge Cote’s rate of 1.85% of Annual Revenue. In fact, the music publishers thought the combined PRO rate of 4.3% was also too low. The only way to get a higher rate is to pull the digital rights licensing away from the PROs’ control and make direct deals with digital services. This would allow the music publishers not to be governed by the consent decree in matters dealing with digital performance rights licensing. Some of the major music publishers and independent music publishers were in this process of pulling their digital rights with the PROs and EMI Music Publishing, Sony/ATV Music Publishing and Universal Music Publishing even negotiated direct deals with Pandora as they were the first music publishers to pull their digital rights licensing from the PROs. There had been a six month waiting period before any publisher could pull digital rights from ASCAP or BMI.

This process was moving forward for many publishers and then Pandora went to the ASCAP and BMI rate courts, asking those courts to rule that the publishers’ rights withdrawals did not apply to digital services like Pandora that had applied for licenses under the consent decrees. Both rate court judges ruled that the music publishers could not pull just one set of licensing rights (e.g., digital rights) from either ASCAP or BMI. The judges said if the music publishers wanted to license directly, they would have to pull all performance rights licensing from the PROs. No music publisher wants to do that.

Now, the PROs, the music publishers and others are asking the Department of Justice to agree to change the consent decrees so that it is clear that digital rights licensing can be pulled from the PROs. This will mean all digital companies, including Pandora when its current license is up in 2015, will have to negotiate with multiple music publishing companies either to get their services up and running, or to continue to offer their digital music services, because they won’t be able to clear digital performing rights at the PROs alone if the music publishers withdraw their digital rights. It will add a whole new level of rights clearance issues and liability to the process because the lawyers for these new digital companies will have to engage in these direct deals and ensure that they are covered for all of the music repertoire in their client’s digital services.

Before this rate battle began between ASCAP and Pandora, there was no question that all of the music publishers were being represented by the PROs for digital rights licensing.

The future seems precarious to the music publishing/songwriter community. The BMI rate court has yet to take up the Pandora royalty rate issue. If the PROs and the music publishers are successful in modifying the consent decrees, they will have a business solution for getting a higher rate, but it really isn’t a solution for the health and development of building new digital music companies and services. I firmly believe none of this would be happening if Pandora had been a good player with ASCAP. They created this situation and then Judge Cote complemented their bad moves with a totally unworkable decision.

I was at a publisher meeting recently, and the presenter gave some startling figures. He said that last year, Tim Westergren took out over $15 million dollars in stock options for Pandora (the highest amount he could extract in any given year). At the same time, Pandora paid ASCAP a little over $11 million in royalties for access to the entire ASCAP repertoire for the entire year. If this is true, or even slightly exaggerated then how does the guy who owns Pandora receive millions of dollars more in money in one year than all of the ASCAP songwriters and music publishers whose music was featured on his service in that very same year? When you look at it from this perspective, you can understand why there is such an outcry from the songwriter/music publishing community.

The music publishers and the PROs want a workable solution with Pandora and all the digital companies, but they cannot sit idly by and not receive a fair market value for their songwriter’s works in the digital arena. It’s a wild west in licensing right now, what I find so sad is…. it didn’t have to be.

Pandora CEO says “Pandora is Radio” so Pandora shouldn’t pay artists at all–and CEO Pay is Up 3,882%

April 25, 2014 6 comments

Sometimes it pays to read the transcripts from earnings calls, especially for company’s like Pandora, our latest set of fake “friends” in the tech community.  Always striving to keep their executive salaries high, Pandora’s CEO let their true strategy slip out in yesterday’s earnings call (see the full transcript on Seeking Alpha):

For the landscape around content licensing remains a complex topic. We reached the important milestone related to content cost during Q1, with a decision in the ASCAP trial. In her ruling, Judge Cote, confirmed our longstanding belief that “Pandora is Radio”. An important finding was wide ranging legal implications for our company.

Additionally the court set a rate of 1.85% of Pandora’s revenue for the five years ending December 31, 2015, which was the upper end of our proposed range of rates. And this decision followed the court’s issuance of summary judgment in September 2013 which upheld Pandora’s right to perform more compositions in the ASCAP repertory.

As you may have seen just last week, multiple record companies filed suit against Pandora in the New York State Court, regarding our use of sound recordings prior to 1972.

To be clear, we paid publish [sic] royalties on these spins. But like other similarly situated companies including Terrestrial Radio, we do not pay sound recording royalties. Pre 1972 sound recordings represent approximately 5% of total spins on Pandora.

So note the emphasis here:  First, Pandora is Radio. How do we know that?  Because Judge Cote, the unelected, lifetime appointment judge in the ASCAP rate court says so.  The same judge who is using Pandora as a vehicle to systematically destroy ASCAP through the tool of a 1941 antitrust consent decree with the Department of Justice (that would be the same Department of Justice that allows Google to perfect its monopoly but keeps a tight rein on those dangerous songwriters.)  ASCAP is one of the only examples of a system that is working in the online music licensing world but Pandora is only too happy to do all it can to destroy it–because it thinks that music should be free or near free now that it’s had both an IPO and a follow on public offering–all the while selling one product.  Music.  And of course its insiders are making millions after artists gave them a break to get up and running.

Pandora’s CEO says that Pandora should be compared to terrestrial radio (and of course the whole point of the compulsory license that Pandora enjoys is that it is not like terrestrial radio).  And terrestrial radio doesn’t pay artists for any sound recording performances (pre-72 or otherwise…see the I Respect Music campaign).

So riddle me this:  Why is Judge Cote’s ruling for Pandora in the ASCAP case “[a]n important finding” with “wide ranging legal implications for [Pandora]”?  Why does Pandora latch on to the “Pandora is Radio” phrase?  Perhaps it’s as simple as this: Because they want to believe–as McAndrews clearly does–that “Pandora is Radio” and tried buying a radio station so they could get the ASCAP court to treat them like a terrestrial radio station for song licensing purposes–then double back to get the Congress to treat them like a terrestrial radio station for sound recording licensing purposes?  What would the other “wide ranging legal implications” beyond the ASCAP case be exactly if the plan wasn’t to try to get out of the sound recording royalty altogether?  I’m all ears.

So when Pandora goes back to the well in Congress and introduces Son of IRFA, expect to see the company deliver the coup de gras:  ZERO.  Run to the Nanny State to have it decree that Pandora is Radio and the “wide ranging legal implications” are therefore Pandora should pay artists far less than they do currently, and preferably shouldn’t pay artists anything.  (The rhetorical strategy that Pandora lobbyists and the National Association of Broadcasters tried to run at the IRFA hearing that completely backfired.)

And if that’s not what he meant, then why did he say it to his investors?

UPDATE:  According to Morningstar, Pandora’s CEO compensation (i.e., pay in both salary and stock) is up 3,882.3%….  Now if that sounds high, you’ll need to ask the blue-chip stock watching service Morningstar how they got that number–because as Pandora’s trolls will tell you, Pandora CEO Brian McAndrews “only” makes $500,000 in salary.

Pandora Key Executive Comp Closeup

In the world of Wall Street, that’s considered a “bargain.”  Wow…that’s inspiring, eh?  Makes you want to stand up and salute followed closely by voluntarily taking a cut in royalties.  Maybe you’ll run into him shopping at the thrift store and he’ll buy you some socks.  Because in the world of artists and songwriters, $500,000 a year sounds like an awful lot of money for a guy who doesn’t want to pay for his one product–music.  Not to mention $29,167,388.

Pandora Executive Comp

So it seems like there is one clear answer to why Pandora is doing everything they can to alienate those who create their only product–Pandora’s executive team is doing it for the money.

Or more precisely–they’re doing it for your money.

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.

Big Tech’s Inverted “Bump”: When demand goes up, royalties go down

November 8, 2012 Comments off

Greg Sandoval has an interesting article today (“Web Radio Growing Faster Than On-Demand Services“) that points out another clear example that the new boss is worse than the old boss.

It has been a time-honored tradition in record deals (and many other types of creator contracts) that if your record has success, your royalty rate increases incrementally.  These are called “bumps.”  For example, a 16% artist royalty would increase to 17% at 500,000 and then to 18% at 1 million.  (Of course in contemporary record deals, those sales bumps would be much lower, closer to 100,000 and 250,000–in fact, as low as you can get them.  While the principle of reward for good performance is the same, the thresholds are much lower.  Why might that be do you suppose?)

Pandora, Google, Sirius, Clear Channel and their Big Tech and Big Media pals are proposing a different approach–the inverse bump.  If you are popular, your rates will go down.

Is this why Tim Westergren drones on about the “middle class artist”?  Because he doesn’t want you to be too successful?

Think about this when Pandora gets done with their ASCAP lawsuit against songwriters.  That ASCAP check?  Great news, you were successful on Pandora, so they cut your royalties.

If you want to voice your opinion on IRFA, Senator Ron Wyden has a comment page on his Senate website click here.

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