Monday, November 12, 2012

Pandora vs. The Music It Relies On

Pandora has been drawing a lot of attention to itself lately. Unfortunately the attention is not artist-friendly. As a company built on the hard work and intellectual property of thousands upon thousands of music creators, they're going after the very people who make their business what it is. That's about as healthy as a tapeworm.

Unfair Play with Artists and Labels:
By now, most of you have surely caught wind of the "Internet Radio Fairness Act of 2012" that Pandora, Clear Channel and others are working on pushing through Congress. The bill aims to change the standard used by the Copyright Royalty Board (CRB) to determine the royalty rates that webcasters must pay to publicly perform sound recordings. More specifically, it calls for the application of the 801(b) guidelines, used to determine rates for satellite radio and cable, instead of the current "willing buyer, willing seller" guidelines that Pandora is held to. "Why?" you might ask? Well, to make things "fair", of course...

Pandora feels picked on. Why should other digital radio providers (i.e. satellite and cable services) be held to different standards? Well, that seems to be a fair point. After all, shouldn't the value of the right to perform a recording exist independently from the medium through which it's delivered? Maybe so, but as David Lowery notes, the distinction is made by HOW users interact with that medium. In Pandora's case, the relatively more interactive curation features (i.e. "thumbs up" and "thumbs down") justify a higher value placed on the right to perform the recording since, in theory, each performance is more actively sought out by the listener.

But the main issue is that, as you might expect, the 801(b) guidelines would result in Pandora paying significantly less royalties to artists. It may or may not be fair that Pandora is treated differently by the CRB, but it's certainly unfair that parity be paid for entirely on the backs of artists.

As one might expect, the RIAA is fighting back. They are working with Congressman Jerrold Nadler on a bill that also seeks to level the playing field for digital radio service providers. The major difference? They're seeking to subject satellite radio and cable music operators to the same "willing buyer, willing seller" standard that currently applies to Pandora. Instead of lowering Pandora's rates, they want to raise everyone else's. Needless to say, satellite and cable won't take kindly to this, especially as Sirius/XM and Music Choice present their cases to the CRB for even lower royalties under the 801(b) standard.

While taking this all in, it's also important to note that:

- Pandora claims hardship because it pays over 50% of its revenues to rights holders. By comparison, Spotify pays out 65%-70% and iTunes pays a steady 70% to rights holders

- Terrestrial radio broadcasters are not required to pay any royalties to artists for the performance of their recordings but make billions of dollars selling advertising against them

But that's not all...

Squeezing Songwriters and Publishers:
With so much focus on the royalties being paid to artists and labels, why not invite songwriters and publishers to the party too? After all, it's the "fair" thing to do, right? Pandora seems to think so. Last week the company filed suit against ASCAP in an effort to decrease the royalties paid to songwriters and publishers for the performance of their compositions.

Whether or not you think that the effort against artists and labels is unfair, consider that Pandora only pays 4% of its revenue to songwriters and publishers. Just 4%, and they want to lower this even more. Further, as Justin Kalifowitz notes in a guest post for Billboard, Pandora maintains one of the lowest songwriter to artist royalty ratios in the business, paying only 8 cents to songwriters and publishers for every dollar paid to artists and labels. Now that is unfair! Given all of this (and with no thanks to the consent decree by which ASCAP is bound), Pandora is already exploiting the rights to publicly perform songs at a bargain. Cutting deeper into the pockets of songwriters hardly seems fair.

Looking Ahead:
So the question remains - what is really "fair"? As we mentioned in a previous post, the ultimate goal should be a balanced approach. Any radio service relies first and foremost on the content that it plays. Squeezing this resource to the more immediate benefit of shareholders, advertisers or investors is short sighted and cannot be healthy for the industry in the long-term. But creators also need distribution services to promote and sell their content and should work to encourage healthy growth in this market. That said, creators should not subsidize this entirely. Getting terrestrial radio broadcasters to chip in with royalties on sound recordings would certainly help a lot, as would bringing up rates paid by satellite radio and cable music providers (perhaps this could also lead to more balanced songwriter to artist royalty ratios). If everyone pays a little bit more, Pandora could still pay a little bit less and EVERYONE in the industry would be a lot happier.


The Battle Over Sound Recordings:

"Pandora, Clear Channel, Others Form Advocacy Group for Lower Web Radio Payments; MusicFirst Pushes Back" from Billboard:

"A Good Deal To Do: Pandora Doubles Down Against Creators, Now Strikes At Songwriters" from Music Tech Policy:

"Tell Congress to Save Music and Stop the 'Pandora Bailout Bill'" from Grammy.org

"Four Simple Reasons Why the Pandora Radio Act Screws Musicians (EZ Reader)" from The Trichordist:

"Let's Get Ready To Rumble! 2013's Dueling Internet Radio Royalty Bills" from Billboard:

"Major Labels, Artist Managers to Meet in New York, Nashville To Discuss Webcasting Rates" from Billboard:

The Battle Over Compositions:

"Pandora Sues ASCAP for Lower Rates" from Billboard:

"Songwriters Are Left Out of Pandora's Royalty Plan: Guest Post by Downtown Music's Justin Kalifowitz" from Billboard:

Tuesday, November 6, 2012

Value Wars: Terrestrial Radio vs. SESAC

Last month, the Radio Music License Committee (which represents roughly 10,000 terrestrial radio broadcasters) filed an anti-trust lawsuit against the performing rights organization SESAC. In short, the RMLC feels that SESAC is engaging in anti-competitve behavior and violating several antitrust laws.

SESAC is the smallest of the three main performing rights organizations (PROs) in the United States, representing about 23,000 composers and publishers. It is a for-profit operation. The other two PROs, ASCAP and BMI, represent memberships totaling closer to 500,000 each. They are both not-for-profit operations. In 1941, the U.S. Department of Justice filed anti-trust lawsuits against ASCAP and BMI, ultimately binding them both by consent decrees that limit their abilities to license music and negotiate fees. SESAC, which has managed to fly under the radar for many years, has recently come under fire with lawsuits issued by the Television Music License Committee (TMLC) in 2009, and now the RMLC. By way of this most recent lawsuit, the RMLC is seeking "injunctive relief, requiring, among other things, that SESAC submit to a judicial rate-making procedure comparable to what the consent decrees governing ASCAP and BMI impose".


Clearly, radio broadcasters want to lower their licensing costs by imposing stricter regulations on SESAC's operations. But is this a fair objective? SESAC provides a service that is also offered by two other (much larger) organizations. Shouldn't they be allowed to charge what they want? After all, a free market dictates that if the price is too high, the buyer can just say "no" and take their money elsewhere. So, why not let economics run its course?

Well, the RMLC does not see this particular space as a free market. According to their claims, SESAC manipulates the system by creating a monopoly over certain "must have" songs, which they use as leverage to charge increasingly high license fees. SESAC is then allegedly able to court more songwriters and publishers with the promise of higher royalty payments. The valuable catalogs of these new writer and publisher members allow SESAC to raise license fees even more...and so on...much to broadcasters' displeasure.


So what does this mean for the music industry? If the RMLC gets a ruling in their favor, every PRO will then be subject to rate court intervention over license fee disagreements. To say that this scenario has been an inconvenience for ASCAP and BMI would be an understatement. The two PROs are constantly in negotiation with licensees, often for retroactive usage, and many times settle for less than favorable terms rather than face the potentially more permanent ruling from a full rate court proceeding (see our previous posts on ASCAP and BMI settlements). SESAC could be in the same boat. This ultimately limits how much money songwriters and publishers can make from broadcasters whose businesses rely on their music. This in turn limits the value of the services that PROs provide to songwriters and publishers, which begs the question - does a weakened PRO system encourage copyright owners to operate independently of PROs and license their music directly?

Direct licensing in general has certainly been a hot topic of late, with EMI's April Music dropping ASCAP for digital performances in 2011, Big Machine Records striking a deal with Clear Channel, and DMX winning direct licensing cases against both BMI and ASCAP. And while proponents cite reasons like cost savings and greater transparency, does this practice really only benefit the big record labels and publishers who have the large catalogs and administrative resources to manage direct relationships? If so, what happens to the smaller players? Are they left to rely on PROs further weakened by the loss of major repertoire and still crippled by consent decree stipulations?

Please - let us know your thoughts on this. What is the best solution to ensure that all music is fairly valued and still compatible with distribution models on which it also relies? Is the RMLC over-reaching, or is SESAC taking advantage of them? How do you see this case turning out, and what do you see as the implications of this decision? Speak up in the comments section below!


"SESAC in RMLC's Litigation Sights" from Common Law Blog:

"More Than 10,000 Radio Stations Are Now Taking Legal Action to Lower Their Royalties…" from Digital Music News:

Radio Music License Committee Press Release:

About SESAC:

Full RMLC vs SESAC legal complaint: