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<header class="story-header" style="position: relative; color: rgb(51, 51, 51); font-family: nyt-cheltenham, georgia, 'times new roman', times, serif; font-size: 16px;">Pandora Suit May Upend Century-Old Royalty Plan
By BEN SISARIO<time class="dateline" datetime="2014-02-13" style="font-size: 0.6875rem; line-height: 0.75rem; font-family: nyt-cheltenham, georgia, 'times new roman', times, serif; color: rgb(0, 0, 0); margin-left: 12px;">FEB. 13, 2014</time>
</header><figure class="media photo lede layout-large-horizontal" data-media-action="modal" itemprop="associatedMedia" itemscope="" itemid="http://static01.nyt.com/images/2014/02/14/business/Music2/Music2-master675.jpg" itemtype="http://schema.org/ImageObject" style="margin: 0px 0px 45px; position: relative; width: 465px; float: left; clear: left;">
Launch media viewer
<figcaption class="caption" itemprop="description" style="font-size: 0.8125rem; line-height: 1.0625rem; font-family: nyt-cheltenham-sh, georgia, 'times new roman', times, serif; color: rgb(102, 102, 102); width: auto; position: static; right: 0px; bottom: 23px;">Carole King performing after receiving the 2013 Library of Congress Gershwin Prize for Popular Song. Pool photo by Yuri Gripas
</figcaption></figure>
As the music industry races toward a future of digital streams and smartphone apps, its latest crisis centers on a regulatory plan that has been in place since “Chattanooga Choo Choo” was a hit.
Since 1941, Ascap and BMI, the two giant licensing organizations that dominate music publishing, have been governed by consent decrees with the Justice Department. These agreements were made to guarantee fair royalty rates for songwriters and for the radio stations, television networks and even restaurants and retail shops that play their music.
But with the industry struggling to make money from digital music, this system has come under attack. The streaming service Pandora is squaring off against Ascap in a closely watched trial over royalty payments. Big music publishers like Sony/ATV and Universal are calling on the government to overhaul the system, and technology companies are accusing the publishers of trying to skirt federal rules meant to protect them.
The outcome could reshape the finances of a large part of the industry.
<figure class="media photo embedded has-adjacency layout-large-horizontal" data-media-action="modal" itemprop="associatedMedia" itemscope="" itemid="http://static01.nyt.com/images/2014/02/14/business/Music1/Music1-articleLarge.jpg" itemtype="http://schema.org/ImageObject" style="margin: 45px 0px 45px 120px; position: relative; width: 495px; color: rgb(51, 51, 51); font-family: nyt-cheltenham, georgia, 'times new roman', times, serif; font-size: 16px;">
Launch media viewer
<figcaption class="caption" itemprop="description" style="font-size: 0.75rem; line-height: 1rem; font-family: nyt-cheltenham-sh, georgia, 'times new roman', times, serif; color: rgb(102, 102, 102);">The charter members of the American Society of Composers, Authors and Publishers, including Victor Herbert, seated, and Irving Berlin, right. ASCAP</figcaption></figure>“What’s happening with these court cases will determine the future of the music publishing and songwriting industries,” said David Israelite, the president of the National Music Publishers’ Association. “It is simply unfair to ask songwriters and publishers to be paid something less than a fair market rate for their intellectual property.”
For nearly a century, Ascap and BMI, known as performing rights organizations, have served an essential middleman function. They grant the licenses that let various outlets use songs, and then funnel royalties from these billions of “performances” back to publishers and songwriters.
Together, the groups process more than $2 billion in licensing fees each year, and represent more than 90 percent of the commercially available songs in the United States. Performance royalties have become critical for songwriters as sales of compact discs and downloads — which pay a different kind of royalty not administered by Ascap and BMI — have fallen.
Ascap, which stands for the American Society of Composers, Authors and Publishers, was founded by a group of composer luminaries including Irving Berlin and Victor Herbert. Its 100th birthday is this week. BMI, or Broadcast Music Inc., was created by broadcasters in 1939 as a competitor.
After federal antitrust investigations, both groups agreed to government supervision in 1941.
This system has hummed along for decades. But with the rise of Internet radio, publishers have complained that the rules are antiquated and unfair. They point to the disparity in the way Pandora compensates the two sides of the music business: Last year, Pandora paid 49 percent of its revenue, or about $313 million, to record companies, but only 4 percent, or about $26 million, to publishers.
“It’s a godawful system that just doesn’t work,” said Martin N. Bandier, the chairman of Sony/ATV, the world’s largest music publisher.
The wider music world has been galvanized by the issue of low royalties from fast-growing streaming companies.
In 2012, for example, when Pandora’s former chief executive testified at a congressional hearing on music licensing, songwriters protested on Capitol Hill. Five writers of hits by stars like Beyoncé and Christina Aguilera showed that 33 million plays on their songs on Pandora yielded just $587.39 in royalties for them.
Music executives argue that the problem is rooted in the Justice Department’s oversight of Ascap and BMI. Under the consent decrees, the performing rights groups are not permitted to refuse licenses to any outlet that applies for them, and rate negotiations can drag on for years. To get around this, some big publishers have tried to change their ties with Ascap and BMI, forcing digital outlets like Pandora to negotiate directly.
Pandora cried foul in its federal lawsuit, saying that the move led to higher rates and violated the Justice Department regulations. That issue is also at play in a separate pending suit filed last year by BMI against Pandora. The two suits, filed in Federal District Court in Manhattan, ask the court to set a royalty rate for Pandora. A third, much smaller performing rights group, Sesac, is not subject to a consent decree.
Pandora argued in court that it had been put in “absolute gun-to-the-head circumstances” in negotiations with publishers, and had fought to keep its rates low. In a statement, the company said that the consent decrees offered important protections for the music world, including “a mechanism to establish a reasonable royalty rate when songwriters and music users cannot agree on a rate.”
Ascap argued that Pandora should pay it more than its current rate of 1.85 percent of revenue as part of the 4 percent that it pays for all publishing rights. When Apple made direct deals with publishers last year for its new Pandora-like service, iTunes Radio, its rates were said to be about 10 percent of revenue.
Closing arguments in the case were heard on Monday, and the judge is expected to rule soon.
In frustration, leading music figures have begun to ask the government to update the consent decrees to allow more flexible licensing. In an opinion article in The Wall Street Journal last month, the songwriter Burt Bacharach said these agreements “are supposed to guarantee us ‘reasonable fees,’ but these aren’t remotely reasonable.”
Ascap and BMI have met with the Justice Department, although they would not say specifically what they had requested. A Justice Department spokeswoman declined to comment.
What will happen if publishers do not get the relief they want from the government is unclear. Some have suggested that they might abandon the performing rights organizations.
“Everything is geared now to what happens with the Department of Justice,” said Zach Horowitz, the chairman of the Universal Music Publishing Group. “If we can’t secure adjustments to the consent decrees, which were last modified before the introduction of the iPod, we’ll have no choice but to consider some radical steps in order to ensure our writers are fairly compensated in the rapidly changing marketplace.”
Two court rulings late last year threw the industry into confusion over how the performing rights organizations would continue to represent publishers. Universal and Sony/ATV have since made short-term arrangements with BMI to stabilize the market, but their involvement in the long run is still an open question.
“If we were forced into the corner and had to do that,” Mr. Bandier said when asked whether his company would withdraw from Ascap and BMI, “it would be catastrophic for those two societies. And we don’t want that to happen.”
A future without Ascap and BMI, or one in which they no longer represent a majority of songs, has the music industry worried. Major publishers could handle responsibilities like issuing licenses to radio networks, but even the biggest of them say that Ascap and BMI have an irreplaceable infrastructure.
“No other organization, and certainly no single publisher, can negotiate, track, collect, distribute and advocate for music creators on the scale that we do, with the same level of accuracy, efficiency and transparency across so many different media platforms,” Paul Williams, the songwriter and president and chairman of Ascap, said in a statement.
On Thursday — the 100th anniversary of its founding meeting — Ascap reported that it had $944 million in revenue in 2013. It also paid $851 million in royalties to its members, up 3 percent from 2012.
For songwriters, Ascap and BMI have also been among the most reliable institutions in the music industry, and few want to see them go. But Rick Carnes, a Nashville songwriter and president of the Songwriters Guild of America, said that while these organizations had served him and his colleagues well, the Justice Department agreements that govern them were outdated and must be changed.
“This is a horse-and-buggy consent decree in a digital environment,” Mr. Carnes said. “There’s no way that works now.”
By BEN SISARIO<time class="dateline" datetime="2014-02-13" style="font-size: 0.6875rem; line-height: 0.75rem; font-family: nyt-cheltenham, georgia, 'times new roman', times, serif; color: rgb(0, 0, 0); margin-left: 12px;">FEB. 13, 2014</time>
</header><figure class="media photo lede layout-large-horizontal" data-media-action="modal" itemprop="associatedMedia" itemscope="" itemid="http://static01.nyt.com/images/2014/02/14/business/Music2/Music2-master675.jpg" itemtype="http://schema.org/ImageObject" style="margin: 0px 0px 45px; position: relative; width: 465px; float: left; clear: left;">
<figcaption class="caption" itemprop="description" style="font-size: 0.8125rem; line-height: 1.0625rem; font-family: nyt-cheltenham-sh, georgia, 'times new roman', times, serif; color: rgb(102, 102, 102); width: auto; position: static; right: 0px; bottom: 23px;">Carole King performing after receiving the 2013 Library of Congress Gershwin Prize for Popular Song. Pool photo by Yuri Gripas
</figcaption></figure>
As the music industry races toward a future of digital streams and smartphone apps, its latest crisis centers on a regulatory plan that has been in place since “Chattanooga Choo Choo” was a hit.
Since 1941, Ascap and BMI, the two giant licensing organizations that dominate music publishing, have been governed by consent decrees with the Justice Department. These agreements were made to guarantee fair royalty rates for songwriters and for the radio stations, television networks and even restaurants and retail shops that play their music.
But with the industry struggling to make money from digital music, this system has come under attack. The streaming service Pandora is squaring off against Ascap in a closely watched trial over royalty payments. Big music publishers like Sony/ATV and Universal are calling on the government to overhaul the system, and technology companies are accusing the publishers of trying to skirt federal rules meant to protect them.
The outcome could reshape the finances of a large part of the industry.
<figure class="media photo embedded has-adjacency layout-large-horizontal" data-media-action="modal" itemprop="associatedMedia" itemscope="" itemid="http://static01.nyt.com/images/2014/02/14/business/Music1/Music1-articleLarge.jpg" itemtype="http://schema.org/ImageObject" style="margin: 45px 0px 45px 120px; position: relative; width: 495px; color: rgb(51, 51, 51); font-family: nyt-cheltenham, georgia, 'times new roman', times, serif; font-size: 16px;">
<figcaption class="caption" itemprop="description" style="font-size: 0.75rem; line-height: 1rem; font-family: nyt-cheltenham-sh, georgia, 'times new roman', times, serif; color: rgb(102, 102, 102);">The charter members of the American Society of Composers, Authors and Publishers, including Victor Herbert, seated, and Irving Berlin, right. ASCAP</figcaption></figure>“What’s happening with these court cases will determine the future of the music publishing and songwriting industries,” said David Israelite, the president of the National Music Publishers’ Association. “It is simply unfair to ask songwriters and publishers to be paid something less than a fair market rate for their intellectual property.”
For nearly a century, Ascap and BMI, known as performing rights organizations, have served an essential middleman function. They grant the licenses that let various outlets use songs, and then funnel royalties from these billions of “performances” back to publishers and songwriters.
Together, the groups process more than $2 billion in licensing fees each year, and represent more than 90 percent of the commercially available songs in the United States. Performance royalties have become critical for songwriters as sales of compact discs and downloads — which pay a different kind of royalty not administered by Ascap and BMI — have fallen.
Ascap, which stands for the American Society of Composers, Authors and Publishers, was founded by a group of composer luminaries including Irving Berlin and Victor Herbert. Its 100th birthday is this week. BMI, or Broadcast Music Inc., was created by broadcasters in 1939 as a competitor.
After federal antitrust investigations, both groups agreed to government supervision in 1941.
This system has hummed along for decades. But with the rise of Internet radio, publishers have complained that the rules are antiquated and unfair. They point to the disparity in the way Pandora compensates the two sides of the music business: Last year, Pandora paid 49 percent of its revenue, or about $313 million, to record companies, but only 4 percent, or about $26 million, to publishers.
“It’s a godawful system that just doesn’t work,” said Martin N. Bandier, the chairman of Sony/ATV, the world’s largest music publisher.
The wider music world has been galvanized by the issue of low royalties from fast-growing streaming companies.
In 2012, for example, when Pandora’s former chief executive testified at a congressional hearing on music licensing, songwriters protested on Capitol Hill. Five writers of hits by stars like Beyoncé and Christina Aguilera showed that 33 million plays on their songs on Pandora yielded just $587.39 in royalties for them.
Music executives argue that the problem is rooted in the Justice Department’s oversight of Ascap and BMI. Under the consent decrees, the performing rights groups are not permitted to refuse licenses to any outlet that applies for them, and rate negotiations can drag on for years. To get around this, some big publishers have tried to change their ties with Ascap and BMI, forcing digital outlets like Pandora to negotiate directly.
Pandora cried foul in its federal lawsuit, saying that the move led to higher rates and violated the Justice Department regulations. That issue is also at play in a separate pending suit filed last year by BMI against Pandora. The two suits, filed in Federal District Court in Manhattan, ask the court to set a royalty rate for Pandora. A third, much smaller performing rights group, Sesac, is not subject to a consent decree.
Pandora argued in court that it had been put in “absolute gun-to-the-head circumstances” in negotiations with publishers, and had fought to keep its rates low. In a statement, the company said that the consent decrees offered important protections for the music world, including “a mechanism to establish a reasonable royalty rate when songwriters and music users cannot agree on a rate.”
Ascap argued that Pandora should pay it more than its current rate of 1.85 percent of revenue as part of the 4 percent that it pays for all publishing rights. When Apple made direct deals with publishers last year for its new Pandora-like service, iTunes Radio, its rates were said to be about 10 percent of revenue.
Closing arguments in the case were heard on Monday, and the judge is expected to rule soon.
In frustration, leading music figures have begun to ask the government to update the consent decrees to allow more flexible licensing. In an opinion article in The Wall Street Journal last month, the songwriter Burt Bacharach said these agreements “are supposed to guarantee us ‘reasonable fees,’ but these aren’t remotely reasonable.”
Ascap and BMI have met with the Justice Department, although they would not say specifically what they had requested. A Justice Department spokeswoman declined to comment.
What will happen if publishers do not get the relief they want from the government is unclear. Some have suggested that they might abandon the performing rights organizations.
“Everything is geared now to what happens with the Department of Justice,” said Zach Horowitz, the chairman of the Universal Music Publishing Group. “If we can’t secure adjustments to the consent decrees, which were last modified before the introduction of the iPod, we’ll have no choice but to consider some radical steps in order to ensure our writers are fairly compensated in the rapidly changing marketplace.”
Two court rulings late last year threw the industry into confusion over how the performing rights organizations would continue to represent publishers. Universal and Sony/ATV have since made short-term arrangements with BMI to stabilize the market, but their involvement in the long run is still an open question.
“If we were forced into the corner and had to do that,” Mr. Bandier said when asked whether his company would withdraw from Ascap and BMI, “it would be catastrophic for those two societies. And we don’t want that to happen.”
A future without Ascap and BMI, or one in which they no longer represent a majority of songs, has the music industry worried. Major publishers could handle responsibilities like issuing licenses to radio networks, but even the biggest of them say that Ascap and BMI have an irreplaceable infrastructure.
“No other organization, and certainly no single publisher, can negotiate, track, collect, distribute and advocate for music creators on the scale that we do, with the same level of accuracy, efficiency and transparency across so many different media platforms,” Paul Williams, the songwriter and president and chairman of Ascap, said in a statement.
On Thursday — the 100th anniversary of its founding meeting — Ascap reported that it had $944 million in revenue in 2013. It also paid $851 million in royalties to its members, up 3 percent from 2012.
For songwriters, Ascap and BMI have also been among the most reliable institutions in the music industry, and few want to see them go. But Rick Carnes, a Nashville songwriter and president of the Songwriters Guild of America, said that while these organizations had served him and his colleagues well, the Justice Department agreements that govern them were outdated and must be changed.
“This is a horse-and-buggy consent decree in a digital environment,” Mr. Carnes said. “There’s no way that works now.”