Pandora suit could upend century-old music royalty system

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Posted: Tuesday, February 18, 2014 12:00 am

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.

“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.

For nearly a century, ASCAP and BMI, known as performing rights organizations, have granted the licenses that let various outlets use songs, and then funneled royalties from “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.

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. BMI, or Broadcast Music Inc., was created by broadcasters in 1939 as a competitor.

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.

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 relationships with ASCAP and BMI, forcing digital outlets like Pandora to negotiate directly.

In its federal lawsuit, Pandora said that 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 U.S. 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.

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, but their involvement in the long run is still uncertain.

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,” said Paul Williams, the songwriter and president and chairman of ASCAP.

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