Pandora vs. BMI's Court Battle Reveals Long-Term Strategies, Licensing Aims

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The federal courthouse in Manhattan photographed on Oct. 23, 2014 in New York City.

A tale, told in the Manhattan court where BMI and Pandora are arguing their cases, illustrates perfectly the angles and lengths that these organizations are willing to go to prove a point. It also shows why the hot issue of whether publishers can withdraw their digital rights from the performance rights organizations' (PROs) blanket licenses may be a good thing for the largest of music publishers, but not for smaller publishers.

It went something like this. When BMG Chrysalis withdrew from BMI on Jan. 1, 2014 it asked for a rate that Pandora apparently was unwilling to pay, prompting the service to pull any song that BMG controlled a 100% stake in for six months. One label with songs licensed from BMG tells Billboard it missed out on at least $75,000 in revenue during that period.

So, in trying to establish a benchmark that would justify the royalty rate BMI is asking the court for -- 2.5% of total revenue, versus the current rate of 1.85% -- BMI referred to the direct deals that Pandora made with Sony/ATV (which includes EMI Music Publishing) and Universal Music Publishing Group. Sources suggest that both companies received the pro rata equivalent of 10% of revenue, in direct deals with Pandora, as compared with the 4.3% of revenue the custom digital radio service had been paying publishers.

To counter BMI's argument, Pandora will likely point to its direct deal with BMG Chrysalis.

With BMG, Pandora took a different tack, refusing to give in to the pro-rata share of 10% of revenue that sources say all three publishers wanted. As BMI's lawyer Scott Edelman (Milbank, Tweed, Hadly and McCloy) put it during the opening day of the trial (Feb. 10), after signing deals with Sony/ATV/EMI and UMPG, Pandora decided "it would freeze out a smaller publisher, BMG, and take down BMG's works and starve BMG until BMG would agree to do a favorable deal that Pandora could then bring to this rate court and present as evidence."

All three Pandora direct deals -- with Sony/ATV, UMPG and BMG Chrysalis -- were cut under the same high pressure circumstances. In mid-December 2013, Judge Louis Stanton, who is presiding over the current trial as well, ruled that the DoJ consent degree doesn't allow for publishers to partially withdraw their digital rights; publishers had to be all in or all out.

Consequently, Judge Stanton ruled that the three publishers who said they would withdraw digital rights after Dec. 31 -- Sony/ATV, with EMI; and UMPG; and BMG Chrysalis -- were "all-out," and not a part of the BMI blanket license.

That meant that, unless Pandora reached a deal or accommodation with those publishers in the two weeks between Stanton's ruling and the publishers' New Year's Eve deadline, Pandora would have to pull down all of those companies' songs, or face massive copyright infringement fines. Making things more difficult, Pandora claimed that none of the publishers, nor BMI, would give the service a list of the songs in each catalog.

With a gun to its head, or so Pandora claims, it cut deals with Sony/ATV/EMI and UMPG at a rate for each publisher that sources say is for the pro-rata share of 10% of revenue.

Since the large publishers had already begun withdrawing their digital rights partially in 2011, Pandora began experimenting with the algorithm its service uses that its music selections are based on to see what happen if it had to completely remove popular songs from its service. As a result of that preparation, Pandora knew that the missing songs didn't impact listener satisfaction. So when it moved against BMG and pulled down some of its songs, it wanted to hurt BMG's revenue collections and possibly create turmoil for ithe company with its songwriters if they noticed the declining revenue. It also wanted to send a message to the rest of the publishing community about the risks of trying to purse direct deals.

In effect, Pandora took a gamble that BMG wouldn't sue it for keeping those songs up, because music publishers claim that licensing deals usually only cover the copyright owner's share of a song. However, not all publishing deals explicitly spell out the terms of a license (say executives in the digital services camp), so Pandora is counting that if a case went to court, it could point to the licenses it had on songs that were co-written by other non-BMG songwriters. With those licenses from the non-BMG songwriters, it would argue that it can keep those songs up on its service.

Pandora didn't actually pull down the entire BMG catalog. According to sources, Pandora pulled down only those songs where it determined BMG was the sole publisher. In making that move, Pandora took the controversial stance that it had licensed the other BMG songs, through other deals with other copyright owners of those songs -- where BMG was only a partial stakeholder.

When Pandora wouldn't negotiate with BMG for the 10% rate, BMG returned to BMI and became a part of the blanket license, which meant Pandora was licensed to play all of its songs. But "Pandora said no, 'we're not playing them, even though we can,'" BMI's attorney told the court.

After six months of losing out on that revenue, BMG apparently cut a deal with Pandora in July at a much lower rate than what it had initially asked for. Edelman argued that the BMG deal shouldn't be considered as a benchmark because it is a flat fee deal, not the typical percentage of revenue.

While the Pandora/BMG direct deal was never actually spelt out in court, the rate appears to be lower than 1.85% of revenue.

After six months of potentially losing out on revenue from the 100% controlled BMG songs, BMG apparently cut a deal with Pandora in July at a much lower rate than what it had initially asked for. Edelman argued that the BMG deal shouldn't be considered as a benchmark because it is a flat fee deal, not the typical percentage of revenue.

However, sources close to BMG camp refute what the lawyers  in the BMI rate court proceedings  said about Pandora squeezing BMG. Those sources say that when BMG couldn't get the rate it asked for, it played hardball with Pandora and ordered the service to take down its songs. When Pandora only removed those songs that where 100% controlled by BMG, the music publisher responded with charges of copyright infringement for the other songs with split ownership. But it also told the service it was prepared to litigate but would rather make a deal if one could be reached that was mutually beneficial to both parties.

In fact, BMG wasn't alone in potentially missing out on the revenue from streams of its music. One independent music executive at a company unaffiliated with BMG said that suddenly his company's royalty statements from digital royalties collection organization SoundExchange "were missing tens of thousands of dollars a month."

When he looked into it, he discovered it was because Pandora was no longer playing his company's master recording where BMG was sole the publisher. "We missed out on all that revenue; and what could we do," he says. "It's not like we can get it back -- the music was never played."

As part of that process, BMI and Pandora each, using their own economist, have to set a range of royalty rates for the judge to consider as well as a specific percentage. In the case of BMI, which asked for a 2.5% fee, it set a range from 1.85%-5%. According to Pandora's lawyer Kenneth Steinthal (King & Spalding), the BMI economist needed to limit the low end if the BMI range to 1.85%.

So the BMI economist "had to find a way to reject the most recent of Pandora's direct licensing with withdrawing publishing, meaning the BMG agreement of July 2014," Steinthal said. He said it is really a flat-rate fee, not a percentage of revenue rate; and that the deal has assumptions and incentives that make it a deal that BMI argues shouldn't be viewed as a benchmark.

"We are confident that the direct deal reached with Pandora delivers great value to our writers both in terms of absolute dollar amount paid as well as transparency with respect to accounting," BMG Chrysalis' president of creative and marketing Laurent Hubert said in a statement.

While Pandora and BMI duke it out, the Dept. of Justice is reviewing requests from the PROs and music publishers to amend the consent decrees it has imposed on BMI and ASCAP since 1941 -- 74 years -- and allow for publishers to partially withdraw rights so that publishers can cut direct deals a higher rates than what the two PROs were previously given. Those rates currently are the 1.75% of revenue Pandora pays to BMI and the 1.85% it pays to ASCAP.

Publishers complain that in the digital economy they aren't getting their fair share of the recording industry pie, pointing to a twelve-to-one royalty ratio weighted towards sound recordings, record labels and artists over songwriters and publishers. Consequently, beginning in 2011, publishers began pressuring the two large performance rights organizations (PROs) -- ASCAP and BMI -- to allow them to withdraw their digital rights from their blanket licenses so that they could negotiate direct deals with digital services.