Women in Music 2016

Pandora and BMI Wrap Up Arguments, Await a Big Decision

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

The five-week rate trial -- begun on Feb. 11 -- that will decide the royalty rate Pandora must pay BMI for the use of its catalog came to a close this past Friday (Mar. 13). Pandora's lawyer, Kenneth Steinthal of law firm of King & Spaulding, reminded Judge Louis Stanton that the court's decision would likely have ramifications far beyond an agreement between the digital radio service and the performance rights organization (PRO).

At the end of his closing statement, Steinthal posited that if Judge Stanton rules in BMI's favor and gives the PRO the 2.5% (of total revenues) rate it is asking for, he would be establishing an industrywide fee.

"Not only will other standalone services, whether startups or otherwise, have Pandora's rate applied to them," Steinthal said, "but it would not shock me in any way, shape, or form that broadcast radio will be faced with whatever the results are... especially given the arguments that Pandora and broadcast radio are absolutely competing head-to-head."

What was meant as a cautionary plea to Judge Stanton regarding the possible scope of his ruling should be heartening to the music publishing industry, if the ruling does go BMI's way. Pandora is asking to pay BMI a royalty rate between 1.70% and 1.85%. BMI is seeking a 43% increase, to a rate of 2.5%, from its present level of 1.75%.

Pandora's argument points to the rate that the Radio Licensing Music Committee pays -- 1.7% of revenue. Since both sides agree that Pandora is competing against traditional terrestrial radio (and its digital simulcasts), it should pay a similar rate.

BMI's lawyer Scott Edelman, with the lawfirm of Milbank, Tweed, Hadley & McCloy, countered with the argument that Pandora uses far more music than terrestrial radio, which bundles it with news, DJs, weather and traffic. Edelman's main argument for the 2.5% rate was that the consent decree -- an law which has since the 1940s governed how, among other things, rate disputes are decided -- provides that if BMI makes a reasonable proposal, "then the rate court's job is done," and no other arguments are needed. (The consent decrees are currently being scrutinized by the DOJ to see if they need to be amended -- Congress held a hearing on them last week ahead of a potential copyright reworking by legislators.)

Since 2011, publishers have been threatening to withdraw from the PROs, if they didn't allow for partial withdrawal so that they can cut direct deals with digital services. The two large PROs accomodated those pleas by rewriting their by-laws to allow for partial withdrawal.

BMI's lawyer continued, saying the direct deals signed when music publishers withdrew digital rights at rates substantially higher than the one paid to BMI, also back up the rate the PRO is asking for. For instance, the deal the Universal Music Publishing Group cut with Pandora while withdrawn from BMI was quoted in court at the 7.5% level, which means it would get its pro-rata share of that percentage of revenue. To BMI, this is a competitive market rate deal set between willing buyer/willing seller.

Steinthal said that the deals agreed to when digital rights were withdrawn were "under unprecedented market circumstances." Both Judge Denise Cote, who presided overthe ASCAP rate court, and Judge Stanton subsequently ruled in late 2014 that the consent decree doesn't provide for partial withdrawals, and publishers either need to be all-in or all-out of the PROs.

Judge Cote made her ruling in September 2014, saying publishers were all part of the Pandora license up to the point of its termination. When Stanton made his ruling on Dec. 14, withdrawing publishers were said to be out of BMI, effective Jan. 1, 2014. Because of that, Pandora argued it had had only two weeks to make a deal, or face copyright infringement because it had no way to determine which songs belonged to which company. Consequently, Pandora argued that the deal it cut with UMPG and other withdrawing publishers were not rates set in a competitive market.

Moreover, Pandora's lawyer pointed out that BMI also had secretly offered withdrawing publishers the ability to return to BMI, retroactive to 2013. So, while Pandora was negotiating with a gun to its head, the publishers had a safety net, knowing that they didn't immediately need to replicate all the functions of a PRO and go out and cut thousands of licensing deals to keep income flowing.

Edelman countered, saying that the publishers' withdrawals from the PROs were a reaction to rates received from digital services, and particularly Pandora. "The publishers did not seek to withdraw from TV or from radio or from bars or from restaurants. Their frustration was directed at Pandora," Edelman said. "They sought to withdraw from Pandora, and other digital music services like it, because Pandora has adopted a business model where it's practically giving music away and only inserting three minutes of commercial time in each hour. The action on the part of the publishers is clear evidence that the prevailing PRO rates were not sufficient."

In addition to the royalty rate, Judge Stanton will also rule on how large Pandora's advertising deduction can be. Most digital deals with ad-supported business models include such a deduction, particularly when an outside agency is involved. When that occurs, the ad agency collects the advertising revenue and takes its cut off the top before turning over the revenue to, say, a radio station. BMI is willing to allow a 15% deduction (of total) for outside commissions, which would effectively reduce the rate that Pandora pays to 2.125%. The radio service is also asking that the deduction include its internal costs in addition to its outside commission, to maintain its own sales staff.

Since Pandora is paying some publishers directly, it doesn't want to double-up that amount, so it is arguing over how the formula for the deduction from the BMI rate should be decided.BMI argues that if a publisher accounts for 15% of the songs in the blanket license, then the fee should be reduced by 15%. But Pandora is asking that if a publisher that withdraws is able to negotiate a higher rate than BMI, the amount that it has to pay that publisher be deducted on a dollar-for-dollar basis from the BMI pool of revenue. If the Judge rules the latter, it would further reduce the BMI payment.

Finally, Judge Stanton needs to determine the length of the Pandora license, which began on Jan. 1, 2013. BMI wants the contract to end on Dec. 31, 2016, while Pandora is pushing for Dec. 31, 2017. "If one thing has become apparent in this trial, it is that too much has been invested in this proceeding for us to have hit the reset button at the end of 2016," Steinthal said.