Apple Quarterly Earnings Lower Than Expected
Apple Quarterly Earnings Lower Than Expected

While digital and satellite radio services may have another level of negotiations to navigate for Apple's forthcoming radio service, a report last week by the New York Post claiming that Sony/ATV Music Publishing is the snag holding up the launch of the service makes the situation more dramatic than it really is.

Recently, Apple began negotiations with major record labels in an attempt to license master-rights records for an Internet radio service that would offer custom channels in a way similar to Pandora and Clear Channel's iHeartRadio. That news was first reported by the Wall Street Journal.

In order to build that service, Apple started with one of the Internet radio compulsory licenses --approximately a half-dozen different types exist, it was unclear at press time which one they are seeking -- and is trying to work backwards to negotiate waivers to come up with direct-licensing deals with major labels that will allow it to build a more flexible custom radio-streaming service that would have the same per-play, per-song rates as Pandora's custom-radio service.

After it gets the majors on board, Apple likely would roll out the contracts it negotiated with the majors to independent labels, which would also have to sign on. Sources say Apple had been hoping to launch the service sometime around Thanksgiving, or at the least before Christmas of this year.

In starting with a compulsory license and negotiating waivers, it seems that Apple is hoping to operate under a compulsory license for publishing, which would allow them to license music from the music-publisher collection societies, launch their service and negotiate the rate later.

The new level of publisher negotiations would apply to all new digital services seeking compulsory licenses, not just Apple, and theoretically began in May of last year, when EMI Music Publishing's then-chairman Roger Faxon pulled digital performance rights of its 200,000-song April Music from ASCAP. While the exact contents of that catalog were not confirmed by EMI or Sony, it appears to include such songs as Bon Jovi's "Livin' On A Prayer" and "You Give Love A Bad Name," Frankie Avalon's "Venus," Aerosmith's "Pump," Cher's "Heart of Stone," Tom Petty's "I Won't Back Down," and Tracy's Chapman's "Why" and "Talkin' About A Revolution."

In addition to April Music, according to sources, EMI subsequently pulled other catalogs from ASCAP, all before a Sony-led consortium acquired EMI Music Publishing earlier this year and placed it with Sony/ATV for administration.

In June of 2011, after EMI Music Publishing's gambit, Billboard predicted that other leading music publishers would follow suit.

As it is, Sony/ATV is pulling the digital performance rights for both itself and EMI from BMI on January 1, 2013; and its catalog and the rest of EMI's from ASCAP the same date.

"All we are seeking is a fair and reasonable royalty for the writers and ourselves for digital performances," Sony/ATV chairman/CEO Martin Bandier told Billboard.biz. "We think the songwriter is just as important as the master recording and should get a fair price."

Moreover, Bandier added, "We are in favor for all new digital services, especially for a service being started by Apple, which already has a great track record as a partner."

Apple also needs major and independent record labels to sign off on the service. At press time, Apple hadn't approached the independents and none of the major record labels had signed on for the service because Apple is trying for direct deals built around a compulsory license, with waivers in negotiations that sources have described as complex. In starting with the compulsory license and working backwards seeking waivers, Apple is hoping to get direct licenses that would come with lower rates than the Copyright Royalty Board statutory rates set for the different classes of compulsory licenses corresponding to the different classes of digital music and radio services. Or, as sources put it, Apple is hoping to get the same per-song play, per-listener rate that Pandora pays -- 0.0011 cents -- instead of the .0020-cent NAB-negotiated rate that regular Internet radio pays; and without the 25% of revenue bucket that Pandora would be subject to, if its per-song-play/per-listener rate wasn't higher. It also is looking for more flexible terms, such as a waiver from limitations on how many songs from one artist can be played in a certain time period.

According to those sources, Apple initially was hoping to launch the service between Thanksgiving and Christmas. If it can't get the deal it wants, then it could go with a straight compulsory license and offer a plain, no-frills internet-radio streaming service -- and in that case, then Sony/ATV would be the fly in the ointment until its rate is negotiated.

While music publishers may consider pulling digital performance rights from ASCAP and BMI, they are keeping their performance rights with the collection societies for places like stores, arenas, clubs, bars and restaurants because it would be nearly impossible for publishers to individually license such venues, let alone collect. Currently, the digital performance royalties being reclaimed represent a small sliver of the societies revenues, with some placing it at about 1%.

So even if Sony/ATV weren't reclaiming digital performance rights from the collection societies, Apple would have had to negotiate at the very least for the EMI April Music catalog and the other catalogs it subsequently pulled from ASCAP, although the argument could be made that the service could launch without those songs, and added them later after a rate had been negotiated. Moreover, sources say that Sony/ATV didn't initiate its desire to reclaim digital performance licensing from ASCAP and BMI just because of Apple. Sources say those discussion began in the summer of 2011, after EMI started pulling those rights.

Furthermore, the Sony/ATV move on top of EMI's "April Music" gambit means that *all* digital music services will have to deal with Sony/ATV for performance licensing of its songs and the EMI catalogs, not just Apple's new radio service. Those negotiations would begin whenever existing services licenses with ASCAP and/or BMI expire.

The reason why publishers like EMI and now Sony/ATV would want to reclaim digital performance rights is because ASCAP and BMI operate under a consent decree with the U.S. government. That means new digital radio stations can file for a compulsory blanket license with ASCAP and BMI, which must be granted immediately by law, so new digital radio services can begin playing music even if a rate hasn't been negotiated. If ASCAP and the new radio service cannot negotiate a rate, then it goes to rate court, a process that can take years -- and a lot of money -- before a rate is actually determined.

On the other hand, sources say Sony/ATV is not reclaiming digital performance rights from SESAC, which is not hindered by a government consent decree and sometimes has greater flexibility in rate negotiations than BMI or ASCAP.

Services like Pandora and (presumably) Apple's planned digital streaming service require performance licenses, not mechanical licenses -- unlike interactive streaming services like Spotify, which need both. That being the case, publishers say they are not happy with the songwriter performance royalty they are getting from Pandora, which came out to an estimated 4% of revenue when BMI and ASCAP payments are added together, according to an informed source.

In contrast, Pandora paid 50% of its revenues last year to record labels for master rights licensing (and it was up to nearly 64% of revenues in the current year). "That comes out to a 12.5-to-1 ratio last year -- that's the worst comparative ratio anywhere in the business of master rights royalties to publishing rights royalties," says a senior music industry publishing executive.

For example, interactive services like Spotify pay out publishing royalty for both performance and mechanical that is calculated from a complex formula that begins with about 10% of the service revenues; the publishing rights for cloud services is set at 12% of revenue; while synchronization rights for streaming music video's begin at 15% of revenue. The ratio of publishing royalty to master rights royalties comes out roughly between 4-to-1 down to 6-to-1, all much better than 12 1/2-to-1 that the collection societies got from Pandora last year.

Questions? Comments? Let us know: @billboardbiz

Print