Tim Westergren and Martin Bandier

Tim Westergren and Martin Bandier

photo credit for Westergren: Bloomberg via Getty Images

In making the decision on March 14 to set Pandora's royalty rate to ASCAP at 1.85% through the end of 2015. Judge Denise Cote rejected practically every argument the PRO, and its two largest members -- Sony/ATV Music and Universal Music Publishing Group -- made on behalf of a higher rate, according to the redacted 136-page decision, released yesterday.

According to the document, the U.S. Federal Judge, who presides over the Southern District of New York, said that ASCAP failed to demonstrate that its rate proposal of 2.5% for 2013 and 3% for 2014-15 is reasonable.

At the same time, in a minor conciliation to the PRO and publishers, Judge Cote also ruled that Pandora had failed to prove its case that it was entitled to the 1.7% rate that terrestrial radio pays for its digital broadcasts.

With the court's decision to apply the 1.85% rate through 2015, ASCAP will have had the same rate for over 10 years.

Since ASCAP requested the 1.85% rate for the first two years (2011 and 2012) of Pandora's consent decree license, the Judge decided that it would be a reasonable rate for the entire license period.

Moreover, the judge noted that the 3% rate level is the historical division between what has been paid by non-interactive music services like Pandora and interactive music services like Rhapsody and now Spotify. That rate divide requires that the Pandora license be well below the 3% rate at which ASCAP licenses interactive music services, the Judge wrote.

Furthermore, the Judge dismissed arguments about the growth of Pandora, saying that the percentage rate itself guarantees that the licensee gets larger payments as the digital music service grows. From Pandora's viewpoint, adoption of a single rate through the life of the license facilitates business planning, the Judge pointed out.

In making direct deals with Pandora after withdrawing from ASCAP, Sony negotiated a royalty rate for its pro-rata share of 5% of Pandora income, or an implied rate of 2.28%; while UMPG negotiated a royalty rate for its pro-rata share of 7.5% of Pandora income, or an implied rate of 3.42%. Both of those rates are substantially higher than the 1.85% royalty rate that ASCAP was being paid by Pandora and neither qualify as market rates according to the Judge, because negotiating circumstances compelled Pandora to accept such rates. Consequently, the judge ruled that the deals didn't pass muster under willing buyer/willing seller circumstances.

In both instances, Pandora was under time pressure to make deals, and didn't have a complete list of songs from each publisher, which could be used to take down songs, if it chose not to make a deal. Sony/ATV and ASCAP didn't provide a list of the Sony catalog, according to the documents. And while UMPG provided a list of its songs, the non-disclosure agreement precluded the list from being used to take down the publisher's songs, according to Pandora's interpretation, which the Judge agreed with. In Pandora's view, the NDA on the list meant it could only be used to allow the service to assess the financial impact of UMPG's withdrawal from ASCAP so the service knew what rate to press for in rate court.

"Without the list, Pandora's options were stark," the Judge wrote in assessing the circumstances Pandora faced when making its deal to pay a higher rate to Sony/ATV. "It could shut down its services, infringe Sony's rights, or execute an agreement with Sony on Sony's terms."

As for the 10% rate that iTunes Radio is paying the large publishers and the two PROs bound by consent decrees, which the PRO and the two publishers used to justify their case for a higher rate -- compelled by the DOJ to license anybody that requests one and compelled to use a rate court if the licensee and licensor can't agree on a rate -- the judge ruled that the deal wasn't a competitive market rate.

The iTunes Radio service complements Apple's iTunes store and iTunes Match service, all of which operate as an ecosystem that generates synergies. "As a consequence, Apple conducted negotiations for its licenses for the public performance of compositions within the context of a business model that has no analogue for Pandora," the Judge concluded.

Finally, the judge noted that the higher rate sought by the large publishers was driven by envy of the rates that Pandora was paying the record labels, thanks to another rate-setting body, the U.S. Copyright Royalty Board.

While the disparity in royalty payments between record labels and publishers drove changes in the publishing industry -- like the large publishers withdrawing digital rights from the two large PROs -- U.S. legislation prohibited the PRO rate courts from considering that disparity when setting or adjusting public performance royalties. In fact, Congress made that rule at the behest of the publishers, and only recently. On Feb. 25, when Rep. Doug Collins (R-GA), a member of the House Committee on the Judiciary, again at the behest of songwriters, PROs and publishers, introduced legislation under the name the Songwriter Equity Act that would allow the master recordings rates to be considered when setting publishing rates.

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"While we are not surprised, we are disappointed by the Court's decision [on rates]," Sony/ATV chairman and CEO Martin Bandier said in a statement. "The compulsory rate court process has once again produced an artificial non-market rate and underscores why Sony/ATV withdrew its new media rights from both ASCAP and BMI. While we respect the Court and the judicial process, we know what occurred in the SATV/Pandora negotiation and we strongly disagree with the Court's expressed views on credibility and its conclusions. Pandora earns nearly a billion dollars in revenue each year, while tens of thousands of songwriters and publishers receive only $15 million collectively." 

If Pandora continues to grow this year at the same 54% growth rate it had last year when it hit $600 million in revenue in an 11-month period, its revenue will be about $1 billion by the end of this year.

"This decision only strengthens our resolve to fight to reform this system so that our writers and composers and their heirs are fairly compensated for their music," Bandier said.

Said UMPG chairman/CEO Zach Horowitz in a statement: "[The ruling] reinforces what we already knew to be the case -- that songwriters will never receive fair market rates unless the consent decrees are changed."

Meanwhile, National Music Publishers Assn. president David Israelite, who already condemned the March 14 decision as a "slap in the face to anyone who creates music or represents those creators," added the observation that Pandora founder Tim Westergren cashed out more stock than Pandora paid every ASCAP songwriter and music publisher combined. "That fact is a sad testament to both this ruling and the impact of outdated consent decrees," he said.

“The rate court's decision preserves the status quo, which is unacceptable for the thousands of songwriters and composers who depend on ASCAP royalties for their livelihoods," ASCAP President and Chairman Paul Williams emailed to Billboard after the original publication of this story. "Unfortunately, it is now more clear than ever that it is time to update the laws that regulate how songwriters and composers license our works to make sure the next generation of songwriters is paid fairly regardless of how listeners enjoy their music."

Currently, the U.S. music publishing industry has turned its attention the U.S. Dept. of Justice in hopes of negotiating a change in the consent decree laws.

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