The Market-Rate Showdown: Who Will Blink First?
Pandora is being challenged on all sides by a hostile music industry, between the turndown of its offer of a higher rate, the rewrite of ASCAP’s bylaws aimed at (in Pandora’s view) Pandora, the publishers helping to scuttle its IRFA campaign, the labels designing deals with Apple that could drive up Pandora’s royalty and publishers withdrawing digital rights from PROs in hopes of achieving greater payments.
Publishers see Pandora’s acquisition of KXMZ as a move for lower rates. Pandora insists the strategy is more about licensing security. Pandora’s motion may say it’s eligible for lower rates, but the digital camp sees that move as a way to counter the higher rate that publishers are going to make the case for in rate court.
For their part, music executives have been outraged by the terrestrial acquisition, which they say turns logic on its head. Publishers claim that since terrestrial radio already pays $400 million in royalty fees, they agreed to allow their much smaller digital operations of terrestrial radio station to pay the same rate.
In fact, the main gist of motions in both the ASCAP and BMI rate courts is about licensing coverage.
To boil it down: Pandora is arguing that its consent decree licenses with ASCAP and BMI includes all of the music from all of the publishers who are now withdrawning their rights from those PROs. Pandora believes it has a BMI consent degree license that covers the period of Jan. 1, 2013-Dec. 31, 2017, and disputes any withdrawal of digital rights from the PRO license during that period. It further argues that by allowing publishers to withdraw and “extort” higher new media rates—which the PRO can then turn around and cite as a benchmark in the rate court hearing—it “seeks to make an anticompetitive mockery of the BMI consent decree and of this rate court.”
Pandora argues that it asked ASCAP for a license beginning Jan. 1, 2011, and has been operating under an interim license; since it owns KXMZ, it claims it’s now eligible for the rates negotiated by the Radio Music License Committee and has asked the court to rule under the consent decree that the EMI withdrawal was invalid.
Executives in the publishing community respond that just because Pandora asked for a five-year licensing period doesn’t mean it’s entitled to it. What if Pandora had requested a 50-year license?
ASCAP filed a petition with the FCC to deny Pandora’s acquisition of the Rapid City terrestrial station. The petition labels the acquisition a “theatrical media stunt designed to draw attention to what Pandora wrongly perceives as an unfavorable royalty payment structure.” ASCAP makes the argument that investment advisor ownership of Pandora’s stock may tip it beyond the 20% threshold applied to foreign ownership of a U.S. media property, another reason to deny the acquisition.
Meanwhile, the publishers and Pandora are maneuvering over how the direct licenses will be presented in rate courts. Which brings up the question: What is market? Is it the 1.7% of revenue that terrestrial radio pays? Is it 4.3% that Pandora paid? Or is it the 10% that Apple has agreed to?
While Sony/ATV achieved a higher rate of 5%, Pandora argues that’s not a market rate because Pandora “had a gun to their head,” in the words of one executive sympathetic to Pandora’s position. When it was negotiating with Sony/ATV for the direct license, it requested a complete list of Sony/ATV’s ASCAP copyrights so that it could pull those songs if it couldn’t agree on direct deal. But, according to the rate court document filing, Sony/ATV told Pandora to get that list from ASCAP, and the PRO supposedly ignored Pandora’s request. Likewise, BMI also refused to provide a list of Sony/ATV copyrights, according to Pandora filings with the rate court.
Since it didn’t have a list of Sony/ATV’s songs, Pandora couldn’t pull them and would have been in copyright violation if it didn’t agree to the Sony terms.
But a lawyer who often represents the publishing community says Pandora has it backwards: The publishers have a gun to their head because of the compulsory license and the consent decree.
As for the deal Pandora has since negotiated with UMPG, apparently it’s a short-term contract that protects Pandora from copyright infringement. Sources say it achieved an even higher rate than Sony/ATV did for its ASCAP registered songs. Will the court view UMPG’s deal with Pandora as a market-negotiated rate? If UMPG provided a list of its ASCAP songs to Pandora, then the service had a choice on whether it wanted to pull UMPG’s songs or agree to a rate.
And if the publishers want to go to a direct world, they better be prepared for the consequences, say executives in the digital service providers communities.
“Pandora prefers to license under the blanket license where songs don’t compete on price,” Pandora’s Harrison says. “That’s part of the reason Pandora is able to play songs from more than 100,000 different artists every month. In a world where songs compete on price, there will be winners and losers.”
While services like Spotify may need the entire catalog, Pandora can still function nicely with fewer tracks. It’s not like every song in the world that sounds similar to a particular track is needed to satisfy users.
“I don’t know how he did it, but [Sony/ATV chairman/CEO] Martin [Bandier] has convinced these smaller publishers that they will get the same rate as the bigger ones,” the lawyer says. “But digital services could run a service without songs from Diane Warren, even though she is a phenomenal writer. When they don’t get offered the same rates or the digital services begin pulling down catalogs, they will get painted with the same brush of screwing the publishers, but at the end of the day, the publishers are screwing themselves.”
Another lawyer who works with music digital services says, “The thinking that the large publishers can withdraw their songs from the PROs will result in everyone’s rate going up is just nonsense.”
But all that’s a long way off. In the next few weeks, the ASCAP rate court is expected to decide if Pandora has a license in effect that covers the publishers that are withdrawing digital rights, with the actual rate trial expected to begin in the fall. The BMI rate case is still in the early stages. And if the FCC rules in favor of Pandora’s move into the terrestrial radio world, it could impact any rate court rulings. Meaning the end of this war in nowhere in sight.