'An Edifice Whose Foundation Has Eroded': Inside ASCAP and BMI's DOJ Comments on WW2-Era Consent Decrees

AP Photo/Andrew Harnik
Robert F. Kennedy Department of Justice Building in Washington. 

"We see no scenario in which more government regulation of this industry would benefit anyone," writes the heads of both performance rights orgs.

With the Dept. of Justice review of the ASCAP and BMI consent decrees well underway, the two performance rights organizations laid out their argument as to why the 78-year old agreements should be sunsetted in comments filed with the DOJ and made available to Billboard. The two month-plus period for public comment ended on Friday.

In their comments, both ASCAP and BMI asked that the "outdated" consent decrees be re-worked for a transition period that would eventually culminate with the decrees ending, leaving the two PROs to operate in a free market. That request is being met with considerable pushback from music licensees, i.e. music users. Indeed, in a joint comment, the National Assn. of Broadcasters and the Digital Media Assn. claimed that "removing the decrees without a replacement…would be disastrous. To set the ASCAP and BMI consent decrees on a path to termination would result in chaos in music licensing markets…"

This marks the second time in five years that the DOJ has reviewed the consent decrees at the behest of music publishers and songwriters. Last time, the review ended in disaster when not only did the DOJ not consider amending the consent decrees to the benefit of songwriters and publishers, they imposed a new constraint on the PROs: in instances where songs with multiple songwriters and multiple PROs have a stake, the DOJ said the music users could rely on a license from only one of the rights holders to have the ability to play that song without worrying about licenses from the other rights holders. Fortunately for the industry, two federal courts over-ruled that new DOJ-imposed constraint.

With the subsequent change from Barack Obama's administration, which had a propensity to impose heavy regulations on businesses, to Donald Trump's administration, which is seen as more business-friendly and favors less regulation, the DOJ announced it would review long term consent decrees in general -- looking at 1,000 legacy decrees, according to published reports -- and subsequently followed through on that by agreeing to look at the BMI/ASCAP one in particular.

In moving to have the consent decrees sunsetted, both PROs are advocating for a transition period with a re-worked decree that would keep key elements on the agreements in place for some time, perhaps up to ten years. That transition period would have a decree that would allow all music users to license both catalogs and immediately play songs upon request of a license, provided that a mechanism is established that would issue the payment of interim fees. Currently, if the two sides cannot agree on an interim fee, they have to go to court and thus the music user doesn't have to pay until the fee is set.

Beyond the interim fee, a reworked consent decree would also still retain the rate court process for rate disputes; and the two PROs will continue to receive non-exclusive rights from writers and publishers, allowing those affiliates to continue to do direct deals; and finally, they would continue to offer the adjustable fee blanket license and the per program license. 

"These provisions will allow the industry to function more efficiently and effectively, and facilitate a thoughtful transition to a free market," BMI president and CEO Mike O'Neill and ASCAP CEO Elizabeth Matthews said in their co-authored open letter to the music industry.

But apparently remembering the disaster that befell the consent review last go-round, they added a word of caution. "As we've seen over the years, some organizations will try to use this moment and BMI's and ASCAP's consent decrees to serve their own interests at the expense of the songwriter," Matthews and O'Neill wrote. "Old and new issues could come into play, such as 100% licensing, or, even more concerning, a push in Congress by music users to create a compulsory licensing model. Compulsory licensing would take us backwards, not forward, creating a system in which the government -- not the market -- would determine the value of songwriters' work. It could also have dire consequences for other creative industries. In fact, we see no scenario in which more government regulation of this industry would benefit anyone."

ASCAP COMMENTS

Moving over to look at the individual comments on the consent decrees, ASCAP began its plea by saying "the time has come to modernize its World War II–era Consent Decree to permit ASCAP to compete more fairly with its unregulated competitors and on a level playing field with BMI by ensuring that the ASCAP and BMI consent decrees, which today include different restrictions and requirements, are identical. 

It requested that the DOJ tear up the longstanding consent decrees -- which have been amended a couple of times -- and replace them with a more limited decree that would be operative for only a reasonable sunset period.

ASCAP argues that its consent decree, entered in 1941 and last updated in 2001, is predicated on many "now-disfavored" legal doctrines. "Decades of transformational Supreme Court precedent and industrial organization economics have made obsolete many provisions of a consent decree that was, in effect, designed to regulate licensing behavior that would no longer be considered per se unlawful or presumptively anticompetitive," but are now considered pro-competitive, ASCAP comments to the DOJ state.

For example, pricing discrimination is no longer considered anti-competitive, yet the consent decrees requires ASCAP to treat similar class business the same.

BMI COMMENTS

Likewise, BMI made the same argument, embellishing it by explaining that the consent decree prohibits it from experimenting with new forms of licensing to see if it works before offering it to others. To engage in such an experiment comes with the risk that other users can claim to be "similarly situated" and are entitled to the same deal, even before the feasibility of such a license can be evaluated," BMI explained.

In fact, BMI claims that the "similarly situated" obligation placed on the PROs distorts pricing incentives in that it has "in effect…created a regulated 'most favored nation/ ("MFN") licensing obligation. While MFNs can be commercially reasonable and even pro-competitive, MFNs also have been recognized, in certain circumstances, to have anti-competitive effects as well," according to BMI.

"Although BMI has the ability to make business distinctions to justify different rates, the looming threat of an alleged Decree violation chills its propensity to do so and, thus, limits BMI's ability to offer rates tailored to the attributes of its customers," the PRO claimed.

Even more frustrating to its business model, BMI says that when it enters into a new form of license, it has to cancel all licenses for similarly situated music users. "The cancellation and renegotiation of licensing rates and terms for an entire class of users is extraordinarily inefficient and BMI could avoid doing so, but for the Decree's 'similarly situated' requirement," BMI said.

BMI said it would like to be able to offer volume discounts to incentivize music users to play a greater percentage of its catalog, or even just rely on BMI music, but BMI cannot do so because of the consent decree even though such a practice in modern antitrust law is seen as "unequivocally pro-competitive."

OTHER FACTORS TO CONSIDER

Overall, "the Consent Decree is predicated on legal doctrines and attitudes that no longer hold," according to the ASCAP comments to the DOJ. "It is an edifice whose foundation has eroded." Moreover, beyond the changes in anti-trust law and interpretation, the music marketplace itself has changed considerably since the decree was first entered into. For one, ASCAP now has three competing domestic PROs, not just BMI, but also SESAC and Global Music Rights, or GMR. Moreover, foreign PROs are expanding beyond their local territories, while music publishers nowadays also license music directly, including all-in multiple rights in a license -- giving many licensing options for both music users and rights holder. For example, TV and cable network nowadays often source music directly from creators, through direct licenses or work-for-hire  agreements with songwriters and artists, BMI noted.

Another factor to consider is that when the consent decrees were created, the PROs were licensing music to many independent, small business owners who wanted to use music. Nowadays, it is often dealing with global media conglomerates and mega-tech platforms -- such as Comcast, AT&T, Warner Media, Disney, Liberty Media, Sirius, Viacom, Google, Facebook, Apple, Amazon and Netflix -- which swamp the PROs in size and resources.

"These multi-billion-dollar media giants are many times larger than ASCAP, and with extraordinary and concentrated market share and negotiating power, they no longer need the protection of a consent decree that was designed to shield small users from the power of a dominant ASCAP whose only competitor was a nascent BMI," the ASCAP comments states.

Instead of promoting competition, the consent decrees constrain competition, according to the ASCAP comments. The decree stifles "ASCAP's effort to innovate in the music licensing marketplace and leaving it as the only market actor prohibited from licensing to music users multiple rights to clear and perform music; and restricting ASCAP from engaging in licensing activities that its competitors engage in freely, often at the request of licensees," which prevents ASCAP from engaging in efficient and pro-competitive conduct, according to ASCAP.

ASCAP notes that direct licenses, new technologies and services that aid in tracking music performances enable music users to work around the PROs, including ASCAP, should they desire. Recently, Pandora, Spotify, and other digital media companies successfully avoided licensing entire repertoires of certain publishers," BMI noted in its comments to the DOK. "Pandora, for example, opted to remove BMG musical works from its streaming services for six months." 

Moreover, ASCAP and BMI are working on a joint database that will show a reconciled set of information related to who has the right to license musical works, which will increase the options for music users to license collectively, BMI argued in its comments. "This dataset will include comprehensive information on the vast majority of all musical works licensed in the United States and is expected to be available to the public within the next six months," BMI stated.

BMI adds that direct licensing has become a growing factor in the market, thus creating fierce and robust competition. "A variety of firms, including TuneCore, CD Baby, INgrooves, Songtrust, and The Orchard, have created platforms that allow publishers and songwriters to make their music available and licensable on the internet, facilitating their ability to directly license various music uses," BMI's comments states. "The increasing use of source and direct licensing arrangements and alternative licensing models means that there are now even more robust alternatives to BMI's blanket license than when alternatives to BMI's blanket license were last judicially considered and found to be viable."

ASCAP also wants the ability to license other composition rights besides public performance, which is the only right it is allowed to license under its consent decree, noting that not even BMI has that constraint, let alone the other two U.S. PROs, music publishers and foreign PROs. Services like YouTube and Netflix require more than public performance rights to operate, and ASCAP wants to be able to provide one-stop licensing rights too to such services.

However, while the BMI consent decree didn't specifically prohibit it from licensing other rights beyond performance, the fact that the ASCAP consent decree did so, caused uncertainty regarding BMI's ability to do so. "This is an example of how the decree has impeded BMI's ability to meet marketplace demand for more efficient licensing solutions," BMI stated. Recently, the Second Circuit has affirmed BMI is permitted to engage in any activity that is not expressly prohibited by the consent decree.

In yet another nuanced change,  ASCAP and BMI both say they want to be able to negotiate licenses that can last for more than five years, which it is currently constrained from doing.

Finally, even without the consent decrees, ASCAP and BMI both note that they must still comply with anti-trust laws and that there are legal remedies in place should it not abide by those laws. For example, both GMR and SESAC -- the U.S. PROs not under consent decrees -- have had antitrust lawsuits brought against them challenging their licensing practices.

If the consent decrees are reworked into a transitional one that winds up with the consent decree eventually expiring, BMI argues there is little to fear because up until 1994, many licenses were negotiated without resorting to the BMI rate court, which was created that year, or any other provision of the decrees.

In conclusion, BMI said its DOJ decree "reflects an outdated model of antitrust enforcement by regulation. It imposes an inflexible contract structure and a judicial rate-setting process that are unresponsive to market needs, impede BMI… from adapting to changes in the marketplace, stifle innovation, and are unnecessary to preserve competition."

ASCAP concluded that if the PROs are unshackled from the consent decrees, the free market will yield new innovations and benefits to songwriters, licensees, and users for decades to come."


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