A battle over royalty rates -- with Pandora in the middle -- defined the year in music publishing, and may define 2014 as well.
The future of the publishing industry in the digital age has ping-ponged this year between market rate negotiations, rate court rulings and consent decrees that predate digital disruption by more than a half century. And it’s now clear that back and forth will continue well into next year, as stake holders maneuver to be in the right position when the ball finally stops bouncing -- if it ever does.
Much of the year’s battling was set in motion in January, when the newly combined Sony/ATV-EMI music publishing powers used its market clout to negotiate a 25% royalty increase from Pandora. Universal Music Group and BMG pulled digital rights from ASCAP in hopes of following suit.
Pandora argued that it had a license to all ASCAP repertoire thanks to the performing rights organization’s existing consent decree. And in September, the New York rate court came down in favor of Pandora in a ruling that said ASCAP’s blanket license has to include all of its repertoire.
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The BMI rate court judge is now weighing the exact same kind of motion from Pandora, and music publishers are resigned that the court will come down on the same side as the ASCAP ruling.
But that doesn’t mean this issue is settled. The ASCAP and BMI consent decrees have existed since 1941, and sources say ASCAP has reached out to the U.S. Department of Justice looking for an amendment. Publishers who Billboard spoke with say they hope this last ditch effort by ASCAP will result in changes from the DOJ that would benefit both ASCAP and BMI, which would be preferable to reworking the performance licensing business model.
“My first choice would be not to pull our entire repertoire out of ASCAP and BMI,” the head of a publishing company says. “I would much rather if the consent decree was changed so we could negotiate directly with digital services and maybe even the broadcasters, while allowing the PROs to continue to oversee all components of general licensing while administering payments from whatever services that we cut direct deals with.”
That executive also notes that most DOJ consent decrees last 10 years, while the ASCAP/BMI consent decrees are 70 years old and were done in a completely different time. Consent decrees were supposed to rein in what was then described as the nearly monopolistic power of the PROs. Instead, today they do it so well that when it comes to digital, the services get a license before any rates are established, which impairs the negotiating powers of the PROs.
ASCAP and BMI declined to comment for this story.
Naturally, those in the digital camp disagree. “The ruling reset the equilibrium to where it should be—the power in licensing is supposed to be with the user,” an executive at a digital service says. “The reason why the consent decree exists is to put a check on the fees that ASCAP and BMI can seek.”
But publishing executives note that even when the consent decrees were modified in 2001, that was before the iPad arrived. So publishers are hoping the DOJ will work with ASCAP “to modernize a document that is antiquated,” as one executive puts it.
While publishers wait to see if ASCAP makes headway with the DOJ on the consent decree, some of the majors and larger independent publishers are walking through a series of “what if” scenarios, in case it turns out they have to seriously consider pulling out of the PRO to achieve market rates.
“If ASCAP and BMI can’t get fair rates because of the consent decree, and a judge has ruled that you can’t partially withdraw certain rights from the PROs, then every publisher has to seriously consider what to do to get fair rates,” the head of an influential music publisher says.
Digital royalties are still less than 10% of total revenue for the publishing industry, so why would publishers make a decision that could affect the other 90% of their income? An industry insider points out that the PROs each collect more than $940 million per year and have multiyear licenses in place with most music users, which supplies a steady flow of income to their publisher and songwriter members.
“Still, industry executives expect digital streaming revenue to begin growing dramatically,” the insider adds. “So, if push comes to shove, the publishers will not stay long term in a low-rate environment.”
Circumstances may ultimately dictate that publishers withdraw from the two PROs, but that’s not a decision lightly made. As one senior publishing executive says, “Publishers and digital services achieve all sorts of efficiencies through ASCAP and BMI—it would be a very difficult marketplace if they were to disappear. But ultimately if you can’t get paid fairly, you will have to give up efficiency in order to achieve market rates.”