Pandora/ASCAP Ruling: Judge to Sony/ATV, UMPG, Others – You’re Either 'All In' or 'All Out' (Analysis)

The ruling by the ASCAP rate court handed down on late Sept. 17 says the performance rights organization blanket license must include all of its repertoire, including the songs of the publishers trying to withdraw the digital rights. But the ruling has broad implications beyond the Pandora dispute.

That means that the recent trend of pulling only digital rights from ASCAP -- which has been done by publishers like Sony/ATV Universal Music Publishing Group and BMG and been contemplated by others, like Warner/Chappell Music -- is not going to fly.

However, a spokesperson for Sony/ATV says the direct license deal that the company cut with Pandora for its songs is not impacted by the ruling because the two parties agreed to abide by their deal, which ends Dec. 31. That means that at the end of this year, Sony/ATV will have to abide by under the rate set by the court, through the end of the Pandora license on Dec. 31, 2015.

In effect, the judge says because of the consent decree ASCAP has been operating under since 1941, if publishers give their rights to ASCAP for licensing, then ASCAP must license all of its repertoire in a blanket license to all music users, including digital service providers. To put it differently, publishers affiliated with ASCAP for licensing can't withhold rights to "particular classes of licenses," i.e. digital music service providers.

So while the consent decree does not apply to individual publishing companies, once they give their music to ASCAP to license to any third party licensee, the PRO must abide by the consent decree and license all of its music to licensees that apply for a license.

By extension, the ruling could also impact BMI, if Pandora asks the BMI rate court to look at the consent decree and that Judge agrees with Pandora's argument that BMI too must license all its repertoire.

Pandora had filed a motion seeking an interpretation of the ASCAP consent decree that would not allow for selective withdrawals of "new media rights" by the PRO's member publishers. The decision in Pandora's favor was handed down by Judge Denise Cote for the Southern District of New York Federal Courts.

In the short term, that means that all the publishers, including ones that already cut direct licensing deals with Pandora like the Universal Music Group, must abide by whatever royalty terms that the Judge rules on in the rate court trial beginning later this year on Dec. 4.

Pandora Sues ASCAP for Lower Rates

For the long-term, the ruling likely means that the only way publishers can withdraw digital rights from ASCAP is to pull out of ASCAP completely, a move contemplated by EMI back in 2010. But when EMI informed ASCAP of that decision, a solution emerged that the bylaws would be rewritten so that publisher members can withdraw certain rights. But the Judge’s ruling closes off that avenue.

Consequently, direct deals negotiated with Pandora for rates that are well above the 4.3% rate that Pandora paid to music publishers for licensing their songs last year are no longer valid, which means that publishers will lose millions of dollars in revenues, if the rate court doesn't set rates as high as the direct deals.

So short-term, the ruling likely delivers ASCAP and BMI a victory because it makes no sense for the publishers to pull out of the PROs to get higher rates from digital service providers. That income stream is by far the smallest channel in terms of revenue, paying ASCAP $25 million of the $601 million collected by ASCAP domestically in 2012. In contrast, general licensing to stores, bars and clubs brought in $82 million, while performances from TV, cable and radio, respectively, brought in $104 million, $204 million and $177 million, according to ASCAP's annual report.

One publishing executive says it wouldn't make sense for publishers to pull all of their rights because the PROs get market rates in many of the deals they negotiate. "Why would a publisher give up the majority slice of their royalties which are at market in order to get an incremental increase from the smallest slice of the royalty pie, and increase their transactional costs to license and/or litigate," the executive asked. "It would not make sense for them to do -- even long term."

Longterm as digital revenue grows, there might be incentive for the publishers to once again seek direct deals, but don't expect the PRO's to sit still and not meet that challenge.

Publishers, however, will likely wait and see what rates are set by the Pandora court before seeking other options. Publishers are hoping that the court will see the deals cut with Sony/ATV and Universal Music Publishing Group with Pandora as well as the deals that those publishers and few others have negotiated with Apple iTunes Radio, a Pandora-like service, as market rates and apply them to Pandora. Those rates are believed to range from 5% to 10% of advertising revenue.