On the heels of Sony/ATV and EMI striking a deal to directly license their music to Pandora, Universal Music Publishing has notified ASCAP and BMI that it too will no longer rely on the two performance rights organizations to negotiate digital performance licenses and royalty rates.
In addition, sources say that BMG Chrysalis has also negotiated the option to withhold its digital performance rights from ASCAP and BMI, but it has yet to decide if it will actually use a direct deal strategy.
Sony/ATV has just completed negotiations with Pandora on its own behalf and for the EMI Music Publishing catalog, which it administers, which sources say yielded a 25% increase.
Since Pandora was paying music publishers approximately 4.1% of its revenue, according to its most recent 10-K filing with the Securities and Exchange Commission, simply put that means that Sony achieved a rate of about 5% of Pandora's for licensing its and EMI's songs to the service.
ASCAP, BMI and SESAC typically represent music publishers on a non-exclusive basis to license performance rights and collect performance royalties on their behalf. The motivation to do direct deals is driven by the belief that ASCAP and BMI, which operate under consent decrees they have signed with the U.S. Department of Justice, are hamstrung in getting a market rate from services like Pandora.
Since terrestrial and digital radio operate under compulsory licenses, BMI and ASCAP cannot refuse to grant a license to services like Pandora, even if a rate has yet to be negotiated. Once those type of digital services apply for a license, they may begin playing the music immediately and if the parties fail to negotiate a rate, any dispute goes to rate court, the U.S. District Court for the Southern District of New York, which is currently hearing a case between ASCAP and Pandora.
As music publishers point out, they were able to negotiate a rate of 12% from Amazon, Google and iTunes for their scan and match cloud lockers, while the labels get 58% a revenue, a ratio of about 5-to-1. In contrast, the labels get above 50% of Pandora's revenues while publishers get 4.1%, a ratio of 12-to-1. The difference, they say, is due to the compulsory license and the consent decrees.
“With the consent decree constraints that apply to both ASCAP and BMI, in our view, it’s especially challenging for either society to achieve market rates in negotiations with digital services," says UMPG chairman/CEO Zach Horowitz in a statement to Billboard. "In order to ensure that our songwriters are fairly compensated, we believe the best approach is for us to negotiate directly with these services. For that reason we notified both ASCAP and BMI at the end of last year that we will be withdrawing our digital rights for controlled catalogs at the earliest opportunity. With ASCAP, this will be effective July 1, 2013. With BMI we are still working out the effective date."
The rights-withdrawal delay is because PROs typically have contracts with publishers, and in turn with music services like Pandora, so an effective date when a publisher is free to negotiate direct deals on its own behalf must be established.
Other publishers are taking a wait-and-see attitude about the direct deals strategy, although most point out that they themselves don't have the clout to follow in Sony/ATV and UMPG's footsteps. But they also expect eventually to be the beneficiary of their actions, since rate courts tend to look at market-negotiated rates when setting rates. Moreover, some say it is to their benefit that the PROs stay strong, and that whatever upside they could get from withholding digital rights could hurt in other areas where the PROs negotiate on their behalf.
While it may seem like the PROs are losing a big chunk of business -- since Sony/ATV, EMI, UMGP, and BMG account for an estimated 60% of global publishing revenue -- that is not the case. Digital royalties only account for about 3% of their revenue today, although undoubtedly that will grow going forward, so the withholding of digital rights by these publishers revenues won't have much of an impact today.
Further, taking off what sting there might be currently to the PROs, Sony/ATV has negotiated a deal with BMI to handle Pandora administration for its BMI songwriters and is in negotiations with ASCAP to handle that as well for ASCAP songwriters. Likewise, UMPG has negotiated a deal for with ASCAP to handle Pandora administration for its ASCAP songwriters, and is involved in negotiations with BMI to handle it for its BMI songwriters.
One potential holdup to those negotiations is that Sony and UMG are pushing for an administration fee lower than the estimated 11-13% revenue that the PROs typically withhold every year from royalty disbursements to cover their expenses.
Manwhile, Pandora is currently in rate court with ASCAP, while Pandora has agreed to pay BMI 1.75% of its revenue and 0.4% to SESAC, according to its 10-K. If Pandora is paying 4.1% to publishers, that means ASCAP and the small portion of EMI's catalog withdrawn from ASCAP in 2011-- before it was acquired by a Sony-led consortium and administered by Sony/ATV, which has withdrawn the rest of the catalog -- is getting 1.95% of revenue.