Music Industry Sings the Blues After DOJ Licensing Recommendation
August 19, 2016
Not since 1941 has there been such a seismic change to the rules governing licensing agreements between licensees, music publishers and the performing rights organizations (ASCAP and BMI) that administer performance royalty payments.
Music publishers believe that performance royalties, especially with respect to digital exploitations, are being paid at rates much lower than market rates. The rates stem from decades-old consent decrees that stipulate the rates to be paid by licensees. Consequently, major music publishers tried to bifurcate their digital and terrestrial rights and pull their digital rights from the performing rights organizations (PROs). This would have enabled music publishers to license digital performance rights at market rates and not at rates dictated by the consent degrees. Because litigation squashed the music publishers’ strategy, they turned to the rate court and the U.S. Department of Justice (DOJ).
For the past 2 years, music publishers and PROs have petitioned the DOJ to amend the consent decrees due to the disruptive technology of digital media. They sought changes concerning rate-setting procedures, the licensing of bundled rights and the granting of partial-right licenses. Not only did the DOJ deny these requests, it threw the music publishing industry a curveball.
To make matters worse for music publishers and songwriters, the DOJ issued a June 2016 recommendation that the PROs should operate under a “100%” licensing structure. Under the current system, a PRO can only license the portion of the compositions it represents. Thus, it only collects for and pays royalties to its songwriters and publisher members. If a particular composition is written and published by multiple entities that are represented by different PROs, each PRO collects and reports royalties for the portion of the composition it represents. Under 100% licensing, anyone who owns a part of a composition will be able to license the performance rights for 100% of the composition. Let’s take a deeper look at the impact of the DOJ’s game-changing announcement.
Enabling music publishers and PROs to license 100% of a composition would have numerous negative impacts on the industry. Licensees will look to the entity offering the lowest rates to license compositions, resulting in a smaller pool for performance royalties. PROs will have to administer rights for the portion of songs controlled by nonmembers. Thus, the PRO will have to pay the royalties collected for the nonmember share to either the nonmember’s PRO or directly to the nonmember. This reporting obligation is an administrative burden that will add costs and delay payments. Increased cost from administering the portion of songs controlled by nonmembers will further reduce performance royalty payments to songwriters and music publishers. Furthermore, royalty payments will be delayed while PROs determine where to pay nonmember royalties and for additional payment cycles when the nonmember’s PRO is paid. Finally, if one PRO pays another PRO, the royalty could be subject to a second administrative fee.
Music publishers and PROs claim that the new system will cut already thin royalty margins by allowing licensees to shop around for lower royalty rates. They contend that current royalty rates, subject to the consent degrees, are already below market rates. However, licensees—such as digital streaming services—have long-contended that music publishers and PROs have charged exorbitant performance fees. It is still uncertain whether the DoJ’s recommendations will be accepted by the U.S. rate court. If so, it will negatively impact an industry that has been devastated by the Internet. In addition, there has been little mention of how 100% licensing will impact consumers, if at all.
While the DOJ had suggested a transition period of up to 1 year for the new guidelines to take effect, music industry experts fear the new system will result in an administrative nightmare. Together, ASCPA and BMI administer more than $2 billion in licensing fees annually. There are logistical concerns that royalty payments to the PROs, songwriters and music publishers will be reduced and greatly delayed under the new system. The U.S. now has four PROs, which further complicates matters.
There are concerns that under 100% licensing, songwriters may limit themselves to creative collaborations with only those who are members of the same PRO in order to avoid the aforementioned administrative and financial pitfalls. It would be unfortunate to limit songwriters’ ability to collaborate, which could hinder the creative process.
While the DOJ’s decision has the potential to cause significant uncertainty in the marketplace going forward, it’s worth noting that it is solely a recommendation and not a formal ruling. Any changes to the rules governing licensing agreements must be approved by a federal judge from the U.S. rate courts that enforce the consent decrees. That ruling, which can be challenged by either side, is expected later this year and will most likely lead to litigation. Stay tuned.