Original Sin and Obama’s Missed Opportunity: What’s Next for the ASCAP and BMI Consent Decrees?

Original sin–In Christian theology, the condition of sin that marks all humans as a result of Adam’s first act of disobedience to God.

It’s kind of an Old Testament thing.  The ASCAP and BMI consent decrees punish songwriters for a kind of original sin that most of them don’t know about and that happened some time before 1941–before most of them were born.  And yet all of them are held guilty in advance.

Sound familiar?

The Obama Justice Department just had a spectacular loss on its misguided and probably unconstitutional 100% licensing position in front of Judge Louis Stanton, the BMI rate court judge who has primary responsibility for interpreting the BMI consent decrees.  BMI asked for declaratory relief from Judge Stanton which was granted in a decisive opinion rejecting the government’s position.  So now what?

Not only did the Obama Justice Department go down the wrong rabbit hole with the consent decrees, they also managed to get themselves sued–by songwriters.  How in the world could that have happened?  Not just one, but two separate and distinct lawsuits.

The songwriters lawsuit is against the Justice Department, the Attorney General of the United States and the head of the Antitrust Division, Principal Deputy Assistant Attorney General Renata B. Hesse.  (It appears that Principal Deputy Assistant Attorney General Hesse is the prime mover in pushing the DOJ’s position on 100% licensing through the Justice Department, although it is hard to imagine that the Attorney General did not personally approve the position given the magnitude of the change in position.)

The songwriters’ lawsuit is not brought under the consent decrees.  The complaint alleges that the DOJ attorneys, starting with Principal Deputy Assistant Attorney General Hesse, engaged in unconstitutional behavior by denying songwriters their due process rights as well as taking the economic value of private property without compensation (see Professor Richard Epstein).

The lawsuit also alleges that the process that Principal Deputy Assistant Attorney General Hesse engaged in–secret phone calls, no public comment on proposed amendments to the consent decree, deceptive practices designed to encourage songwriters to leave their PROs–violated laws governing the behavior of federal administrative agencies.  The implication is that the DOJ intentionally engaged in deceptive practices lead by Hesse but also the recently departed Litigation III Section Chief David C. Kully.  (Mr. Kully was probably “just following orders”, but we all know where that can lead.)

What are the possible steps forward from here?

No Change for Music Users

Some of the less knowledgeable reporting on fractional licensing suggests that somehow music users are burdened by the decision.  Not true–most music users already have licenses from ASCAP, BMI, SESAC and increasingly from Global Music Rights.  SESAC and GMR are not subject to consent decrees because more PROs means more competition which means good things happen, right?  That was, after all, reason for the consent decrees in the first place–to encourage more competition, not less, in the public interest.

The choices afforded songwriters among competing licensing associations are no more burdensome for music users than having to deal with any other vendors in their business.  On the contrary, if the Justice Department had been successful in their stated goals of encouraging songwriters to leave ASCAP and BMI, the Justice Department would have mandated mind numbing complexity in the market place.

The Missed Opportunity

The real policy failure is that the Department of Justice failed to adopt any of the hundreds of policy proposals made by the public to amend the consent decrees–the longest running consent decrees in the history of the United States–after years of review, negotiation and discussion.

Not one.

Instead, the DOJ fixed on 100% licensing, which is something that nobody had asked for publicly as the Copyright Office noted (at p. 2, text accompanying note 8):

Despite the wide-ranging nature of the study and invitation to raise additional issues, none of the participants identified fractional licensing of musical works by the PROs as a practice that needed to be changed.

The Justice Department missed an historic opportunity to do something good for everyone.

This is tragic.

Possible Futures

DOJ Changes Position on 100% Licensing

The easiest thing would be for Principal Deputy Assistant Attorney General Hesse to issue a statement acknowledging she got it wrong on 100% licensing and that the DOJ is abandoning the position.  I doubt this will happen.

DOJ Appeals Judge Stanton’s Ruling 

Given the general bull-headedness that produced the flawed 100% licensing statement in the first place, I think it is more likely than not that the DOJ appeals Judge Stanton’s ruling.  If you were able to suspend reality to the point that you would come up with the idea in the first place, then you are probably possessed of the kind of denial that would make you believe you will prevail on appeal.

As Judge Stanton is a U.S. District Judge sitting in the Southern District of New York, the appeal in this case would go to the Second Circuit Court of Appeals.  It seems unlikely that the Second Circuit is going to rule against the subject matter expertise of the BMI Rate Court judge–expertise is the point of having rate court judges in the first place.  This is particularly true in a case requiring an interpretation of the consent decree.

Nevertheless, I will not be surprised to see an appeal, particularly one filed before the ASCAP rate court judge (Judge Cote) follows Judge Stanton’s which is likely.  An appeal of the BMI case would allow the DOJ to drag out the uncertainty which seems to be the plan for reasons no one outside the Justice Department can understand.

ASCAP Asks for Declaratory Relief

Given the many rulings against songwriters handed down by Judge Cote, caution may be the watchword for any request for declaratory relief by ASCAP.  However much I appreciate Judge Stanton’s ruling, it must be said that the conclusion is rather obvious.  Even so, I thought that the ASCAP members’  partial withdrawal from collective licensing of the bundle of rights was so obviously the law that it was axiomatic, and Judge Cote ruled against that rather obvious policy.

It may be better for ASCAP to simply wait it out until the issue arises before Judge Cote in a future proceeding.  Since the MIC Coalition seems to have its hand in the Justice Department’s positioning anyway, it would not surprise if the MIC Coalition went to Judge Cote for their own declaratory relief.

MIC Coalition
MIC Coalition Members

SONA Pursues Its Lawsuit

The most interesting part of the puzzle is the lawsuit brought by Songwriters of North America, Michelle Lewis, Thomas Kelly and Pamela Sheyne.  As a threshold matter, it reinforces the idea that ASCAP and BMI are comprised of songwriters bargaining collectively.  While it may be convenient for the broadcasters, Google and their MIC Coalition to heap condemnation on the PROs, when doing so they are actually shaming the individual songwriters who are members of ASCAP and BMI.  Those songwriters don’t feel they’ve done anything wrong.

The SONA lawsuit confirms this for all to see.  While it takes considerable courage to sue a defendant who comes with badges and guns and prints money to pay their legal bills, the DOJ is now faced with a process that reeks to high heaven, looks at least potentially fraught with corruption and which SONA will now put under a microscope–if they survive summary judgement.

Of course, it should not be lost on anyone that the DOJ’s position will be some version of “We lost, so no harm, no foul” as absurd as that may seem.  I’m not sure that “just kidding” is a good look for them.

Until the ASCAP judge rules on the issue and follows Judge Stanton’s reasoning and the DOJ agrees not to file an appeal, there’s no reason for SONA to change course.  If SONA survives summary judgement on one or both of its claims, then things may get interesting.

Governors Take Action

Texas Governor Greg Abbott was the first state governor to call on the Attorney General to back off of the 100% licensing rule, acting in defense of Texas songwriters.  It would not be surprising to see other governors write their own letters to the AG, particularly now that Judge Stanton has ruled.

Terminating the Consent Decrees

What this episode should teach everyone is that the consent decrees have run their course.  They are now being manipulated by crony capitalists for private commercial advantage.  Hesse’s connections to Google and the MIC Coalition are well known and only further undermine the public’s trust in government’s ability to operate fairly.

Abandoning the consent decrees does not mean that songwriters would get a free pass on antitrust prosecution, it just means that the true free market would operate outside of a little intellectual elite in a far away Eastern city that thinks it can plan the lives of songwriters better than songwriters can themselves.  Music users and the government would still be free to bring antitrust actions if the facts warranted it as has already happened to SESAC (which is not subject to a consent decree).

So for the moment, songwriters are in a holding pattern but with the wind at their backs.

I’m still looking forward to an explanation of why Google, Pandora, Clear Channel and a host of other giant multinational corporations with hundreds if not thousands of lobbyists need the awesome power of the U.S. Government to protect them from…songwriters.

Getting closure on this regrettable episode will be better for songwriters and for music users.  It’s hard enough without the Nanny State intervening.  Collective licensing is one of the few areas of the business that is working pretty well in the digital age.

Songwriters deserve the chance to live their commercial lives without paying for long-forgotten sins committed before most of them were born.

 

 

 

 

 

Watch this Space: MTP Podcast on 100% Licensing with David Lowery, Steve Winogradsky, Chris Castle coming soon

The MusicTechPolicy podcast is back! Next week we will kick things off with a discussion of the Department of Justice [sic] ruling on 100% licensing and partial withdrawals. Participants will be David Lowery, Steve Winogradsky of Winogradsky/Sobel and author of Music Publishing: The Complete Guide and me. Watch this space for links to the podcast when […]

via Watch this Space: MTP Podcast on 100% Licensing with David Lowery, Steve Winogradsky, Chris Castle coming soon — MUSIC • TECHNOLOGY • POLICY

Cost Recovery and the DOJ’s 100% Licensing Scheme

After a prolonged and expensive process of soliciting public comments on potential betterments in the ASCAP and BMI consent decrees, the Department of Justice has decided to ignore all of the ideas presented and focus on the one thing that is almost guaranteed to destroy the PRO system in the U.S.–adopt the punitive policy of “100% licensing”.

Simply put, 100% licensing refers to the ability of a co-owner of an undivided interest in real property to grant a nonexclusive license to allow a third party to use the whole parcel without the consent (and potentially over the objection) of the co-owners.  A co-owner relying on this rule also assumes the obligation of accounting to the co-owner and to not license at a rate that constitutes economic waste of the property.

The Department of Justice seeks to apply this theory to song copyrights through the consent decrees.  After all the hopeful aspirations that the legacy consent decrees were going to be fixed by the Obama Administration, it now appears that at this late stage of the Administration’s term, the can will just get kicked down the road even further.

The Administration’s relatively new position appears to have been based on extraordinarily bad advice–advice that is so bad it looks punitive.  This in part because in order to get to the punchline, the Administration has to ignore the implications to international trade, replace a voluntary licensing doctrine with a government mandate, ignore written agreements between generations of songwriters, and impose untold transaction costs on songwriters without requiring an increase in royalty rates to permit cost recovery.

The Four Preconditions

It is true that the rule has been applied to copyright in the U.S. from time to time, but it is actually quite rare because of four preconditions.

First, to the extent the rule obtains at all, it is a U.S. creature.   Applying this rule to copyrights originating in countries other than the U.S. when the rule is not recognized in those other nations raises the real possibility that the proposed application by the DOJ is unlawful.  In fact, it may actually be a treaty violation that could cause the United States to be hailed into a WTO arbitration.  (See Fairness in Music Licensing Act where that exact thing happened, the U.S. lost, and U.S. taxpayers are subsidizing foreign songwriters.)

The rule also involves voluntary licensing by the co-owner.  To my knowledge, it has never been applied to a government mandated license in copyright, real property or otherwise.  (If the DOJ is confident in its position, then I for one would like to see this issue briefed.)  I am also not familiar with cases where the license is issued over the objection of the co-owner.

The rights of the co-owner typically will originate with some agreement or purchase agreement that grants to the co-owner the right to the use of the whole of the property even though they only own a partial interest.  In order to be effective, the co-owner license must not violate an agreement to the contrary between or among the co-owners.

At a minimum, songwriters often avail themselves of “song split agreements” to document their percentage ownership.  Since song split agreements typically provide for each writer to administer their respective shares of copyright, it is likely that there are hundreds of thousands, if not millions, of song split agreements covering songs available under ASCAP and BMI blanket licenses.

Not only are there likely to be written agreements covering these songs, the fact that each songwriter has registered their works with their respective PROs of which they are writer members is pretty easily interpreted as an “implied in fact” contract from the mere uncontested registration of song shares with multiple PROs.  As the U.S. Supreme Court noted in Baltimore & Ohio R. Co. v. United States, 261 U.S. 592 (1923):

[A]n agreement “implied in fact” founded upon a meeting of minds, which, although not embodied in an express contract, is inferred, as a fact, from conduct of the parties showing, in the light of the surrounding circumstances, their tacit understanding.

What could be clearer than the uncontested act of PRO registration?

Perhaps most importantly and most relevantly for this post, the co-owner’s license is presumed to be negotiated at a rate that will take into account the cost of the license to the  granting co-owner.  This is another place that the DOJ’s proposed rule disintegrates or even becomes punitive.

Under the DOJ’s proposed 100% licensing rule, the applicable rate payable to PROs under the consent decrees is a rate for the use of the music licensed.  No rate court took into account the “surprise” cost of administering songs in a 100% licensing world now being created by the DOJ from whole cloth.

Cost Recovery

Since the cost of administering these licenses was never included in the rate, any fee charged for 100% licensing by PROs would simply offset the costs for the convenience of the licensee music user and not be a rate for the benefit of songwriters, it seems proper that any music user seeking to trade on this theory should pay the freight.

In other words, ASCAP and BMI songwriters should be able to charge a fee for the convenience of 100% licensing that should be outside of the consent decrees and rate courts altogether.  If not, the new transaction cost of administering 100% licensing when deducted from the already minuscule rate court license fees may well cause the music user to be in a better position than she would be in if the PRO had fully performed under the consent decree’s terms.

This is particularly true regarding the rates that were mandated by the two rate court judges without an opportunity for songwriters to be heard regarding these additional “surprise”regulatory costs now contemplated by the Department of Justice.

If the Obama Administration wants to lame duck their way out of amending (or terminating) these ancient consent decrees, they could at least do songwriters the courtesy of telling them to their faces.

 

Are Legacy Revenue Share Deals More Trouble Than They Are Worth?

By Chris Castle

As an important publisher panel observed at MIDEM this year, revenue share deals make it virtually impossible for publishers to tell songwriters what their royalty rate is.  That’s especially true of streaming royalties payable under direct licenses for either sound recordings or songs or the compulsory licenses available for songs.

There are some good reasons why streaming rates developed without a penny rate–or at least some reasons that are the product of sequential thought–but there are also good reasons for creators to be distrustful of the revenue share calculation.  This is particularly true of compulsory licenses for songs where songwriters and publishers don’t even have the right to examine the services books to check if the service complied with the terms of the compulsory license (known as an “audit” or “royalty compliance examination”).

If you thought record deals were complicated, you will probably have to find a new vocabulary to describe streaming royalties.  (Calling Dr. Freud.)  But even under direct licenses for songs or sound recording licenses where there usually is an audit right, the information that needs to be audited is so closely held, so over-consolidated and the calculations so complex that there may as well be no audit right.

The result is that smart people with resources at big publishing houses cannot determine the penny rate coming out of Spotify and others with the information that is on their accounting statements.  That is hard to explain to songwriters (or artists for that matter, as they have similar problems).

Why is the calculation so complex?  The artist revenue share calculation looks something like this in its generic configuration:

[Monthly Service Advertising Revenue or Monthly Subscription Revenue] x [Your Total Monthly Streams on the Service/All Monthly Streams on the Service] x [Revenue Share] = Royalty per stream

Both monthly revenue and monthly usage change each month–because they are monthly.  In order to get a nominal royalty rate, you have many calculations on both sides of the equation.  Because these calculations are made monthly, it is not possible to state in pennies the royalty rate for any one song or recording at any one time.  There’s actually an additional eye-crossing wrinkle on subscription deals of setting a negotiated minimum per subscriber which can vary by country, but we will leave that complexity aside for this post–YouTube’s “Exhibit D” lists 3 pages of one line entries for per subscriber minima around the world.

In a simple example, if both advertising revenue and subscription revenue were $100, your one recording was played 10 times in a month, all recordings were played 100 times in a month and the revenue share was 50% for the sound recording then you would get:

$100 x [10/100] x .50 = $0.50 for that month.  How you get to the multiplicand in the revenue pot is not so simple and has gotten more complex over the years.  In fact, the contract language for these calculations make the Single Bullet Theory seem more plausible.

Revenue share formulas produce a different product when the factors change–which for the most part changes every month.  The formula we’re using is for the sound recording side, but publishers have a version of this calculation for their songwriter’s royalties, too.  The statutory rates are a version of this formula (see the nearly unintelligible 37 CFR §385.12).

Most of this information is under the exclusive control of the service, and largely stays that way, even if you are one of the lucky few who has an audit right.  Bear in mind that the “Monthly Service Advertising Revenue” in our formula is a function of advertising rates charged by the service, and “Monthly Subscription Revenue” is a function of net subscription rates charged by the service.  These calculations take into account day passes, free trial periods, and other exceptions to the royalty obligation.  There is essentially no way to confirm the revenue pot when the royalty rates appear on the publisher or label statements.

The problem is that the entire concept of revenue share deals is out of step with how artists and songwriters are used to getting paid, even for other statutory mechanical rates such as that for downloads.  If a publisher or label can’t come up with a nice crisp answer for what the songwriter or artist royalty is based on, the assumption often is that the creator is being lied to.  And who’s to say that’s an unreasonable conclusion to jump to?  The question is–who is lying?  Here’s a tip–it’s probably not the publisher or label because they’re essentially in the same boat as the artist.

How Did We Ever Get Here?

Let me take you back to 1999.  Fish were jumpin’, the cotton was high, and limited partners showed up for capital calls.  Startups were starting up their engines–some to drive into a brick wall at scale, others to an IPO (and then into a brick wall at even greater scale).

On the Internet, you didn’t just do business with a company, they were your “partner.”  You didn’t just negotiate a commercial relationship with a behemoth Fortune 50 company that could crush you like a bug–in the utopian value system your little company “partnered” with AOL for example.  Or Intel.  Or later, Google.

What that meant for music licensing was that startups wanted rights owners to take the ride with them so if they made money, the rights owner made money.  Rights owners shared their revenue, you know, like a partner.  Except you only shared some of their revenue.  You weren’t really a partner and had no control over how they ran their business even if the only business they’d had previously run was a lemonade stand.

The revenue share deal was born.  To some people, it seemed like a good idea at the time.  And it might have been if there were relatively few participants in that revenue share.  But revenue share deals don’t scale very well.

Enter Professor Coase and His Pesky Theorem 

Here’s the basic flaw with revenue share deals:  Calculating the share of revenue for the entire catalog of licensed music on a global basis requires a large number of calculations.  For companies like Spotify, Apple or YouTube, calculating the share of revenue for millions of songs and recordings requires billions of calculations.

Free services like Spotify or YouTube involve billions of essentially unauditable calculations, all of which are based on a share of advertising revenue.  Advertising revenue which is itself essentially unauditable due to the nearly pathological level of secrecy that prevents any royalty participant from ever knowing what’s in the pie they are sharing.

That secrecy runs both upstream, downstream and across streams.  And as we all know, keeping secrets from your partner is the first step on the road to ruining a relationship.

But before you get too deep into nuances, let’s start with a basic problem with the entire revenue share approach.  In order to get to a per unit royalty, you have to multiply one dynamic number (the revenue) by another dynamic number (the usage).  Meaning that the thing being multiplied and the thing by which it is multiplied change from month to month.  The only constant in the formula is the actual percentage of the pie payable to the rights owner (50% in our example).

Remember–this all started with the digital service proposing that artists, songwriters, labels and publishers should take a share of what the service makes.  If you have a significant catalog, however, you do what you do with everyone who wants to license your catalog–you require the payment of a minimum guarantee as a prepayment of anticipated royalties (also called an “advance”).

So in our simple example, if the service is pitching that they will invest heavily in growth and make the catalog owner $50 over a two year contract, the catalog owner is justified in responding that however much confidence they have in the service, they’d like that $50 today and not a burger on Tuesday.  The service can apply the $50 minimum guarantee against the catalog’s earnings during the term of the contract, but if the minimum guarantee doesn’t earn out, the catalog owner keeps the change.  This shifts the credit or default risk from the catalog owner partner to the digital service partner (who actually controls the fate of the business).

But–given the complexity of the revenue share calculations, at least three questions arise:

Question: How will creators ever know if they are getting straight count from the service due to the complexity of the calculations?

Answer: The vast majority will never know.

Question:  How will anyone know if the advance ever recoups with any degree of certainty if they cannot verify the revenue pot they are to share?

Answer: The royalty receiver has to rely on statements based on effectively unverifiable information.

Question:  And most importantly, if streaming really is our future as industry leaders keep telling us, then which publisher wants to sign up for a lifetime of explaining the inexplicable to songwriters and artists who question their royalty statements?

Let’s Get Rid of Revenue Share Deals

There’s really no reason to keep this charade going any longer.  If the revenue share deal was converted to a penny rate, life would get so much easier and calculations would get so much simpler.  There would be arguments as always about what that penny rate ought to be.  Hostility levels might not go away entirely, but would probably lessen.

Transaction costs should go down substantially as there would be far fewer moving parts.  Realize that it’s entirely possible that the transaction costs of reporting royalties in revenue share deals (including  productivity loss and the cost of servicing songwriters and artists) likely exceeds the royalties paid.  My bet is that the costs vastly exceed the benefits.

And the people who really count the most in this business–the songwriters and artists–should have a lot more transparency.  Transparency that is essentially impossible with compulsory licenses.

Because when you take into account the total transaction costs, including all the correcting and noticing and calculating and explaining on the publisher and label side, and all the correcting and processing and calculating and messaging that has to be done on the service side, surely–surely–there has to be a simpler way.

 

You Know What’s Cool? ASCAP crosses the $1 billion line

Actually, $2 billion is cool.  ASCAP has hit over $1 billion in worldwide gross revenue for 2015, the second year in a row ASCAP exceed the $1 billion mark.  US gross came in at an all-time high of $716.8 million, and US royalty distributions to ASCAP members were up 6.2% year over year to $573.5 million, also a record high.

It’s particularly remarkable that ASCAP was able to deliver these returns to songwriters and publishers when PROs are hobbled by the near-compulsory licenses in the antediluvian consent decrees imposed on songwriters by the US government.  Given the expense of herding sheep, also known as the rate court cottage industry that drives rates in a race to the bottom and expenses up through the roof,  this is quite a remarkable accomplishment.  Not to mention the cost of hand holding the U.S. Department of Justice.

Songwriters with ex-US activity often get whipsawed by exchange rates when the dollar is strong, which isn’t something most people think about.  Given that ex-US collections were off for this and other reasons, it’s particularly comforting that ASCAP was able to offset those declines with an increase in US revenue.

For more on the consent decrees, listen to Larry Miller’s Musinomics podcast “Songwriters, Consent and the Age of Discontent“.

 

 

 

Musonomics Podcast: Songwriters, Consent and the Age of Discontent

I was honored to be included on an episode of the Musonomics podcast hosted by the brilliant Larry Miller of the NYU Steinhardt Music Business Program.  “Songwriters, Consent and the Age of Discontent” is a deeper dive into the state of the songwriter economy with songwriters Brett James and Ari Leff, ASCAP General Counsel Clara Kim, New Yorker writer John Seabrook and me.

You can subscribe to the podcast on iTunes (which I recommend as I think it’s in the top 3 music business podcasts) or listen to it on SoundCloud.