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ASCAP’ public comment on collective management rules review

The marketplace for music is changing dramatically. New technologies are transforming the way people listen to music, substantially altering the economics of the music business, particularly for songwriters and composers. Streaming music through services such as Pandora, Spotify and iTunes Radio is quickly surpassing physical music sales and digital downloads in popularity. Digital audio-visual services such as Netflix and Amazon are revolutionizing the ways in which the world watches television and movies, changing the traditional media landscape.

Music is now enjoyed by more people, in more places and over more devices. But the regulatory regime that governs how public performances are licensed has failed to keep pace. These developments in the marketplace have shown that the current rules are inadequate in a number of ways and needs to be modified. First, they have been recently interpreted by the court to prohibit ASCAP from accepting partial grants of rights from its members, creating a situation that restricts ASCAP members’ ability to enter into direct licenses through “arms’ length” transactions at true market value. This, in turn, may ultimately compel major music publishers to withdraw from ASCAP altogether and place the viability of collective licensing at risk.

Second, court proceedings have become extremely time-consuming and labor-intensive, costing the parties millions in litigation expenses. Due to the absence of clear guidance, court proceedings have resulted in license rates that many believe do not reflect the rates that would be negotiated in competitive market negotiations and, thus, do not reflect the true value of the rights at issue. Finally, ASCAP is prohibited from licensing rights in music compositions other than public performance rights – such as synchronization rights and mechanical rights – while its competitors (such as SESAC and Global Music Rights), as well as BMI, are free to license such rights.

Although the methods through which ASCAP licenses music on behalf of its members are, in most instances, technology-neutral, ASCAP has recently experienced a number of complications in its negotiations with “new media” music services – services that perform music over the Internet or wireless networks, and that typically play far more music than traditional media licensees. More choice and greater consumer control has led to vastly increased music usage, as new music services like Pandora, iTunes Radio and Spotify (to name a few) require access to a massive variety of songs in order to provide users with an optimally tailored content consumption experience. These services perform virtually wall-to-wall music for their users with limited commercial interruptions, and provide each user with a personalized stream, using music with much greater intensity than traditional broadcast platforms. This tectonic shift in the technological landscape has presented a variety of significant challenges for ASCAP, as it struggles to adapt to changes in the marketplace.

Specifically, because ASCAP licenses are compulsory and fees can be set retroactively, certain music users have strategically delayed or extended the negotiating process, choosing to remain applicants or interim licensees indefinitely – in some cases a decade or longer – without paying fees to ASCAP or providing ASCAP with the information necessary to determine a reasonable final fee.

In some cases, established music users have decided that interim license rates are more favourable than anticipated rate increases, and have made strategic choices to stay on interim terms until ASCAP determines it must commence an expensive Rate Court proceeding. Until final fees are negotiated or set by the court, ASCAP and a license applicant may enter into an “interim” license as a placeholder. In such cases, however, “interim” fees are set only by mutual agreement or court determination, and still do not represent actual value.

In the case of new services without a history of licensing with ASCAP – particularly new digital services that have failed to earn revenues – interim fees are often contested, allowing such users the benefit of access to ASCAP’s millions of songs without paying any fee. Even where an interim fee is paid, it is often at less than full value. When such interim fees continue for a period, ASCAP risks such applicants exiting the marketplace, whether due to bankruptcy, dissolution or otherwise, leaving ASCAP with an inability to set final fees and true-up any fee balance.

In other cases, new applicants have applied for a license – claiming a right to perform ASCAP members’ music while an application is pending – while simultaneously disclaiming the need for such a license and refusing to provide the information necessary for ASCAP to formulate a fee proposal. In the scenarios above, ASCAP must decide whether to use its limited resources to pursue a lengthy and arduous rate court proceeding, or, alternatively, accept what it may believe is a below-market rate and permit users to remain as applicants or interim licensees longer than would be preferred.

The problems with the current ASCAP rate-setting process, and the inability of ASCAP to offer multiple rights in music compositions to music users, have fuelled a new interest on the part of owners of copyrights in musical works to license their works directly to certain users or categories of users on an exclusive basis. The ability to enter into such direct licenses with music users has taken on new importance in recent years for a number of reasons.

First, many ASCAP members have become concerned that licensing their compositions through ASCAP does not allow them to realize the true market value of their copyrights, particularly with respect to the use of their works by streaming music services. Second, some ASCAP publisher members have expressed an interest in licensing their public performance rights together with other rights when appropriate. Finally, some ASCAP publisher members want increased flexibility to manage their own rights and negotiate contractual terms directly with particular music users.

For example, music publishers might negotiate shorter term licenses agreements or agree to compensation in a form other than monetary royalties-such as equity shares or promotional initiatives. For these reasons, among others, certain members began in late 2010 to contemplate withdrawing from ASCAP altogether. To address these members’ concerns, ASCAP modified its rules in 2011 to permit members to modify their membership agreements (instead of terminating them completely) and withdraw from ASCAP only the right to license new media services, leaving with ASCAP the right to license all other music users (e.g., television and radio stations, bars and restaurants), which ASCAP has long effectively licensed and which would be more difficult for music creators to license individually.

Three major music publishers subsequently withdrew their new media rights from ASCAP – EMI Music Publishing, Sony/ATV Music Publishing and Universal Music Publishing Group. Each then entered into direct licenses with a number of new media users, including Pandora and Apple. For essentially the first time, the music publishers negotiated direct licenses on a “willing buyer-willing seller” basis with music users.

Without changes ASCAP may face the complete resignation of certain of its largest music publisher members, a result that could be as damaging for music users as it could be for ASCAP and its remaining members. Without a robust collective licensing system, the increased cost of having to negotiate licenses with hundreds of thousands of individual copyright owners would likely be passed on to consumers and stymie the growth of innovative new services that would benefit consumer choice and experience.

ASCAP proposes a number of changes to reflect the realities of the modern music marketplace and which would result in more efficient and effective collective licensing, including: (1) allowing ASCAP to accept partial grants of rights from its members; (2) shifting to rate-setting through expedited private arbitration and establishing an evidentiary presumption that direct non-compulsory licenses voluntarily negotiated by copyright holders for rights not granted to a PRO provide the best evidence of reasonable rates; and (3) allowing ASCAP to license multiple rights in music compositions. ASCAP also proposes to (i) remove the restrictions on ASCAP’s foreign conduct; (ii) give ASCAP the ability to refuse to admit to membership songwriters or music publishers under certain circumstances (which it currently is unable to do).

ASCAP also proposes to implement an expedited arbitration process for the resolution of disputes over rates and other terms. The proposed arbitration process would include a streamlined schedule for an applicant to provide necessary information to ASCAP, for ASCAP to quote a rate, and (if the parties are unable to agree on a rate) for the parties to commence and complete arbitration in an expedited fashion, thereby eliminating the need for – and uncertainty surrounding – interim licenses.

In connection with the proposed expedited arbitration process, ASCAP also proposes establishing a presumption that rates and other financial terms of direct licenses agreed upon by music users and copyright owners independently of the rate-setting process are the best benchmarks for setting ASCAP’s rates. These proposed modifications would achieve several important objectives. First, they would replace the current rate court process, which has become unduly costly and time consuming.

Second, they would substantially reduce (perhaps to zero) the number of licensees on non-final “interim” licenses, as well as users who publicly perform the ASCAP repertory for years without any license in place. Third, by establishing a presumption that direct licenses between willing buyers and willing sellers are the best benchmarks for determining the ASCAP rate, these modifications should result in rates and other terms that accurately reflect the true market value of public performance rights in musical compositions.

The last two years, however, have seen an increase in the number of direct licenses negotiated between music publishers and music users. These direct licenses provide “economic data that may be readily translated into a measure of competitive pricing” in the market for public performance rights. Indeed, courts have already recognized the value of such benchmarks to the rate-setting process, acknowledging that direct licenses provide evidence of the true market value of public performance rights in a competitive market rather than a “hypothetical” value determined by the Rate Court.

The use of compulsory license benchmarks rather than competitive market benchmarks may also result in very different rates for similarly situated music services, depending on whether the service entered into direct licenses with music publishers, negotiated a rate with a PRO outside of Rate Court, or applied to have a rate set by the court. Composers’ and songwriters’ compensation, in turn, will vary depending on whether their music publishers engage in direct licensing or license their music through a PRO.