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Netflix’ public comment on collective management rules review

Netflix has engaged in negotiations over license fees and terms with each of ASCAP and BMI in order to secure licenses for the public performance of copyrighted musical works embedded in the programming it transmits to viewers. Since the inception of its streaming service, Netflix has relied upon the ASCAP and BMI rules to secure interim licenses upon request pending the negotiation of final agreements with ASCAP and BMI. And Netflix has conducted its negotiations with ASCAP and BMI with the knowledge that, if negotiations reach an impasse, it can rely upon the provisions of the current rules providing for federal “Rate Court” jurisdiction over ASCAP and BMI to secure reasonable license fees and terms.

Pursuant to longstanding industry practice, Netflix has been responsible for obtaining licenses for the public performance of copyrighted musical works embodied in all of the programming it transmits. Most of such programming is not produced by Netflix; it is produced by third parties who select and incorporate the music (along with all other programming elements) into the programming. The producers and distributors of such programming obtain and license to Netflix all of the copyright and other rights necessary to transmit the programming (including those for creative inputs such as a script, choreography, acting, and directing), with the sole exception of the non-dramatic public performance rights to the copyrighted musical compositions embedded therein. Indeed, pursuant to standard distribution contracts for such third-party-produced programming, television exhibitors such as Netflix are prohibited from altering the musical content of the programming.

In light of this practice whereby musical work copyrights are licensed differently than all other copyrighted elements of movie and television programming, downstream television exhibitors like Netflix have had to procure the necessary public performance rights in the musical compositions contained in programming they obtain from third parties. Because they must do so after the music has already been irrevocably embedded in the programming, the music is already “in the can” and there is no meaningful opportunity for downstream exhibitors to negotiate with the composers or publishers of that music regarding its value. By contrast, were composers and publishers to negotiate with program producers regarding the value of their works at the time of music selection, real competitive negotiations could occur.

The current rules are just as critical today to constrain the market power of ASCAP and BMI, if not more so. The rules provide a number of protections to users. Core among them are: (i) the effective compulsory license provided for thereunder upon a user’s written application for a license; (ii) the right to secure a “reasonable” fee determination by the federal court in the event the user and ASCAP/BMI cannot reach a negotiated resolution; (iii) the right to obtain a “through to the audience” license covering all facets/platforms of distribution utilized by an originating service provider through to the end user; (iv) the requirement that ASCAP/BMI may only secure a non-exclusive grant of rights from its members, which enables users to secure direct licenses from individual ASCAP/BMI members outside of the PROs’ blanket licenses; and (v) the requirement that ASCAP/BMI offer alternative structures to the traditional “blanket” license, including a “per program” and “adjustable fee blanket license” (or “AFBL”), which structures can facilitate price-competitive direct license transactions.

While ASCAP and BMI have competed with each other for writer members and affiliates, respectively, this form of competition is not meaningful to users who effectively require licenses from both ASCAP and BMI –given that ASCAP’s and BMI’s huge repertories are mutually exclusive. Further, the non-exclusive licensing and alternative-to-blanket-license provisions ensure that rightsholders are free to transact directly with users and that licensees can seek to obtain rights directly from individual ASCAP/BMI members as an alternative to accepting ASCAP’s or BMI’s blanket license terms. As the Antitrust Division has noted, these provisions serve “to assure that music users have competitive alternatives to the blanket license, including direct and per-program licensing … ,” so as to provide such users with “important protections against supracompetitive pricing of the [PRO] blanket license …. “. Nor is there is any need to allow for partial withdrawals in order to enable such direct licensing transactions to occur.

ASCAP is prohibited from collectively licensing movie theatres for musical work performances associated with audiovisual content exhibited in theatres. As a consequence of this injunction, based on longstanding industry practice (to which BMI and its affiliates have conformed), writers and publishers typically negotiate with movie producers -in the same transaction and before production of a film is completed –regarding the value of both the synchronization rights and theatrical (i.e., movie theatre) public performance rights (as well as, in the case of score music written for a film, the compensation for the writer’s time and effort) associated with all the music contained in films to be released theatrically. The transaction costs associated with obtaining theatrical performance rights in this fashion appear to be negligible, since it is merely one incremental aspect of a negotiation that is already taking place. And the negotiations are conducted in an essentially price-competitive market given that, if a licensor seeks a price deemed excessive by the producer, the producer -before the music is embedded in the film -is able to substitute in favor of alternative music writers/publishers.

Critically, however, this injunctive provision applies only to movie theatre operators. As a result, writers and publishers overwhelmingly do not negotiate with producers of audiovisual content regarding (and do not grant to such producers) the right to publicly perform anywhere else the musical works embedded in audiovisual content -even for the exact same film that is initially released theatrically. As a consequence, uniquely for musical work performances, audiovisual content producers/distributors invariably exclude from the otherwise comprehensive copyright reps and warranties made to downstream exhibitors (such as Netflix) the right to publicly perform the musical compositions embodied in such content. So, for example, when Netflix enters into a motion picture supply agreement, the film distributor grants Netflix all rights in the licensed movies necessary for Netflix’s exhibition, except for musical work performance rights. Downstream exhibitors are then left to obtain these performance rights in a market that is devoid of price competition, as the music is already embedded in the audiovisual content they receive and such exhibitors lack the right and/or ability to remove/replace the music.

Industry practice is such that Netflix and other exhibitors have taken blanket licenses from the three U.S. PROs in a process that is far more inefficient than the process whereby the identical rights are licensed seamlessly (and in a price-competitive manner) for theatrical exhibition. These negotiations are expensive and can lead to ASCAP/BMI Rate Court litigation. While the goal of Rate Court litigation is to arrive at a court-determined rate that is equivalent to what would result from negotiations in a competitive market, both the substantial costs of litigation and the uncertainties inherent in court-determined approximations of what a competitive market would yield could be avoided entirely were the same musical work licensing practices applicable to theatrical performances of audiovisual content applied to all audiovisual content performances.

The PROs should be prohibited from advancing as benchmarks direct licenses entered within the first five years of a major publisher’s withdrawal from a PRO. And it is consistent with the reasons for the 5-year provision as initially adopted, i.e., to not allow PROs to generate benchmarks from a marketplace in transition, e.g., where there is a lack of licensing track record, or a new market in which licensees have generated little revenue (and therefore may have little incentive or ability to engage in Rate Court litigation concerning initial license rates expressed as a percentage of revenue), etc. PRO must require any withdrawing publisher to give at least one year’s notice to all existing PRO licensees and the PRO must publish a complete list of works subject to any such withdrawal, including data regarding co-owners. Such publication is necessary to enable users (if possible) to take down withdrawn works or otherwise take steps to address such withdrawals.

In many cases, a publisher does not own 100% of a work. The rules should clarify that works not 100%-owned by withdrawing publishers remain licensable from PROs without copyright infringement risk to licensees (so long as PROs are licensing on behalf of co-owners of those works). This is especially important given that an individual TV show or movie can have dozens (or more than 100) individual music cues, many of which can have multiple co-owners. The existing ASCAP and BMI song databases are fundamentally inadequate for users seeking to identify, for example, the songs licensable on a publisher-by-publisher or writer-by-writer basis. The PROs should be required to identify, with specificity, all the songs which they are able to license, searchable by publisher and writer, including information regarding co-ownership, along with (where available) corresponding performing artist and sound recording information.