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Comments of Dr. Adam B. Jaffe on collective rights management – second part

The underlying source of the PROs’ and publishers unhappiness with the current performance royalty landscape seems to be that musical works performance royalties for non-interactive digital music services are much lower than the sound recording royalty rates for the same licensees. It is important to note in this context that this disparity results from an explicit decision by the CRB that sound recording performance royalties should not be tied to music composition performance royalties.

The available evidence from experience with the musical works performance royalty market itself suggests, to the contrary, that while Rate Courts exert downward pressure, performance royalties generally remain above the competitive level. First, in circumstances where licensees have been able to utilize direct (non-collective) licensing on a significant scale in a reasonably competitive marketplace in which individual rightsholders were competing against each other on the basis of price to have their works performed, the resulting prices have been well below the rates of collective licenses. That is, while the blanket license eliminates any possibility of competition for performances, this direct license regime effectuated competition.

Most antitrust enforcement actions emerge out of a particular set of market conditions at a point in time. In most markets, companies that manage to establish some kind of monopoly position can be expected to be unable to sustain any such dominance if prohibited from engaging in anticompetitive behavior for some period of time. But the market power associated with the collective pricing by the PROs is fundamentally different. It is not the result of a narrow or temporary set of circumstances – it is inherent in the licensing structure they have chosen to establish, and around which the industry has organized itself for decades.

Even though the copyright owner has an absolute monopoly on the right of performance in her work, the terms and conditions that are specified for the license of that right are subject to the forces of competition, at least to some degree. If the copyright owner (whether a composer writing new music or a publisher licensing previously-created works) sets the price too high, then the producer has the option of either substituting a different pre-existing work available on more favorable terms and conditions from a publisher or hiring a composer to create a new musical work for the contemplated program. Of course, if the producer is making a documentary about the Beatles, then it is unlikely to want to do so without using any Beatles music. If the producer is making a documentary about rock-and-roll in the 1960s, there are many different songs, available from a wide variety of copyright holders, that it could use. For local news broadcasts, there may be many composers available to write a news theme. Thus, competitive market forces would determine the market price for the right to broadcast each particular performance.

A typical audio-visual program embodies multiple creative or artistic inputs, such as a script, visual images, acting, and direction. Many of these artistic elements also involve copyright rights, and hence, diverse permissions are necessary to broadcast a television program (including copyright performance rights other than those for musical compositions). Generally, the producer of an audio-visual program or commercial obtains, and conveys to the broadcaster, all of the rights needed for the broadcast of the program – with the sole exception of the right to perform the musical compositions publicly. Indeed, the creation of audio-visual programs (including movies) or commercials already requires the program producer to interact with the owner or agent of any musical works used. Whether the music is specially composed for the program or not, incorporating it in an audio-visual recording requires the acquisition of the “synchronization” right for that musical work. This “sync” right is distinct from the performance right, but it is held by the same party that must grant the performance right. It is not obvious why also acquiring the closely related public performance right for the same musical composition at the same time would entail burdensome transaction costs.

Movies shown on broadcast media require the acquisition of the public performance rights for the music in those broadcasts, and under current practice those rights are typically secured by the broadcaster through one of the PROs. The right to perform the music in the movie on television could be secured by the movie producer at the time the movie is made. In the case of movies, the feasibility of this potential arrangement is dramatized by the fact that the movie theaters also need to secure the right for the public performance of the movie music in their venues – and this public performance right is, in fact, secured by the producer at the time of production and then conveyed to the theaters. Effectuating competition for broadcast performance rights in movies would require only adding the broadcast performance right to the theater venue performance right (and sync right) already secured by movie producers at the time of production.

The competitive market for the music performance rights in movie theaters was brought about in large measure by a private antitrust lawsuit. Operators of motion picture theatres challenged certain provisions of ASCAP’s by-laws which prevented ASCAP’s members from conveying music performance rights to movie producers, forcing theaters to take a blanket license for music performance rights which were not available from movie producers. A federal court concluded that ASCAP violated the antitrust laws and issued an injunction stopping ASCAP and its members from licensing music performance rights for performances in movie theaters to anyone but the movie producers. As a result, movie theaters do not need licenses to exhibit motion pictures; they pay for the music performances in their venues through the rental or other contracts they hold with movie distributors, and this compensation flows back through the distribution chain. Music creators and publishers are compensated for these performances as part of whatever contract they made with the movie producer.

The first question to analyze is the extent to which multiple withdrawn publishers might effectively compete against each other and the PROs in licensing music performance rights. For this to occur, it would have to be the case that the blanket license of one could substitute, at least to some degree, for the blanket license of the others. At a minimum, for broadcast licensees with limited or no control over the music they broadcast, this is not the case. In order to function, such a broadcaster must have a license to publicly perform music from the repertories of each of these organizations. The reason is that a blanket license from one publisher or PRO protects the station only against the possibility of infringement of that licensor’s compositions. Since so much of the broadcaster’s programming is pre-recorded, and they are responsible for the music performances in commercials and for programs for which they do not know the identity of the music and/ or are not contractually permitted to edit/replace the musical works embedded in the programming, it is not possible for such a broadcaster to limit its music performances to compositions licensed by a few publishers or PROs.

Publishers do not intend to use partial withdrawal to compete for share or to reduce costs, but rather they see it as a vehicle for using their market power to increase royalties. ASCAP agreed to grant the publishers the right of partial withdrawal at least in part because it anticipated that the publishers’ market power would allow them to extract higher royalties, and that those higher royalties could in turn be used as benchmarks to achieve higher royalties for other rightsholders. ASCAP did not even consider charging a lower price than that achieved by withdrawing publishers in order to drive greater volume of use of the repertory of remaining works licensable by ASCAP.