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Music Choice’s public comment on collective management rules review

In evaluating the rhetoric and proposals advanced by the PROs, and music publishers, it is important to be mindful of the distinction between a “fair market” and a “free market”. The copyright owners use these terms interchangeably, yet these terms are not synonymous. At the most basic level, “free market” rates are the rates that a seller would obtain in an idealized market, free from any government intervention in the form of taxes, subsidies, or regulation.

“Fair market rates” are typically defined as rates that would be agreed to in an arms-length transaction in a workably competitive market between a willing buyer and a willing seller, each having reasonable knowledge of any relevant information and neither being under any compulsion to act.

In a truly competitive market, where neither party is compelled to act and both parties have adequate information, free market rates may be the same as, or close to, fair market rates. The market for blanket music copyright performance licenses, however, is unique and inherently devoid of competition. This is, in part, due to the bundling of thousands of individual copyrights in a blanket license. Moreover, no PRO’s blanket license is a substitute for any other PRO’s blanket license, and licenses covering the entire catalog from each of (at least) the major music publishers are necessary for a music service to avoid massive infringement liability.

Moreover, overall music publishing industry revenues have increased from $3.9 billion in 2011 to approximately $4.2 billion in 2013, and by 2017 those revenues are projected to increase to approximately $4.4 billion, according to independent market research. If music publishing revenues are stable, or even increasing, yet songwriters claim that their revenues are sharply decreasing, either the songwriters are wrong or the music publishers and PROs are falling to pass along the songwriters’ proper shares.

Music publishers’ and songwriters’ second premise, that the consent decree rate courts have imposed rates below fair market value, is also false. ASCAP and BMI have had several different opportunities, in several different rate cases, to prove (if they could) that the higher rates they desire were consistent with fair market value. Time and time again, before two different, neutral, sophisticated federal district court judges, the PROs failed their burden of proof. There can be no question that the current rates have been fairly determined to be fair market rates. The real grievance of the music publishers and songwriters is that they are not happy with the results of these cases. Of course, a seller would always prefer to be paid more than fair market value for their goods or services.

Indeed, to the extent that music publishers and songwriters have not done as well as they would have liked in recent years, the causes of any such underperformance have nothing to do with performance royalties, but instead have been driven by a large number of unrelated factors, such as the recent extended recession (which affected everyone, including Music Choice) as well as changing music consumer dynamics. With less disposable income, it is natural that consumers would buy less music.

In Music Choices experience, both ASCAP and BMI always take the position that rates should significantly increase. The burden of rate court litigation is felt far more severely by a single licensee (especially a small company like Music Choice) than by large businesses like ASCAP or BMI, which can fund rate court proceedings out of license revenue streams and can spread that burden among a large number of constituents. If the PROs were given the power to unilaterally set interim rates, Music Choice would be under extreme pressure to accept unreasonable rate increases merely to avoid the cost of litigation.

As with their “fair market value” argument, the PROs seek to misrepresent the results of rate court proceedings. Neither ASCAP nor BMI has been able to prove that the rates set at the source of music programming do not adequately capture the value of the ultimate performance to the audience. The requirement of granting through-to-the-audience licenses must not be abandoned. Nor should the Consent Decrees be subject to any sunset provisions.

Major publishers in direct blanket licenses are effectively the same as PROs because each one (like each PRO) has aggregated from the original copyright owners (the songwriters) and controls a large enough catalog to render its blanket license necessary to a programmed music performance service like Music Choice, and most publishers (also like the PROs) administer licenses for many songs that they do not actually own.

The major publishers should also be subject to conduct-regulating consent decrees (or other form of regulatory oversight) if they were to withdraw their catalogs from any regulated PRO. The safeguards of the Consent Decrees against anti-competitive conduct would be wholly undermined if publishers were permitted to selectively withdraw performance rights from the PROs for some music licensees but not others.

Rate court proceedings have decades of precedent and, therefore, have predictability. In ASCAP and BMI rate court proceedings, the governing standard is a reasonableness standard, which has been construed by the District Court for the Southern District of New York and explained by the Second Circuit Court of Appeals. The cases proceed under a uniform set of rules familiar to all counsel – the Federal Rules of Civil Procedure and Evidence.

Eliminating the rate courts in favor of private arbitration would sacrifice this history and predictability. The use of federal judges to decide rate cases is also far preferable to the use of private mediators. Moreover, any private mediator with relevant music industry experience would necessarily have represented either music copyright owners or licensees (but not both). The nature of this experience would tend to undermine at least the appearance of impartiality necessary to a fair and reliable adjudication.

The Consent Decrees were designed to implement protections to help mitigate the extraordinary market power obtained by the PROs from the aggregation of performance rights alone. Allowing PROs to aggregate even more rights would grant them even more market power.