Pandora has been hit with a copyright infringement lawsuit by major record labels, according to The New York Times. The labels contend that the music streaming service must pay license fees for songs recorded before 1972.
The suit was filed in New York state court by Sony, Warner, and Universal, according to the Times. The labels argue that even though older songs, like James Brown's "I Got You" and the Beatles' "Hey Jude," aren't protected under federal copyright law -- they are covered by state laws.
The record labels claim they lose millions of dollars yearly from Pandora, other streaming music services, and satellite radio companies for playing older songs. Many of these songs are played on streaming stations like "Golden Oldies" and "50s Rock 'n' Roll," and the labels say they should get royalties for these pre-1972 songs.
Yet, this is a part of a much bigger fight that at times seems like toddlers fighting in the sandbox.
Internet-based music platforms are legitimate businesses now, but tensions between the music establishment and new media remain as bitter as ever. They came to a head in the courts last month in a fascinating case between Pandora Media, now America’s biggest internet radio company, and the 100-year-old American Society of Composers, Authors and Publishers (ASCAP.) It concerned the arcane issue of music publishing royalties, and uncovered some questionable behavior.
ASCAP is one of two main “publishing rights organizations” that act on behalf of songwriters to collect royalties from radio stations, movie studios, and technically speaking, anyone else (such as bars and restaurants) who plays music in public.
Pandora had been seeking to lower the amount it pays to publishers in royalties to be in line with that paid by terrestrial radio stations — 1.7% of gross annual revenue. Pandora’s argument was that its service is radio-like: Yes, you can personalize what you listen to, but you cannot play songs on demand, at your will, or offline. ASCAP had been seeking to increase rates to as high as 3% of Pandora’s gross revenue, citing the much higher rates paid by other digital services, such as Spotify. The court ended up ruling last month that the rate would stay unchanged at 1.85%.
But the tactics used by the music industry against Pandora were the really interesting part.
Before we go any further, a quick explanation of how the mind-bendingly complex world of music royalties actually work is required.
Under a “consent decree” issued by the Justice Department in 1941, ASCAP and the other main publishing royalty organization, BMI, which together control about 90% of all commercially available recorded music, are obliged to grant blanket licenses to anyone (mainly radio stations) requesting them. When a fee can’t be agreed, a rate-setting court decides the percentage amount of royalties these license holders pay in exchange.
This arrangement makes it logistically possible for the radio business to exist—a station effectively only needs to deal with two companies, rather than millions of artists, composers, and publishers, to get access to a vast array of music. And songwriters don’t have to spend time worrying about negotiating or policing the licenses for their work.
Unlike old-fashioned radio companies, internet-based services like Pandora are also required to pay separate performance royalties, which go to record companies, and then performing artists. In fact, this is Pandora’s single biggest cost. It paid out 49% of its revenue last year in performance royalties, compared to 4% in publishing royalties, which go to publishing companies, and eventually songwriters.
The ownership structures behind recorded music are notoriously opaque. And the fine for playing a single song publicly without a license can be as high as $150,000. Which is why its so important to be have the relevant licenses with ASCAP (and the other publishing royalty organizations) in place.
Pandora’s experimental fee accord with ASCAP expired at the end of 2010. In October of that year, it applied for the same kind of blanket license used by radio stations. But ASCAP resisted. It was under pressure to get its members a better rate, and to close the gap with the royalties recording artists get (remember, Pandora pays out about 49% of its revenue in recording artist royalties).
Spotify, which is reportedly part owned by record companies (asked by Quartz to confirm, a spokesman declined to comment) pays 10.5% of its revenue in publishing royalties. Its service—which is almost, but not quite, music ownership—is different from Pandora’s in letting you play songs offline and on demand. Apple also recently agreed to pay 10% publishing royalties for its radio platform, but that business is very much ancillary to its electronic devices business.
In November 2012, Pandora commenced legal action to get the dispute with ASCAP resolved. And the evidence in the ensuing trial revealed the extraordinary pressure being placed on it. In her decision, US judge Denise Cote outlined (p. 97) “troubling coordination” between ASCAP and two of the world’s biggest publishing companies, Sony and Universal Media Publishing Group, against Pandora, that “implicates a core antitrust concern.”
Emails between Universal’s president Zach Horowitz and ASCAP’s CEO John LoFromento show that pressure had been placed on Pandora’s legal counsel not to represent the firm in the suit. Horowitz (p. 57) also urged LoFromento to “be strong,” describing Pandora as “scared.”
Pandora is now under intense pressure to settle with ASCAP. They have to put this behind them. You can really push Pandora and get a much better settlement as a result. They are reeling. They will pay more, a lot more than they originally intended, to do that.+
In the months leading up to the case, Sony, which has the largest music catalog, withdrew its digital rights from ASCAP, intending to negotiate with Pandora directly in order to get a higher rate. If Pandora were unable to agree terms with Sony, it would be unable to play large swathes of its music library legally, or be liable for significant fines if it inadvertently did.
Mindful of this fact, Pandora in early November 2012 requested from both Sony and ASCAP a list of Sony tracks available for license so it could remove them from its service. According to the court documents, it reiterated the request throughout the month. Yet the information was not forthcoming, and the court papers indicate (p68) that this was part of a concerted strategy.
ASCAP personnel shared their amusement with each other over Sony’s decision to withhold the list from Pandora. In one email, [ASCAP executive Matthew] DeFilippis asked ASCAP’s counsel Richard Reimer “Why didn’t Sony provide the list to Pandora,” to which Reimer replied “Ask me tomorrow,” to which DeFilippis responded “Right. With drink in hand.”+
According to the ruling (p66), Sony “quite deliberately” withheld this information to weaken Pandora’s hand in the negotiations. By December 18, with fewer than two weeks left in the year, Pandora agreed to a one-year deal with Sony at a rate that would see its total publishing royalty costs increase by 25% to 5% of its revenue.
A couple of months later, Universal also withdrew its digital rights from ASCAP, seeking a similar outcome. In negotiations with Pandora it sought a rate that would push Pandora’s overall publishing royalty costs up to 8%—double what they had been only months earlier. Despite a confidentiality agreement around its deal with Pandora, “Sony made sure that UMPG [Universal] learned all of the critical terms” of its agreement, the court papers show. It was a move that would give Universal an even stronger hand in negotiations.
“Sony and UMPG each exercised their considerable market power to extract supra-competitive prices,” Judge Cote wrote in her ruling (p. 97.)
Fight for your rights
ASCAP denies that it was involved in any “troubling,” coordinated behavior against Pandora. “We respectfully and strongly disagree with the judge’s findings and conclusions on that issue,” an ASCAP spokesperson said in an emailed statement. Sony and Universal did not respond to requests for comment.
But it is clear that this fight is far from over. The publishing industry wants the consent decree abolished. In the music industry’s favor, it is difficult to think of any other form of media that must be sold to anyone requesting it.
“The Pandora rate court decision preserves a status quo that is unacceptable for songwriters and composers, thousands of whom depend on ASCAP royalties for their livelihoods,” ASCAP said. “As streaming has grown in popularity, so has the value of music on streaming services. Recent agreements negotiated without the artificial constraints of a consent decree make clear that the market rate for Internet radio is higher than 1.85%,”
Paul Fakler, a copyright lawyer and partner with New York based Arent Fox, who was not involved in the case, says that its highly unlikely that Judge Cote’s ruling will be overturned on appeal. “I think there is no question” of “troubling coordination” he says. “I don’t know how one could come to any other conclusion.”
To get the 73-year-old consent decree overturned, the music industry needs to lobby the Justice Department directly, or less plausibly, get legislation through Congress. “It would be a disaster for the music industry” if the consent decree is abolished, Fakler explains, arguing that if there were no rate court, publishing companies could demand increases and licensees would have no choice but to agree. “The entire digital music space would die, if suddenly you had no supervision over these licenses. Because if the consent decrees are gone, then they are gone for everyone,” he says.
The recent court decision means that publishing companies are either in ASCAP, or out. They can’t opt out of the organization only for digital rights. If they are out, it means they would need to use their own resources to complete the onerous task of collecting royalties from millions of bars, restaurants, and radio stations. It remains a possibility.
http://qz.com/197344/pandora-and-the-music-industry/ (much more here)
We recently saw a big win in the book rate category for Amazon under digital content for Apple price-fixing.
Given such factors are we headed to another point where this must be decided and do you think it will side in such as way as the ebooks were decided or will they just lock the courts up in these other schemes? Why do you think Pandora and other streaming is such a threat?