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Direct to Digital: How Sony/ATV's Deal with Pandora Affects the Music Business

From All Music Matters by Joel Goodman and Andrew DeWitt

What's The Big Deal?

On January 17th, 2013, news broke that Sony/ATV Music Publishing negotiated a one-year direct licensing agreement with internet radio service provider Pandora. Notably, the deal increases by 25% the amount of money Pandora will pay Sony/ATV for the public performance of its works.

A Brief Background

Until the end of 2012, Sony/ATV (which now also administers EMI Music Publishing's catalog following Sony Corp.'s acquisition of the assets last year) utilized ASCAP and BMI to license the digital rights to its catalog. Effective January 1, 2013 it has pulled these rights from both organizations' purview. "Why?" you might ask. Well, ASCAP and BMI are bound by consent decrees that substantially limit their ability to negotiate license rates. And representing a catalog of over 2.5 million works, Sony/ATV is currently the world's largest music publisher. Pandora needs Sony/ATV, plain and simple. So by going direct, Sony/ATV maintained considerable negotiating leverage while reducing their limitations (i.e. Sony/ATV is not bound by a consent decree or compulsory license rates). The short term benefits to the company were clear, and it did what it believed to be in the best interests of its songwriters and its bottom line. Says Martin Bandier, Chairman/CEO of Sony/ATV and board member of both ASCAP and NMPA, "This is an historic deal and positions our songwriters well. I am sure that other songwriters and publishers will make their own arrangements soon. For the first time ever, we were able to negotiate for something that doesn't have a compulsory license and we were free to use market conditions in our negotiations. That is truly monumental."

Looking Beyond

So what does this mean for the industry at large? How might this impact other publishers and other digital music service providers (DSPs)? What about ASCAP and BMI?

To start, other major publishers will surely see this as an opportunity to follow suit, not just with Pandora, but potentially with many other DSPs too. The precedent has been set, and most DSPs know that if they want to stay competitive, they need the big players on board.
What then for the smaller, independent publishers? While the majors may find less value in the collective bargaining offered by ASCAP and BMI, the indies rely heavily on the services of these PROs. They don't have the leverage (i.e. large catalogs) to negotiate equitable rates on their own, nor the resources to manage a portfolio of individual agreements with many DSPs. Likewise, most DSPs are surely not set up to take on negotiations with the thousands of independent music publishers out there.

Picturing PROs

So this then begs the question - can ASCAP and BMI effectively represent the independent publishing community should the majors all choose to go direct? Well, there are a few things to consider when addressing this question. The first is that, without the rights to the major publishing catalogs, ASCAP and BMI are at a negotiating disadvantage. They no longer represent everything that a DSP truly needs to effectively operate. It is also very possible that, if negotiations are taken to rate court (as they currently are between ASCAP and Pandora), the court will uphold the DSP's right to an Adjustable Fee Blanket (AFB) license from the PROs, which effectively means that the DSP can "carve out" the money they pay to their direct licensors (in this case, the majors) from the fees they pay to ASCAP and BMI.* This would mean less money for the PROs, and thus less money for independent publishers.

Stepping back, it's worth considering what history can teach us. Twenty-five years ago, cable television was a nascent form of media that paid dismally low performance royalty rates to the PROs, much like digital streaming sites today. But publishers stayed the course, leaving their rights in the hands of these organizations, trusting that the power of collective bargaining would pay off. And it did. Cable television is now one of the most significant revenue streams for the PROs, and thus for its publishers and songwriters. So we must ask - is a tendency towards direct licensing really good for the long term health of our industry? What becomes of an increasingly fragmented licensing environment? The PROs currently collect close to $2 billion each year. What happens to this money when catalogs start fending for themselves? Will the indies be hung out to dry? Will songwriters, who currently get 50% of all performance monies distributed by the PROs, receive less as they become subject to the potentially less favorable terms of their publishing deals?

On the flip side, direct deals executed by the majors could act as real world indicators of the fair market value of public performance rights. Thus it is also possible that, if negotiations between ASCAP/BMI and a DSP are taken to rate court (again, the current ASCAP/Pandora suit may provide the most immediate results), the judge may set a rate more favorable to the PROs, pointing to the existing and now higher major publisher deals for justification. As the majors continue to negotiate increasingly favorable rates directly, the independent community could benefit too.

Dancing with DSPs

Finally, we have the DSPs. Pandora in particular has been very public in its pursuit of lower royalties across the board, and it's hard to imagine other DSPs complaining if they succeed in any respect. But seeing Pandora agree to an increase in publishing royalties exemplifies the unique negotiating position that publishers (in particular the majors) have. Pandora operates by exploiting two basic copyrights - the public performance of songs and the public performance of recordings. The right to publicly perform sound recordings digitally is offered as a compulsory license, meaning that as long as a DSP pays the statutory rate set by the Copyright Royalty Board, they can perform any recording they like without having to engage the labels. But the right to perform compositions is controlled wholly by the copyright owner, meaning all usages must first be negotiated with the publisher. Considering that all sound recordings encompass an underlying composition, the publishers (in particular the majors) really hold the keys to the DSPs' cars.

Now consider that, until this deal, Pandora was only paying 4% of its revenues to songwriters and publishers, while it paid roughly 50% to artists and labels. "How could this be so lopsided, considering the publishers' negotiating position?" you might ask. Further, is a song's value really that different from and artist's performance? Well, as mentioned earlier, the consent decrees to which ASCAP and BMI are bound have greatly impaired their abilities to negotiate. But circumventing the PROs, as Sony/ATV has done, avoids this limitation. So why did Sony/ATV only ask for a 25% increase, bringing their effective royalty to 5%? That's a good question, but perhaps they're just testing the waters, waiting to see how things shake out from here. Says Bandier, "We only made the deal for one year so we can assess it then. But we are betting on the future with this deal. At the same time, the rate is reasonable for Pandora. We want Pandora to survive and thrive. The more people in the [digital] area, the better it is for all of us."

Will the other majors seek direct deals? If so, what rates will they set? Will Pandora succeed in reducing the statutory sound recording rate, or will the RIAA uphold these rates, and then some? What will come of Pandora's rate court suit against ASCAP? The Sony/ATV deal is only for 1 year, giving them the flexibility to react to the outcome of these events quickly. If sound recording rates are reduced, they can really turn up the heat on the DSPs. If not, they may need to get more creative. Ultimately, rights holders should want Pandora, and others like them, to succeed. They need effective distribution methods for their music, so they can't squeeze the DSPs too much. But artists and songwriters deserve to make a fair living too, and shouldn't suffer by the hand of politics or disproportionate market power. What's most important is finding that balance - between songwriters, publishers, artists, labels, majors, indies, PROs and DSPs. A well-balanced environment where everyone is able to thrive behooves us all.

*It's also interesting to note that in 2010, the court upheld a decision to allow the background music service provider DMX to exercise its right to an AFB license. The first publishing company to license direct to DMX, setting off the chain of events that led to this decision? Sony/ATV.

Update 02/04/13: UMPG has now signaled its intent to withdraw digital rights from both ASCAP and BMI, and BMG Chrysalis has negotiated this right, but not yet signaled its intent. Things are already starting to get more interesting.

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