Nearly every sector of the recording industry has been outspoken about their desire to increase the royalty rates. Of late, the music publishers have been particularly active pressing their case in public and in Washington, D.C. Last week, representatives from the industry testified before Congress as part of an ongoing review of copyright laws being undertaken by the House Judiciary Committee.
The industry throws around terms like “free market”, “market rates” and “fair playing field.” These are of course buzzwords aimed at convincing Republicans to support the industry’s initiatives. However, if Congress is seeking equitable reforms that balance the rights of artists and publishers with those of distributors and others that use music, they must look past this rhetoric and examine some unavoidable realities about the music industry and market economics.
Unencumbered competition is the cornerstone of any free market. However no such competition exists when it comes to music licensing. Three major publishers hold the rights to nearly all musical compositions. These corporations then assign licensing authority to three Performance Rights Organizations (PRO) that functionally control 100 percent of all musical compositions. The catch is, these PRO’s won’t disclose exactly which musical compositions they each control. So, anyone seeking to license any one particular song, must buy a license for all songs from all three PRO’s to avoid crippling infringement fines.
Such a structure offers publishers and PRO’s absolute power in setting prices. The industry has repeatedly abused this power so egregiously that the government has deemed them a monopoly and the two largest PRO’s have been forced to operate under a consent decree since 1941. The consent decree gives the federal court authority to set rates using a pre-set formula when market negotiations break down--and the negotiations often break down.
Publishers would like Congress to believe that this consent decree is “outdated” and an unnecessary “handicap.” However the industry has sought to abuse their vast power as recently as 2013 when Pandora sought to renew its license with the American Society of Composers, Authors and Publishers (ASCAP). Sony attempted to withdraw ASCAP’s right to license digital streaming of its works and force Pandora into direct negotiations. With their current license about to expire, Pandora sought a list of Sony’s works so it could avoid any infringement. Sony refused, leaving Pandora with the Hobson’s choice of risking infringement, stop playing all music or paying whatever rate Sony was demanding. Due to the “outdated” consent decree, Pandora was able to successfully appeal to the federal courts which intervened and set rates for a new license.
Music publishers decried the rates as “below market”. Once again, due to the nature and structure of copyright laws, rates in the music industry aren’t actually set by the “market”. They are set by government entities which review specific economic and business data to determine what they believe the price might be if a real market existed.
Rates for performance royalties paid to artists by streaming music platforms are set by the Copyright Royalty Board (CRB) within the Library of Congress. The CRB has artificially driven up rates for streaming music. The CRB set rates would have required streaming platforms pay upwards of 90% of their total revenue in royalties had Congress not intervened and set rates at an approximately paltry 60% of revenue.
As in the Pandora case, rates for publishers are set by the courts using a preset formula when negotiations break down. However artists’ performance rates aren’t part of the calculation. When artists were being granted performance rights in the 1990’s the same publisher organizations now agitating for change feared the new royalty would drive down their rates. They successfully petitioned Congress to expressly forbid the courts from considering performance rates as a data point in the formula for determining their own rates.
Now, in the wake of the Pandora decision and in the face of rapidly escalating performance royalties for artists, the music publishers are pushing legislation to un-rig and re-rig the law they previously demanded. The bill, known as the Songwriter Equity Act (SEA), would require the courts to consider performance royalty rates as “market rates” in setting publishers rates. So in short, the SEA would use one rate artificially inflated by government to artificially inflate another and call them both “fair market value.”
But with the SEA the industry is not seeking a “free market.” Rather they are seeking a one way price increase on licensees which will prove fatal to the growing streaming music industry. Their efforts at casting off the consent decree certainly wouldn’t produce a “fair playing field”. Rather it would provide publishers the unchecked power to extort any price they wish without recourse as Sony attempted to do with Pandora.
Proper copyright law is directed at finding a balance between those that own content and those that use it for the purpose of promoting “the progress of science and the useful arts.” The music industry’s lobbying for special carve outs to perpetually avoid evolving with consumer demand is in large part responsible for the irrational and overly complex system currently in place.
The House Judiciary Committee’s attempt at comprehensive review is a long overdue opportunity to bring balance back to the system. Hopefully they will be able to look past the industry’s rhetoric and star-studded messengers to move forward with responsible, balanced reform.
Daniel Horowitz is an independent consultant specializing in public policy strategy, coalition building and development. He previously has served as staff in the U.S. House and Senate and as the presidential appointee in charge of policy at the U.S. Small Business Administration.
Vice President Joe Biden waits to conduct a mock swearing-in ceremony with Sen. Brian Schatz, D-Hawaii, in the Capitol's Old Senate Chamber, December 2, 2014. Schatz was sworn in to serve the remainder of his term since he was appointed to the seat after Sen. Daniel Inouye, D-Hawaii, passed away.