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Voices


There is a push by a small group within the music-licensing industry that threatens to end any hope of a viable streaming digital music marketplace.

Last Tuesday, a subcommittee of the House Judiciary Committee held a hearing to begin a formal review of the music-licensing system. If Congress follows its usual record of caving to entrenched industries, we can anticipate the end of subscription online music services, and look forward to a future limited to royalty-crippled “Internet Radio.”

You may ask why the House and Senate — which have agreed on so little these past few years — would agree to stifle an industry struggling to achieve profitability. So should we all.

In March, David Pakman wrote a detailed analysis of the inherent conflict within the existing system in which streaming music services find themselves crushed by the inflexible (and mathematically challenged) royalty system. More recently, Spotify’s recent round of investment has been aptly termed a “transfer of wealth,” as the funding was simply seen by analysts as an immediate ability to approach the Hollywood licensing conglomerates in an honest effort to appease the licensing trolls.

And yet, rather than seize another opportunity to encourage partners in the development of a new, viable and sustainable mobile-distribution system, some of the music licensing organizations are once again actually doing the opposite. While the performance rights organizations (PROs) have been negotiating in LA, they have given their cadre of lobbyists in Washington orders to do otherwise.

The lobbyists for the performing-rights organizations (ASCAP, SESAC and BMI) have quietly demanded that their Congressional allies exact a hard price for support of any reform of copyright law. The mislabeled and disingenuous name of this vehicle is the Songwriter Equity Act — as if writers of songs are not paid throughout the entire music-making and distribution process.

But in an act even more stunningly kept quiet, these same lobbyists have simultaneously succeeded in convincing the U.S. Department of Justice to reopen the consent decree limiting the behavior of ASCAP and BMI, a decree made necessary after a history of intractable behavior violating antitrust law and stifling artistic freedom, entrepreneurial initiative and commercial competition.

The music-licensing organizations continue to keep their heads firmly stuck in the sands of the 20th century. Digital disruption has continuously hammered the business of music production and distribution since the early 1990s. Tower Records (remember the CD music “superstore”?) no longer exists. By the recording industry’s own records, sales of physical CDs have plummeted from the 1999 market cap of more than $18 billion to less than $4 billion.

And yet, despite several court decisions (U.S. v. ASCAP), royalty rates established by the Copyright Royalty Board, and general public distrust of their efforts, the PRO lobbyists continue to fight for more largesse from their congressional allies.

The transition from CDs to digital was traumatic for the music industry, but the licensing organizations seem oblivious to the fact that an ever more dynamic transition has occurred since iTunes dragged the ordinary consumer into the digital music marketplace. The redirect from desktop to a mobile-oriented marketplace is causing consumers to demand even more innovation and flexibility. This shift — which we in the app-centric mobile world have been living — has not made an appreciable dent in the approach by these same licensing organizations, who are doing almost the same business as when they were founded nearly 100 years ago.

The facts are indisputable and hard to ignore. Despite reaching more than 10 million paid subscribers and 30 million more users of their free services, Spotify cannot marginalize costs and come any closer to profit. Despite reportedly reaching more than 150 million users in 2012, Pandora also continues to operate in the red and faces similar cost constraints. The list goes on and on.

The Copyright Royalty Board (CRB) and its federally appointed judges determine the rate of royalties based on economic data and factual testimony; as the streaming music system matures, it is inevitable that the CRB will further adjust the rate — and it will not likely be in the direction preferred by the PROs.

Unsatisfied by the current regime, stymied by the federal courts, the PROs have been complaining to hometown members of the House and Senate. They are petitioning the Department of Justice to do what neither Congress nor the courts have determined to be appropriate.

The Washington lobbyists simply believe that the streaming music services are operating incorrectly. Their suggestions are limited to “put in more ads” — even to the paid services for which consumers are already paying a monthly subscription.

These royalty groups — which specialize in collecting royalties from small businesses playing music in the background while customers shop — refuse to understand the dynamics of a rapidly changing digital and mobile marketplace. Rather than negotiating a new, freely adjusting percentage of revenue, or (heavens!) simply allowing the marketplace to function within the current royalty rates as determined by the Copyright Royalty Board, the music-licensing lobbyists are attempting to push Congress to rewrite the entire royalty system — just to suit their own needs, not even at the behest of the major music labels.

This push is not based on any evidence of wrongdoing or malfeasance by the streaming music services, but merely the principle of “I want.” Like a 2-year-old who demands a lollipop but is unable to explain any reason why he should get it, ASCAP, SESAC and BMI are bleating to Congress — demanding change to the underlying law governing the licensing of music works, otherwise known as The Copyright Act.

I hope they are careful what they wish for, for change is what they may well get.

Daniel Horowitz is an advocacy adviser specializing in policy strategy, coalition building and development. He previously has served on the staff of both Republican and Democratic members of the U.S. House and Senate, and as the presidential appointee in charge of policy at the U.S. Small Business Administration.



6 comments
Joel Goodman
Joel Goodman

Unfortunately this article confuses various aspects of the music business in such an incomprehensible way that it is useless. This is unfortunate because at this time we need more clarity. It's ok to have different opinions and pov's - but at least be clear about what you're talking about. 


Jerry and Seth below are right and make some good points. I'd like to clarify a few points. First - PRO's have not outlived their usefulness by any stretch of the imagination. The PRO's, collectively bargain obo songwriters and publishers in most countries of the world for fair payment for the public performance of music. They serve a very important function. 


Please note that the vast majority of income to the PRO's comes from broadcast television, cable TV and terrestrial radio. The money received from stores, bars and restaurants is very small. Also - currently new media, internet etc. (which includes Pandora, YouTube, Apple, Netflix, Hulu et al) ... makes up only 6% of the total income to PRO's.


The Songwriter Equity Act is very important. One of the issues it is looking to update is the mechanical rate for record sales. (This may be the fly in our authors ointment). Originally dating back to the 1909 Copyright Act this rate, adjusted for inflation today should be about $.47 per song. Instead it is $.091. My plumber get's better raises!


There are many laws, including the consent decrees that don't take modern technology or how the business has changed into account and these laws need to be updated. The consent decree and the copyright law have not been updated since before the iPod was introduced.



rheiblim
rheiblim

It is completely true that the structure of the music industry has changed, so why is it strange that writers and publishers also wish to update rulings from near 70 years ago? Disruption is often wonderful, but the disruptors also should not get a free ride on others. Streaming music is here to stay, but how it will be paid for may well also need evolution.

Jerry Davenport
Jerry Davenport

I agree with Seth, this is highly confusing but I think it is intentional as the writer of this blog is a lobbyist and from the sound of this blog he's writing on behalf of the RIAA.

There is no legitimate argument for not addressing the archaic consent decrees that PRO's and songwriters are subjected to when licensing performance rights.Archaic because these consent decrees were originally entered in 1941 when there were no digital streaming services.

The problem with this blog is that it fails to address the known fact that record labels negotiate market rates for their sound recordings.

Publishers and songwriters cannot negotiate a market rate since they are held by the consent decrees of 1941.

Seventy-five percent of the income for songwriters and publishers is regulated by outdated laws and antiquated government oversight, which as for too long resulted in devalued intellectual property rights and undervalued royalty rates. In 2012, five well-known songs had been streamed on Pandora more than 33 MILLION times in the first quarter.In return for the use of their works those writers and their publishers collectively received a mere $2,033.00.

These lobbyists will have you believe that allowing songwriters to negotiate a market rate will kill digital streaming services but this is unfounded and quite honestly a scare tactic.The Songwriter Equity Act is not mislabeled and far from disingenuous.In considering how much these digital streaming companies make from subscriptions and ad revenue, they will be able to pay a fair market rate for these songs.Isn’t that the basis of their business, playing songs?If you were to look at it in other terms, they are paying way below the minimum wage and are subjecting songwriters to indentured servitude.

Seth Keller
Seth Keller

As a music biz guy, I'm probably the only one reading this who cares, but this editorial confuses the issue. It's conflating master royalties (what the owners of the recordings--typically record labels--collect for themselves and artists), performance royalties (what the PROs collect on behalf of songwriters and publishers) and mechanical royalties (what publishers collect for themselves and songwriters).  


Whether this confusion is intentional or not, only Daniel knows.  Right now there's even debate within the music industry as to whether PROs have outlived their usefulness.  They may not even be around in the future.  Their main function contrary to this piece is to collect royalties for commercial radio airplay for publishers and songwriters. Although they do issue licenses to establishments that play music while people shop, that's kind of down the list of priorities for most of the folks who earn money from performance licenses.


PROs asking for more money is not going end streaming services. Songwriters and publishers get paid a fraction of what master recording owners (ie, record labels) get paid. That's the main issue. Publishers and PROs are looking for a fairer share--something closer to what master owners are getting.


The main reason Spotify and Pandora (which are two different types of streaming services) are not profitable is the upfront licensing fees they agreed to pay to record labels. 


Daniel, you may or may understand all the different licenses and parties involved; but if you do, it would be great for you to write a follow up clearly outlining the complexities of the issue because I think your finger is pointed at the wrong entities.

yngruffian
yngruffian

@Seth Keller seconded. 


I also find the authors sentiments that the lobbying parties from various rights societies to be no more than infantile, bleating lambs to be incredibly misguided. Your guise that this is not at the behest of the major labels is spot on, however you are completely off base if you think this serves only the reps associated with ASCAP, BMI etc. 


This is 100% about protecting the songwriter and the publisher which most of these streaming services are being forced to acknowledge. 

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