Modernizing music licensing

The typical consumer likely can't name a product for which the federal government sets the price -- let alone under a regulatory regime that dates back to the early 20th century. But so it is with music. The price to reproduce, distribute or perform a song publicly is not negotiated in the free market but set by the U.S. government.

The anomalous treatment of music is not lost on music creators -- perhaps most famously Taylor Swift -- who complain of dramatically reduced royalty payments in the streaming area, and the depressing effect (economic and otherwise) of government regulation. And in recent years, at least, it has come to the attention of the government itself. In 2015, the U.S. Copyright Office released a comprehensive study, Copyright and the Music Marketplace, which depicted an antiquated and inconsistent music licensing system struggling to keep up with the digital age, and recommended change. Parts of the U.S. regime date back to the days of player pianos; in 1909, seeking to forestall monopoly in the piano roll market, Congress enacted a compulsory license for the "mechanical" reproduction and distribution of musical works. Anyone seeking to reproduce and distribute a particular song could obtain a license to do so in exchange for payment of 2 cents for each copy made. The compulsory license -- which has since spanned vinyl, cassette tapes, CDs and downloads -- survives to this day. But the rate hasn't kept up with 100 years of inflation; it now stands at 9.1 cents per for a physical copy or download, with streaming calculated in the micro-pennies.

Late last year Congress, heeding the pleas of songwriters and the music publishers who license their works, as well as Spotify other digital services faced with the challenge of obtaining millions of individual song licenses, passed the Music Modernization Act. The MMA is a major update to music licensing laws that, among other reforms, creates a new blanket license for streaming services. These services will now be able to obtain permission to use all available songs simply by filing a single notice with a centralized collective that songwriters and publishers will be running -- and the licensees will be funding. While the legislation does not end government regulation of rates (digital providers would not have supported such a bill), it improves the ratesetting standard to be applied by the Copyright Royalty Board, the entity that determines the rates for the reproduction and distribution of songs under the compulsory license. Instead of looking to non-market-based criteria, the board must now set royalty rates at what a willing buyer and willing seller would agree to in the marketplace.

In addition to the right to reproduce and distribute musical works in both physical and digital formats, copyright law guarantees musical work owners the exclusive right to perform their works publicly, and to authorize others to do so. But how is this right administered, given the countless venues in which music is played? In the first half of the 20th century, two organizations, ASCAP and BMI, came into existence to solve this problem. These performing rights organizations (or PROs) offered licenses to dance halls, restaurants and other establishments, as well as to radio stations, allowing such entities to play all of the songs the PRO represented in exchange for payment of a licensing fee. The PRO then divided and distributed the royalties collected to its songwriter and music publisher members.

Once again, the U.S. government got involved. In 1941, the Department of Justice brought claims against both entities, challenging certain of their licensing practices on antitrust grounds. The antitrust claims were settled that same year after ASCAP and BMI agreed to enter into consent decrees. Unlike other aged consent decrees, the PRO decrees have never been phased out and continue to dictate the terms on which ASCAP and BMI can -- and in fact, are required to -- issue licenses to music users to perform the works in their respective repertories. If the PRO and a licensee cannot agree on a rate under the mandatory license, the decrees provide that the price is to be set by a New York federal district judge sitting as a "rate court."

In 2011 and 2013, large music publishers sought to withdraw license authority for digital uses from ASCAP and BMI so these publishers could, acting individually, engage in market-based negotiations with digital services. The courts overseeing the ASCAP and BMI decrees, however, determined that under the terms of the decrees, the publishers could not do this -- songs had to be either "all in" or "all out" of the PRO. In other words, and counterintuitively, the 1941 antitrust settlements prevent individual copyright owners from negotiating outside of the collective framework to grant licenses to digital services.

Music owners next turned to the Antitrust Division of DOJ, seeking modification of the decrees to allow greater flexibility in digital licensing practices. But instead of coming up with a plan to update the decrees, the Antitrust Division doubled down, issuing an unprecedented interpretation of the decrees in 2016 that would have required ASCAP and BMI to grant "100% licenses" covering the copyright shares of non-affiliated writers for jointly authored songs. Actual implementation of such a rule would have been extremely disruptive to the music community, which has long relied on separate licensing and payment of royalties for songwriters' fractional interests when a song has more than one writer (as is common). Fortunately, the Antitrust Division's ultra vires pronouncement was struck down soon after it was challenged in court by BMI (and by songwriters in a separate suit).

The subsequently enacted MMA modified some of the procedural rules for the federal courts overseeing the decrees, but that legislative effort was not focused on performance rights, and did not seek to overhaul the World War II-era framework governing the licensing of those rights. In its 2015 report, the Copyright Office questioned the wisdom of continuing to combine PRO rate proceedings, which affect the entire industry, with antitrust oversight of particular actors, proposing that ratesetting matters be separated from whatever government supervision might be required to address specific competition concerns. But the PRO system lives on as regulation by consent decree -- a strange brew of ratesetting methodology and antitrust additives.

The MMA did make a modest but significant move in the right direction by requiring that PRO rate court proceedings be randomly assigned to different New York judges than those overseeing enforcement of the consent decrees as a general matter. But greater reform is needed to bring the PRO system into the 21st century. Three years after the "100% licensing" debacle, the DOJ is once again looking at the consent decrees. Now under new leadership, instead of seeking further to entrench the decrees, the Antitrust Division appears to be questioning the wisdom of relying on them at all. In a request for public comments last month, the DOJ asks, among other things, whether the PRO decrees should be terminated altogether.

The songwriting and music publishing community is hopeful that the Antitrust Division's response this time around will be forward-looking and productive. But could the pendulum swing too quickly and far in the other direction? Many believe that precipitous termination of the longstanding consent decrees without an adequate period of adjustment could do more harm than good. In the near term, a constructive approach might be to modify the decrees so copyright owners and music users have greater incentives and flexibility to negotiate rates for new uses of music outside of the rate court structure. And when a license dispute does end up in court, the rate court judge -- who, under the terms of the MMA, is no longer charged with the responsibility of enforcing the consent decree -- should be focused on establishing a fair, market-based rate rather than antitrust policing.

And then, in the longer run, we should look to a day when music owners can bargain for the full value of their songs free of government-imposed price constraints. 

Comments on the consent decrees can be submitted at ATR.MEP.Information@usdoj.gov. The public comment period ends August 9.