Let the music play

The recent ruling in the case of Pandora v. ASCAP has the potential to not only reorient the intense debate over royalty rates for music in the digital age, but also remind policymakers of the important role that antitrust enforcement still plays in the digital economy. 

A federal judge blocked the attempts of the big music publishers to force Internet radio provider Pandora to pay more than other radio stations for streaming songs.  Performance rights organizations (PROs: ASCAP and its sibling, BMI), both operate under a consent decree designed to prevent just the kind of anti-competitive behavior exhibited against Pandora.

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The court's ruling should put an end to the claims that these antitrust decrees are “obsolete” or “outdated.”  The trial demonstrated that the large publishers and ASCAP not only have "very considerable market power that each of them holds," the court ruling said, but that market power "was magnified" by the way "they coordinated their activities with respect to Pandora."

The strong evidence of the immense market power of large music copyright holders makes it absurd to claim that market rates would be the fair result of negotiations between "willing buyers and willing sellers."  Indeed, the decision explains that the evidence at trial revealed troubling coordination between Sony, UMPG, and ASCAP, which implicates a core antitrust concern underlying…and casts doubt on the proposition that the 'market under examination reflects an adequate degree of competition to justify reliance on agreements that it has spawned…'

Ironically, the court noted that the "publishers were focused principally on the disparity between the enormous fees paid by Pandora to record companies for sound recording rights and the significantly lower amount it paid to the PROs for public performance rights to compositions." The court said that "Pandora was really just caught in the middle of a tug of war between the labels and publishers, with the record labels taking over 60 percent of its revenue, which contributes to the fact that Pandora has yet to demonstrate sustained profitability." Yet, the publishers pressed their demands even though they "acknowledged that Pandora could not afford to pay that much," the ruling said.  

At the same time, the case reminds us of the broad and important role that mass market licenses (compulsory licenses under the Copyright Act and collective licenses under the antitrust decrees) have by ensuring access to music in a timely and efficient manner. "The ability of ASCAP and other performing rights organizations (“PROs”) to grant licenses covering a large number of compositions creates significant economies of scale in the market for music licensing,” the court said.  

Some will argue that Congress needs to act to fix this mess, but that is not a very attractive prospect.  The chances that Congress will act on any major legislation any time soon are slim and Congress has not distinguished itself in attempting to update the copyright laws to deal with the digital age.  Congress tends to be more responsive to powerful incumbent rights holders than consumers, while future innovators and technologies are largely unrepresented in the lobbying scrum.

Fortunately, there are administrative solutions that could be pursued. 

The antitrust authorities can use this new evidence of the inevitable abuse of market power in the music sector to strengthen the consent decree – making it clear digital rights are covered and insisting on an organizational structure for the professional rights organizations that gets them out from under the thumb of the dominant publishers.  They would also have to make it clear that the type of behavior in which the largest publishers engaged vis-à-vis Pandora violates the antitrust laws and will be dealt with very sternly.

The royalty rates paid for sound rights can be reduced, for example, to the levels paid by satellite radio (creating a level playing field between competitors).  This could be followed by the negotiation of an increase in the royalties paid to publishers, creating a balance between the giants in the music sector. 

We have heard this tune before.  Just last year this same court ruled that collusion between the top five book publishers and Apple constituted illegal price fixing for e-books.  Here, the top two music publishers and their PRO colluded to illegally raise royalty fees, providing another reminder that the digital economy is not immune to the abuse of market power.  We will see more of this kind of behavior, not less, as the digital economy grows, unless we reaffirm our commitment to the pro-competitive, pro-consumer enforcement of the antitrust laws.

Cooper is research director at the Consumer Federation of America. 

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