Pandora Suit May Upend Royalty Plan Created during WWII ; Music Service Opposes Licensing Groups in Trial over Payment Regulation

By Sisario, Ben | International New York Times, February 15, 2014 | Go to article overview

Pandora Suit May Upend Royalty Plan Created during WWII ; Music Service Opposes Licensing Groups in Trial over Payment Regulation


Sisario, Ben, International New York Times


The streaming service is squaring off against Ascap in a closely watched trial over payments.

As the music industry races toward a future of digital streams and smartphone apps, its latest crisis centers on a regulatory plan that has been in place since "Chattanooga Choo Choo" was a hit.

Since 1941, Ascap and BMI, the two giant licensing organizations that dominate music publishing, have been governed by consent decrees with the Justice Department. These agreements were made to guarantee fair royalty rates for songwriters and for the radio stations, television networks, and even restaurants and retail shops that play their music.

But with the industry struggling to make money from digital music, this system has come under attack. The streaming service Pandora is squaring off against Ascap in a closely watched trial over royalty payments. Big music publishers like Sony/ATV and Universal are calling on the government to overhaul the system, and technology companies are accusing the publishers of trying to skirt federal rules meant to protect them.

The outcome could reshape the finances of a large part of the industry.

"What's happening with these court cases will determine the future of the music publishing and songwriting industries," said David Israelite, the president of the National Music Publishers' Association. "It is simply unfair to ask songwriters and publishers to be paid something less than a fair market rate for their intellectual property."

For nearly a century, Ascap and BMI, known as performing rights organizations, have served an essential middleman function. They grant the licenses that let various outlets use songs, and then funnel royalties from these billions of "performances" back to publishers and songwriters.

Together, the groups process more than $2 billion in licensing fees each year and represent more than 90 percent of the commercially available songs in the United States. Performance royalties have become critical for songwriters as sales of compact discs and downloads -- which pay a different kind of royalty not administered by Ascap and BMI -- have fallen.

Ascap, which stands for the American Society of Composers, Authors and Publishers, was founded by a group of composer luminaries including Irving Berlin and Victor Herbert. Its 100th birthday was on Thursday. BMI, or Broadcast Music Inc., was created by broadcasters in 1939 as a competitor.

After federal antitrust investigations, both groups agreed to government supervision in 1941.

This system has hummed along for decades. But with the rise of Internet radio, publishers have complained that the rules are antiquated and unfair. They point to the disparity in the way Pandora compensates the two sides of the music business: Last year, Pandora paid 49 percent of its revenue, or about $313 million, to record companies, but only 4 percent, or about $26 million, to publishers.

"It's a godawful system that just doesn't work," said Martin N. Bandier, the chairman of Sony/ATV, the world's largest music publisher.

The wider music world has been galvanized by the issue of low royalties from fast-growing streaming companies.

In 2012, for example, when Pandora's former chief executive testified at a Congressional hearing on music licensing, songwriters protested on Capitol Hill. Five writers of hits by stars like Beyonce and Christina Aguilera showed that 33 million plays of their songs on Pandora yielded just $587.39 in royalties for them.

Music executives argue that the problem is rooted in the Justice Department's oversight of Ascap and BMI. …

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