US review of music licensing spells trouble for internet radio

The Justice Department said this week it will review World War II-era antitrust rules that limit how music publishers can license their songs. The plan sounds reasonable enough, but make no mistake: the process is less about modernizing music rules than it is about helping industry incumbents bash internet radio services like Pandora(s p).

If you’re unfamiliar with the rabbit hole that is music licensing, this week’s announcement is about so-called “consent decrees” that require ASCAP and BMI, two umbrella organizations that collect money on behalf of song writers, to license their catalogs to all comers.

The Justice Department says it will accept public comments for two months on whether the consent decrees “need to be modified to account for changes in how music is delivered to and experienced by listeners.”

The consent decree system has worked well historically because it serves as a far-reaching collection agent for songwriters, while also providing a one-stop licensing shop for radio stations and anyone else who wants to play music in public. Today, however, it is under strain.

The music industry, for instance, hates the fact that internet radio services like Pandora can avail themselves of the blanket licensing regime in the same ways as AM/FM stations. Last year, Sony and other big publishers tried to withdraw just the digital portions of their catalogs from ASCAP and BMI, until a court ruled last year that they couldn’t do that — they had to be “all-in or all-out.”

ASCAP also lost an important court fight earlier this year in which a federal judge refused its request to hike Pandora’s licensing rate beyond what other radio stations pay.

The music industry has responded to these setbacks with a new half-baked lawsuit against Pandora, and is pushing Congress to pass a special “Oldies” bill that would force digital radio services like Sirius XM(s siri) and Pandora to pay even more for pre-1972 recordings. On top of this legal and lobbying campaign, we can now add the Justice Department’s decision to reexamine the consent decree rules.

New rules won’t help musicians much – but they could kill Pandora

There is nothing wrong, of course, with revisiting old rules — especially when those rules date from 1941. The problem here is that the review is likely to occur in a vacuum, and without regard to the larger problems of the music industry economy.

As I’ve pointed out before, Pandora has become a scapegoat for the permanent decline in CD sales. That decline has resulted in less money for everyone, including musicians, songwriters and publishers.

In response, ASCAP and musicians like David Lowery have disingenuously blamed Pandora and Spotify for shortchanging artists. (The arguments are unfair because they don’t acknowledge that the digital services must, due to quirks of copyright law, pay large sums for a different set of royalty rights that traditional radio services don’t pay at all.)

In this context, the Justice Department’s consent decree review appears tailored to open the door to increased royalties on the likes of Pandora (which helps explain why its share price fell yesterday).

In the larger picture, however, the review process may serve to wring more money from digital radio services, but it will not generate nearly enough revenue to replace those lost CD sales — though it could simply drive some innovative music companies out of business altogether.

A better approach would be for Congress to consider leveling the royalty radio rates across platforms — terrestrial, satellite and internet — in a way that supports both musicians and innovation.