Pandora faces new royalty squeeze as music industry pushes to lift longstanding rules

It’s rare to see a Silicon Valley company preach the virtues of regulation, but that’s precisely what Pandora is doing as it pleads with the Justice Department to uphold music industry rules that date from World War II.

For the internet radio service, however, it may come down to a matter of survival: if the music industry gets its way in overturning the current rules, known as consent decrees, [company]Pandora[/company] could be crushed in a vicious circle of ever-escalating royalties.

Here’s a closer look at the consent decree fight, and how it fits into a broader pattern of Pandora becoming a scapegoat for the larger troubles of the music industry.

In praise of 70-year old regulation

The details of the music copyright system — which determines who gets paid and how much — are eye-glazing at the best of the times, and the 1941 consent decrees are no exception. In plain English, the decrees are legal orders that require two big industry middlemen, ASCAP and BMI, to follow a set of rules over how they license song rights on behalf of their songwriter and publisher clients.

The rules require the organizations to license songs to anyone who wants to perform them, and at prices fixed by a special court. (Right now, the rates are 1.7 percent of revenues for AM/FM radio stations and 1.85 percent for Pandora.)

The Justice Department imposed the consent decrees in the first place as a matter of antitrust law after finding that ASCAP and BMI had monopoly-type powers when it came to song licensing. And while ASCAP and BMI have chafed at the limits on their pricing power, the system over the years has largely worked out for everyone involved: radio stations and others have enjoyed an easy way to obtain song rights, while songwriters and publishers get an efficient way to collect royalties.

Now, however, the rights organizations are petitioning the Justice Department to make new changes to the consent decrees (the last changes happened in 2001), and are portraying them as World II era relics. In the words of ASCAP, it’s time to “update our music licensing system to better reflect how people listen to music today.”

The music industry will have an easy time finding sympathy for its position: after all, who wants to let ancient regulations stand in the way of more money for songwriters? Unfortunately, it’s not that simple. While music royalty rules desperately do need to be updated for the digital age, the proposals laid out by ASCAP and BMI are less a case for modernizing music rules than they are a means to throttle Pandora.

If a judge says no, will the Justice Department say yes?

If you’re wondering why the arcane issue of consent decrees is in the news in the first place, it’s because the Justice Department asked for public comments about whether it’s time to change to them. In response to the initial comment period, which closed last week, ASCAP and BMI offered up three suggestions — the first of which could be a death sentence for internet radio stations like Pandora.

That suggestion is to let music publishers, which control the songs licensed through ASCAP and BMI, dodge the consent decree obligations when it comes to digital song rights. For practical purposes, this would mean that big publishers like Sony or Warner could force Pandora to negotiate one-on-one for access to their song catalogs — while at the same time using ASCAP and BMI to collect royalties at the usual fixed rate from AM/FM stations, and from other companies that perform music such as restaurants, clubs and bowling alleys.

One problem with this suggestion is that excluding digital song rights from the royalty scheme is exactly what a federal court judge recently said the music industry can’t do. In a December ruling, a judge said songwriters have to be “all in or all out” when it comes to ASCAP and BMI. And, in a separate rebuke to the music industry, a different judge called attention to apparent collusion by big publishers against Pandora.

As a result of those decisions, the music publishers now appear to be hoping that the Justice Department will do what the courts would not, and give them a free hand to wring more money from Pandora.

The wrong solution to a real royalty problem

It’s hard to overstate the contempt and even outright hatred that many musicians hold for Pandora and other digital music services. Blogs like alt-rocker David Lowery’s The Trichordist, for instance, are full of diatribes that accuse the companies of getting rich from songwriters’ work while failing to pay musicians enough to make a living.

The complaints are understandable — the digital economy has been terrible for musicians’ pocketbooks — but changing the consent decrees to wring more money from Pandora is not going to help. That’s because internet music companies already pay much, much more than the 1.8 percent rate currently set under the ASCAP arrangement.

According to a Pandora spokesperson, the company paid around 53 percent ($342 million) of its total revenue in royalties in 2013, and expects to pay an even higher percentage in 2014.

The reason that this figure is so much higher than the 1.8 percent rate required by ASCAP is that digital music services must pay a king’s ransom for another type of performance royalty rights — called sound recording rights — that non-digital services don’t have to pay at all. And while the music industry has tried proposals to extend those royalties to the world of AM/FM radio, politicians have been quick to defeat such measures as an unpopular “performance tax.”

Internet radio, however, lacks the same political clout as terrestrial stations, which makes it the better (or perhaps the only) target that the music industry can hit when asking Washington for more money. And that is what the industry is gamely trying to do, through monkeying with the consent decrees and with other measures like the ill-advised “RESPECT Act.”

So what will happen? According to Andre Barlow, an antitrust expert and former Justice Department lawyer, it’s too soon to say.

“The DOJ has a lot of information to review and consider before making a decision.  Given the importance of these decrees to maintaining competition, I don’t believe that the decrees will be terminated, however, they may be modified.  The degree to which they will be modified will be determined by the DOJ’s analysis of the market.”

Stay tuned in other words.