Modifying the music consent decrees without clear goals will harm consumers

The Department of Justice (DOJ) is considering modifications to the age-old consent decrees governing the two biggest publishing rights organizations (PROs) in charge of licensing most of the publishing rights digital music services need to do business. These consent decrees have made sure the market has functioned for over 70 years. Any modifications to these consent decrees without clear competitive goals will be bad for consumers and move competition in the wrong direction, especially considering the unanswered questions of coordination among music publishers and PROs.

The consent decrees arose because of the unique nature of the music industry. Every song has two copyrights: one for the writers and one for the recording artists. These copyrights can be owned or controlled by any number of people and corporations. This complicated mess of rights has led to a lot of problems, and it was difficult for those that wanted the rights to play music and those that owned music rights to find and negotiate with each other. The music industry solved this problem through PROs, which collect all of the publishing rights, usually from music publishers. PROs then license these rights primarily through a single blanket rate that covers every song they control.

{mosads}Normally this kind of price fixing violates the antitrust laws. But the DOJ decided to settle its challenges to the PROs’ business practice through a consent decree, which allows them to continue doing business as long as they follow an agreed upon set of rules. The Supreme Court later examined a challenge to the PROs’ blanket licenses and decided that they were OK, primarily because of the need for such a service and the efficiencies the PROs created. It was also important to the Supreme Court that competition was protected through the consent decrees. In short, the system in place worked.

Unfortunately, music publishers now want to change how the system works so that it only works for them. One of the biggest areas of contention is over a potential change to allow music publishers, at their option, to withdraw from the PROs the rights to license their repertory to a class of music user — called partial withdrawal. The publishers want partial withdrawal to force digital music services to directly negotiate with them for license fees while allowing all other music users to license through the PROs. This would allow publishers to use their market power and control over crucial information to extract the most money out of digital music services.

We know exactly what publishers will do if they are allowed to use partial withdrawal because they have already tried it. ASCAP and BMI, the two largest PROs, tried to implement partial withdrawal for their members, but their attempts were found to violate the consent decrees by ASCAP court judge Denise Cote and BMI court judge Louis Stanton.

Before these decisions, the publishers used partial withdrawal to drive up licensing fees for services like Pandora. For example, in 2013 Sony withdrew from ASCAP the rights to license its music to digital music services. During rate negotiations, Sony refused to give to Pandora a list of the songs it owned. Not only did Pandora have to negotiate without knowing what it was getting in the deal, Pandora also could not remove Sony’s songs from its service if negotiations fell through. This means Pandora would be liable for $150,000 per infringement for any Sony song that played after Sony withdrew from ASCAP.

This kind of abuse of power is concerning, especially since Sony was just allowed to increase its market power by purchasing EMI in 2012. During Pandora’s rate trial with ASCAP, Cote was concerned about the coordination and use of market power in the Sony and other publisher deals. The DOJ originally appeared to take this activity seriously. Almost a year ago Billboard reported that the DOJ was investigating “alleged coordination among ASCAP, BMI, Sony/ATV Music Publishing, and Universal Music Publishing Group.” However, nothing about this investigation has been made public since. Considering the implications of a potential consent decree modification, it would only make sense if consumers were assured that the DOJ has taken Cote’s concerns seriously and thoroughly investigated matters before making any decisions.

These actions are not just bad for digital music services like Pandora, they are bad for songwriters as well. The Songwriters Guild of America wrote to the DOJ expressing concerns about partial withdrawal and fears that it would allow publishers to take advantage of songwriters. These fears appear to be warranted, a leaked contract between Sony and Spotify showed that while Spotify is paying most of its revenue to rights holders, a decent amount of this revenue is being paid to Sony in such a way that it might not be going to artists.

So if partial withdrawal is bad for digital music services and bad for artists, why is the DOJ considering it? The most likely answer is that the DOJ hasn’t set a clear goal for these modifications. Setting a goal would direct the DOJ’s efforts toward improving competition in the music market and ideas that fall short of that would be scrapped. Without such a goal, the DOJ has no guidance but the loudest voices in the room. Unfortunately, those loudest voices are likely to be publishers looking out for their own interests, not competition.

Balto is a former policy director of the Federal Trade Commission, attorney adviser to Chairman Robert Pitofsky and antitrust lawyer at the U.S. Department of Justice.