Royalties paid for the use of music by broadcasters and digital media companies, and other issues about music rights, can be an incredibly dense subject, with nuances that can be overlooked. I participated in a CLE webinar earlier this week, sponsored by the Federal Communications Bar Association, where we tried to demystify some of the issues in music licensing (see description here). I moderated a panel on the Hot Topics in Music Licensing, talking about the broadcast performance royalty, the appeal of the webcasting royalty decision, issues about the proliferation of performing rights organizations seeking royalties for the public performance of musical compositions, and more theoretical issues about the entire process of clearing music for use by broadcasters and other businesses. To highlight some of the issues, and some of the tensions in the world of music royalties, I put together the attached article. Hopefully, it provides some context on the relationship between some of these hot topics, and gives some food for thought as to how these issues can be addressed.
As 2023 begins, our “Hot Topics” panel will look at some of the current legal and policy issues in music licensing that may be relevant to the communications industry. Most of the issues we will discuss are ones that have been debated, in one form or another, in copyright circles for decades. But, as copyright can be so complicated with many stakeholders with differing interests, the chances of any final resolution to any of these issues may well be small. This article is meant to put some of those debates in context, as many of the specific issues, in one way or another, are intertwined.
The issue that likely will be the most contentious this year (and has been for decades) is the continuing effort of the recording industry to establish a public performance right in sound recordings that would apply to non-digital performances. For over 25 years, recording artists and the record labels (which usually hold the copyrights to popular recordings) have had a right to a performance royalty for digital performances. Broadcasters who stream an online simulcast of their programming, along with webcasters and others who make non-interactive digital transmissions, must pay a performance royalty, generally to SoundExchange. The rates to be paid are set by the Copyright Royalty Board. But in the US, over-the-air broadcasters, restaurants, bars, clubs, retail establishments, and others who publicly perform music pay only for the performance of the musical compositions (the “musical work”), not for the performance of the song as recorded by a particular artist (the “sound recording”). That has been a point of contention for a century, almost from the moment when recorded music first appeared, but the issue has become particularly heated in the last two decades, once the sound recording public performance right was established after being mandated by copyright legislation in the late 1990s.
The recording industry has been particularly focused on establishing the sound recording performance right for over-the-air-broadcasting, arguing that the right is common throughout the rest of the world, and that music creators and copyright holders should be compensated when others are using that music as the basis of their business. Broadcasters have traditionally argued that they provide the promotional vehicle by which artists attract audiences to buy their recordings and attend their concerts. The artists and labels now contend that this promotional value is not nearly as significant as it once was, with the plethora of other means to distribute music. But there is also a question of economics. Broadcasters have argued that any royalty should be a negotiated one, as taking additional money out of a broadcast industry that is under attack from all sorts of new competition could well cripple the services provided by broadcasters, at the same time that more and more rights holders are seeking a bigger and bigger “piece of the action” from broadcasters.
In the last Congress, artists and labels pushed for passage of the American Music Fairness Act to establish this royalty, trying to carve out support from smaller broadcasters by proposing low rates for small, independent broadcasters. Other rates under the proposed legislation would have been set by the Copyright Royalty Board using the “willing buyer, willing seller” standard that attempts to establish the value that a competitive market would put on such rights. While that bill passed the House Judiciary Committee in the last Congress, it never made it to the floor of Congress, but likely will be reintroduced this year.
At the same time, broadcasters and other music users feel that they have been squeezed by royalty demands from all quarters. The traditional performing rights organizations (“PROs”) that collect royalties on behalf of songwriters and their publishing companies for the public performance of the musical work (the two largest being ASCAP and BMI), are always seeking higher royalties, as they are under pressure from their own members who, in some cases, are looking at alternative collection societies that promise higher royalty payments. The rates paid by the radio industry to ASCAP and BMI are currently under negotiation. ASCAP and BMI are nonprofit organizations (though BMI last year announced that it was investigating financial alternatives, including a possible sale) and both are bound by antitrust consent decrees, requiring them to treat all artists in the same non-discriminatory way, paying them at the same royalty rates. Traditionally, these two PROs have been limited to only licensing performance rights for musical works, while newer competitors can provide wider services to artists, including collection of mechanical royalties (paid when a reproduction of a song is made, e.g., when a record is pressed, a download made, or an on-demand stream is served) and even sync licensing (permission to use a song within an video or audio production, like in a movie, commercial, or podcast).
The two traditional PROs have competition from SESAC, which has been around for decades but in recent years has been owned by private equity companies and has expanded beyond simply collecting performance royalties into providing other licensing services. Through litigation, both the radio and TV industry have secured the right to force SESAC to submit to an arbitration panel if it cannot reach a voluntary royalty rate in negotiations with broadcasters; however, other antitrust restrictions do not currently apply to SESAC’s operations. Global Music Rights (GMR), another privately owned PRO, is not governed by any antitrust restrictions, having forced the radio industry last year to abandon litigation to impose such restrictions. Instead, GMR has offered license agreements to the commercial radio industry at rates that, while not public, did not receive widespread praise for their reasonableness. Not only can these for-profit PROs offer artists incentives to abandon the traditional PROs, but the big publishing companies (many owned by the record labels) have talked about withdrawing from ASCAP and BMI in order to license music themselves, especially to the big digital music services. Competition between these groups, particularly for the most successful songwriters, puts upward pressure on royalty rates.
And it is not just music royalties that are being sought, but now PROs representing the writers of comedy and spoken-word material that is recorded and played by radio, TV, and digital services are demanding their own performance royalties. While SoundExchange collects royalties for all sound recordings, whether music or not, the musical works PROs are limited by the consent decrees or their business practices to only representing musical works. These spoken word organizations have been active in pursuing royalties from many of the big digital services in the past two years. Watch for their efforts to continue and possibly expand in the near future.
These developments only scratch the surface of the rights issues that exist. Digital music services are now beginning to deal with the results of the Music Modernization Act, enacted in 2018, which created a music rights collective to collect the mechanical rights for musical works used by on-demand services like those offered by Spotify, Amazon, and Apple. Rates for these rights are also overseen by the Copyright Royalty Board, although the music services and rightsholders recently announced a settlement for the royalties to be paid by these services for the next five years. These digital music services must negotiate directly with the copyright holders for the rights to use sound recordings in on-demand services, resulting in royalty rates that reportedly approach 75% of a service’s income. With music royalty rates so high, some of these services have started to emphasize podcasts and other material that does not result in paying high music royalty payments.
In a normal marketplace, when the cost of goods used by a business gets too high, the business will search for new suppliers who can provide the needed goods at a lower price, or it will seek substitutes for those goods. To some extent, the increase in podcasts and other non-music programming on some of the big digital platforms may represent that search for substitutes. But, on the music side of things, it is not that simple. Few music services or music radio stations can survive with recordings from only one record label, as consumers want to hear their favorite songs regardless of the label on which that song is released. Musical works performing rights are even more complicated as, particularly in today’s music industry, there are often multiple songwriters on any popular song, and each songwriter may be a member of a different PRO. To get the rights to play the song, the radio station cannot just rely on the rights from one PRO, as it generally needs all the rights from all the PROs in any song to play that song. Plus, each of the PROs have attracted core songwriters in multiple genres of music, making it difficult to work around the music that they license. Thus, music services generally cannot get by simply by paying only one PRO.
There is the additional complication of it being very difficult to understand the ownership of various musical rights. There is no universal registry of who owns what rights to what songs and, even when it is clear who owns a particular set of rights, it may be difficult, especially for a small entity, to get the attention of a rightsholder to try to directly license the music. The Music Modernization Act promised to create a directory for musical works, but so far that promise is just aspirational. The catalogs listed on the sites of most PROs include caveats that they are not legally binding.
Similarly, as sound recording rights are bought and sold in an active trading market, just knowing the name of the band or record label may not get you the name of who needs to be contacted to clear music rights. So far, online exchanges have not come to represent a wide enough swath of music to facilitate easy transactions to allow a music service to pick and choose the music that it wants to use. There is no market by which suppliers of music can be played off each other for the music service to lower its costs. The murky nature of rights ownership, and the need for music services to have the rights to play virtually all songs in order to be attractive to consumers, allows each service to use the rates given to other services to create a constant upward march in royalty rates. Once a GMR gets a high rate through contracting with must-have songwriters and outlasting the radio industry in litigation, its rates will serve as a benchmark for negotiations with the other services to demand higher rates, and those new rates will in turn be used to demand higher rates by the next PRO in line to negotiate. PROs are also now beginning to index their royalties to the amounts paid for sound recording performance rights, linking those two rights together where an increase in one spurs an increase in the other.
Is there a better way? One thought that has been floated is to create one pot for all payments for music use where any music user, whether it be a big on-demand digital media company or a local radio station, would pay one set price for the music that it uses. That total price paid for music is what is important to the service – not how much each of the competing PROs should receive, and not how much should be paid for the sound recording versus the musical work. If there was a single pot into which all royalties could be paid, then those royalties could be divided up by the artists, songwriters, and copyright holders. Those in the music industry are in a better position than the music service to determine who should be entitled to what percentage of the total pot. Those in the music industry have the information as to who owns what rights. They know what is being paid for those rights in the open market. This system would be similar to the proceedings held by the Copyright Royalty Board to distribute among TV rightsholders the royalties paid by cable systems for programming carried on distant television signals carried by these systems. How these royalties are divided is really a dispute between these rightsholders, not between the music service using the music and the rightsholder.
Of course, any such system would upend the business models of the many collection societies that have sprung up to distribute music royalties – so don’t look for this solution anytime soon. Until then, the debates will go on as to who should be paid how much by each music user.