Will New Music Royalty Rules Stifle Internet Radio?

Source: Pandora

Source: Pandora

The outcome of a long-running dispute over song licensing fees that is being fought between two music industry heavyweights and Pandora may threaten the future of Internet radio as we know it. The American Society of Composers, Authors, and Publishers (ASCAP) and Broadcast Music, Inc. (BMI), two of the biggest performance rights organizations, are currently asking the Department of Justice to make major changes to the longstanding consent decree rules that limit how much the organizations are allowed to charge for licensing song rights.

The current push to revise the consent decree rules follows last year’s court decision that found ASCAP and BMI could not selectively deny Pandora the rights to play certain works in its repertory, reports Billboard. That ruling essentially foiled an attempt by the performance rights organizations to force Pandora to pay a higher song licensing rate. As noted by Gigaom, under the current consent decree rules, Pandora pays a 1.85 percent royalty rate and terrestrial radio stations pay a 1.7 percent royalty rate. A subsequent court ruling that determined Pandora’s rate of 1.85 percent noted the apparent collusion between ASCAP and several music publishers as the groups were both trying to force Pandora to agree to higher royalty rates.

The consent decree rules were first established in 1941 to prevent ASCAP and BMI from having a monopoly on song licensing. However, the performance rights organizations argue that the rules need to be updated for the digital age. As a result, the Department of Justice recently asked the public for comments about whether the consent decree rules should be changed. ASCAP submitted its own comments about the consent decree revision in which it outlined its vision for how song licensing should be restructured “to better reflect how people listen to music today.” Unfortunately, the changes that ASCAP and BMI are proposing would not only wipe out Pandora, it would also likely end Internet radio as we know it.

Source: Apple.com

Source: Apple.com

It should be noted that although Pandora only pays a slightly higher song licensing royalty rate than terrestrial radio stations, it is further burdened with substantial royalty fees for sound recording rights, fees that non-digital radio stations have traditionally been excluded from paying. As a result, Pandora already pays over 50 percent of its total revenue in royalties, according to Gigaom.

So what are ASCAP and BMI asking for? Among the changes requested by ASCAP is the ability to “accept a limited grant of rights from its members, meaning ASCAP is able to license certain uses while the rights holders handle others directly.” However, this selective withholding of part of its repertory is exactly what a judge’s previous ruling banned, as noted by Billboard. In other words, ASCAP is asking the Department of Justice to make consent decree rule changes that ASCAP and BMI were unable to secure from a judge.

If the Department of Justice implements the consent decree changes that ASCAP and BMI are seeking, it would make music licensing so expensive for Pandora that it would likely cease operations. However, Pandora would not be the only Internet radio service to be negatively affected by these proposed rule changes. As recently pointed out by J.P. Morgan analyst Rod Hall, the changes would also increase costs for smaller online radio networks such as Apple’s ad-supported iTunes Radio service and its recently acquired Beats Music on-demand service. “Upward pressure on streaming costs could be a negative for Apple’s newly acquired Beats Music unit,” wrote Hall in a research note obtained by Apple Insider. “Typically, attempting to pass this sort of cost increase through to customers after the low price Genie is out of the bottle is tough in a competitive environment.”

Due to several differences between the two services, Apple’s iTunes Radio licensing agreement with ASCAP is markedly different from Pandora’s. As noted in the court ruling earlier this year that determined Pandora’s rate of 1.85 percent, Apple already pays an “industry-wide rate of 10 percent.” However, if ASCAP and BMI gain the greater flexibility in setting licensing terms that they are seeking, there’s no telling how high total royalty fees for all Internet-based radio services could go.

According to data provided by Statista, Pandora still dominated the Internet music streaming market in the U.S. with a 31 percent share in March 2014. IHeartRadio was a distant second place with a 9 percent share, while iTunes Radio followed close behind with an 8 percent share. Although Apple is a relatively small player in the overall market now, it is widely believed iTunes Radio and the nascent Beats Music service will become more important to the company’s bottom line in the future as more consumers shift from digital music downloads to music streaming services.

According to the Nielsen Entertainment & Billboard’s 2014 Mid-Year Music Industry Report, the on-demand audio streaming market saw a year-over-year increase of 50.1 percent. Meanwhile, sales of digital albums declined by 11.6 percent and digital track sales fell by 13 percent during the same period. For these reasons, whether or not ASCAP and BMI have their proposed consent decree rules changes granted could have major ramifications for the long term future of Internet radio.

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