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The Digital Music Performance Royalty Apocalypse

Paul Fakler

SXSW 2014

Overview of DMS Music Licensing Landscape

Where We Have Been

Where We Are Going

Web IV

Pre-72 Sound Recordings

Publisher Withdrawals From PROs

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Licensing Landscape for Streaming Services

Two Distinct Copyrights

History of Sound Recording Copyright

1888 – 1971

1972 – 1995

1995 – 1998

1998 – Present

3

Licensing Landscape for Streaming Services

Rights Needed

Public Performance

Duplication / Mechanical (Interactive Only)

Types of Licenses Available

Direct

Statutory / Compulsory

Collective

4

Interactive / On-Demand Streaming and Limited

Downloads

5

©Mechanical

§115

HFA

Performance

ASCAP/BMI/SESAC

Direct?

℗

Duplication

Direct

Performance

Direct

Non-Interactive / Programmed Streaming

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©

Mechanical

Not Needed

Performance

ASCAP/BMI/SESAC

Direct?

℗Duplication

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SoundExchange

Performance

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SoundExchange

Music Royalty Rates for Streaming Services

Total Royalty Burden: 55-75% of Gross Revenue

Some higher

Almost 15 year history of streaming – No streaming

service has EVER been profitable on an annual basis

What possible reason other than royalty burden?

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Music Royalty Rates for Streaming Services

Total Royalty Burden: 55-75% of Gross Revenue

Sound recording licenses = vast majority of cost

Interactive - © = 10.5% of revenue

Programmed - © = Less than 5% of revenue

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Why Are Sound Recording Rates So Much

Higher Than Musical Composition Rates?

Public Performance Rates for © Much Older

More Stable Over Many Years

Rate Court – Antitrust Consent Decree

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Why Are Sound Recording Rates So Much

Higher Than Musical Composition Rates?

℗ Rates Set by CARP / CRB

Different approach / concerns

Initially set rates as equivalent – Rejected RIAA argument that ℗>©

Web I – Adopted RIAA argument that ℗>©

Web II – Interactive direct license benchmarks – Labels enjoy

absolute pricing power – market is neither competitive nor rational

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Key Issues for DMS Royalties in 2014:

Webcasting IV CRB Proceeding

New Panel of CRJs

Will they re-examine first principles?

Notice of institution of proceeding indicates they may

Variations among sellers – segmented market / rates?

Per-play or percentage of revenue?

Inherent value of music?

11

Key Issues for DMS Royalties in 2014:

Webcasting IV CRB Proceeding

New Panel of CRJs

Benchmark issues

iTunes Radio

Broadcaster direct deals

PRO benchmark – on appeal

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Key Issues for DMS Royalties in 2014:

Webcasting IV CRB Proceeding

New Panel of CRJs

Overall dynamic – every past CRB proceeding has led

to a substantial increase in the webcasting sound

recording royalty rate

Will that change?

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Key Issues for DMS Royalties in 2014:

Pre-’72 Sound Recordings

Pre-’72 Recordings = No Federal Copyright

Consequently not covered by statutory license

Is there any state law performance right?

If so, terrestrial radio has been massively infringing

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Key Issues for DMS Royalties in 2014:

Pre-’72 Sound Recordings

Pre-’72 Recordings = No Federal Copyright

Sirius XM litigation

Tennessee legislation

Problem proving which recordings are really pre-’72

How to license?

15

Key Issues for DMS Royalties in 2014:

Publisher PRO Rights Withdrawal

Publishers’ Answer to Rate Disparity is to

Increase Musical Composition Performance Rates

Lack of Success Due to Rate Court Oversight

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Key Issues for DMS Royalties in 2014:

Publisher PRO Rights Withdrawal

Strategy – Selective Withdrawal

Direct licensing – absolute pricing power

DMS still needs license from PROs

Hope to use direct licenses as benchmarks in rate court

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Key Issues for DMS Royalties in 2014:

Publisher PRO Rights Withdrawal

Legal Challenge – Pandora Rate Court Cases

ASCAP – selective withdrawal violates consent decree, therefore

ineffective – works still in ASCAP repertory

BMI – selective withdrawal violates consent decree, therefore

construe withdrawal as total – works out of BMI repertory for ALL

licensees

After short period of chaos, withdrawing publishers returned

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Key Issues for DMS Royalties in 2014:

Publisher PRO Rights Withdrawal

What Now?

Attempts to modify consent decrees

Attempts to eliminate consent decrees

SESAC antitrust cases

Attempts to change evidentiary rules / benchmarking –

Songwriter Equity Act of 2014

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Apocalypse Now?

DMS Market – 15 Years of Chaos

Several New Threats With Potential to Increase Rates Further

If Market Is Ultimately Destroyed Who Benefits?

Record Companies Need To Reset Expectations – Cannot

Expect Streaming, Especially Non-Interactive, to Subsidize

Revenue Declines Not Caused by Streaming

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