Congress Must Act if DOJ’s Actions Harm Viability Of Music Streaming | Commentary

Posted April 7, 2015 at 10:00am

By Mike Montgomery The Senate Judiciary Committee recently held what should be considered an historic hearing to discuss the competitive landscape surrounding music licensing; not just the age old fight about how to divide the royalties, but to examine whether competition in the music space is healthy enough to allow new entrants — such as Pandora and iHeart — to continue to innovate and delight consumers.  

In his opening statement, Sen. Patrick J. Leahy, D-Vt., said the committee needs to work toward ensuring fair compensation for artists while also ensuring that new music streaming companies can thrive. And that brought to the fore the 65-year-old antitrust consent decrees that dictate how music license rights are handled in the U.S.  

Leahy’s goal isn’t ambitious — it’s logical. But it won’t be met if music labels and the organizations that represent songwriters and publishers get their way, because any modification of the consent decrees would threaten the existence of companies such as Spotify.  

Before 1941, American Society of Composers, Authors and Publishers and Broadcast Music, Inc. (“professional rights organizations”) were the main gatekeepers for anyone who wanted to publicly play a piece of music. They could raise rates as much as they wanted and deny licenses to anyone, clearly in violation our nation’s antitrust laws, leading to the consent decrees in place today.  

Under the current system, the PROs are required to license their full catalogs to all comers due to the consent decrees.  

Today’s music industry is dominated by a small group of power players, including ASCAP, BMI, Universal Music Group, Sony Music Entertainment and Warner Music Group. These organizations look at companies such as TuneIn and Rdio and see a big pot of gold from which they’d like a larger cut. If past is prologue, there’s little doubt the PROs and labels would eventually collude in order to further enrich themselves.  

We’ve seen it before. ASCAP and BMI were sued by the government for their behavior in the 1940s. In the 1950s, record labels paid DJs to spin their songs in what became known as the payola scandal.  

Streaming is a genie that can’t — and shouldn’t — be put back in its bottle unless the DOJ abolishes or severely weakens the consent decrees. Consumers should brace for the worst if the DOJ, absent an heroic effort by Congress to defend against such an assault on innovation and consumer choice, were to allow the publishers to partially withdraw their music catalogs from the PROs in order to directly negotiate with the streaming companies.  

Partial withdrawals would be a death knell for music streaming according to an email ASCAP’s Paul Williams probably wishes he never sent, stating that partial withdrawals would naturally lead to “higher market price[s] which will give us bargaining power in rate court.”  

Since streaming companies currently distribute more than 40 percent of their revenue in royalty payments, higher rates and a loss of leverage in negotiations will put devastate their business models. The truth of the streaming market is that it’s working as-is. Last year Pandora paid out $446 million in royalties. Spotify distributed $1 billion in the last year alone.  

Allowing the few players at the top of the music industry new opportunities to collude will create an environment where streaming companies can no longer afford to operate as they do today. Consumers, used to the ease and affordability of streaming services, will return to the one method no one wants to see them using: piracy.  

Higher royalty rates would likely kill advertising-based freemium business models, which allow consumers to listen to Pandora and Spotify for free as long as they also listen to ads. Only 20 percent of Spotify’s users are subscribers while even less of Pandora’s users pay to play. Increasing costs would mean these services would need to convince more people to ante up, listen to more ads, or avoid the ad-supported version altogether.  

There’s a very good chance that instead of ponying up, a lot of those listeners would instead turn to bootlegging. Or, the streaming market could become dominated by Google and Apple, two companies that can afford to use music as a loss leader. That lack of competition will hurt everyone.  

Should the DOJ choose to weaken the consent decrees, Congress must do more than hold one historic hearing — it will have to save the music industry from itself by trumping the DOJ and locking into place the current rules of the road so that people everywhere can enjoy music on a variety of innovative platforms.  

Mike Montgomery is executive director of CALinnovates.

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