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What’s Next for ASCAP and BMI as SESAC Buys The Harry Fox Agency?

A lot of people are wondering what it means for the music industry since it was reported that the National Music Publishers Association (NMPA), the leading trade organization for US music publishers, has sold its wholly-owned mechanical licensing subsidiary, The Harry Fox Agency, Inc. (HFA) to SESAC, Inc., the smallest of the three domestic music performing rights organizations (PROs). While I don’t have a crystal ball, I suspect that this strategic acquisition is part of the trend to transform PROs from mere licensors of performing rights to broader music rights and data mining clearing houses.

Published reports in Billboard and elsewhere state that SESAC’s winning bid of about $20 million over others, including PROs, BMI and SOCAN, was the culmination of a process that began a year ago when NMPA put HFA up for sale. As to why BMI, but not ASCAP was a bidder, it may have to do with the Consent Decrees under which the two organizations have operated for decades.

ASCAP’s Consent Decree (last amended in 2001) and BMI’s Consent Decree (last amended in 1994) are similar but far from identical. Specifically, under Article IV(A) of its Consent Decree, the only music right ASCAP is permitted to license is the  public performing right (although it can also serve as an agent to collect royalties from the sale of blank digital audio tape). BMI, under Section IV(B) of its Consent Decree is only specifically precluded from being a record label or a record or sheet music distributor.

That said, until recently, BMI traditionally refrained from entering other aspects of the music business, such as mechanical (songs used in audio-only recordings) and synchronization (songs used in audio-visual use in film, TV, video, etc.) licensing out of concern that the Department of Justice (DOJ) would seek to impose more stringent restrictions. However, this is one instance where the Internet really has changed everything, with ASCAP and BMI welcoming the ongoing DOJ review.

The revenue for licensed digital performances (e.g., streaming) is growing and the online environment knows no geographic boundaries. So while the traditional analysis focused on competition for domestic public performing rights among the three US PROs, foreign PROs, which often bundle performance and mechanical rights, have been creating competitive transnational alliances. And, as extensively discussed in the Copyright Office’s Music Licensing Report earlier this year, the major publishers (which are free to bundle all music rights) sought to withdraw digital performance rights from ASCAP and BMI because they felt Consent Decree and other legal restrictions (i.e., de facto compulsory licensing and statutory rate setting standards) artificially suppressed the fees these PROs could obtain from licensees such as streaming services.

However, the judges that oversee the ASCAP and BMI Consent Decrees held that such “partial withdrawals” were invalid. So, among other things, ASCAP and BMI are seeking modification of their Consent Decrees to allow partial withdrawal of digital rights and the bundling of various music licenses (e.g., performance, mechanical and synchronization). The Copyright Office Report supports relaxing the Consent Decree restrictions as well as amending the Copyright Act to have all licenses that are set by a tribunal (whether Rate Court or the Copyright Royalty Board) to be determined on a willing buyer/seller standard.

Conventional wisdom holds that DOJ is likely to relax ASCAP and BMI’s Consent Decree restrictions. SESAC doesn’t have a Consent Decree but has been subject to anti-competition litigation. What this means for the PROs is far from secret. Last year, at a public forum held by the Association of Independent Music Publishers (AIMP), the CEOs of the three PROs shared the stage and their thoughts about the future of their businesses. All three agreed that the future for the PROs is to offer efficient one-stop licensing for music users who often require several distinct music rights, including mechanicals currently offered by HFA (and music publishers who don’t license through HFA), synch rights which are controlled by each individual publisher, and even performing rights in sound recordings (currently licensed by SoundExchange), especially if such performing rights are statutorily extended to radio broadcasts, as endorsed in the Copyright Office’s Music Licensing Report. Indeed, the Report recommends that the PROs and other licensing collectives morph into broader “music rights organizations” (MROs).

And while SESAC is principally owned by a private equity firm, BMI probably had more than $20 million in its war chest to offer NMPA but didn’t. Why? ASCAP and BMI together represent north of 90% of US songwriters and music publishers. With HFA going to SESAC, that shifts the domestic competitive landscape, giving even more reason for DOJ to relax Consent Decree restrictions, which is probably more valuable to BMI. Moreover, even with mechanical income falling to about 21% of music publishing income from about double that at the peak of the CD market (and with overheads staying static or increasing due to processing millions of micro-payments, reason enough for NMPA to sell), the data HFA has regarding the 48,000 publishers it represents and the 6.7 million musical works it’s licensed on 21.4 million recordings, is probably more valuable to the much smaller SESAC than to BMI.

So what happens now? First, I don’t see SESAC significantly trying to grow its market share as a PRO. Their business model in that arena will likely continue to be, as it states on its web site, “a selective organization, taking pride in having a repertory based on quality, rather than quantity.” So I don’t see SESAC courting writers and publishers in a more concerted manner although adding HFA may make them a more viable alternative to ASCAP and BMI. In fact, I don’t foresee significant changes in writer-publisher relations at any of the three PROs.

Rather, I think that the game plan for all three PROs is what SESAC states in the news release posted on its web site:

SESAC’s acquisition of HFA is part of a previously announced strategy under its new leadership team to pursue a simplified and more efficient, multi-right, multi-territory licensing model utilizing an ongoing focus on information technology and data science to meet the developing needs of music users, distributors, writers, composers, publishers and other stakeholders. The transaction enables SESAC to enhance value by offering music streaming and other digital platforms greater efficiency and transparency in the music licensing process, thereby delivering better monetization outcomes for its affiliated writer and publisher clients.

As much bigger companies, ASCAP and BMI already have plenty of data, even without adding HFA’s to the mix. And reading between the lines (as was hinted at by the three CEOs at last year’s AIMP forum), lies the ancillary and potentially very lucrative business of mining, packaging and selling the vast stores of data the PROs collect to entities both inside and outside of the music industry, thus taking a page from the Google and Facebook playbooks.

If the ASCAP and BMI Consent Decrees are relaxed, then all three PROs can more freely pursue diversified business strategies. This could lead to higher performance royalties to writers and publishers through both more competitive negotiations and, by leveraging the data they collect, lower overheads – but potentially at the cost of control of “proprietary” information and transparency if the PROs expand beyond core music licensing businesses.

And there is also the risk that HFA, now to be owned by a for-profit privately held business as opposed to a trade organization controlled by its member music publishers, may impose higher tolls to access data and could potentially lead to less, rather than greater industry-wide licensing transparency. But the likelihood of this occurring will be diminished if ASCAP and BMI offer mechanical and other forms of licensing. And I don’t think SESAC will have HFA cease licensing ASCAP and BMI composers. That would be a bad business move, especially since SESAC will want to maintain as much current music data as possible.

Anyway, that’s how I see it. That said, the only certainty about the music business is that it’s always unpredictable.

Update: 14 September 2015:

It’s now been reported that the sale of HFA to SESAC has been approved by the NMPA Board and membership. The sale is now complete and SESAC now officially owns HFA.

Update: 1 October 2015:

It’s now been reported, quoting SESAC’s CEO, that up to 30% of HFA employees are being let go because of what is euphemistically called in HR-speak, “redundancies” between the SESAC and HFA staffs.

Copyright Law, Capitol Hill and the Music Business: Can This Marriage Be Saved?

On Wednesday, I attended a luncheon sponsored by the Association of Independent Music Publishers. Like last month’s AIMP lunch, the room was packed with my PRO, music publishing and copyright lawyer colleagues. This time it was for a panel discussion on copyright reform and the music business. The panel, moderated by attorney Michael Sukin, consisted of Jacqueline Charlesworth, General Counsel of the US Copyright Office, Steve Marks, General Counsel of the RIAA and David Israelite, President of the NMPA.

Charlesworth, who started the discussion with a brief PowerPoint recap of recent developments, joked that she was asked by Sukin to sit between Messrs. Marks and Israelite – and she did. In the past, RIAA and NMPA were perhaps more frenemies than besties, with sometimes divergent interests. Charlesworth summarized the various House hearings on copyright and the music business as well as the Copyright Office’s music licensing study which is still in progress. She said there is a consensus that Section 107, the current fair use statute, does not need to change as the four statutory factors were adequate guidance for the courts.

Charlesworth also gave a recap of the hearing regarding Section 512 DMCA takedown notices, with most agreeing that the process doesn’t work. She also addressed the status of the proposed Songwriter Equity Act, which I’ve previously discussed, and the RESPECT Act, which would provide that pre-1972 recordings (which are not protected under federal copyright law) would be subject to the statutory licenses for streaming recordings. This would mean that online services would have to pay royalties regarding the streaming of recordings of classics from the Big Band era to the Beatles and beyond. Recently, two courts have determined that even absent federal copyright protection such royalties would need to be paid under California state law.

Steve Marks discussed royalty payments to labels by streaming services and the disparity among them. He said Pandora pays about 50 cents per user per month in royalties to labels whereas Spotify pays $7 per user per month. One is on a statutory license for a non-interactive service (i.e., users can’t select individual songs) whereas the other is interactive, and therefore subject to market rates. You can guess which is which. He said this disparity doesn’t make sense since the user experience is similar and the distinctions between interactive and non-interactive are increasingly blurred. He agreed that the current music licensing “system” is broken, using as an example of one instance where 1500 separate licenses were needed for one 20-song album. I’m thinking that’s an awful lot of split copyrights and samples to be cleared.

Both Marks and Israelite stressed that statutory rate-setting provisions should be amended to reflect a free market benchmark, i.e., what a willing buyer and seller would negotiate. Marks also stated that with respect to music services he favored pursuing new licensing models, including blanket, collective and bundling of rights. He also stated that both labels and publishers should be paid directly by services (i.e., no pass-throughs) with all rights holders having audit rights.

Israelite stressed that like health care reform and immigration reform, copyright reform means different things to different constituencies. To what he characterized as “extreme academics”, copyright reform means looking at copyright through the prism of the public good and getting material into the public domain as quickly as possible. They and their Silicon Valley funders believe that copyright duration should be shortened and that fair use and application of compulsory licenses should be expanded.

By contrast, Israelite said most of the creative community view copyright as a property right that needs to be strongly protected in order to incentivize creators to create new works. Historically, Israelite pointed out, copyright reform had always been about strengthening copyright protections.

Israelite spoke eloquently on the stifling effect statutory and Consent Decree regulations have on songwriters and music publishers, pointing out that labels have about 8% of their income regulated while publishers have 75% of theirs subject to Congressional or Consent Decree oversight. As a result, Pandora pays 50% of its revenue to labels but only 4% of its revenue to publishers who are subject to rates dictated by statutes and Consent Decrees. The panelists all touched upon the current Justice Department review of the ASCAP and BMI Consent Decrees, a topic I discussed here.

Very little of the discussion covered new ground. However, what was interesting was the degree of mutual support that RIAA and NMPA had for their respective interests. For example, Israelite expressed strong support for copyright protection for pre-1972 recordings and a terrestrial public performance right for sound recordings. Similarly, Marks expressed support for Consent Decree reform and to amend the Copyright Act in Sections 112 and 114 to have rates regarding musical compositions set using a fair market benchmark.

This more closely united front is undoubtedly the result of common perceived “enemies” that did not exist historically such as Google/YouTube, Apple/iTunes, Pandora, Spotify and anti-copyright academics such as Lawrence Lessig. None were singled out by name. And of course, the music industry needs these online services as much as they need the content that labels and publishers provide.

While none of the panelists felt that major changes to copyright law as a whole would be forthcoming anytime soon, they did feel that some changes with respect to music could happen in 2015. And something else to watch is RIAA and NMPA’s working on ways to address “micro-licensing” issues: license requests that often aren’t handled because the dollar value is too low to justify the administrative costs. Finding a way to effectively deal with these micro-licenses potentially lead to many millions in additional revenue while helping users whose requests are too often ignored.