Deep Dive Episode 47 – The Songwriting Industry and Antitrust Consent Decrees
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Most people would be surprised to discover that music is among the most regulated of all the products and services they enjoy each day. Through a combination of historical accidents, momentum, and politics, the U.S. government has ended up strictly controlling the prices that radio stations, streaming services, and others pay to use music, and also regulating the terms of sale. This strict control has been in place since 1941 as a result of consent decrees that settled antitrust lawsuits brought by President Roosevelt’s Department of Justice. As a result, a handful of judges determine how songwriters and composers get paid for the use of their music and how they can do business.
The 77-year-old consent decrees were originally designed to regulate a marketplace that faded into history a long time ago. They pre-date streaming services, the internet, commercial FM radio, and even the birth of rock, hip-hop, and most other modern popular music genres. The music business has evolved and changed many times in the intervening years, but the consent decrees march on determining how songwriters are compensated.
The Department of Justice has recently announced a review of aged consent decrees, with Assistant U.S. Attorney General Makan Delrahim targeting the music licensing consent decrees for particular scrutiny.
Nate Kaczmarek: We’ve been looking forward to this afternoon’s discussion entitled “The Songwriting Industry and Antitrust Consent Decrees.” Since 1941 when music industry antitrust lawsuits were settled by consent decrees, the U.S. government has ended up strictly controlling the prices that radio stations, streaming services, and other pay to use music. It also regulates the terms of sale. These 77-year-old consent decrees were designed to regulate a marketplace that does not look anything like the current music business. And the Department of Justice has recently announced a review of the decrees.
To discuss this history and the current issues being weighed by the DOJ, we’re happy to have with us two very interesting speakers this afternoon. Our first guest is Kristen Osenga, who will serve as a moderator/participant for the call. She is a Professor of Law at the University of Richmond School of Law. Her scholarship focuses on the intersection between law and linguistic in patent claim construction, as well as other aspects of patent law. We’re also pleased to have with us Mark Schultz, who is a Professor of Law at Southern Illinois University School of Law where he teaches and writes, primarily, in the area of intellectual property.
If you’d like to learn more about Kristen and Mark and their interesting work, please visit regproject.org where we have listed their full bios. I will first turn it over to Kristen to get us started. After opening remarks from Mark and some questions back and forth between our speakers, we will go to audience Q&A. So please do think about the questions you’d like to ask of Mark. Thank you both for joining us. Kristen, the floor is yours.
Kristen Osenga: Thank you, Nate. As Nate just noted, I’m going to provide a very brief introduction to the issue and then turn it over to Mark. So music is part of our everyday life. It doesn’t matter where you go. There’s often a musical backdrop: ball games, the mall, your car. It sets the scenes in movies. It helps us recall events in our memories. It makes us workout harder sometimes and so much more. No matter what kind of music – rock or country, hip hop or classical – and no matter whether you’re accessing it in your car, on your phone, through your intelligent devices, the key issue is, honestly, we really don’t think about music. If we did think about it, we might be shocked to learn that the music industry is one of the most heavily regulated industries there is.
We generally think of pharmaceuticals or telecommunications when we’re thinking of regulated industries. But interestingly, the music industry is subject to one of the more complicated and, frankly, old-school regulatory schemes that exists. The regulations we will be talking about today were imposed in 1941. Think back to that day. Long before commercial FM radio, before the internet, before digital streaming services like Pandora or Spotify. Although technology has advanced greatly, we’re still working under an ancient scheme that dramatically affects how the industry works today, specifically how songwriters and composers are paid, despite how much the music industry has changed in the last 70-plus years.
Can you even imagine how innovative and exciting the music industry could be today if it had not been hampered by these regulations? Despite recent efforts to bring the music industry into modern times, there’s still a lot of work to be done. With that very brief introduction to subject matter, I’m going to turn it over to Mark, who’s going to explain this ancient regulatory scheme, the problems it causes and what can and should be done to move the music industry into today’s times. Mark?
Mark Schultz: Thank you, Kristen, and thank you to those of you who are listening. So today I want to accomplish a few things. One, I want to briefly explain some of the market structure and the rights at issue here and the relevant organizations to give you the necessary background if you’re not familiar with it. Two, I need to explain a long history behind it. It’s a 77-year-old consent decree. And so we have to start our story back in the 1940s. And it goes forward to today where there’s currently an ongoing argument about changing the status quo. And then, the third thing I want to accomplish is to analyze the status quo and talk about why some argue it needs to be changed and what some of those benefits might be and some who argue why we need to keep it the way things are. Okay.
So let’s begin with explaining the market structure. And the first thing I need to explain is that we’re talking about performance rights here. We’re not talking about the rights to prevent people from copying your music or selling bootleg copies of it. In some ways, those are unregulated; although, there’s some complex regulatory issues there, too. But that part of the market is not what we’re talking about. We’re talking about the market for performance rights. And what performance rights are are the control over the right to play a song.
And when I say play a song, what I mean are a few different things. One, playing a song means what it sounds like. Say a band steps up to the stage in a nightclub or stadium and plays a song — plays somebody else’s song, which is common. That is a performance of the song. Another way to perform a song, though, is to play the sound recording. You can play the sound recording to the public. You might play it in a shopping mall. You might play it in a store. You might play it as background music in a restaurant. Another way to perform a song — to perform a musical composition is to play the recording — broadcast the recording over the radio, streaming it over the internet, via satellite radio and all the other ways we get music today. In any instance where it’s performed to the public to, say, a large group, that’s a public performance.
And the right to control that is a lucrative right. It’s a place where songwriters derive a large part of their revenue. And indeed, in an era where the music business has changed, increasingly, the music business relies on royalties from performance rights. It relies on royalties from streaming services, and, less so than before, it relies on selling either physical or digital copies. And you can imagine, as that last part of the market decreases, the performance rights become important, particularly the fees paid by broadcasters. And this is what has been heavily regulated historically.
So let me explain how this part of the market works. The market for performance rights is a market where the rights are typically aggregated by an organization called the Performing Rights Organization. And they take — what we have in the world are songwriters, who sometimes own the rights to their song. They might assign them to a publisher, sell them to a publisher or other entity. But we have, potentially, many thousands of entities or individuals who own the rights to a particular song and potentially could control the right to perform that song.
On the other side of the equations, you have thousands and thousands, tens of thousands, probably millions of entities who would like to publicly perform music: bars, restaurants, radio stations, television stations. And we all know how popular music works. It’s played spontaneously. It’s chosen. It’s a very volatile market where, if something is popular one day, not popular the next. It’s rather unpredictable who wants to play what when. And we’re talking about three to five-minute units of time these songs take up. So if you can imagine that these thousands of entities on each side of the equation had to negotiate permission with each other and fees, you can imagine a market that is too complex, too beset by transaction costs to even exist.
So there’s a solution to this problem, and it’s the performing rights organization. They sit in the middle of the equation. Typically, if this were a visual presentation, there would be a slide here that would have shown you a mess of lines and arrows that look like spaghetti going from both the sellers and buyers in a market that looked incredibly complex. And the next slide would simplify that market by putting the performing rights organization in the middle. And they are the central clearinghouse for these performance rights. Everybody pools. All the publishers and songwriters pool their performance rights into the performing rights organization, which then administers them and provides one-stop shopping for the bars, restaurants, retailers, and broadcasters who want to perform this music. And so it’s a very efficient solution.
Of course, the challenge then is we’ve now created an entity that brings together a group of people who are arguably competitors and put them into one or a few — we’ve created one or a few performing rights organizations who now turn around and negotiate with the rest of the market. And perhaps you can now see coming — you don’t have to be an antitrust expert to see coming the potential competition issue here; that you have a few entities controlling the market. And they have a lot of market power. And in fact, today, it’s estimated that the two main performance rights organizations that are subject to the antitrust consent decrees we’ll discuss today, ASCAP and BMI control 90 percent of that market.
And before I depart from this topic, I also want to explain that the performing rights organizations’ solution is a very, very common one globally and historically. The first performing rights organizations were formed in the late 18th century in France in order to administer the rights of playwrights, dramatists, and others. The first music one was formed in France in the mid-19th century. In the U.S., the Copyright Act was not amended until 1897 to provide for performance rights for songwriters, composers, and others. So it was starting in 1897 this issue became relevant to the American music business. And by the 1910s, the American Society for Composers and Publishers was formed to administer these rights. In other words, ASCAP was formed to go out and license these rights.
And this way of dealing with the music market is essentially universal. And in fact, it’s often governed by — it’s typically mandated by law, in most countries in the world. And in fact, globally, for the most part, the way things work is that the rates are set in some way by the government, whether it’s a regulatory body, whether it’s a statute, or, in our case, a court governing an antitrust consent decree. This is very normal, and, in fact, the treaties in this area provide that, in general, the members of the Berne Convention and the Rome Convention—the two relevant international copyright treaties—provide that members must provide exclusive rights in creative works but that the exclusive rights with respect to performances only needs to provide for equitable remuneration. In other words, you can get paid, but you don’t necessarily, by treaty, have the right to control the use of your work. So we’ve got this world where an efficient solution sprang up largely from the marketplace. But it has been enshrined by treaty and national law as the way to administer these rights.
Okay. Let’s talk more about the U.S., and let’s get to the heart of the matter: the antitrust consent decrees. So ASCAP, as I said, was formed in the early 20th century. And for a while, it was truly a monopoly. It was the only place that broadcasters — the early broadcasting industry really could go to get their one-stop shopping for rights. By the 1930s, many broadcasters became frustrated with ASCAP. They believed the rates it was charging were too high.
There was a controversy where, for a while, many radio stations in the 1930s were boycotting ASCAP, and they were only playing public domain music, which at the time consisted of things like “Bicycle Built for Two,” and other classics that we heard as children, which quickly frustrated their audiences. So at that point, the broadcasters got together and formed their own performance rights organization, Broadcast Music Incorporated, BMI. And BMI was able to find a catalog of songs that it could license that ASCAP didn’t control. Interestingly, that catalog of songs included a lot of blues music, country music, Latin music, and other forms of music which had not been quite yet fully popularized in the U.S. So popular music as we know it today probably comes largely from this dispute. Now, of course, the membership of both organizations has changed and evolved quite a bit over the years.
So we come to the early 1940s with ASCAP and BMI each controlling a large chunk of the market and each a place where broadcasters and others who want to use music — who want to perform music have to go to get their licenses. And the way PROs work, in general, is that if you are, say, a bar or a concert hall or a broadcaster, you go to the PRO. You seek a license, or, more likely, the PRO comes to you and knocks on your door and says you need a license. You pay an annual fee, and you get access to all of the works in their repertoire for a flat fee.
And then, the PRO collects those fees from all of its licensees, puts them into the pool, and then divides the pool up among its members, and typically does so in a way that is, I guess, corresponds to how much a particular song was played. So if you’re a very popular artist with a very popular song that year, you’re going to get a larger slice of that pool than somebody who’s music was barely played. But anyway, the proceeds are pooled, divided among the members. And, of course, we have this situation in the U.S. in the early ‘40s where ASCAP and BMI are the entities you have to go to. And they’re not really regulated at this point.
And what the Department of Justice — the Roosevelt-era Department of Justice looks at these two entities that control a large part of the market — these two very big businesses that dominate the market, have a huge market share. And they impose a very mid-19th, 20th century solution. They bring an antitrust suit. The antitrust suit gets settled in 1941 for both ASCAP and BMI. So following these antitrust lawsuits, these two major entities were subject to consent decrees. Each consent decree assigned a judge the authority to set prices for performing, broadcasting, and then much later, streaming songs. Under the consent decrees, judges also governed many of the aspects of how songwriters, composers, and the entities that represent them do business.
Since then, each consent decree has been amended only twice, ASCAP’s most recently in 2001 and BMI’s in 1994. And if you consider the changes in the music marketplace, that’s fairly interesting, to say the least. The 1941 consent decrees certainly pre-date most forms of modern popular music. They pre-date FM radio as a commercial enterprise. They pre-date all of the modern ways of getting music that we know. And yet, they’ve marched on for many years. So the key features I want to emphasize of these consent decrees is that, first, they require non-exclusive licenses. So if you put your music into ASCAP or BMI, you are committing to allow ASCAP or BMI to allow all comers to use the music, to use the entire catalog. There are no exclusive deals.
So contrast this with what we’ve grown up with, with say, television, where a broadcast network shows a certain show. You know you need to go to NBC to see Friends or Seinfeld back in the ‘90s. Today, you know you need to go to Netflix to see Orange is the New Black or whatever you’re streaming on Netflix. Most notably, HBO has exclusive rights over Game of Thrones. And so that’s not true in the music marketplace when you think about it, right? There’s no one radio station you turn to to hear a particular artist’s music, and that’s because of the non-exclusive licenses mandated by the consent decrees. They are required to license the entire catalog. And most notably, they have to do so at standard rates determined by the judges.
And if the parties which to alter the rates or alter the terms or increase the rates, they need to go to the judges. By the way, for much of the history of these consent decrees each consent decree, the BMI consent decree and the ASCAP decree, were governed by one judge. They had what you might call an anomalist set up, where an unelected official, without even the indirect accountability that most regulators have to the public — an unelected, non-expert judge for many decades essentially ran important aspects of that part of the music business. One determining the prices set by BMI; the other determining prices set by ASCAP and the terms in which licenses were available.
Today, that structure has only slightly been altered very recently by the Music Modernization Act because now these rate cases are now going to be assigned randomly to judges in the Southern District of New York. So you won’t just have one judge who is king or queen of the music licensing business. It will be a shared responsibility. Okay.
So that brings us — that’s a quick version of the history of these consent decrees. And in recent years, there have been attempts to modernize the consent decrees by ASCAP and BMI. ASCAP and BMI have sought to alter the consent decrees. The concern in recent years was that times have changed and, in a specific way, that some of the members of ASCAP and BMI were dissatisfied with the current arrangement in a very specific way.
The consent decrees require if you put your rights in ASCAP and BMI, they’re made available to all comers. And all comers include not just all the entities I’ve been talking about frequently so far: the radio stations and retailers and restaurants. But that also includes Pandora, Spotify, Apple Music, and others. When we look at Pandora, Spotify, and Apple Music, what do we see? We see a handful of entities in a market that is very technologically savvy. And what the parties involved here, the members of ASCAP and BMI that became dissatisfied with the current arrangements, saw is a chance to negotiate separately.
They said, “You know, we can negotiate with Spotify. We could negotiate our own rates for our catalog. And things have changed. Technology has changed things to the point where, if Spotify can have certain music and not have certain music, that’s not a burden. The service is administered digitally. We’re long past the day where PROs were absolutely necessary.” Imagine a 1950s DJ sitting there with a bunch of records and having the sift through a paper list of which records they could and could not play and keep that up to date on a constant basis as new music is issued daily. It’s just inconceivable, and the PRO with non-exclusive entire catalog licenses, of course, was an important solution to those transaction costs.
But today, with digital technology, Pandora, Spotify, Apple Music, and others can easily determine which music they’re allowed to stream and which music they’re not allowed to stream. They could pay different rates to different parties. They can easily track this information. And so the argument by a number of large members of ASCAP and BMI was “We want to pull out our digital rights. We want to do a partial withdrawal. We still need ASCAP and BMI. We still want ASCAP and BMI to negotiate with all those retailers, bars, restaurants, and the broadcasters. But we want to be able to negotiate our rights separately.”
Well, they’re under a consent decree, of course, so they have to go to court to ask the court to do so. They go to court, and the response of the court was that they could not — the court said the current consent decree does not allow for this, that you’re either all in or all out. You either have to completely withdraw your music or have it completely in and available to all comers at standard rates. And so, at this point, there were a lot of quotes that I suspect the median age of my audience is high enough that I can say. Lots of people in the music business were quoting “Hotel California.” “You can check in, but you can never leave.”
And this was not a happy situation. So next, the ASCAP turned to the U.S. Department of Justice and asked the Department of Justice to agree to a modification of the consent decree to allow partial withdrawal. So DOJ proceeded. The Obama Justice Department proceeded to review the consent decrees. And so in 2016, they announced their conclusion. So did ASCAP get what it wanted? No. The consent decree was not relaxed. In fact, it was made more regulatory. It announced a new interpretation of the consent decree that required ASCAP and BMI to license on what they called a full work basis.
By this, the Department of Justice meant that BMI and ASCAP must grant blanket licenses that cover 100 percent of the rights to works in each of their respective repertoires, whether it controlled 100 percent of those rights or not. Now, I’m going to try to avoid getting into the weeds in this because it gets a little hard to explain. But imagine a songwriting team.
So let’s take the classic songwriting team of Lennon and McCartney. They each, potentially, could — they wrote songs together. They each could potentially have belonged to different PROs. One could have been an ASCAP member. One could have been a BMI member. The way the music business has worked for a long time is ASCAP and BMI could each license the fraction of the song it actually controlled because Lennon had put his songs into one, in my example, McCartney into another. And songwriters did this all the time.
Songwriting is a very fluid, I guess, business and discipline. People work together with different people all the time. They’re members of different PROs. It’s never really been a problem. But DOJ, in 2016, said, “No, this is a problem. The business essentially has to license rights it doesn’t have on a full 100 percent basis to truly provide one-stop shopping.” There were lots of great quotes of reactions of ASCAP and others. One, ASCAP’s president, Paul Williams, said, “It’s as if the DOJ saw songwriters struggling to stay afloat in a sea of outdated regulations and decided to hand us an anchor in the form of 100 percent licensing instead of a life preserver.”
They later observed — or BMI later observed, “In the world proposed by DOJ, iconic songwriting teams like John Lennon and Paul McCartney might have worked with each other only if they agreed to join a single PRO. To impose these kinds of restrictions cannot be in the public interest.” So what we have here is DOJ essentially attempting to up the ante and saying, “Look. We want to not only continue the consent decrees but increase their involvement in determining the structure of this business and how people work together in it.”
So the next thing that happens is the parties go to court to fight this new interpretation of the consent decrees. And they eventually win. The final appeal is issued in — the Second Circuit rules in December 2017 in favor of the PROs keeping the status quo. So it felt like a victory, but, in truth, after BMI won its lawsuit in December 2017, all it got was the status quo for its troubles. So it tried to change the status quo. Things almost got worse, and it managed to preserve the status quo. And that’s where we find ourselves today.
But of course, there’s a new administration and a new Assistant Attorney General for Antitrust. And one of Assistant Attorney General Makan Delrahim’s priorities is to review outdated consent decrees. Apparently, there are hundreds of old consent decrees, stretching back decades, that govern a variety of industries despite huge changes in the intervening years. And Delrahim has particularly targeted for criticism these consent decrees because they are among the oldest, if not oldest, ongoing consent decrees. So he has announced an intention to review them and that it is likely that DOJ will perhaps repeal them or seek the end of them.
So this, of course, has been met with alarm by certain market participants. And so, in the Music Modernization Act passed last year, there’s a provision that provides for congressional oversight of any end to the consent decree. And Senator Graham, as chair of the Senate Judiciary committee, has stated in February that the consent decrees — essentially said the consent decrees as they are work fairly well and that the parties really ought to sit down and discuss this together – the parties being the PROs and the broadcasters and others. And he wants the DOJ to, of course, be accountable for any changes and to speak with the Judiciary Committee first.
In response to this, ASCAP and BMI have proposed, in March, a time-limited transitional form of a consent decree, which they say would have a sunset provision on it, as they say modern consent decrees do, and that it would essentially, in a nutshell, preserve the status quo for now but, as they say, conditioned on receiving fair fees. So what we’re looking at is a potential end to the consent decrees. And now, I come to the part of the discussion where I’d like to analyze the consent decrees and, I guess, perhaps, some of the consequences for changing the status quo and the pros and cons.
And first, I guess, one of the things I’d like to do is ask you to consider why the current status quo with the consent decrees is in some ways normal and in some ways the strangest thing in the world. Why does it seem normal? Well, this is — the competitive concerns, first of all, that led to the consent decrees, you can see, in many ways, still exist. And there’s a lot of history there where the U.S. and other markets have been careful to regulate the performing rights organizations such that this is a market where, by treaty, the only guarantee that the countries have to provide is for equitable remuneration — that you get paid, not that you actually control your performance rights.
So there seems to be a longstanding recognition for over 100 years that there are potentially competitive concerns in this market. And I also want to make another point — is that we lawyers—I assume most of my or all of my audience is lawyers—and [inaudible 35:29] areas are often quite comfortable with rate setting. It seems very familiar.
And this is where I wanted to make a point. It’s more of a sociological point, even, that the reasons we’re very familiar with and maybe somewhat comfortable with regulated industries, with governments setting terms and prices, is because that’s where we have a role. That’s where we spend our time. There are not lawyers who spend a lot of time on vegetable rate settings, right, the prices you pay for your peaches or your green peppers. Those can fluctuate at the grocery store from day to day. A lot of other things you buy fluctuate.
There’s no real-world of regulatory lawyers — room for regulatory lawyers. It’s not a place where economists can write academic papers and make a lot of money testifying as expert witnesses. So if you look at the academic literature, if you look at the law reviews, if you look at ABA sections and ABA publications, you see that the world of regulated industries, of rate setting, of setting terms or transactions is a pretty familiar and comfortable one. So I want to try to convince you just briefly that it’s actually really, really weird. And I think I’ve started to do that, right?
In America, in the U.S. market and most other markets, most transactions that you do every day are rather relatively lightly regulated. It’s not normal to set prices. This is the — the normal preference is for markets to determine these things, and it’s never really a disaster. Most things — the world works pretty well when gas stations can raise or lower prices as needed and the grocery store can change prices and so many of the other transactions we do on a daily basis. We trust the individual market participants to figure things out for themselves without help from a regulatory agency, a statute, or a court. And so, let’s acknowledge that it’s an unusual state of affairs.
Now, let’s now look at the status quo specifically, though, in what I argue is an unusual state of affairs and look at arguments for and against changing the status quo. Okay. Let me be fair. We couldn’t find somebody with whom I could debate. Let me try my best to present a few of the arguments against changing the status quo. One of them — it’s more of a rhetorical argument — is we just reviewed the consent decrees a few years ago. Why are we revisiting this now? Well, it’s a new administration. These are the sort of things that happen. I don’t think it’s a strong argument.
But a stronger argument is that there are competitive concerns. That if ASCAP and BMI are unleashed, they control a lot of the market, and we could see rates skyrocket. And in a fairly common rhetorical move, the few op-eds I’ve seen about this issue of course identify the little guy as the victim. It’ll be the struggling local bar or the like that does not — that’ll have to pay high rates and be put out of business or the local radio station. And there are competitive concerns when two entities control a large part of the market. And there’s an argument that, hey, things have worked pretty well so far.
This is essentially what Senator Graham has said. And so why change things? We have this rich, vibrant music market. Well, here’s some arguments against — arguments in favor of changing the consent decrees. First is the current setup really distorts the market, and it creates an unfair bargaining advantage for the broadcasters and others. And let’s look at particularly the broadcasters. For a music radio station, what’s the major input of a music radio station? Music. And you would think that they’d have to pay a lot for the major input, especially since they do add value.
But they are, in many ways, I guess, a reseller of somebody else’s product or somebody who showcases somebody else’s product. What do they pay? Well, their rates are, more or less, in the single digits of their revenue. Arguably, about, let’s say, on average 3 percent of — the royalties are at 3 percent. Is this too much or too little? Well, it’s hard to say because this has never had a functioning market. So it’s hard to say what a functioning market would look like. But if we look at, say, the prices — see what Apple pays for an iTunes download. Seventy percent of that goes back to the music industry.
When we look at Apple Music and we look at Spotify, about 58 percent of Spotify’s revenues go back to the music industry in some way, shape, or form. And so when we look at other parts of the music industry that aren’t completely analogous but are somewhat analogous — that are less regulated, we see the lion’s share for this major input going to them. And so those single-digit rates seem unfair. Perhaps. And that’s because, if you have to go to court to raise your prices, you’re already behind the game. You’re going to get opposed. There’s going to be politics involved. There always are. And it’s going to be difficult to get your rates increased.
Now, you may respond to this, still—rightly so—saying, “Look. That’s great, Schultz. But what you’re really just telling me is that there’s these two big entities and one’s not getting as much from the other as it good. You’re just talking about shifting revenue around. What does this matter to me?” And I think the second argument we make in our paper is probably the more compelling one is that this gets in the way of innovation, especially the term setting. When you can’t do an exclusive rights deal, you can’t innovate with respect to business models and creativity.
And we, say, look at the television market. It’s not a perfect analogy, but when we look at the television market, which is much less regulated, what we see is a market where there are exclusivities, where people do exclusive deals, and where they can invest in something, where HBO can invest in a Game of Thrones with all of its lavish sets and locations, where you can try a variety of different business models for delivering content.
We don’t really have that in the music industry. We have some change. We have streaming services. That’s pretty exciting. It’s been great the last several years, but there’s no exclusivity. There’s no one place you go that’s the only place you can get the music. TIDAL tried this — the streaming service TIDAL, the artist-owned streaming service. But what they quickly found, the artists who tried to exclusive streaming deals there, is that, of course, the radio had the right to play their music right away. And so an exclusive deal doesn’t really mean much or attract many customers when Jay-Z or Beyoncé’s latest record — and these are the ones who tried the exclusivities — when their latest record can be listened to on the radio. Their fans don’t have to go to TIDAL to get it.
And so you don’t get some of those potential benefits and changes to the market. In conclusion, what we have is a pretty long-standing arrangement that has a lot of history behind it. It has a certain historical logic to it, but that logic’s time may have run out. And there’s a potential move to change the consent decrees. And I guess clearly where I’m coming down is I would argue that it’s worth experimenting with, seeing what a less regulated market would look like. I think we would see a lot more potential innovation in business models and potentially creativity. So thanks for listening.
Kristen Osenga: Thank you, Mark. That was fantastic. Nate, I’d like to open it up for questions now in the time that we have left.
Nate Kaczmarek: Okay. Very good. Go to our first question now.
Chris Garvey: One of the things about music — this is Chris Garvey, and I’m a patent attorney. Music is more attractive with familiarity. The first time anybody heard “The Firebird” symphony they thought it was horrendous. But the second time it wasn’t so bad. And eventually, it became acceptable. And I think this is true of most songs. There have been experiments done where mice are subjected to music in the womb, and the music they’re subjected to tends to be the one they go to the treadle on the side of the cage to select.
So there’s a limit to the monopoly, and the limit is shown by the fact that there was a pay-to-play situation on the radio stations — that people actually paid radio stations or DJs on radio stations to play their music so it would become popular and they could sell more records. So there’s a limit to this course of monopoly that music licensers have. And I’m just wondering what creative solutions you can think of in a world where we could have various computer programs doing any sort of distribution over the net that we can imagine.
Mark Schultz: So thanks. I think, fundamentally, you’re asking does — I think there are a couple things going on in your statement and question. But one of them you seem to be invoking a really familiar argument that’s been made that, hey, radio actually is advertising and that all of you who complain about — you songwriters, as well as record labels who complain that you get little or nothing in the case of record labels from airplay, in reality, you get free advertising. So it’s a very plausible and appealing argument. It’s one that the broadcasters have made for decades.
And the difficulty with this argument, I think, is that it fails to recognize what an economist named Stan Liebowitz has called a fallacy of composition. And what he means by that is, sure, there was a history where people engaged in payola. And think of why you would want to engage in payola — pay somebody to play your record. So that it becomes more popular and people buy your record. But does that mean that people buy more records? Does that mean that radio stimulates more revenue for the recording industry and for songwriters overall?
What Liebowitz argues and points out is that what we’re really talking about is just the composition of the market has changed so that certain artists become more popular than others due to airplay, whether it’s paid for or whether it’s just chosen randomly by DJs or however it’s chosen. Whoever gets featured, sure, they sell more records. But it doesn’t mean that songwriters of the industry, generally, sell more records because of radio. And the other thing Liebowitz and others have pointed out is that radio itself is potentially a substitute for other forms of music — for other forms of entertainment.
There have been studies that have shown that in towns where there are fewer radio stations people, historically, bought more records and CDs because there was less radio to listen to. So to get their music, they went to the record store. Whereas, if you lived in an urban area with lots of radio stations, you’re probably less inclined to buy. And I think this point is more true than ever in an age of streaming, right? If you pay your $15 or whatever it is a month for your Spotify or Apple Music subscription, if you happen to hear something on the radio you like, you don’t pay more for your subscription to stream it.
You just choose to stream that particular song you heard on the radio that you liked as opposed to another song you could have streamed. Thus, the composition changes but not the overall market. I think there was something else in your question, but I didn’t quite discern that. So I think I’ll stop there.
Chris Garvey: Well, the question was what other creative solutions can you imagine? I haven’t given it much thought. But it seems to me that if you go online to sample things or download things or — there’s so many — there’s an infinite number of creative solutions, and nobody seems to be coming up with anything much except streaming services.
Mark Schultz: Well, and maybe that is a sign of a market that is somewhat shackled, right? It’s shackled by two things: one, what I’ve been talking about, two, something I haven’t talked about yet — piracy. And I won’t talk about that at length. But on the one hand, when everybody is allowed to offer the entire repertoire, there are no exclusive deals, no special terms, you don’t get that kind of diversity of business models you see in other forms of entertainment.
Think about video games. You have a variety of ways to enjoy and experience a video game. Music is much more restrained within a box. And the other challenge the music market has had is having to compete with online piracy, and not just online piracy, but services like YouTube that essentially benefit from online piracy because they pay very little to the creators because they don’t have to because they are basically sheltered from liability as long as they take down a particular file once they get a notice it’s infringing. Otherwise, this music stays on their service, and they can provide access to it with paying very little.
So I think that’s the difficulty in this market is, in a more free market, we might see a greater variety of solutions. And we could speculate as to what they might be, but they might be specific services that develop and exclusively deliver particular genres or particular songs, particular artists. But we just can’t have that in the current market. Thanks.
Nate Kaczmarek: Okay. Let’s go to our — it looks like we can squeeze in one more call before the top of the hour. Let’s go to that call now.
Maritza Bolano: Yes. Hello. My question goes to the issue of — by the way, my name is Maritza Bolano. I’m an attorney in private practice in New York, and also, I’m a former musician. So I wanted to look at this from the composer, the songwriter aspect. [Are] there currently organizations that would advocate and represent their interests and generate — in order for them to generate the kinds of remuneration independently and advocate for their own music on these stations and sell and buy, like people who buy and sell oranges on the street? Songwriters are totally shackled by this industry. And without their input, there is no music. That’s basically my question. Thanks.
Mark Schultz: Yeah. I think, with all due respect, this is as much a statement as a question, an effective one, that because of the way the industry works, it’s hard for any group of songwriters to break off and work independently. And in truth, I think if you — I’ve been to ASCAP headquarters and SESAC headquarters. That’s another one of the PROs. And they’re definitely in tune with their songwriters. They promote their songwriters, and they care about songwriters. But on the other hand, yes, they are very big organizations. And it could be that certain groups of songwriters might be served by working independently.
It’s really hard to do that in the current marketplace because you could break off and form a separate PRO. Although, to some extent, there seems to be at least a natural oligopoly here. But second of all, if you did so, all you could do is offer the same terms as ASCAP and BMI, so you’d have fewer efficiencies without any particular extra benefit of negotiating leverage or the ability to do an exclusive deal or to charge different rates if you had particularly big stars in your stable. I think it’s a very tough situation because of the homogeneity imposed on the market. And in truth, when ASCAP and BMI between them have a catalog of 10 million songs, I said I think they do promote the interests of individual songwriters.
But I think it’s perfectly predictable and likely that certain groups of songwriters or many other individuals get lost in the shuffle when the organization is that big. So yes, this would be another way in which the market could innovate. If we had a freer market, we might see some specific groups advocating for their own particular unique interests. And we have seen that happen, by the way, in other parts of the copyright industries, even in the music industry. So when it comes to, say, sheet music and displaying lyrics by projector, the Christian music publishers have gotten together. And they provide a licensing organization that meets the unique needs of their licensees, which are churches, typically, and their licensors, which are worship music composers.
And they provide very favorable rates to churches in the recognition that they’re a special market and they need a special organization. But that’s a part of the market—the market for sheet music and projecting lyrics on a screen—that is not regulated like the current music market is for performance rights. And so it’s a very different market, and they’re able to break off and advocate for the rights of a particular unique group of creators with unique interests.
Nate Kaczmarek: Okay. Very good. We have covered a lot of good and interesting ground. I’m curious. Kristen, do you have any final questions or anything you’d like to ask Mark before we sign off?
Kristen Osenga: If I’m hearing him right, it’s entirely possible if the consent decrees got lifted or reduced we might end up with the musical version of Game of Thrones. Did I put that together right, Mark?
Mark Schultz: Well, I think if you listened to the broadcasters, that’s what they’ll tell you. It depends on what we mean — the creative benefits of it or the horrible backstabbing and battles. I suppose it’s an apt metaphor. I took you the wrong way, I think. Yeah. The music publishers would say yes. We could enter a new creative age where there’s creative works like that available. And I think the broadcasters would tell you it will be the kind of bloodbath you’ve seen on Game of Thrones.
So whether we get a metaphorical Game of Thrones or a literal Game of Thrones, I guess, is the debate. And I suppose we have to wait and see. I think the only — and the one other fear, perhaps, is the way politics works is there is some fear that — and I think it’s a valid fear among music publishers and probably the PROs — is that, of course, Congress could always step in. As I remember Billy Tauzin, who was a representative from Louisiana and was chair of the relevant committee back in the ‘90s, was trying to work out some copyright legislation. And the parties in the room — the industries in the room couldn’t agree. And Tauzin’s admonition to them was that, “You know, if you guys can’t get together and agree on a legislative solution, Congress is going to have to write the legislation. And none of you want that.”
So I think that’s maybe what some people fear — the unintended consequence that if the consent decrees are lifted without restraint, without restriction that Congress will step in and actually create a legislative solution that perhaps industry participants like less. So I would suspect, in the end, it won’t be a wild unregulated market. It won’t be a first-best solution that a libertarian free-market advocate would like. But I think we live in a world of the fifth or sixth best solution, so maybe, I think, the parties will compromise and get to a second or third best solution.