Partial Licensing or Total Monopoly? The Efforts to Adapt Antitrust Law in Music to a Digital World

Aaron Benmark
J.D. Candidate 2016, UCI Law

The Department of Justice has agreed to review the consent decrees that govern the music royalty market and consider modifications to update the decrees to reflect the digital age. Pandora and other digital music stations argue that the ASCAP/BMI consent decrees remain important to ensure a competitive marketplace; music publishers and the publishing rights organizations (“PROs”) counter that the decrees do not allow them to receive fair value for their digital catalog. Caught amidst the battle between two powerful industries are music creators and consumers, who wish to see their own interests protected. Unfortunately, the complicated nature of the consent decrees make predicting the effects of any of the proposed modifications difficult, if not impossible.

ASCAP and BMI originally entered into the consent decrees in 1941 after lengthy litigation under Section 1 of the Sherman Act. The consent decrees were an attempt to address competition concerns created by the market concentration possessed by the performing rights organizations (“PROs”), particularly in the holding of rights of public performance for songwriters and music publishers. The consent decrees have occasionally been amended, most recently in 2001. Since 2001, rapid shifts in the digital marketplace for music has led to renewed conflict over the decrees. As a result, the Department of Justice Antitrust Division agreed to review the decrees and consider proposed modifications.

The PROs and major publishers have gone so far to suggest the consent decrees should be eliminated entirely, labeling them as outdated, World War II era provisions that have failed to keep up with the marketplace. However, organizations representing musicians and consumers, while often amenable to modifications to the decrees, point out that even under the decrees, the publishers have looked to abuse market power when possible. Additionally, given that the music industry is concentrated in fewer hands than ever in the modern economy, the need for antitrust regulation to prevent abuses of market power is likewise stronger than ever. Therefore, it is exceedingly unlikely the consent decrees will be withdrawn completely.

Harder arguments have arisen over proposed modifications. Covering every battleground would be impossible in a single article, but one of the most significant fights has been waged between Pandora and ASCAP and BMI over “partial withdrawals” of rights and the lack of transparency in the PRO’s digital catalogs. ASCAP and BMI support the ability to withdraw parts of their catalogue from deals with digital radio stations such as Pandora. They did so in a series of negotiations with Pandora, in which Pandora eventually consented to a temporary licensing rate increase. Pandora, however, subsequently won a court injunction declaring these partial withdrawals illegal under the consent decrees. As a result, ASCAP and BMI have proposed that the Department of Justice modify the consent decrees to allow partial withdrawals moving forward.

Pandora’s characterization of the negotiations under the partial withdrawals, supported by the findings of the trial court, illuminate the potential for anticompetitive behavior on the part of the PROs. According to Pandora’s characterization of these negotiations, ASCAP and BMI withdrew parts of their catalogues from licensing agreements negotiated with Pandora. However, they then refused to reveal to Pandora the specific lists of withdrawn songs. Without the lists, Pandora had no knowledge of which songs were infringing and which were not. As a result, Pandora effectively could not play anything from the PROs without risking playing songs that had been withdrawn. In effect, the partial withdrawal had the same effect on the negotiations as a full withdrawal. Pandora was faced with a Hobson’s choice: they could shut down their service entirely or agree to rate hikes. They chose the latter and immediately appealed the partial withdrawals in court. This appeal was successful, and the court found that the withdrawals were illegal under the current consent decree.

ASCAP and BMI support the partial withdrawals for an obvious reason; it allows them to use their market power to achieve better deals for their clients. Allowing these partial withdrawals, they argue, will allow musicians and publishers to maximize the market value of their works by negotiating direct licenses for their individual songs. They also warn that music publishers may withdraw from ASCAP and BMI entirely if they believe they can achieve better profit maximization through direct licenses than collective licensing.

The best outcome is unclear. If the music publishers withdraw from ASCAP and BMI, it will create chaos in the marketplace for music licensing, dramatically reduce the power of collective licensing, and may in fact lead to even greater market concentration than already exists. However, as seen in the Pandora negotiations, allowing partial catalog withdrawals may grant an unfair bargaining advantage to the PROs, hurting digital media providers and consumers. In such a complicated marketplace, even small modifications to the Consent Decrees could lead to a myriad of unforeseen and unpredictable consequences.

This is just one of many problems facing the Department of Justice as they evaluate the proposed modifications. In additional to the partial withdrawals, they must also consider proposals to replace the current rate-setting courts with expedited arbitration, to allow direct licensing, and to allow ASCAP and BMI to license multiple rights in musical compositions rather than the public performance right alone. Enacting any one of these proposals could have deep and far-reaching ramifications in the market for digital music. Together, these proposals create an enormous amount of uncertainty.

What is clear is that the Department of Justice must do something to update the Consent Decrees to the modern digital marketplace. In choosing their approach, however, they must think deeply about the consequences, not just for the publishers, PROs, and digital media companies, but also for the consumers and musicians who depend on a functional marketplace for music.