The Future of Streaming Music Rests with Congress

When it comes to the content industry, the world is a-changing. No matter what the industry – publishing, music, television, movies, comic books and more – there has already been a significant shift in the how and where people consume this content thanks to broadband, the Internet and, more recently, mobile technologies.

According to Nielsen (NASDAQ:NSLN) Soundscan numbers, digital music track sales fell 12.5% in the 1Q 2014 to 312 million, down from 356.5 million, while digital album sales dropped 14.2% to 27.8 million from 32.4 million. And just in case you are wondering, CD sales are declining even faster, down 20.5% to 31.9 million from 40.1 million.

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By comparison, on-demand song and video streams in the first quarter of 2014 climbed 35% to 34.28 billion, up from 25.44 billion streams in the first quarter of 2013. Pandora's (NYSE:P) application has been among the most-downloaded free apps for iPhones and iPads, demonstrating that streaming is becoming a mainstream way to listen to music on portable devices. Pandora is now available on more than 400 connected devices and at the end of May the company had 77 million active listeners. During the month those millions and millions of people listened to 1.73 billion hours of Pandora programming, a 28% increase year over year.

Even third party research firm Nielsen, the company that measures the ratings of television shows, had updated its ratings measurement system to capture data about television viewing not simply through broadcast, but through streaming. Given Nielsen’s acquisition of radio ratings giant Arbitron one has to wonder how long until Nielsen Audio expands its measuring scope to include services like Pandora, Spotify, Apple’s (NASDAQ:AAPL) recently acquired Beats service and’s (NASDAQ:AMZN) new Prime Music offering.

As these changes have taken place copyright law has failed to keep pace. Recent tweaks have been specifically targeted and usually at the behest of one sector of the content industry seeking advantage. Current copyright laws have not seen a comprehensive review since long before the existence Netflix (NASDAQ:NFLX), Hulu, Pandora or Spotify, which means the system as a whole is geared towards the content industry of yesteryear.

There is little debate that the current copyright laws need to be comprehensively reviewed and updated to reflect current market realities. Congress is in the process of doing just that. The House Judiciary Committee will hold hearings this week to examine music licensing specifically. While a forward looking approach is to be commended, there are some in the industry that are seeking to use this review as a means to rig the system in their own favor. To that end, there are some realities from yesterday that should not be overlooked. The future of steaming music services could be at stake.

As a result of copyright law, power is highly concentrated in the music licensing business. Songwriters rightly control their work product. However, when songwriters and music publishers collectively assign control to Performance Rights Organizations like the American Society of Authors, Composers and Publishers, the aggregation of control becomes absolute. Three PROs effectively control 100% of all musical compositions.  There is no competition or marketplace for those wishing to license and use compositions.

In the past, these organizations have abused this power by colluding to push up rates. As a result ASCAP and Broadcast Music Inc. have been deemed a monopoly and forced to operate under a federal consent decree since 1941 that gives licensees the right to seek federal court intervention when PROs’ demands begin to cross the line of propriety.  The third organization, The Society of European Stage Authors and Composers, is currently in the midst of a federal antitrust suit.

In addition to Congress’ review of copyright laws, the Department of Justice recently announced that it will be reviewing the consent decrees for ASCAP and BMI with a view of updating them as well. Not surprisingly, the music publishers and PRO’s have advocated for a full repeal.

In light of the industry’s history, there are some key questions Congress should be asking this week:

Are the recent actions of the music publishers reflective of what would occur in a free, competitive marketplace?

Pandora was recently forced to petition the federal court to intervene in negotiations between them and ASCAP. In the decision, it was revealed that the major publishers intentionally withheld vital information about the details of their catalogs, giving Pandora 3 choices: pay whatever amount the publishers wanted, not pay and face infringement claims that would wreck its business, or stop playing music altogether.  In what other market could a seller of a product legally not tell the buyer what they are purchasing and then sue them to oblivion if they refused to pay the ransom.

Why would the DOJ even consider removing the constraints of the consent decree?

In addition to ASCAP’s antics with Pandora, a Pennsylvania court recently found that that SESAC, which controls approximately 5% of the market, likely exercises monopoly power, and thereby might be destined for anti-trust constraints. The major publishers, currently under consent decree, control market shares multiple times greater than SESAC.

The manner in which Congress views the answers to these questions will have significant implications for the growing streaming marketplace. Removal of the only check on the publishers’ vast power would leave publishers completely unimpeded to raise rates.

It is clear that the publishers’ main goal is to drive up rates paid by licensees. In addition to ridding themselves of the consent decrees they are seeking legislation that would reconfigure the formula federal courts currently use to require the court to set higher rates.

Either of these policy changes would be devastating to streaming music providers. Services like Pandora already pay over 60% of their revenue in licensing fees while others pay far less for delivering the same service. As a result, services like Pandora have been unable to see profitability and sustainability is already in serious question. Further raising rates would likely be fatal.

The outsized influence of the content industry being exerted to implement one-sided copyright laws is much to blame for the current complex and irrational system in place now.  The time for reform is now, but Congress should remain focused on comprehensive reform that strikes a balance between artists’ and composers’ compensation and licensees that reflect consumer demand in the rapidly changing music marketplace.