June 4 (Bloomberg) -- The U.S. Justice Department will review decades-old agreements that govern songwriter royalties, following court battles between rights holders and the Internet radio firm Pandora Media Inc.
The review will “examine the operation and effectiveness of the consent decrees” dating back to 1941 with two major songwriter groups, the American Society of Composers, Authors and Publishers and Broadcast Music Inc., the department said in a notice today.
The review could lead to changes in the rules governing how much Pandora, the leader in Internet radio, pays songwriters each time their works are played. Ascap and BMI, both based in New York, represent hundreds of thousands of songwriters, composers and publishers. They’ve argued in court disputes with Pandora that the agreements with the Justice Department don’t take into account the rise of digital media.
“The department understands that Ascap, BMI and some other firms in the music industry believe that the consent decrees need to be modified to account for changes in how music is delivered to and experienced by listeners,” the Justice Department said.
Dave Grimaldi, a spokesman for Pandora, defended the role the decrees play, saying they provide important protections for songwriters and broadcasters, including mechanisms to establish a reasonable royalty rate when the two parties can’t agree on one. Consumers benefit as well, he said in an e-mailed statement.
“The consent decrees help foster innovation and competition by enabling new industry entrants,” said Grimaldi.
Pandora fell 0.4 percent to $24.52 at the close in New York, taking its decline this year to 7.8 percent.
The consent decrees cover payments made to songwriters whenever works are played on formats including radio, television, live performances and digital outlets like Pandora. The review will explore whether changes are appropriate, the department said. It’s seeking public comment on possible modifications.
“We don’t need a blind survey to suggest that artists hate making $650 on a million plays on Pandora,” Richard Tullo, an analyst at Albert Fried & Co., said today in a note.
Songwriters, publishers and the groups that represent them have sought higher royalty rates from broadcasters for public performances of their works at a time when royalties from the sale of recorded music have declined. Ascap distributed $851.2 million to members in 2013, while BMI distributed $814 million in fiscal 2013.
Pandora pays songwriters separately from performers, who make up a bigger chunk of expenses. The company, based in Oakland, California, sued Ascap in 2012 to seek “reasonable” license fees to play Ascap songs on its service.
The royalty rules applied to an estimated 7 percent of Pandora’s content acquisition costs in 2013, “and any change in the system should have minimal or no impact on Pandora’s royalty rates going forward,” said Michael Pachter, an analyst with Wedbush Securities in Los Angeles, in a note today.
In March, a federal judge in Manhattan ruled that Pandora must pay 1.85 percent of revenue to Ascap from 2011 to 2015, a higher rate than Pandora had proposed. The court rejected Ascap’s request for increasing rates over that period.
Pandora was sued by BMI over rates in June 2013, when that songwriters group alleged that it proposed a “reasonable” blanket royalty rate for allowing songs to be played on the Internet radio service and was rejected. The case is pending.
Pandora had 77 million active listeners in May, an increase of 9 percent from the same period a year earlier, according to a statement today. The company has about a 70 percent share of the Internet radio market in the U.S.
The consent decrees, reached in antitrust cases against the groups, require broadcasters and performing rights organizations to seek license rate determinations from the New York federal court if they can’t negotiate an agreement.
Ascap President and Chairman Paul Williams said the group is “gratified” by the department’s decision to review the agreements.
“Since the Ascap decree was last reviewed in 2001 -– before even the iPod was introduced –- new technologies have dramatically transformed the way people listen to music,” Williams said in a statement. “The system for determining how songwriters and composers are compensated has not kept pace, making it increasingly difficult for music creators to earn a living.”
Michael O’Neill, chief executive officer of BMI, said in a statement that “technology has truly helped democratize the entertainment industry, giving large and small players a forum to be heard over any device -– but the creators of the music must be paid properly and fairly for their contributions.”
Martin Bandier, chairman and CEO of Sony/ATV Music Publishing, said he welcomed the review.
“In the current digital environment, it is crucial that Ascap and BMI’s outdated consent decrees are amended to reflect the realities of the current marketplace and emerging business models,” Bandier said in a statement today. “We are optimistic the system will be reformed to allow our writers and composers to receive fair market value for their music.”
To contact the reporters on this story: Christie Smythe in Brooklyn at email@example.com; David McLaughlin in Washington at firstname.lastname@example.org; Cliff Edwards in San Francisco at email@example.com