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The Department of Justice (DOJ) logo is pictured on a wall after a news conference to discuss alleged fraud by Russian Diplomats in New York December 5, 2013. REUTERS/Carlo Allegri The Department of Justice (DOJ) logo is pictured on a wall after a news conference to discuss alleged fraud by Russian Diplomats in New York December 5, 2013. REUTERS/Carlo Allegri  

ASCAP And BMI’s Cartel-Like Behavior Against Pandora Earns Them A DOJ Investigation

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Daniel Horowitz
Independent Consultant
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      Daniel Horowitz

      Daniel Horowitz is an independent consultant who has served as a staffer in the U.S. House and Senate and as Assistant Administrator for Policy at the U.S. Small Business Administration.

Last month, the Department of Justice (DOJ) took the extraordinary step of issuing a Civil Investigative Demand for Documents to music publishers ASCAP, Broadcast Music, Inc. (BMI), as well as music publishing companies Sony/ATV and Universal Music.

The DOJ’s demand is the most recent salvo in an investigation into major music publishing companies and their apparent collusion to force increased royalty payments by Internet streaming service Pandora. The news of the investigation is a major stumbling block on the publishing industry’s high-pressure campaign on the Obama administration to lift a long-standing consent decree with the government designed to prevent exactly the kind of price-fixing ASCAP and others appear to were found to have been engaged in.

Since 1941, much of the music publishing industry has been governed by consent decrees signed with the Department of Justice (DOJ) acknowledging there is little to no competition for music licensing.  The agreements are the result of a Sherman Anti-Trust Act lawsuit precipitated by years of bullying by the industry. The two largest music licensing organizations, the American Society of Composers, Authors and Publishers (ASCAP) and Broadcast Music, Inc. (BMI) were found to be colluding with music publishers to artificially force radio stations to pay higher royalty rates.

Hindered by their efforts to force large rate hikes on consumers, the industry began a campaign to ask the Obama administration to abandon the long-standing consent decree designed to protect consumers, and ASCAP and BMI had reason to hope their celebrity-filled campaign would be successful. After the their initial request, the DOJ announced a review of the decrees but the discovery of new evidence of price fixing against Pandora has created a speed bump in their blitz. Even absent internal documents from these companies, the Pandora case provides ample evidence that the restraints provided by the consent decrees are as important and necessary now as they were in 1941.

When Pandora’s existing license from ASCAP was near expiration, and both parties in the middle of a long and drawn-out negotiation, Sony chose to withdraw their music catalog from the ASCAP collective, forcing the start-up company to add a completely new round of negotiations directly with the world’s largest music publishing company, just to continue to legally stream the songs Sony licenses. Sony and ASCAP refused to tell Pandora which songs were being withdrawn from ASCAP’s “blanket license.” Without this license, Pandora would face fines of $150,000 for every listener streaming any Sony work. Faced with this extortionate action, Pandora chose to fight and take their case to federal court under the terms of ASCAP’s consent decree.

Discovery documents and pleadings in the case are chock full of revelations of the industry’s malicious behavior. Ultimately, Judge Denise Cote dismissed Sony’s false claims that they were unable to produce a list of their copyrighted works saying, “Sony understood that it would lose an advantage in its negotiations with Pandora if it provided the list of works and deliberately chose not to do so.” She goes on to conclude that, “What is important is that ASCAP, Sony, and UMPG did not act as if they were competitors with each other in their negotiations with Pandora. Because their interests were aligned against Pandora, and they coordinated their activities with respect to Pandora, the very considerable market power that each of them holds individually was magnified.”

Ultimately the federal judge declared that ASCAP and Sony’s actions raised “core anti-trust concerns.” In short, they behaved like cartels trying to shakedown Pandora and absent the consent decree, they would have gotten away with it.

Like the player piano, cassette tapes and the CD-ROM before it, streaming music has become the focal point of hatred among the music publishing industry. The intent of the music publishers and their licensing agencies is clear — raise rates even if (or maybe because) it will kill streaming music services.

In doing so, they will rob tens of millions of consumers of a product and the music they love. They will also shortsightedly deny themselves of a channel capable of producing robust revenue for songwriters and artists to ultimately replace declining sales in every other medium.

The Internet isn’t going away. So, rather than stifle the industry, they need to adapt to it through real market negotiations. Or, as in the words of famed free-market economist Frédéric Bastiat, “They will come to learn in the end, at their own expense, that it is better to endure competition for rich customers than to be invested with monopoly over impoverished customers.”