Is A Crony Deal In Place To End Streaming Music?

Andrew F. Quinlan President, Center for Freedom and Prosperity
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When Beyoncé and her husband Jay-Z held an exclusive $40,000 per-person fundraiser for President Barack Obama’s re-election, it was part of a concerted effort by the music industry to curry favor with the administration. Now the industry is looking for the White House to return the favor. They are asking the Department of Justice (DOJ) to tear up a long-standing agreement between the recording industry and the government designed to ensure that royalty rate hikes cannot be imposed without real market-based negotiations.

Senator Mike Lee (R-Utah) wants to know whether the fix is in and has called a hearing for next week. The Chairman of the Senate Judiciary Committee’s Subcommittee on Antitrust will be asking government officials whether they are seriously contemplating such an action. It may not sound like a big deal, but eliminating the consent decree would have long-standing consequences on the American consumer – none of them good.

Prior to the Second World War, the vast majority of music in America was controlled by just two music-publishing organizations. They used their market dominance to demand radio stations pay more in royalties or lose access to their suite of songs to play on the air. And since they controlled almost all music rights, that was really no choice at all.

The lack of competition, facilitated as a side effect of government granted intellectual property rights, led the Department of Justice to sue for violations of the Sherman Antitrust Act. Rather than lose in an obvious instance of restraint of trade, the publishers agreed to a consent decree that established a set of guidelines on how to deal with the royalty issue. If an agreement could not be reached, the Southern District Court of New York would arbitrate the case.

Proving the more things change, the more they stay the same, Sony Music in 2013 pulled their licenses from online streaming service Pandora and refused to even let the company know which songs they could play and which they could not. Playing a song without a license could result in a $150,000 fine per incident for the company. Pandora raced to the courthouse where a federal judge found that Sony and the music publishers were working together to force the rate increase – a clear violation of the agreement they had signed in the 1940’s.

Lobbyists for the music industry have been pressing the Obama administration to abandon the consent decrees, allowing them to force rate hikes as they please on radio, television, and online broadcasters. That would, given their tiny profit margins, threaten the economic viability of streaming music – which would suit the music industry just fine. They would much prefer to roll back technological progress and force consumers to download songs, or even go back to buying CDs, rather than adopt their business model to the growing popularity of innovative streaming services.

Pulling the consent decree would have a devastating affect on the competitive market that has worked its magic under existing rules for nearly 75 years. It would be turmoil for broadcasters, radio stations and other business models if the recording and publishing industry was again free to collude and set confiscatory prices at will. The agreement was established for a reason, and as we have seen with the recent episode with Sony, the rules are still needed.

The music industry raises millions of dollars for politicians. They are used to getting what they want from government. Given their close ties to the Obama administration in particular, Sen. Lee wants to ensure that the crony fix is not in. It’s great to see one senator willing to stand up for the American consumer instead of their industry benefactors and check writers.

Andrew F. Quinlan is the co-founder and president of the Center for Freedom and Prosperity (@cfandp), a Washington-based think tank promoting free market ideals and ideas.