A Tone-Deaf Ear and the Reform of Music Licensing

There is a push by a small group within the music-licensing industry that threatens to end any hope of a viable streaming digital music marketplace.

Last Tuesday, a subcommittee of the House Judiciary Committee held a hearing to begin a formal review of the music-licensing system. If Congress follows its usual record of caving to entrenched industries, we can anticipate the end of subscription online music services, and look forward to a future limited to royalty-crippled “Internet Radio.”

You may ask why the House and Senate — which have agreed on so little these past few years — would agree to stifle an industry struggling to achieve profitability. So should we all.

In March, David Pakman wrote a detailed analysis of the inherent conflict within the existing system in which streaming music services find themselves crushed by the inflexible (and mathematically challenged) royalty system. More recently, Spotify’s recent round of investment has been aptly termed a “transfer of wealth,” as the funding was simply seen by analysts as an immediate ability to approach the Hollywood licensing conglomerates in an honest effort to appease the licensing trolls.

And yet, rather than seize another opportunity to encourage partners in the development of a new, viable and sustainable mobile-distribution system, some of the music licensing organizations are once again actually doing the opposite. While the performance rights organizations (PROs) have been negotiating in LA, they have given their cadre of lobbyists in Washington orders to do otherwise.

The lobbyists for the performing-rights organizations (ASCAP, SESAC and BMI) have quietly demanded that their Congressional allies exact a hard price for support of any reform of copyright law. The mislabeled and disingenuous name of this vehicle is the Songwriter Equity Act — as if writers of songs are not paid throughout the entire music-making and distribution process.

But in an act even more stunningly kept quiet, these same lobbyists have simultaneously succeeded in convincing the U.S. Department of Justice to reopen the consent decree limiting the behavior of ASCAP and BMI, a decree made necessary after a history of intractable behavior violating antitrust law and stifling artistic freedom, entrepreneurial initiative and commercial competition.

The music-licensing organizations continue to keep their heads firmly stuck in the sands of the 20th century. Digital disruption has continuously hammered the business of music production and distribution since the early 1990s. Tower Records (remember the CD music “superstore”?) no longer exists. By the recording industry’s own records, sales of physical CDs have plummeted from the 1999 market cap of more than $18 billion to less than $4 billion.

And yet, despite several court decisions (U.S. v. ASCAP), royalty rates established by the Copyright Royalty Board, and general public distrust of their efforts, the PRO lobbyists continue to fight for more largesse from their congressional allies.

The transition from CDs to digital was traumatic for the music industry, but the licensing organizations seem oblivious to the fact that an ever more dynamic transition has occurred since iTunes dragged the ordinary consumer into the digital music marketplace. The redirect from desktop to a mobile-oriented marketplace is causing consumers to demand even more innovation and flexibility. This shift — which we in the app-centric mobile world have been living — has not made an appreciable dent in the approach by these same licensing organizations, who are doing almost the same business as when they were founded nearly 100 years ago.

The facts are indisputable and hard to ignore. Despite reaching more than 10 million paid subscribers and 30 million more users of their free services, Spotify cannot marginalize costs and come any closer to profit. Despite reportedly reaching more than 150 million users in 2012, Pandora also continues to operate in the red and faces similar cost constraints. The list goes on and on.

The Copyright Royalty Board (CRB) and its federally appointed judges determine the rate of royalties based on economic data and factual testimony; as the streaming music system matures, it is inevitable that the CRB will further adjust the rate — and it will not likely be in the direction preferred by the PROs.

Unsatisfied by the current regime, stymied by the federal courts, the PROs have been complaining to hometown members of the House and Senate. They are petitioning the Department of Justice to do what neither Congress nor the courts have determined to be appropriate.

The Washington lobbyists simply believe that the streaming music services are operating incorrectly. Their suggestions are limited to “put in more ads” — even to the paid services for which consumers are already paying a monthly subscription.

These royalty groups — which specialize in collecting royalties from small businesses playing music in the background while customers shop — refuse to understand the dynamics of a rapidly changing digital and mobile marketplace. Rather than negotiating a new, freely adjusting percentage of revenue, or (heavens!) simply allowing the marketplace to function within the current royalty rates as determined by the Copyright Royalty Board, the music-licensing lobbyists are attempting to push Congress to rewrite the entire royalty system — just to suit their own needs, not even at the behest of the major music labels.

This push is not based on any evidence of wrongdoing or malfeasance by the streaming music services, but merely the principle of “I want.” Like a 2-year-old who demands a lollipop but is unable to explain any reason why he should get it, ASCAP, SESAC and BMI are bleating to Congress — demanding change to the underlying law governing the licensing of music works, otherwise known as The Copyright Act.

I hope they are careful what they wish for, for change is what they may well get.

Daniel Horowitz is an advocacy adviser specializing in policy strategy, coalition building and development. He previously has served on the staff of both Republican and Democratic members of the U.S. House and Senate, and as the presidential appointee in charge of policy at the U.S. Small Business Administration.

This article originally appeared on Recode.net.