Uh oh, here we go again…

In what may be a historic decision, Judge William Conner of the Southern District Court of New York (“SDNY) has set a rate for the blanket licenses of the songs in the American Society of Composers and Publishers (“ASCAP”) catalog to AOL, Yahoo, and RealNetworks (operator of Rhapsody and other music services). The companies had each individually approached ASCAP for a blanket license to cover all of their uses of music.

Sidebar: Recall that there are two distinct protected elements of a song that you hear, the underlying lyrics/composition and the sound recording. Owners of rights in each of the works have a number of exclusive rights. For example, Songwriters have the exclusive right to perform the work. Technically speaking every public space where you hear music should have a license to perform the songs. Well, it would be a bit cumbersome if the operator of the parking lot had to contact every songwriter to ask for permission to play the song much less to negotiate individual rates. In the United States, songwriters and publishers join a “performing rights organization” (a “PRO”) of which ASCAP is one, to collectively license the songs to end users.

Yahoo, AOL and RealNetworks had individually attempted to obtain a blanket performance license from ASCAP for the use of the songs in its repertory that would apply to the wide range of services/sites the companies offer. The companies each agreed that they needed a license. However, ASCAP and the parties were not able to reach mutually satisfiable agreements. While temporary licenses were put in place, ASCAP filed a request with the SDNY for it to set the final rate.

Sidebar: ASCAP, and its competitor Broadcast Music, Inc. (“BMI”) are collectives that negotiate for many as one. Technically speaking they exercise a monopolistic power through their collective representation of rightsholders. Since the beginning of time, okay not really but close, ASCAP and BMI each operate with the consent of the Department of Justice of the United States. An element of the ASCAP consent decree is that the Southern District Court of New York serves as “rate court” in situations where ASCAP is unable to negotiate a license fee with a potential customer. Either ASCAP or the licensee has the right to go to the court after a period of time has passed to request that the court determine a “reasonable” fee for the requested license.

Rate setting proceedings at the SDNY are handled in the same manner as day to day litigation. The parties engage in discovery, present evidence and testimony, on which the judge bases his/her decision. Oh, and of course the lawyers get paid.

Here, ASCAP had originally proposed that AOL and Yahoo pay a 3% royalty based on music related revenues defined to mean the “total amount of time users of AOL and Yahoo!, respectively, spent streaming [music and music videos], as tracked internally by the companies.” For RealNetworks and AOL Music Now, ASCAP proposed that the 3% royalty would be based on all domestic revenue.

The licensees proposed paying ASCAP a license rate specific to 5 different revenue categories, or “buckets.” The blended rate would include: 2.5% of net revenue directly attributable to on demand audio streaming content; 1.615% of net revenue of directly attributable to audio webcasting services; 0.9% of revenue directly attributable to streaming music videos; and 0.1375% of revenue directly attributable to non-entertainment programming.

According to the licensees “directly attributable” revenue would be limited to “revenue generated from the sale of advertising and sponsorships that appear on the music player through which the music is streamed, as well as a pro rata share of revenue from subscription services that include music performance.” The licensees specifically exclude “all revenue from advertising placed off the player, including ads on webpages behind the player or anywhere else on the [licensees'] websites, and it excludes the value of any house ads and promotions of the [licensees'] sites and services.”

To determine the reasonableness of the proposed rates, the court considered other licenses and agreements the parties had entered. The court reviewed the licenses ASCAP has granted to radio, television and cable companies. It noted that the agreements the licensees had with the major labels were of particular interest as the agreements were entered in the free market (i.e. they can negotiate with 4 companies easily while negotiating with thousands of songwriters/publishers not so much). Also, the court reviewed agreements BMI had entered with some of the licensees but limited their relevance since the licenses were not blanket licenses.

In fact, Judge Conner noted “[i]n this novel proceeding, there are no perfect comparables. No other ASCAP licensee offers the full panoply of music uses and options available to each of the Applicants or the myriad ways in which they use music to generate revenue.” The Judge continued that “[t]his unprecedented capability to make millions of songs available to the entire nation all at once far outstrips the music distribution capabilities of all other, passive media such as radio and television.”

In the end, Judge Conner settled on a flat royalty rate of 2.5% of the applicant’s music related revenue. The closest license structure the court could find that was similar, and negotiated at arms-length between the parties, was the blanket license between ASCAP and Music Choice at a 2.5% royalty rate. Remember that each of the companies has a temporary license in place under which they have to pay ASCAP retroactively for any royalties due. According to press reports the difference between the amounts the Applicants proposed to pay and the amount the court has set as the rate are multi-millions per year. For example, AOL would have paid $872,000 in 2006 under its proposal, but now will pay ASCAP $7.8 million.

The moral of the story is fairly simple, judges recognize the value of music even if technology and new media companies do not.