Intellectual Property and Antitrust: Music Performing Rights in Broadcasting 2

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Part VI: Second Amended Final Judgment
By Michael Einhorn,

Faced with the ongoing responsibility generally to enforce the nation's antitrust laws and specifically to afford to music licensees a "genuine choice" between blanket and program licenses, the Antitrust Division targeted ASCAP's licensing practices as a necessary first step to reform licensing in the performing rights industry:

Notwithstanding the clear requirement... that ASCAP offer broadcasters a genuine choice between a per-program and a blanket license, ASCAP has

 consistently resisted offering broadcasters a realistic opportunity to take a per-program license. Among other things, ASCAP has sought rates for the per-program license that have been substantially higher than the rates it has offered for the blanket license, and it has sought to impose substantial administrative and incidental music use fees and unjustified and burdensome reporting requirements on users taking a per-program license [including the costs of protracted litigation]. In addition, ASCAP has refused to offer a per-program or per-program-lie license to users other than those explicitly named in the decree, although, over time, such licenses would be practical for more and more types of users.

The Justice Department negotiated a second version of the Amended Final Judgment, AFJ2, which is designed to enhance competition between ASCAP and providers of direct- and source-licenses.

The objective is to ensure that a substantial number of users within a similar situated group will have an opportunity to substitute enough of their music licensing needs away from ASCAP to provide some competitive constraint on ASCAP's ability to exercise market power with respect to that group's license fees. (Emphasis mine)

This statement contrasts with Magistrate Dolinger's stated intent to limit exit from the ASCAP blanket license. The Department is now negotiating a similar decree with BMI.

In this pro-competitive context, Subpart VII(A)(1) of AFJ2 would oblige ASCAP to offer per-program licenses, upon request, to any requesting broadcaster or on-line transmitter. Subpart VII(A)(2) extends the idea of program licenses to segment licenses that may implicate day parts (on radio), page links (on web sites), broadcast channels (on music subscription services), or other means of breaking down music usage by time or location. The per-segment license aims to ensure that users that do not transmit "programs" may nonetheless have access to a license that varies with music use. Accordingly, AFJ2 would allow the Rate Court magistrate great flexibility in its implementation.

The new segment license conceivably could enable stronger competition between ASCAP and BMI. Because music licensees generally require catalog from both organizations, the two PROs do not compete against one another to sell blanket licenses and have no incentive to undercut the other's blanket fee. Rather, each may use the other's blanket fee as a benchmark for its own in its next negotiation with the particular industry group at hand.

However, the two organizations could be given incentive to compete in the sale of segment licenses to broadcast and webcast radio users, who can readily bunch songs from different writers to provide exclusive "all-BMI" or "all-ASCAP" segments. In a competitive market where license revenues depend on the number of segments actually sold, each PRO would have financial incentive to sell more exclusive segments by cutting license fees and assisting with material designed to extend the length of the segment.

Net of a surcharge that is designed to cover the additional costs of administering the program license, AFJ2 aims to ensure that the "total license fee [including commercial uses] for a per-program or per-segment license approximate the fee for a blanket license for a typical user." Music licensees are then to be categorized in groups of similarly situated customers that operate comparable businesses and use music in analogous manners. Each category must have a Court-approved "representative music user"; i.e., a hypothetical licensee whose frequency and intensity of usage are typical of the license group-at-large.

For this representative user, the total expected payment for a necessary slate of ASCAP-program licenses should approximate its fee for the blanket alternative. That is, if 50 percent of a representative station's programs use ASCAP music (defined as having any music written by an ASCAP composer regardless of how it is eventually licensed), the appropriate percentage multiple for the program license should be 2 (2 = 1/.5) times the percent rate for the blanket. The representative station may pay a blanket fee of 1 percent of its total advertising revenues, or a program fee of 2 percent of advertising revenues for the particular programs that it actually licensed.

If ASCAP were able actually to license all the programs where its music was used, payments of the representative user would be identical under the blanket and program alternative licensing systems. However, payments to ASCAP diminish as more programs migrate to competitive alternatives. Once derived, the multiple is then extended to all stations in the user group.

There is a significant difference here with the Dolinger formula in Buffalo Broadcasting. In AFJ2, all of the station's programs that contain performances of music written by ASCAP members would be counted as part of the 50 percent that use ASCAP music, regardless of eventual license source. This contrasts with the Magistrate Dolinger's formula of Section 5, which bases a program multiple on the fraction of station programs where the ASCAP program license was actually deployed.

To illustrate further the difference, suppose in the above example that the representative station were able to source- or direct-license music requirements in 60 percent of its music-using programs. This reduces the need for the ASCAP program license to 20 percent of all programs (.20 = .50 x (1 - .6)). Dolinger's per program rate for the representative station, and all users in its group, would have increased to 5 percent (= 1/.2), which recognizes that ASCAP program licenses were actually deployed in 20 percent of all programs. However, the revised fee percentage under AFJ2 would be 2 percent (= 1/ .5), since 50 percent of all programs continue to use ASCAP music under one license or another. Substantial savings are evidently possible in the latter system and ASCAP can no longer increase the program rate as usage of its program license declines.

As another pro-competitive gain, AFJ2 permits to each program licensee a full offsetting allowance for the "mini-blanket" fees for commercial and promotional music that is now used outside of the program. This amendment contrasts with previous procedures (see Section 5) that fixed charges for the commercial "mini-blanket" as an addition to the program total. As previously mentioned, ASCAP may also fix a surcharge to compensate for its additional costs of administering the program license.

As an important economic matter, AFJ2 does not clearly specify whether the program/blanket multiple that is used to derive a particular station's program percent rate must be used to establish equal percent rates for each ASCAP-licensed program in the station's portfolio, or on average. Under strict nondiscrimination, the percent rate for each program licensed through ASCAP would necessarily be equal.

Alternatively, only the aggregate amount of program fees could be restrained as a percent of underlying program revenues, with individual discounts and upgrades permitted around the average for licenses charged to single programs. Enforced equality has been the case, but AFJ2 seems ambiguous. However, to provide to ASCAP the greatest ability to match competitive providers of source and direct licenses, this strict equality should be relaxed. This point is discussed further in a technical memorandum soon to be made available by this author.

While AFJ2 provides economic incentives for a station licensee to substitute from an ASCAP program to a source- or direct- alternative, the draft Decree is somewhat more protective against license exit, as would result when radio stations switch from music to talk formats in certain programs. In the latter case, no license would be needed at all. However, if the representative user were able to reduce its usage of ASCAP material (program, source, and direct) from 75 percent to 50 percent of all segments in the day, its program multiple would be adjusted in AFJ2 to restore its original revenue stream. Upward adjustments of this nature would limit ASCAP's incentives to lower prices aggressively to maintain a program or segment license against exit threats. A related competitive problem will occur in the market for exclusive segment licenses (discussed above), where rate adjustments will protect ASCAP from segment shifts to BMI, and vice versa.

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