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The U.S. government issued consent decrees in 1941 that forever changed the music industry by regulating the rights of songwriters. Recently, the U.S. Justice Department has been reviewing the decrees after years of criticism from songwriters, music publishers and others in the industry, who decry the laws as antiquated and unfair. While technology has changed, the regulations have not. The result has been economically devastating to songwriters who cannot negotiate a fair-market price for their work. The decrees affect the American Society of Composers, Authors and Publishers (ASCAP) and Broadcast Music Inc. (BMI), two performance-rights organizations that license and distribute royalties. The government is considering whether artists would be able to remove part of their song creation lists in order to do their own licensing deals with other services. Lawrence Gelburd, a music producer and lecturer at Wharton, joined David Israelite, president and CEO of the National Music Publishers Association, to discuss why the issue is so important to the future of the music industry, on the Knowledge@Wharton show on Wharton Business Radio, SiriusXM channel 111 (listen to the podcast at the top of this page).
An edited transcript of the interview appears below.
Knowledge@Wharton: Set the backdrop as to how this decree came into play and why the U.S. Justice Department is looking to make this change.
Lawrence Gelburd: Let’s start with copyright. When you’re part of a team that writes a song, or maybe you’re the sole songwriter, you initially have a set of copyrights and there are multiple rights. One is to have the song performed on the radio. There are mechanical license rights. So you own the right to say, “You can make a physical copy,” like a CD or an LP, and sell it. You also have sync license. So you have the right as the copyright owner to give someone who’s making a film or a motion picture access to use your song legally in conjunction with that picture. There are also grand rights for theatrical performances and print rights.
This copyright that you own is a set of rights, one of which is the right for performing rights organizations like ASCAP, BMI and SESAC. They collect money, for example, from terrestrial radio, so that’s their focus. And they have strength in numbers. ASCAP has almost a half-million members, and BMI is quite large as well.
David Israelite: For people who aren’t intimately familiar with the music industry, you have to take a step back and understand what we’re talking about. When you listen to music on the radio, like Sirius XM, there are two completely different rights that are involved. When a songwriter writes a song, that song has a copyright. When an artist records the song, that recording has a different copyright. What we’re talking about here are just the songwriters. Many times they’re also artists themselves. For example, when Taylor Swift writes her own music, she’s both the songwriter and the artist. But you have lots of other instances where the songwriters are different than the artists, and they’re only making their living through the exploitation of the copyright as a songwriter.
Now, the public performance of these songs, as Lawrence was talking about, is a right that is not regulated by law. However, ASCAP and BMI, which are in the business of licensing these rights on behalf of songwriters and collecting the money, were put under a consent decree by the Department of Justice in 1941 because at that time it was thought that these two private companies had too much market concentration. They were licensing these songs to the fledgling broadcast industry, and the Justice Department thought they needed to be regulated.
Fast forward to today and those same consent decrees still govern these two private companies. What we’re talking about are changes to these consent decrees that would allow songwriters and their representatives, which are usually known as music publishers, to pull their music out of ASCAP and BMI so that they could license it directly or through a different organization to the people that want to use the songs.
“These changes to the consent decrees that are being sought is an effort to really get the songs back into a marketplace so that they would be valued appropriately.”–David Israelite
Knowledge@Wharton: In most cases, ASCAP and BMI are competing against one another. But in this case, they would be on the same side, correct?
Israelite: Yes. In fact, pretty much everyone who represents songwriters or music publishers, or these performance rights organizations, wants these types of changes. There are two other organizations. Lawrence mentioned one called SESAC, and there’s a fourth started by Irving Azoff called Global Music Rights. Those two companies don’t operate under consent decrees. They’re in a total free market. So when Sirius XM, for example, wants to play the music that they represent, they have to go and negotiate with them over the value of the songs that they represent.
In the case of ASCAP and BMI, because of the way that these 1941 consent decrees work, there’s no real negotiation. If someone wants to use the songs in the ASCAP repertoire or the BMI repertoire, all they have to do is ask. From the moment that they ask, they now have a right to use the songs. And if you can’t agree on a price, if you don’t have the leverage to say no then that negotiation takes a very different path. You then go to a single federal judge in the southern district of New York. You have a federal trial. It usually takes several years and many millions of dollars, and at the end of that trial that judge will dictate how much the songs are worth to ASCAP.
And then a different judge for BMI. The result of that process has been that the value of songs, the value of songwriters, has been just devastated. They’re not getting paid anything near what would be considered free-market rates or fair-market value for what they create. These changes to the consent decrees that are being sought are an effort to really get the songs back into a marketplace so that they would be valued appropriately.
Knowledge@Wharton: The people that are creating the music would like to see more of a true free market where they could maximize the revenue that they could potentially get from these songs?
Israelite: Absolutely. If you take a company like Pandora, which is a digital radio company, the artist’s side of the equation with record labels is: They are getting about 50% of the revenue that’s generated by Pandora. But if you look on the songwriter side, because of these consent decrees, in the last two trials that just happened for ASCAP and BMI, the songwriters were getting less than 5% of the revenue.
In every other country in the world, the songwriters are getting as much as the artists for radio models. But in this country, because of these unique consent decrees, you ended up with a division where the artist’s side and the record label’s side were getting up to 10 times more than the songwriter. That’s just one example of just how harmful these consent decrees have been to songwriters.
“You now have these consent decrees from 1941 that are regulating how we do business today with giant technology companies, and it really has flipped the power balance.”–David Israelite
Knowledge@Wharton: Do you think these consent decrees will be significantly changed?
Israelite: The Justice Department recognized that there were a lot of problems and started a process last August to look at these consent decrees. These two consent decrees, which came in during World War II, haven’t been changed since the invention of the iPhone, for example. They were designed to protect the fledgling broadcast industry. If you look at today, you have companies like Google, Amazon, Apple that are benefited by the regulation of songwriters. That somehow Google needs protection against the massive power of songwriters is just ridiculous.
So, there’s a process going on right now at the Justice Department to change those consent decrees. But as you can imagine, everybody who pays songwriters doesn’t want to see a change because they are benefiting from these consent decrees where you can’t say no and you end up going to a single federal judge to set a price. I’m hopeful that there will be changes, but it is a very tough environment when you’re fighting against pretty much everybody from broadcasters to satellite radio to digital music companies that all enjoy paying songwriters less than they would have to in a free market.
Knowledge@Wharton: Lawrence, do you think that changes are possible?
Gelburd: I think they are but there are a lot of entrenched organizations that would like to have these stay the way that they are. The life of a songwriter who is not famous and doesn’t have big records is very different from the life of the successful songwriter or the performer. What you find is that there are different feelings about how things should go, depending on whether the artist is really successful or not. To some extent with the large organizations, that strength is if you want to have a song by a particular artist, you now have access to all of the artists. It’s more efficient to do that. It gives them more leverage in getting the money for the songwriters across the board.
The very successful songwriter or performer in the music business has power, so they might want to be able to make their own deal separately instead of pulling along all these other small artists who haven’t had any big hits like they have. What you find is what’s good for the goose might not be good for the gander.
I worked at EMI Music Publishing for a short time, and one of the things I realized is, yes, they have over a million songs in copyright. But you can’t push a million songs to movies and so forth. So what happens is — and this happens in almost any business or in the arts — that top percentage that is very successful has a different vision of what is good than the one who is being brought along. The opinion of whether this is a good change or not depends on basically what side you’re on, in terms of successful and small.
Israelite: There’s no question that the more successful songwriters are earning more and have more leverage. But what we’re talking about here is really how much songs in general are worth. There are a lot of issues where there may be divisions between the middle class of songwriters and the very top, but not on this issue. Because on this issue, what we’re talking about is do you have the ability to negotiate the value at all? And there very much is a rising-tide-lifts-all-boats, or in this case all songwriters, kind of an equation about this.
As Lawrence mentioned, if a movie wants to use a song in their movie, TV show or a commercial, that’s known as a synchronization. It’s not governed by the consent decree. You have to go to the songwriter. You have to negotiate the value, and they can say no. But in the case of a public performance like what’s used on the radio, you don’t have that situation. You have these consent decrees.
There’s no question that it’s more efficient if you can make everyone have to license through these organizations. But that really isn’t what should drive the policy. It would be more efficient if I could just walk onto a car lot and just take any car I wanted. There’s a property right involved here. These songwriters make their living off writing songs, and they ought to be valued appropriately.
In 1979, the Justice Department adopted a rule that said that every new consent decree should sunset in 10 years because it was considered bad public policy to have open-ended consent decrees. Unfortunately, they didn’t apply that rule retroactively. You now have these consent decrees from 1941 that are regulating how we do business today with giant technology companies, and it really has flipped the power balance.
“If you talk to anyone under 30, it’s very unlikely that they buy copies of music, like a record or a CD or even a download. They want the streaming models.”–David Israelite
The power is already on the side of these large digital companies that control the distribution. You take away the right to even negotiate the value of the songs, and you end up with a situation where in some estimates we’ve lost about 75% of our working songwriters because they simply can’t make a living doing what they do.
That’s really unfortunate because one of the things that America is really good at is [nurturing] our creative industries, and the rest of the world covets American music. Yet you’ve got these songwriters where it used to be that if you had a hit song, that might be enough to carry you for years and pay the bills. But today, it’s no longer the case.
Part of the reason is that consumers generally don’t want to own copies of music anymore. If you talk to anyone under 30, it’s very unlikely that they buy copies of music, like a record or a CD or even a download. They want the streaming models. They go to Youtube, they go to Spotify, they go to Pandora. And those models, because of these consent decrees, don’t compensate the creators in the same way. The economics of the music industry has just been devastated. That’s why it’s so important that these consent decrees change with the times and companies like a Google have to pay the fair value of songs that they’re using.
Knowledge@Wharton: I’m a little surprised with all the changes we’ve had technologically, even in the last 20 years, that there were no changes made to this law.
Israelite: It’s really incredible. It’s something that I think all songwriters are unified on, as are the organizations that represent them, is that everyone would be better off if we were in an environment where you could negotiate the value of your property rights.
Gelburd: If you go back 20, 25 years, the music business, which included selling of physical CDs and copies of music mechanically created, was up around $14 billion or so. That same market today would be about $4 billion, so there’s certainly a need. As recording studios, as technology’s changed, all of these changes have made it more easy and less expensive for artists to create songs. But the value that they’re getting back from those songs, as Dave points out, is woefully inadequate to support most songwriters.
“If you’re a songwriter that’s not also a recording artist, you don’t have that path to try to compensate for the loss of your income.”–Lawrence Gelburd
Israelite: Lawrence is exactly right. One of the things that has happened with artists is that as people are buying fewer copies of their recordings, they’re having to tour more. That’s become the primary source of income for an artist.
Gelburd: If you’re a songwriter that’s not also a recording artist, you don’t have that path to try to compensate for the loss of your income.
Knowledge@Wharton: That also ties into why we’ve seen the growth in the music industry of the stadium tour. Some have to be able to be tied to a concert tour that’s filling up a football stadium of 70,000 to make the kind of money that they want instead of going to the smaller hockey and basketball arenas where they’re only getting about 18,000.
Israelite: There’s no question about it. And again, for the songwriting community, many of whom aren’t artists themselves, this isn’t even an option for them. That’s why so many of them either have stopped writing full time because they can’t make a living doing it or they’re struggling.
Not everyone should be able to make it as a songwriter, but if you’re writing hit songs that people covet, like any other industry, you ought to be compensated appropriately. If you go to a digital store to buy content, like an Apple iTunes or a Google Play store or Amazon, and you can get all this great digital content from movies to books to TV shows to magazines to video games, all of that property is negotiated in a free market. The only thing where the government comes in and sets the price is on the songwriter. The reason is because of an antiquated, outdated viewpoint from World War II, and that’s why it’s just such an obscene situation.
Knowledge@Wharton: Could you see a time when songwriters could potentially make deals with the artists in terms of the value of the particular song? If Taylor Swift has two or three songwriters that are providing all of that content, can a deal be made that way, maybe in the future?
Israelite: Sure. Taylor is a great example because while Taylor’s doing just fine, she also cares quite a bit about the profession of songwriting. She’s a very vocal advocate for all songwriters. If you go to Spotify today, you will not find Taylor Swift’s music on Spotify. The reason why is that because on Spotify there’s both a free tier, where you don’t have to pay anything but you have to put up with advertisements, or there’s a paid tier.
Taylor felt strongly that her music has value and she only wants it available on the paid tier. Spotify wasn’t willing to do that. Taylor Swift was able to withdraw her music as an artist, but as a songwriter she had no rights. She could not have taken her music off of Spotify as a songwriter because of these consent decrees. You look at other creators out there that don’t have the name recognition of a Taylor Swift, and they don’t have the ability to make these kinds of statements. But the consent decrees are preventing the entire industry from being part of the conversation over what the future should look like.
There’s a big debate about whether free tiers are good or bad. Even the CEO of Pandora wrote am op-ed recently that said for radio models, he thought that free was OK. But for interactive streaming models where they’re more like a jukebox, where you can choose what you listen to, that people ought to pay. That’s how Apple does it, for example. So far, Spotify has decided they don’t want to do it that way.
But the writers, because of the consent decrees, don’t get to say yes or no. Their music is going to be on Spotify whether they like it or not. I just think that’s a role the federal government shouldn’t be playing when it comes to property rights. It ought to be the decision of the people who create the property.
Knowledge@Wharton: What is the time frame on this DoJ review and when can we expect to see a decision on a possible change to these consent decrees?
Israelite: This process has been going on now for over a year and a half, and I think we’re close to a point of knowing what the Department of Justice wants to do. I’m hopeful that sometime before the summer we’ll have some indication of where this is going. Congress could also choose to get involved in this. I’m certainly hopeful that the Justice Department would fix this on their own, but that’s always a route it could take.
Gelburd: David, is there a political motivation from some areas to try to keep this the way it is until there’s an election and a new president?
Israelite: It’s a great question. I think there are many people that believe that there would be more friendly ears at the Justice Department, potentially, under a different administration. But this has been a process that’s been going on for some time. It’s being handled right now by the antitrust division of the Justice Department, which is mostly populated with career attorneys.
The hope is that this isn’t a political matter, that this should be analyzed on the merits of the law and that common sense should dictate that there’s no reason to be regulating songwriters because of their market power against a company like a Google or a Pandora that has 90% of the Internet radio market. It’s possible that it could bleed into the next administration, but I think that we’ll have to see how this current process plays out.
Let’s say that you have a new service that wants to be like a Spotify, for example, that wants to launch. The songwriter wants to use their music in that service, but the recording artist doesn’t. Under the rules today, that company wouldn’t get to use that song because they need permission from both owners of copyrights. If the songwriters are able to get out of the consent decrees, then the exact opposite would be true. If the recording artist wanted the song on the service but the songwriter who wrote it didn’t, then the song wouldn’t be on the service.
The truth is, that very rarely happens because both the songwriter and the artist are in the business of trying to exploit their copyrights to make money. I would point you to the one area of the music industry where this is already the way it works: synchronizations. Any time that you want music in a product that has video, like a TV show, a movie, a commercial or even Youtube, you need the permission of both the recording artist and the songwriter. Anyone who’s been on Youtube recently knows you can pretty much find anything you want there, and it’s been licensed. If you got out of the consent decree, you would need the permission of the songwriter. But almost in all cases, that’s what’s going to happen because they both are interested in licensing their music and getting paid.
The difference would be the amount they get paid. The difference would be how the money is split up because once you have equal leverage, the money gets evened out. For example, when a movie wants to use a song and they have to negotiate with both the artist and the songwriter, the money is split 50/50 between the artist and the songwriter because they both could say no. If you look at a case today like a Spotify, it’s split 6 to 1. Pandora, it’s been split 10 to 1.
“That somehow Google needs protection against the massive power of songwriters is just ridiculous.”–David Israelite
Knowledge@Wharton: If all of this were to go through, how is this going to affect pricing for the end consumer?
Israelite: Many of the services that would be affected are already free. Broadcast radio, Pandora radio, even Spotify has free elements to it. I don’t think it would obviously affect any of that. When it comes to paid models, it’s an interesting question. I don’t know whether prices would go up or not. My guess is probably not.
My guess is probably it would just be a different division of money among the players that are sharing the money. For example, with a Pandora service, they’re currently keeping about 50% of their revenue and spending about 50% of their revenue for content. That’s quite a large number to keep when you’re just in the business of delivering someone else’s property to them. So you might see it come out of Pandora’s share, for example.
But even if, worst-case scenario, prices would go up, that just means that’s the value of what you’re getting. And I don’t think the government, especially the federal government, ought to be in the business of trying to set prices for consumers on products that are made by individuals who have property rights. So I don’t think prices would go up. But if they did, that would just be the natural result of how much what you’re getting is worth. And that to me would be OK.
Gelburd: ASCAP mentioned in that filing that they also would like to see it change to go to arbitration from court. Some of these lawsuits have taken 10 years. Can you imagine that?
Israelite: Let’s say you’re a new startup company and you want to be in the business of digital music. You go and ask ASCAP for a license. You’re now licensed. You then spend the next three or four years trying to get off the ground and make your company really successful, like a Pandora or a Spotify that’s worth billions of dollars.
But let’s say you fail and after four years, you’re not able to get off the ground. Well, guess what? Those songwriters whose songs have been used for those four years get nothing because there never will be a payment for them. Everyone else will have gotten paid, all the way through the economic change. So for that company, they’ll have paid their lease. They’ll pay their water bill. They’ll even pay the record label. But the songwriter will get nothing because it takes that long to get to the federal judge to set the price in the first place.