United States v. Broadcast Music, Inc
Filing
83
OPINION AND ORDER. The petition is granted and the rate for the BMI-Pandora license is set at 2.5% of revenue for the years 2013 through 2016. BMI's AFBL formula is adopted and Pandora is entitled to an advertising agency commission deducti on of up to 15% of third-party costs. So ordered. re: (110 in 1:13-cv-04037-LLS) LETTER MOTION for Conference regarding modification of Protective Order addressed to Judge Louis L. Stanton from Atara Miller, Esq. dated October 2, 2014 filed by Broadcast Music, Inc. (Signed by Judge Louis L. Stanton on 5/27/2015) Filed In Associated Cases: 1:13-cv-04037-LLS, 1:64-cv-03787-LLS (rjm)
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BROADCAST MUSIC,
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INC.,
Petitioner,
13 Civ.
4037
(LLS)
- against Related to 64 Civ. 3787
(LLS)
OPINION & ORDER
PANDORA MEDIA,
INC.,
Respondent,
- - - - - - - - - -
- - - -X
TABLE OF CONTENTS
BACKGROUND ............................................................................................................................................................... 3
A. BMI Consent Decree ........................................................................................................................ 6
B. The Online Music Industry ................................................................................................... 7
C. Pandora ......................................................................................................................................................... 9
1. The Music Genome Proj ect .................................................................................... 10
2. Pandora's Business and Revenue .................................................................. 11
D. BMI' s Licensing History of Pandora ..................................................................... 13
E. Publisher Wi thdrawals ............................................................................................................ 15
F. Pandora-Publisher Direct Licenses ........................................................................ 19
1. "Round One" Agreements .......................................................................................... 19
a.
Pandora-EMI License .................................................................................... 19
b.
Pandora -Sony and EMI Licenses ...................................................... 2 0
c.
Pandora-UMPG License ................................................................................. 23
2. "Round Two" Agreements .......................................................................................... 2 5
- 1 -
a.
Pandora -Sony and EMI Licenses ...................................................... 2 6
b.
Pandora -UMPG License ................................................................................. 2 9
c.
Pandora- BMG License .................................................................................... 32
G. Suspension Agreements ............................................................................................................ 35
H. BMI' s Licenses with Pandora's Competi tors ................................................ 3 6
DISCUSSION ............................................................................................................................................................ 37
A. Recent Understanding in the Music Industry ............................................. 37
B. RMLC Radio Broadcasting Stations' Rate as Benchmark .................. 45
C. BMI' s Primary Benchmarks Support a 2. 5% Rate ....................................... 4 8
D. Pandora's Proposed Benchmarks .................................................................................... 52
1. BMI Form License Agreement .............................................................................. 53
2. 2012 Pandora-EMI License .................................................................................... 53
3. RMLC License ........................................................................................................................ 54
4. ASCAP-Pandora License ............................................................................................. 54
5. Pandora-BMG License ................................................................................................... 54
E. BMI's AFBL Framework Is Adopted .............................................................................. 55
F. BMI' s Advertising Deduction Proposal is Appropriate .................. 58
G. Term of License .............................................................................................................................. 5 9
CONCLUSION ............................................................................................................................................................ 60
Broadcast Music,
Inc.
("BMI")
has petitioned pursuant to
article XIV of the BMI Consent Decree for a determination of
reasonable fees and terms for an adjustable-fee blanket license
("AFBL")
to Pandora Media,
Inc., a streaming internet radio
- 2 -
service, for the time period January 1, 2013 through December
31, 2016.
After a five week non-jury trial and post-trial
submissions, the following constitutes the findings, Opinion and
Order of the Court, holding that the 2.5% percentage of revenue
rate and other terms offered to Pandora by BMI are reasonable.
BACKGROUND
BMI is a non-profit performing rights organization
that
licenses
non-exclusive
rights
of
public
("PRO")
performance
to
a
variety of music users on behalf of affiliates who are the music
compositions'
copyright
holders.
BMI's
affiliates
comprise
approximately 600,000 composers, songwriters and music publishers,
and BMI's repertory consists of approximately 8.5 million musical
compositions.
Pandora is a streaming customized internet radio service that
plays musical compositions under licenses which it has obtained
directly from their copyright holders,
PROs such as ASCAP
or through BMI and other
(American Society of Composers,
Authors and
Publishers).
BMI offers a blanket license fee of 2.5% of Pandora's gross
revenue, subject to adjustments to accommodate performances of
works it has licensed directly from their authors or another
PRO.
The adjustment formula includes:
( i) a floor fee equal to
10% of the traditional blanket license fee;
- 3 -
(ii) an incremental
administrative fee, equal to 3% of the remaining 90% of the
traditional blanket license fee, that Pandora would be required
to pay regardless of the extent of direct licensing; and (iii)
credits for performances of BMI works directly licensed or
withdrawn.
BMI also proposes that in calculating gross revenue,
Pandora may deduct up to 15% of commissions paid to third-party
advertising agencies.
The prevailing method followed in setting a reasonable fee is
by reference to "benchmarks": the rates set in (or adjusted from)
contemporaneous
similar
transactions.
As
the
explained in United States v. Broadcast Music,
Choice), 316 F. 3d 189, 194
Second
Inc.
Circuit
(In re Music
(2d Cir. 2003):
In making a determination of reasonableness
(or of a
reasonable fee), the court attempts to make a determination
of the fair market value - "the price that a willing buyer
and a willing seller would agree to in an arm's length
transaction." Showtime, 912 F.2d at 569. This determination
is often facilitated by the use of a benchmark - that is,
reasoning by analogy to an agreement reached after arms'
length negotiation between similarly situated parties.
Indeed, the benchmark methodology is suggested by the BMI
consent decree itself, of which article VIII(A) enjoins
disparate treatment of similarly situated licensees.
The Second Circuit later amplified (id., 426 F.3d 91, 95 (2d
Cir. 2005)):
In choosing a benchmark and determining how it should be
adjusted,
a rate court must determine "the degree of
comparability of the negotiating parties to the parties
contending in the rate proceeding, the comparability of the
rights in question, and the similarity of the economic
circumstances affecting the earlier negotiators and the
current litigants," United States v. ASCAP (Application of
- 4 -
Buffalo Broad. Co., Inc.), No. 13-95 (WCC), 1993 WL 60687 at
[*] 18, 1993 U.S. Dist. LEXIS 2566, at *61 (S.D.N.Y. Mar. 1,
1993), as well as the "degree to which the assertedly
analogous market under examination reflects an adequate
degree of competition to justify reliance on agreements that
it has spawned." Showtime, 912 F.2d at 577.
BMI bears "the burden of proof to establish the reasonableness
of the
fee
requested by it."
BMI Consent
Decree Art.
XIV (A) .
Should it not do so, "then the Court shall determine a reasonable
fee based upon all of the evidence."
Id.
BMI offers as its primary benchmarks five direct licensing
agreements between Pandora and major music publishers Sony, EMI,
and UMPG.
Those agreements were entered into between March 2012
and December 2013.
Their agreed rates range from 2.25 to 5.85%
of Pandora's revenue.
BMI proposes as confirmatory benchmarks
BMI's licenses with Pandora's competitors, entered into between
2010 and 2013, which have a range of effective rates from 2.5 to
4.6% of revenue.
Pandora argues that the 2.5% rate proposed by BMI is
unreasonable because the publisher agreements were the result of
a non-competitive market situation in which it was constrained
to agree to rates higher than those paid by its similarlysituated competitors, who it claims are thousands of commercial
radio broadcasters.
Pandora contends that the long-standing
BMI-Pandora license, which has stipulated a 1.75% rate for the
past seven years, is the best and most comparable benchmark for
- 5 -
establishing a reasonable fee.
Pandora also relies on its
direct licenses with publishers EMI and BMG, its license with
ASCAP, and BMI's agreement with the Radio Music License
Committee ("RMLC"), which represents the commercial radio
("terrestrial") broadcasting stations, as benchmarks
establishing a reasonable rate between 1.7 and 1.85% of
Pandora's revenue.
Pandora proposes a similar adjustment formula with credits
for performances of directly licensed or withdrawn BMI works as
well as an advertising deduction between 9.5% and 12% on a flat
deduction basis or an actual deduction of 15% inclusive of
internal costs.
A. BMI Consent Decree
BMI's business of licensing the public performance rights of
its musical repertory is governed by the Consent Decree settling
this antitrust suit brought by the United States.
v.
BMI,
No.
1996 Trade Cas.
(CCH)
wrote:
Mike - just to play this out.
If they accept those terms, do we propose that we accept
that deal?
- 42 -
Del ida
From: Mike Herring
Sent: Friday, December 27, 2013 11:44 AM
To: Delicta Costin
Cc: Mike Herring; Chris Harrison; Brian McAndrews; Joe
Kennedy
Subject: Re: Publisher Update
I would vote yes.
We could go lower [to] 4 or 5%, but I
would vote yes on 6.
On Dec 27, 2013, at 12:47 PM, "Brian McAndrewsu
wrote:
That deal makes me a little nervous to do now when we don't
have to.
My sense - Chris? - is the BMG is being pretty
unreasonable.
Given that, do we go back at a lower
percentage (4%) - something that is clearly better than
today, something we could live with and feel pretty good
about and make it either a two year deal or a one year deal
with a second year at OUR option?
Downside risk to offering something is they accept and then
they don't withdraw and we are paying them more when we
didn't have to (vs. UMPG where we are a lot more
comfortable taking that risk) AND we don't get a chance to
learn anything from actually taking someone down.
My gut is we should play out Joe's strategy more with BMG
unless they make us an offer we can't refuse?
Best,
Brian
From: Mike Herring
Sent: Friday, December 27, 2013 11:52 AM
To: Brian McAndrews
Cc: Mike Herring; Delicta Costin; Chris Harrison; Joe
Kennedy
Subject: Re: Publisher Update
- 43 -
I think that is a good strategy.
4% is still 2x the
current rate and they are likely to decline it.
On Dec 27, 2013, at 12:53 PM, "Chris Harrison,"
wrote:
I agree.
BMG is asking for a 500% increase. We should be
comfortable speaking publicly about refusing to pay 5x
more.
From: Mike Herring
Sent: Friday, December 27, 2013 12:00 PM
To: Chris Harrison
Cc: Mike Herring; Brian McAndrews; Delicta Costin; Joe
Kennedy
Subject: Re: Publisher Update
Yes, but I also want to say they walked away from a
generous and realistic offer.
From: Chris Harrison
Sent: Friday, December 27, 2013 12:04 PM
To: Mike Herring
Cc: Brian McAndrews; Delicta Costin; Joe Kennedy
Subject: RE: Publisher Update
I hear what you're saying. At this stage I don't think BMG
is "worth" anything more than what we are currently paying
BMI, so I wouldn't want to offer them more than 1.75%.
csh
From: Brian McAndrews
Sent: Friday, December 27, 2013 2:36 PM
To: Chris Harrison; Mike Herring
Cc: Delicta Costin
Subject: RE: Publisher Update
I guess given our lack of consensus on this one, Mike, if
okay with you, I would suggest we punt it until after
1/1/14. We can always make a better offer at that point if
we choose to.
It leaves open the possibility that they
will not withdraw and we'll stay at 1.75%. And, if not, I
- 44 -
don't think it's unreasonable to think we will have more
leverage then than we do now to actually get something
done.
Best,
Brian.
Exh. BX 256.
Once the rate negotiations were freed from the overhanging
control of the rate courts, the free-market licenses reflect
sharply increased rates.
The Sony and EMI licenses with Pandora
executed in December 2012 were at a BMI-adjusted rate of 2.25%,
while those licenses were up to 5.85% in December 2013.
The
UMPG license were executed at a 3.38% rate in June 2013 and at a
3.83% rate in December 2013.
B. RMLC Radio Broadcasting Stations' Rate as Benchmark
A fundamental assertion by Pandora is that it is comparable,
and should receive treatment similar to,
that afforded thousands
of broadcast radio stations who are represented by the Radio Music
License Committee and pay a rate of 1.7 percent.
Kennedy testified
at trial that a 2.5% rate is unreasonable because "our competitors
are paying a lower rate .
All of the RMLC.
And of the other
internet radio companies that agree to be publicly tracked
16 of the other 19 players fall under the RMLC agreement.
it seems unfair or unreasonable
for
Kennedy 1076.
- 45 -
us
to pay a
And so
higher rate."
Pandora
asserts
that
it
directly
competes
with
radio
broadcasting stations for listeners and advertising revenue.
Its
listeners cannot choose to listen to individual songs, unlike an
on-demand service,
but get what is playing on the broadcast or
Pandora station they select.
Pandora
Nevertheless,
Unlike
significant ways.
Pandora
offers
users
the
from
differs
a
broadcast
traditional AM/FM radio
ability to
offer detailed
feedback and customize the music they hear.
radio
station's
bundled
radio
product,
which
in
station,
responsive
Unlike a broadcast
includes
weather
and
traffic reports, advertisements and local and world news as well
as music (including disc jockey chatter), Pandora offers virtually
uninterrupted music
streaming.
While
the
average
terrestrial
radio station plays approximately eleven songs per hour,
Pandora
plays approximately fifteen songs per hour.
Nor is Pandora directly comparable to "on-demand" services
such as Spotify, because Pandora listeners cannot select specific
songs.
Pandora's
catalog
(about
2
million
compositions)
considerably smaller than an on-demand service,
is
whose repertory
(Spotify's is 20 million) must offer the listener the ability to
hear the music that she wants at that time.
On the spectrum extending from terrestrial broadcast radio to
streaming
on-demand
categorization.
music
services,
Pandora
evades
neat
It has aspects of both traditional radio and on-
46 -
demand services,
but differs in its ability for users to create
and modify individualized stations but not to select the playing
of exact songs.
As Pandora stated in its 2014 10-K report:
We compete with many forms of media for the time and attention
of our listeners,
such as Facebook,
Twitter,
Netflix,
Pinterest and Instagram.
Our direct competitors, however,
include iHeartRadio, iTunes Radio, LastFM, Google, Songza and
other companies in the traditional broadcast and internet
radio market.
We also compete directly with the noninteractive, Internet radio offerings such as Spotify and
Slacker.
Exh. BX 2441.
The fact
evolving
and
(not unusual when traditional business models are
shifting)
is
that
Pandora
cannot
be
accurately
characterized as
in any specific category for which rates have
been established.
It has aspects of several, but is not confined
to any one in particular.
As its then-CEO Kennedy stated in an
internal email on December 16,
2011,
expressing his doubt
that
consumers would say Pandora was radio, "we're just Pandora."
Exh.
BX 115.
The terms of the RMLC licenses cover the over-the-air
broadcasts, digital simultaneous broadcasts, and customized
radio products of over 10,000 terrestrial broadcast radio
stations.
As described above, with the advent of the internet,
many of the RMLC members now simultaneously broadcast on the
internet their programming for their terrestrial stations, but
their fare is diversified, not streaming music.
- 47 -
Pandora
specifically points to the customized radio feature of
iHeartRadio, an online music streaming service operated by one
RMLC member, iHeartMedia, which is included in the RMLC rate, as
evidence that its license is a benchmark for Pandora.
analogy fails:
But the
iHeartMedia is the licensee, and operates
hundreds of terrestrial radio stations in addition to its
iHeartRadio service.
Further, when the RMLC license agreement
was negotiated in 2012, the internet portion of iHeartRadio
represented a miniscule part of iHeartMedia's overall music use.
Pandora is not similarly situated to any RMLC licensee,
including iHeartMedia.
The rate for the ten thousand
terrestrial broadcasting members of the RMLC is not a useful
benchmark for Pandora.
C. BMI's Primary Benchmarks Support a 2.5% Rate
Pandora made much of the absence of the list of Sony and
EMI works to be withdrawn in December 2012 and the list provided
by Universal in June 2013 that was subject to an NDA, arguing
that it faced crippling copyright infringement liability because
it did not know what works to remove.
Pandora contends that it
had no alternative but to enter into direct licenses with Sony
and UMPG, and the rates reached in those agreements should be
disqualified as benchmarks.
That argument caught the attention of Judge Cote, who used
it to conclude that the 2012 Pandora-Sony and 2013 Pandora-UMPG
-
48 -
agreements were not useful benchmarks.
However, the record in
this case is far more extensive than what Judge Cote had before
her.
Pandora entered into subsequent agreements with Sony and
UMPG, and a considerable portion of this trial was devoted to
testimony regarding the significance of the lists.
The record
in this case includes transactions in later years than those in
the ASCAP case, and allows the argument that BMI's benchmarks
were distorted by the specter of massive copyright infringement
(due to ignorance of which works to take down) to be appraised
over a longer time period with more transactions.
In light of
the full record in this case, it appears that the list argument
was primarily generated by lawyers, beginning with Delicta
Costin's email in the December 2012 Sony negotiations, and was
repeatedly articulated by Pandora's lawyers rather than by its
businessmen.
In the "Publisher Update" internal email chain in
late December 2013, Pandora's executives never mentioned
avoidance of copyright liability as a motive, or fears about
potential copyright infringement.
Their concerns were directed
to the relative sizes of the catalogs, and the combinations
whose loss could not be tolerated although they could be
foregone individually.
On the credible evidence as a whole, I conclude that the
predominant motive of Pandora's management in the publisher
negotiations was to retain the publishers' works in its
- 49 -
inventory of songs because of those songs' importance to its
business.
In the second quarter of 2014, Sony and EMI's
combined repertory comprised 32.2% of the top 100 songs played
on U.S. radio, while UMPG's catalog accounted for 15.2%, and
BMG's accounted for 6.5%: a total of 53.9% of performances of
those songs.
Joint PTO Ex.
A~~
47, 49-50.
In Kennedy's declaration urging the Federal Trade
Commission to deny Sony's application to acquire EMI, he wrote:
As described above, if Sony alone tried to increase the
price of its performance licenses, Pandora could survive
without Sony's catalogue, though losing Sony's songs would
be less than ideal for Pandora and its listeners.
I am
certain, however, that Pandora could not survive without
access to the combined Sony and EMI catalogues, because the
combined catalogues account for many of the most popular
songs on Pandora and together control a very large
percentage of all music publishing rights in the United
States.
Thus, if Sony acquires EMI and the combined
Sony/EMI music catalogues are withdrawn from the PROs,
Pandora would have no choice but to enter into a direct
license to obtain that content - even at significantly
higher rates.
Exh. BX 771.
The evidence that the motivation for agreement and the
evaluation of license cost were commercial and not legal
comports with the conclusion of BMI's expert Dr. Cremieux:
If that list had been key, and if the acquisition of such a
list or the development of such a list of works had been
key to its negotiation, then from an economic standpoint
what I would expect to observe is that in the early
agreements or presumably there was less time for, and we'll
talk specifically about what I mean by less time, but where
there was less time for Pandora to put together the
material it needed, I would expect the rates to be higher.
- 50 -
Because if Pandora's theory is true, absent the list it's
at the mercy of the publishers and it can't resist an
unreasonable rate.
However, a year later, a year and a half later when a new
negotiation that has been anticipated for at least 12
months is coming up, well, then you would expect that
Pandora would have had more time and would've used this
time to acquire the information it needs to acquire and,
therefore, you would expect those rates to be lower.
In fact, you don't observe that.
There's no relationship
between the amount of time that Pandora was on notice for
and the rate that was ultimately agreed upon.
So it's hard
for me to see the economic kind of tell tale sign of those
lists as being key elements of a negotiation.
There's just
no such evidence.
Cremieux 1597-98.
The reality is that those transactions were driven by
business considerations rather than the collateral prospect of
copyright infringement.
There was at that time a window of free
market negotiations (i.e., outside the framework of rate court
litigation under a consent decree) giving recognition to real
world evaluations.
See, e.g., the discussion among the Pandora
executives set out in full at pp. 37-44, supra.
Accordingly,
the Sony and UMPG agreements negotiated in December 2013 are
valid benchmarks.
And if they were entitled to any discount
because of a legal risk Pandora faced, they could be discounted
substantially and still place 2.5% within a reasonable range.
Dr. Keith Waehrer, Pandora's expert, who has some antitrust
experience, conceived that BMI did not compete, but conspired,
with the publishers when it discussed their potential return to
- 51 -
BMI (thus assuring them of a market) before December 31, 2013,
and later signing suspension agreements that allowed the
publishers to reenter BMI.
Whatever its merits from a doctrinal
point of view, that concept has no factual application to this
situation.
BMI was not a competitor to the publishers.
the agency through which they market their music.
It is
What Pandora
wanted to acquire before December 31 was a license to Sony and
UMPG's catalogs, which constituted a major portion of Pandora's
musical offerings to the public.
The only possible sellers of
those catalogs at this time were Sony and UMPG.
BMI had no
competitive product to offer Pandora, because it could no longer
offer Sony and UMPG's catalogs.
Pandora already had the right
to play all of the other works in BMI's repertory under its
blanket license, and BMI had nothing further to offer.
The
notion that it could compete with the publishers on any ground
has no factual basis.
BMI's licenses with Apple's iTunes Radio, Spotify, Rdio and
Rhapsody, which are Pandora competitors (although they have
slightly different business models) are confirmatory of the fact
that contemporaneous market rates are in the range of 2.5% under
free market conditions.
D. Pandora's Proposed Benchmarks
Pandora proposes a "reasonable" rate between 1.7% and
1.85%, based primarily on the existing Pandora-BMI license rate,
- 52 -
but also on Pandora's direct licenses with EMI and BMG, the
ASCAP-Pandora license, and the 2012 RMLC license.
1. BMI Form License Agreement
The Form License Agreement that BMI entered into with
Pandora in 2005 is outdated, was a substantial factor in causing
the publishers' withdrawals of their catalogs from BMI's
repertory, and its 1.75% rate is too low under current market
circumstances, as shown by contemporaneous transactions.
BMI's decision not to terminate its license between 2005
and 2011 was not an admission that the 1.75% rate was
appropriate; it represented a business decision not to expend
the effort of terminating Pandora's license when Pandora's fees
represented a minimal amount of BMI's licensing revenue in 2011,
the cost of the change would be more than the extra revenue it
would yield, and BMI was already engaged in expensive rate court
litigation with the RMLC and the Television Music Licensing
Committee.
2. 2012 Pandora-EM! License
The 2012 EMI-Pandora deal for ASCAP works is of secondary
importance because it has been superseded by Sony and EMI's two
subsequent direct licenses with BMI.
By December 2012, EMI was
no longer willing to do a deal with Pandora for 1.85%.
Sony
negotiated a Round One direct license with Pandora for the EMIBMI compositions at a rate of 2.25% for BMI's adjusted market
- 53 -
share, and a Round Two license at a share-adjusted rate of
5.85%.
In light of those subsequent agreements, the earlier
EMI-ASCAP 2012 license is not much use as a benchmark.
3. RMLC License
As previously discussed, the RMLC license is not an
appropriate benchmark because Pandora is not radio and is not
similarly situated to the other RMLC licensees.
4. ASCAP-Pandora License
The ASCAP-Pandora license is not a relevant benchmark
because it is based on a different record and does not reflect
the most recent market.
Discovery in the ASCAP-Pandora
litigation closed on November 4, 2013.
United States v. Am.
Soc'y of Composers, Authors & Publishers (In re Petition of
Pandora Media, Inc.),
aff'd, May 6, 2015
6 F. Supp. 3d 317, 345 (S.D.N.Y. 2014),
(2d Cir. 2015).
Thus, the ASCAP-Pandora
license does not reflect the significant free-market Sony or
UMPG direct licenses entered into thereafter.
5. Pandora-BMG License
The Pandora-BMG July 2014 agreement is not an appropriate
benchmark.
It has unquantifiable ancillary benefits to BMG, not
apparently reflected in its fixed-dollar fee structure.
For the same dollar amount, the BMG agreement encourages
additional spins of BMG music on Pandora, which increase sound
recording fees paid to BMG and promote BMG artists and writers,
- 54 -
which was clear to the parties during the negotiations.
It also
released Pandora "from any and all claims that BMG may have had
or could have asserted against Pandora accruing prior to July 1,
2014, including for copyright infringement of any BMG works
during the period prior to July 1, 2014."
of the value of any such claims.
There is no evidence
Exh. BX 319.
At the time BMG
negotiated the agreement it was a BMI affiliate, and Pandora
could perform its catalog through BMI at the rate court rate.
Its unusual flat-fee structure was negotiated by lawyers, with
the transaction's potential use as a benchmark in this
litigation in mind.
E. BMI's AFBL Framework Is Adopted
BMI's AFBL formula is structured as follows:
AFBL Fee
BMI Floor Fee + Incremental Administrative Fee + {Fee
Subject to Credit x Adjustment Factor}
Adjustment Factor= {1 Withdrawn Performances I
{Directly Licensed Performances +
Total BMI Performances + Withdrawn
Performances}
BMI and Pandora generally agree on the structure of the
AFBL and BMI's proposed formula.
The parties disagree, however,
on three of the AFBL's components:
-
55 -
(i) whether the AFBL should
include a floor fee;
(ii) whether the AFBL should include an
administrative fee; and (iii) how the AFBL should be adjusted to
account for withdrawn works that are not being performed and
have not been directly licensed.
As this Court held in BMI, Inc. v. DMX, Inc., 726 F. Supp.
2d 355, 361-62 (S.D.N.Y. 2010), aff'd, 683 F.3d 32
(2d Cir.
2012), a floor fee:
represents the value to DMX of the portion of the AFBL that
is independent of the value of the music performing rights.
Thus it remains constant regardless of the extent of the
licensee's direct licensing.
This value is provided by BMI
assembling its repertoire and making it available to DMX,
and includes the convenience of gaining access to the
entire BMI repertoire in one license, the immediate right
to access new BMI works, and protection against copyright
infringement.
Pandora's economic expert, Dr. Waehrer, conceded at trial
that the publisher withdrawals did not eliminate the value of
the non-music benefits of the traditional blanket license.
BMI's proposed floor fee of 10% of the blanket license fee
(i.e., 10% of 2.5% of Pandora's gross revenues for that year)
accounts for any decrease in the value of those components that
may have resulted from publisher withdrawals, and is lower than
the 17% floor fee affirmed in DMX.
Conceptually, a floor fee may set an artificially high base
if a publisher withdraws all of its works, for BMI's repertory
can be reduced by the withdrawal to a substantially smaller
inventory, of less value to its blanket licensees.
- 56 -
At present, there is no showing of a pending prospect of
such massive publisher withdrawals.
The current situation makes
it more likely that the publishers looked at the practicalities
of BMI being unable to offer a work as part of its repertory if
it could not offer it to all applicants, and they sensibly
decided that it was unworkable for their businesses, even if BMI
was legally allowed to handle all the needed administrative
services.
Until so extreme a concrete case is presented, the question
is sufficiently handled by present crediting mechanisms.
BMI should also be paid an incremental administrative fee
equal to 3% of the traditional blanket fee.
This Court upheld
an administrative fee in DMX because an AFBL is "more expensive
for BMI to administer than its traditional blanket license."
DMX, 726 F. Supp. 2d at 362.
The administrative fee covers the
additional costs of BMI to administer the AFBL because BMI must
track direct licenses to ensure that all performed works are
licensed through BMI or a direct license and then calculate and
process credits to Pandora for performances of directly licensed
works.
It is reasonable to allocate these costs to Pandora.
Finally, BMI's proposed adjustment mechanism is reasonable.
BMI and Pandora agree that Pandora should receive a pro rata,
performance-based credit to account for any BMI-affiliated
composition that is either directly licensed by Pandora or
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withdrawn from BMI's repertory.
Pandora disagrees with BMI's
proposed crediting mechanism only in the limited circumstance
where Pandora removes a publisher's works from its service and
does not enter into a direct license with the publisher, who
continues to stay withdrawn from BMI.
Under BMI's proposed crediting mechanism, Pandora would
receive a partial share credit for all works co-owned by a BMIaffiliated publisher and a withdrawn publisher that Pandora
continued to perform.
For example, if Pandora and a publisher
no longer have a license, but Pandora has a license from another
publisher who co-owns the work and continues playing it, BMI
will give Pandora a credit against the portion of the blanket
fee that represents the value of this music.
This is
appropriate because that music is no longer part of what BMI is
licensing to Pandora, and BMI has no claim to a fee for that
performance.
The performance-based credits should be based on
current performances, not past performances as Pandora suggests,
for accuracy and ease of calculation.
F. BMI's Advertising Deduction Proposal is Appropriate
BMI's offer of an advertising discount is a consistent
feature of its blanket licenses, proffered because of its
history rather than any particular economic justification.
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In this case it takes the form of a discount of 100% of
advertising costs paid to others by the licensee, up to 15% of
their total.
Pandora seeks to include in the amount of discounted
advertising costs its own internal costs incurred in that
connection.
BMI would have no objective control over such
internal costs of Pandora.
Its proposal would involve extra
layers of accounting complications, it has no independent
economic justification, and is simply an attempt to reduce an
overall offer which (as noted elsewhere in this Opinion) is
already at the lower end of reasonableness.
G. Ter.m of License
BMI proposes a four year license term; Pandora contends
that it should be five.
It is clear that Pandora seeks a longer
term because it endeavors to remain under a rate court rate
which is considerably lower than direct license rates.
A shorter license term will allow the parties to reevaluate their licensing relationship sooner, which is critical
given the rapidly changing nature of the online music industry.
The Department of Justice is conducting an ongoing review of the
withdrawals under the ASCAP and BMI Consent Decrees and Pandora
is lobbying the CRB to lower its royalty rates.
BMI's proposed
four-year license term is also longer than any other license
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that BMI has with new media providers.
BMI's proposed four-year
term is reasonable.
Conclusion
The petition is
granted and the
rate
for
the
BMI- Pandora
license is set at 2.5% of revenue for the years 2013 through 2016.
BMI' s
AFBL
formula
is
adopted
and
Pandora
is
entitled
to
an
advertising agency commission deduction of up to 15% of thirdparty costs.
So ordered.
Dated:
New York, New York
May 27, 2015
LOUIS L. STANTON
U.S.D.J.
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