3:06pm PT by Eriq Gardner
Judge Explains Why Pandora Must Pay 2.5 Percent of Revenue to BMI
U.S. District Judge Louis Stanton has unsealed a ruling explaining the basis for why he decided that Pandora, a digital radio service, must pay 2.5 percent of its revenue to BMI, which collects public performance royalties on behalf of songwriters and publishers.
The decision came after two years of legal intrigue.
After publishers attempted to partially withdraw digital rights from BMI in an attempt to get a raise from streaming outlets like Pandora, Judge Stanton decided that Universal Music, Sony and EMI could only make a complete withdrawal under the consent decree that BMI has with the Department of Justice. That led to a lengthy trial where both sides presented "benchmarks" and reasons supporting what the proper rate should be. A judge — and later an appeals court — decided that Pandora should pay ASCAP, another performance rights organization, 1.85 percent of revenue.
In the BMI case, BMI argued for a 2.5 percent rate based on interim deals that were struck directly between Pandora and the publishers, while Pandora wanted to stick with the 1.75 percent rate that it had been paying for seven years under the previous licensing regime.
Stanton's 60-page decision (read here in full) attempts to put these arguments in context.
For example, Pandora reaped $600 million in revenue in 2014, but hasn't been profitable thanks to factors ranging from high music acquisition costs (60 percent of its revenue in 2013) to not being fully successful on the advertising front. (Pandora is able to sell only 60% of its advertising inventory and has now hired a large sales team to compete for local advertising dollars.)
There's also the issue of what other music services are paying. According to the opinion, Apple now pays 4.6 percent of revenue for the iTunes Radio service, while Spotify pays the greater of either 2.5 percent of revenue or 6.25 percent of label costs. Rhapsody pays just under 2.5 percent. Terrestrial radio obviously pays less, but the judge says Pandora differs because users can customize the music they hear. The judge also opines that an "on-demand" service like Spotify isn't exactly comparable because Pandora's catalog is considerably smaller and listeners can't select specific songs. "Pandora evades neat categorization," he writes.
In searching for better benchmarks, Judge Stanton is much more impressed by internal Pandora emails in late December 2013 that discussed how Pandora and big publishers came to interim deals when the old licensing agreement expired. At the time, Sony and Universal were telling Pandora the price for not being sued. Nevertheless, the judge says it is "revelatory of [Pandora] executives' contemporary appreciation of free-market rates." (It also shows that Universal has been expecting Pandora's revenue to climb up to $1.5 billion this year.)
After reprinting these emails in full, the judge sums up the results. "Once the rate negotiations were freed from the overhanging control of the rate courts, the free-market licenses reflect sharply increased rates," he writes. "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 licenses were executed at a 3.38% rate in June 2013 and at a 3.83% rate in December 2013."
Later in his opinion, Stanton explains why those deals represent "valid benchmarks."
"The reality is that those transactions were driven by business considerations rather than the collateral prospect of copyright infringement," he writes. "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... 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 percent with a reasonable range."
The judge settles on 2.5 percent, with a small adjustment made for some of Pandora's advertising costs, and also gives BMI a win by letting the license run four years as it requested, instead of the five-year term that Pandora wanted. He writes, "A shorter license term will allow the parties to re-evaluate 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 [Copyright Royalty Board] to lower its royalty rates... BMI's proposed four-year term is reasonable."