BMI, Pandora Rate Fight Begins in Manhattan
In their opening arguments in the BMI/Pandora rate court trial that began today in New York, the performance rights organization began by stating it is seeking a rate of 2.5% of total revenue, which Pandora countered by asking for 1.75% of revenue, the same rate it has paid for years.
The two organizations are getting set to square off on the life of the deal — whether it will be for 4 years, as BMI wants or 5 years, as Pandora is asking for — and what size deduction there will be to cover the cost of generating advertising. Judge Louis Stanton is presiding over the trial, which is being held in Federal Court in New York’s Southern District.
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The burden of proof is on BMI to justify the rate it is seeking. BMI’s lawyer Scott Edelman of Milbank, Tweed, Hadly and McCloy said that if BMI’s rate ask is reasonable, it should be adopted by the court. He cited the ASCAP rate court ruling of 2008, which determined that Yahoo’s Launchcast service should pay 2.5% of revenue as a performance royalty to the performing rights organization. But later, Pandora’s lawyer Kenneth Steinthal of King & Spalding pointed out the case was appealed and the rate was never affirmed, but rather remanded back to the District Court.
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In further justifying its 2.5% of revenue proposal, Edelman cited a series of direct deals with Pandora. For 2012, both Sony/ATV Music Publishing and EMI Music Publishing cut separate deals with Pandora that would pay them a pro-rated share of 2.25% revenue, implying that U.S. music publishers would collectively receive 5% of revenue. For 2013, Universal Music Publishing Group cut a deal that amounted to 3.38% of, implying an industry-wide rate of 7.5% of Pandora’s revenue for publishing.
Edelman said that Sony/ATV, EMI and UMPG cut a deal for even higher rates for 2014, but those rates couldn’t be disclosed. Nevertheless, he said those five deals represent the best benchmarks for rates set in a competitive market, and support the 2.5% of revenue rate that BMI is seeking.
Steinthal countered that the 1.75% rate that Pandora’s been paying has been extremely rewarding to BMI, as the custom radio service’s royalty payments to BMI grew steadily, from $240,000 in 2007 to $16.1 million in 2014. Meanwhile, as Pandora’s overall royalty payments have grown, the scope of the BMI blanket license has shrunk, he argued. Now, with Pandora having to cut direct deals for Sony, EMI and UMPG, which comprise nearly 50% market share, along with many top songwriters which moved to Global Music Rights as of Jan. 1, BMI has been left with a “diminished offering,” Steinthal said.
He also argued that the Sony and UMPG rates cut for 2014 are not competitive. The showdown over whether to pay whatever rates Sony/ATV, EMI Music Publishing UMPG and BMG Chrysalis (the three-publishers that were ruled out of BMI by Judge Stanton come Jan. 1) were demanding, Steinthal argued, was like being in the midst of a game of chicken. Except for one thing: those publishers managed to avoid withdrawing from BMI because they found a way to temporarily suspend their membership agreements and, after cutting deals with Pandora, rejoined BMI.
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Since they could all return to BMI retroactively, they had a security blanket, Steinthal argued. What good is a rate determined by a game of chicken when only one side — Pandora — is facing financial ruin, but the other side has no risk, he asked.
To put more salt in Pandora’s wound, during the rate-direct deals showdown, those publishers gave stand-still agreements to all the other digital service and never did any other deals with any other service while they were temporarily out of the PRO. Consequently, Steinthal argues that the rates set in those deals with Pandora are the function of artificial circumstances.
BMI’s lawyer Edelman anticipated Steinthal’s argument, pointing out that Pandora chose to pull down BMG songs, rather than cut a deal with them, proving it could have done the same with the other publishers. The real reason Pandora did the deals with Sony/ATV/EMI and UMPG, he argued, was because they wanted to have their songs available for their listeners.
The trial continues today (Feb. 11) and is expected to last for three weeks.
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