Music To Their Ears: What’s An ASCAP License Worth?

June 26, 2012 | Professional Liability | Complex Torts & Product Liability | Intellectual Property

The American Society of Composers, Authors and Publishers (“ASCAP”), which represents music composers, writers, and publishers and which has the non-exclusive right to license the non-dramatic public performances of its members’ music, was formed in 1914.[1] As technologies have evolved over the past century, so has ASCAP’s role.  It is inconceivable that performers at the time could have envisioned what is today the relatively new phenomenon of television programming being delivered to MobiTVle telephones. Yet, the cost for a blanket license for exactly that was at the heart of a recent decision by the U.S. Court of Appeals for the Second Circuit.

The case, American Society of Composers, Authors and Publishers v. MobiTVTV, Inc.,[2] illustrates the intricacies of the copyright law as well as the value to be placed on delivering content to the rapidly expanding MobiTVle phone market. As Southern District Judge Denise Cote observed in her decision in this case,[3] which the Second Circuit affirmed, there has been an “explosion” in the number of wireless telephone subscribers – with an estimated 277 million wireless telephone subscribers in the United States as of June 2009 who use almost 200 billion minutes every month, up from about 10 billion minutes in 1999. The essential dispute resolved in MobiTVTV was the value to place on reaching those subscribers.

Background

MobiTVTV, Inc., a company that purchases programming from cable television networks and transmits it to wireless carriers to which consumers subscribe to obtain wireless service on their MobiTVle phones (or “handsets”), markets its services as a way to help drive demand for more expensive data plans, which are lucrative to the carriers. MobiTV sought a blanket performance license[4] for music from ASCAP, which has an estimated 8.5 million musical works in its repertoire. Under a consent decree,[5] ASCAP is required to issue a “Through-to-the-Audience” (“TTTA”) license to any operator that transmits content to other music users with whom it has an economic relationship relating to that content. A TTTA license effectively allows a licensee to pay a single fee in exchange for the right of the licensee, as well as any of its downstream partners, to perform any of the music in ASCAP’s repertoire. The ASCAP consent decree provides that “[t]he fee for a [TTTA] license shall take into account the value of all performances made pursuant to the license.”

When MobiTV and ASCAP could not agree on a price for the performance rights to the music component of MobiTV’s offerings, ASCAP sought a “reasonable rate” in the Southern District of New York, acting as a rate court pursuant to the consent decree.  The parties had a significant disagreement about what was “reasonable”:  ASCAP contended that it was entitled to over $41 million in fees for the period between 2003 and 2011, including about $15.8 million from November 2003 to July 2009; MobiTV contended that it owed only $301,257.99 for the period from November 2003 to July 2009.

The district court first rejected ASCAP’s fee proposals. Then, to set the rate, it largely credited MobiTV’s fee expert and adopted MobiTV’s proposed fee structure. In doing so, it declined to use the wireless carriers’ retail revenue from their customers as the base for the royalty calculations. Instead, for programming obtained from television networks, the district court used MobiTV’s costs – that is, the amount it paid to content providers for content, plus any revenue derived by MobiTV from advertising inserted into that content. For programming obtained from record labels (music videos), the district court used MobiTV’s revenues – that is, the amount it received from wireless carriers for its services, plus any advertising income. Finally, to this base, the district court applied ASCAP’s suggested rate of 2.5 percent only for all-audio channels. For audio-visual content, it applied the rates used in benchmark agreements between ASCAP and the cable television industry: 0.9 percent to music-intensive programming such as music video channels, 0.375 percent to general entertainment content, and 0.1375 percent to news and sports content.

As a result, the district court set a fee of $405,000 for the period from November 2003 through March 2010, substantially less than ASCAP’s proposed fee.  ASCAP appealed to the Second Circuit, contending that the district court’s rate formulation should have been based on the retail revenues received by the wireless carriers from sales to their customers, rather than on the content providers’ wholesale revenues paid by MobiTV.

Second Circuit’s Decision

In its decision, the Second Circuit explained that, when setting an appropriate rate, the district court had to attempt to approximate the “fair market value” of a license – what a license applicant would pay in an arm’s length transaction. As the circuit court noted, the revenue base used by the district court was the wholesale revenue that the cable television networks received from MobiTV and the wholesale revenue that MobiTV received from the wireless carriers; it did not use the retail revenue – that is, the revenue the wireless carriers received from their customers. ASCAP’s fundamental objection to the district court’s decision was that the revenue base should have been the retail revenue received downstream in the distribution chain by the wireless carriers from their customers, rather than the wholesale revenue received upstream by the content providers from MobiTV.

The circuit court rejected that argument. It noted that, among other things, the district court had reasoned that there were administrative advantages of using wholesale revenue. It also explained that the district court had pointed out that the retail revenue base “vastly” overstated the value of the public performance of a musical composition, because it reflected “so many inputs that bear little or no relation to that content.”

Moreover, the circuit court continued, there were two other factors that argued against using retail revenues as a revenue base: (1) many retail customers pay a single fee for a bundle of programming, making it difficult to determine what part of the fees was paid for music; and (2) the “digital revolution,” which has “turned handsets into computers and permitted television programming to be included among the many innovative products to which a consumer has immediate and constant access,” made it an extremely complex task to tease out one component of the retail price and identify the extent to which retail price was driven by the musical content of the television programming.

The circuit court also noted that MobiTVTV’s expert had given three reasons for using wholesale revenue as the appropriate base:

First, using the revenue of the channel supplier leads to royalties that are most closely connected to the intensity of music use. Second, basing royalties on the revenue of the channel supplier also avoids unreliable and expensive methods for allocating revenue among bundled products and services and to other inputs of retailers (here, the wireless carriers). Third, the revenue of channel suppliers includes sources of revenue that accrue to the channel but not to the retailer, such as advertising that is inserted by the channel supplier.

According to the Second Circuit, ASCAP cross-examined MobiTVTV’s expert in 120 pages of trial transcript but failed to provide the district court with any basis for discounting, much less rejecting, this analysis.

The circuit court acknowledged that in another decision it had declared that “what retail customers pay to receive the product of service in question (in this case, the recorded music) seems to us to be an excellent indicator of its fair market value.”[6] However, the Second Circuit found, that language did not require the use of retail revenue in the MobiTVTV case.

It pointed out that those words were preceded by “absent some valid reason for using a different measure.” In MobiTVTV, it found, the district court had a “very valid reason” for using a different measure: the unimpeached testimony of MobiTV’s expert witness, who explained why wholesale revenue was far superior to retail revenue as a basis for a royalty rate in this case.

Second, the circuit court explained, the “bundling” that occurred with MobiTV’s transmission of programming to wireless carriers made it difficult to determine what part of the fees was paid for the music, as opposed to other programming; the wireless carriers typically offered MobiTV’s television products as part of a bundle of services that also included Internet access and text messaging, and then charged a single data plan fee for the whole bundle. In the circuit court’s view, separating out the relative value of each individual product was fraught with “methodological difficulty.”

Finally, the Second Circuit stated, it was not persuaded that the contention that “retail revenues derived from the sale of the music fairly measure the value of the music,” was universally true.

Simply put, the circuit court found, whether or not in some contexts the retail price of a product containing music was a good measure of the fair market value of the music, the district court in the MobiTVTV case, on the record before it, “did not err in concluding that the retail price paid by customers for a service that delivers video and audio channels containing music to their handsets is not a good measure of the value of the music itself.” The Second Circuit then affirmed the district court’s ruling.

Conclusion

Coincidentally, the Second Circuit recently affirmed other licensing fee decisions involving ASCAP, and BMI.[7] These cases, which arise from time to time, require highly technical economic analyses. But because they ultimately lead to the rates to be charged to consumers, they also have a practical significance to users of MobiTVle devices – as well as, of course, to people who listen to more traditional kinds of public performances subject to licenses provided by ASCAP and BMI.

 



[1] ASCAP currently represents about one-half of the nation’s composers and music publishers. Broadcast Music, Inc. (“BMI”) represents most of the remaining composers in the American market.

[2] Nos. 10-3161-cv(L), 10-3310-cv(CON) (2d Cir. May 22, 2012).

[3] In re Application of MobiTVTV, Inc., 712 F. Supp. 2d 206 (S.D.N.Y. 2010).

[4] Among the rights created by American copyright law is the “exclusive right[] to do and to authorize . . . perform[ance of] the copyrighted work publicly.” 17 U.S.C. § 106.

[5] Because of concerns that ASCAP’s size granted it monopoly power in the performance-rights market, ASCAP is subject to a judicially-administered consent decree, the most recent version of which was entered into on June 11, 2001. United States v. ASCAP, No. 41-1395 (S.D.N.Y. June 11, 2001). BMI operates under a consent decree similar to ASCAP’s. United States v. BMI (Application of Music Choice), 316 F.3d 189 (2d Cir. 2003).

 [6] See, United States v. BMI (Application of Music Choice), 316 F.3d 189 (2d Cir. 2003).

[7] Broadcast Music, Inc. v. DMX Inc., Nos. 10-3429-cv, 11-127-cv (2d Cir. June 13, 2012).

This article is reprinted with permission from the June 26, 2012 issue of the New York Law Journal. Copyright ALM Properties, Inc. Further duplication without permission is prohibited. All rights reserved.

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