There’s been a lot of back-and-forth regarding a recent court ruling that maintains the current royalty rates paid by Internet radio company Pandora to ASCAP, a 100 year-old performing rights organization (PRO) that collects money for AM/FM and Internet radio play then distributes that revenue to songwriters and publishers.

In the coming days, we hope to offer varying viewpoints from individuals and groups in this ecosystem. For now, we’ll try to demystify this decision and the licensing frameworks that informed it.

First off, it’s important to keep in mind that there are TWO copyrights in a piece of music: the sound recording (a performance captured digitally or otherwise), and the underlying composition (think notes on paper and lyrics). We’ll mostly be focusing on the latter, as compositions are at the heart of the Pandora/ASCAP decision. Which isn’t to say that the sound copyright—which compensates labels and performers—doesn’t factor in. More on that in a second.

The March 14 ruling from Judge Denise Cote of the Southern District Court of New York sets a 1.85 percent royalty rate for songwriters and publishers through 2015—the same rate ASCAP has received for a decade. ASCAP had pushed for an increase to 2.5 percent for 2013, with a rise to 3 percent for 2014-15. Meanwhile, Pandora failed to secure the lower rate that AM/FM radio pays songwriters and publishers (1.7 percent). But by and large, this decision looks like a win for Pandora, as the judge dismissed most of ASCAP’s arguments in her partially redacted, 136-page decision.

One of the reasons that publishers have pushed for a higher royalty rate is because they see record labels receiving considerably more for digital plays. This is because performances of sound recordings fall under a different standard known as “willing seller, willing buyer.” Royalties for digital broadcasts of sound recordings are around 50 percent of revenue for a webcaster like Pandora. A trio of federal judges known as the Copyright Royalty Board oversees this rate-setting process, and the money is distributed to labels and recording artists via the nonprofit SoundExchange. But it gets even more complicated: Pandora pays considerably more than satellite radio, which compensates labels and performers under a different standard (that rate is around 9 percent of revenue). This is the main reason why Pandora previously sought legislation to eliminate the willing seller, willing buyer framework in favor of the calculation used for Sirius/XM. Of course, you also have to keep in mind that current law allows AM/FM radio to pay nothing, nada, ZERO dollars to recording artists and labels for over-the-air broadcasts (but they are obliged to pay publishers and songwriters, and a station’s digital signal generates revenue for artists and labels.)

Now back to the publishers and songwriters. Under “consent decrees” that came out of a government antitrust case from the 1940s, ASCAP and BMI are obligated to provide blanket licenses to AM/FM (and now digital) radio. This allows services to play any song in a PROs repertoire, provided they pay a set amount for the privilege. The rate-setting for these uses is overseen by the Southern District Court of New York, which retains jurisdiction. Some publishers have sought to pull digital catalog from the PROs because they feel that they can get higher rates by directly licensing with the services. Judges (including Judge Cote) have mostly agreed that a publisher is “all in or all out” with regard to the music it offers to the PROs to license on their behalf. Meaning, if a publisher pulls music meant for webcasts from ASCAP, it would have to remove ALL its songs—including those broadcast on AM/FM radio or performed in venues. Even the biggest publishers are unlikely to be equipped to handle all of those transactions.

Confused yet? We wouldn’t blame you—even reporters covering this stuff often get the details wrong. Let’s set aside the arcane rate determinations for a moment and look at the bigger picture. Basically, we see the following dynamics at play:

1. Leverage – who has it? Some publishers feel that their leverage is related to their ability to remove catalog. PROs likely think that they’d have more leverage under a different rate standard, such as the one used for sound recordings. Songwriters may be conflicted, as their leverage can come from having a PRO like ASCAP represent them in negotiations, rather than a publisher whose interests may not be perfectly aligned with their own. Services also factor into the leverage concept. It is easy to picture a world where direct licenses make it harder for them to efficiently obtain catalog, due to the need to negotiate with all of the publishers individually (and unlike major labels, there are still quite a few publishers). This could hinder future services from entering the marketplace and frustrate the growth of the legitimate digital music ecosystem.

2. Parity ­– Much of the tension in the current marketplace for radio and radio-like services comes from the fact that the rate setting standards differ wildly between the two copyrights (and also between the different categories of service). Congress has begun to look into this issue, and the Copyright Office has opened an inquiry into the state of music licensing. Still, a comprehensive solution is unlikely to arrive soon.

3. Compensation – Songwriters and publishers feel that they are being underpaid for performances of their music. Compared to the percentages for labels and performers, it’s easy to see why. But for songwriters, it’s not just about how much they get paid—it’s also about how. Under the consent decree, the songwriter money goes directly to the writer(s) with the splits enumerated up-front. As stated on the ASCAP website: “As a condition of membership, all ASCAP members agree that the writer—and not the writer’s employer—will be paid the writer’s share of ASCAP performing rights royalties, even in work-for-hire situations.” Outside of the consent decree, there is nothing guaranteeing the conditions in which songwriters get paid, which means that any move towards direct licensing between publishers and services should be closely scrutinized.

4. Growth – We can likely all agree that a legitimate, licensed market for music is a win for everyone—songwriters, publishers, services and, of course, fans. How we nurture this marketplace in a way that doesn’t disadvantage one or another player—especially the creators—is more complicated. Future of Music Coalition has long stated that musicians and songwriters should not be expected to subsidize the growth of this sector if it means that their compensation is dramatically affected. On the other hand, we should be welcoming of innovations that generate new revenue streams for musicians and aid in discovery. We think that it’s possible to achieve an environment that satisfies both goals, so long as musicians and songwriters are involved in the conversation.

Make no mistake about it: FMC is supportive of the songwriters’ position. Their work is crucial to a diverse music ecosystem: without it, there are no business models to build upon. However, we also believe that there are benefits to the consent decrees—in particular the equitable splits and direct payment to songwriters. We look forward to continuing the conversation.

Photo: stockmonkeys.com