by Ian Dunham, Policy Fellow

On July 7, SESAC announced that it would be purchasing the Harry Fox Agency (HFA), an acquisition that will, for the first time, combine the roles of performance right management and mechanical royalties collection under one roof. The deal was made between SESAC and the National Music Publishers Association, which has owned HFA since 1927. SESAC, the smallest of the three major Performing Rights Organizations (PROs), is the a for-profit entity; unlike larger PROs ASCAP and BMI, it is not currently governed by consent decrees.

That’s a lot of acronyms, so let’s take a moment to break it down. Remember that every piece of recorded music embodies two different kinds of copyrighted works—the composition (think notes and words) and the sound recording (think of a performance captured to tape or digital file). Both SESAC and HFA are focused on royalties generated by the composition copyright—money that goes to songwriters and publishers. They’re not associated with the sound recording copyright, so they don’t deal with paying performers or record labels.

The traditional role of a PRO like SESAC is to handle public performance royalty collection from broadcasters of all kinds, as well as brick and mortar venues like clubs, bars & restaurants, and to distribute these royalties to their songwriter and publisher members. Since their inception in the early 20th century, they have been responsible for one of the major revenue streams within the music business.

In contrast, the traditional role of HFA has been to collect mechanical royalties from physical and sales of CDs and other media as well as digital downloads. Songwriters/publishers earn a 9.1 cent royalty for every reproduced copy of a song. HFA also collects smaller per-stream mechanical royalties for streaming services like Spotify and Rhapsody.

The wall that has been erected between performance royalties and mechanical royalties made sense in a pre-Internet world, since the infrastructure remained discrete and specialized—that is, Harry Fox was not capable or interested in tracking what was being paid for at radio stations, and SESAC didn’t deal with physical media.

However, as music consumption moves more and more into the digital realm, it may make less sense to keep these two functions separate. Services like Spotify generally have to pay both a mechanical royalty per stream to HFA, as well as a performance royalty to the songwriter’s preferred PRO (see our revenue stream chart for the details). Since much of the infrastructure could be considered redundant, the new SESAC hopes to be able to cut costs by removing this redundancy, and aggregating mechanical and performance royalties.

Another possible reason for SESAC’s acquisition is to try to stem the tide of HFA’s falling profits. The New York Times reports that, because of falling record sales over the last 15 years, the business of collecting mechanical royalties has become significantly less lucrative. Right now SESAC is the only PRO that’s able to fulfill both functions, though that could change, as ASCAP and BMI have been asking the Justice Department to change the rules that govern their behavior.

Not long after the deal was announced, the Radio Music Licensing Committee (a group representing commercial broadcasters) announced that it was voluntarily dropping its anti-trust lawsuit against SESAC. The RMLC had sued in 2013 claiming that SESAC was breaking the law in the way it collected royalties from commercial radio stations. Under the terms of the new settlement, SESAC did not admit guilt but did agree to pay RMLC’s attorney fees. SESAC also agreed to negotiate with the RMLC as a group instead of on a station-by-station basis. The deal also includes provisions for a single license to cover all broadcasting activities, rather than separate licenses for FM, for webcasting, and HD broadcasting by the same entity. That won’t automatically mean a lower rate, though. As attorney David Oxenford notes, “the effect of the unitary license is simply administrative convenience – everything is covered by a single license, so each station does not need multiple licenses from SESAC for its normal broadcast activities.” The upshot for AM/FM broadcasters is that the process of getting a license from SESAC will more closely resemble the process of getting a license from ASCAP and BMI.  If a deal isn’t made, it will be set through a process of arbitration.  And the deal also includes some provisions for repertoire transparency, meaning it will be easier for potential licensees to know what is and is not in the SESAC catalog.