WASHINGTON – Today, Senator Mike Lee held his first hearing as Chairman of the Subcommittee on Antitrust, Competition Policy and Consumer Rights, titled “How Much For a Song?: The Antitrust Decrees that Govern the Market for Music.” The purpose of the hearing was to evaluate the state of competition in the market for music licenses and to provide an open, public forum for music industry actors to discuss how we can ensure a vibrant, healthy market in which the prices for music remain competitive for consumers.

“The primary goal of this Subcommittee is to ensure that consumers are protected from those who would abuse the marketplace,” Sen. Lee said. “Today, we’re focusing on consumers of music, especially the tens of millions of Americans who enjoy their music online using streaming services. The advent of streaming technology has introduced profound changes to the music industry, many of which have greatly benefitted consumers. This hearing will examine some of those changes and evaluate how our complex system of antitrust laws and regulations can be appropriately adapted to the changing landscape of the music industry so that the price of music continues to be competitive, while appropriately valuing the copyrights at issue.”

At the hearing, the Subcommittee will hear testimony from several industry professionals, including Mike Dowdle, the Vice President of Business Affairs and General Counsel for Bonneville International; Beth Matthews, CEO and General Counsel of the American Society of Composers, Authors and Publishers (ASCAP); Chris Harrison, the Vice President of Business Affairs for Pandora Media, Inc.; Lee Thomas Miller, a songwriter with Broadcast Music, Inc. (BMI); Matt Pincus, Founder and CEO of SONGS Music Publishing; and Jodie Griffin, Senior Staff Attorney for Public Knowledge.

See below for Sen. Lee’s full remarks, as prepared for delivery:

Opening Statement

How Much for a Song?:

The Antitrust Decrees that Govern the Market for Music

Senator Mike Lee

March 10, 2015

Welcome.  This is the first hearing this Congress of the Subcommittee on Antitrust, Competition Policy, and Consumer Rights.  I’d like to begin by thanking my friend, Senator Klobuchar, for the tremendous job she did chairing this subcommittee before me.  She and I have always enjoyed working together, and we share the same basic goal for this subcommittee: ensuring, first, that consumers are protected from those who would abuse the marketplace and second, that we perform effective oversight of the Department of Justice’s Antitrust Division and of the competition side of the Federal Trade Commission.  I look forward to continuing that bipartisan work this Congress, and I’d like to thank her and her staff for their hard work on this hearing.

I’d also like to thank the Chairman of the full committee, Senator Grassley, for his support for this hearing.  Senator Grassley was planning to be here today, but is stuck on the floor managing some human trafficking legislation.

A few housekeeping matters before we begin.  After Senator Klobuchar and I give some opening remarks about this hearing, we will hear from our panel of witnesses (who I’ll introduce later on), and then we will have five-minute question rounds.

If you’ll all indulge me, some background on this complicated subject is in order.  This hearing is about the market for music.  Specifically, it is about the market for licenses to publicly perform copyrighted musical compositions.  What does that mean?  Every song has an author—the person who wrote it, not necessarily the person who performed or recorded it.  And that author has a copyright in that song, meaning that anyone who wants to perform it in public needs a license from the author.  Which turns out to be a lot of people:  Lots of businesses play music for consumers:  Radio stations and Internet-streaming services like Pandora or iHeartRadio are the obvious examples, but there are all sorts of others:  Bars and restaurants that play music to set an ambience; retail stores that do the same thing; television networks and cable companies that air college football games with a marching band.  All those people need a license for every song they play — or else they have to pay enormous damages to the copyright holder. 

But the market could not function if every neighborhood restaurant had to go look for every author of every song it wanted to play and negotiate with each one of those authors for license fees.  Nor do individual copyright holders have time to contact every bar in America and ask them for license payments. As a result, for more than 100 years, publishers and songwriters have relied on performing rights organizations (PROs) to license music on their behalf and then collect and distribute royalties.  The two largest PROs are called ASCAP and BMI, and we are pleased to have representatives of both as witnesses today.  Both ASCAP and BMI sell blanket licenses to all the works in their inventory—and between the two of them, those licenses will cover most every song.  Roughly speaking (and the number is debatable), ASCAP and BMI each control approximately 45 percent of the market.  The remaining 10 percent belongs to two other PROs, SESAC and Global Music Rights. 

So what does this have to do with antitrust law?  Well, it turns out that virtually the entire market for the licenses we are talking about is governed by a pair of antitrust consent decrees from a long time ago.  In the 1940s, the Department of Justice separately sued ASCAP and BMI over concerns that they had violated the Sherman Act through aggregating control of the music-license market.  DOJ settled these cases and entered into separate consent decree with ASCAP and BMI in 1941.  These consent decrees are somewhat unusual:  They are perpetual in duration, and they essentially function as a regulatory system for the price of these music licenses.  The decrees contain requirements that look very much like a compulsory license and royalty scheme.  Specifically, they require that the PROs offer a fair rate, on a non-exclusive basis, to any user requesting a license, and that they not discriminate among similar licensees.  Any disputes about rates are to be resolved by the judge in the Southern District of New York who oversees the decree, a process that has come to be known as “rate court.”

For almost 75 years, the consent-decree-ruled ASCAP and BMI blanket licenses have allowed consumers of music to have access to virtually the entire catalog of written music by negotiating with just a few entities.  The system has allowed innovative distribution methods to arise while enabling individual songwriters to get royalties from thousands of bars, restaurants, and radio stations across the country. 

Then came the Internet.  In 1995, after the advent of web-streaming, Congress decided to require Internet companies who publicly perform music (but no one else) to pay royalties to recording artists and record labels (the guys who play the songs, rather than the people who write them), in exchange for requiring the record labels to license their works.  In other words, Congress set up a scheme on the sound-recording side that looks very much like the scheme the consent decrees set up on the musical-composition side.  The major difference, however, is that the price of royalties for composers is ultimately controlled by antitrust judges, and the price of royalties for recording artists is controlled by the Copyright Royalty Board, a panel of administrative judges housed in the Library of Congress. 

And these two groups of people do not agree about the price of a license to play music on the Internet.  The Royalty Board set rates for sound recordings played on internet radio that were substantially higher than those the rate court had set for the underlying compositions.  For example, in 2013, Pandora paid approximately 48 percent of its revenue to recording artists and record labels and only about 5 percent of its revenue to songwriters and publishers.  This disparity in rates led publishers to believe that they would be able to achieve better rates outside the consent decrees, so they asked ASCAP and BMI to change their membership rules to allow something called “partial withdrawal,” meaning the right to exclude digital services from the blanket licenses they normally sell.  That would require companies like Pandora to separately negotiate with publishers for public performance licenses at whatever price the market would bear. 

All of that led to litigation that is still pending.  It also led to allegations that the music publishers (who think their judge-set royalty rates are too low) were colluding to keep Pandora’s prices high, instead of competing with each other to drive consumer prices down.  In a lengthy opinion, Judge Denise Cote of the Southern District of New York ruled that publishers had no right to partially withdraw their digital rights from the blanket license under the ASCAP consent decree.  She also rejected publishers’ attempts to use the prices they negotiated with Pandora while they tried partial withdrawal as benchmarks for setting prices generally, noting evidence that the publishers had cooperated instead of competing in those negotiations. That case is pending on appeal.  And even as we speak, a different SDNY judge is now conducting a trial about similar questions under the BMI decree.

Meanwhile, DOJ’s Antitrust Division is currently considering modify the consent decrees to allow partial withdrawals, among other things.  That would have a number of important consequences that today’s panel can discuss.  On the one hand, the publishers say partial withdrawal will allow them to negotiate prices with Internet companies in a free market — and surely the most striking feature of the current system is that there is no free market at work.  On the other hand, others believe that after partial withdrawal, the market will not really be free — because a few music publishers control most of the licenses, and they have been accused in the past of colluding to drive up prices for consumers.

In short, what to do about these consent decrees is a hard problem, one that affects millions of Americans.  Today we will hear from a variety of parties affected by the consent decrees, each with a slightly different place in the market.  Here we have an opportunity to discuss openly the topics DOJ is discussing privately.  As we listen today, we must remember that we have both a responsibility to encourage creativity by recognizing the value of copyrights and a duty to ensure that prices for music remain competitive for consumers.