By: Aditya Parameswary; Julissa Pertiwi Hasan Mustafa
Intellectual property has been an intangible right since a long time, and the music industry plays a major part in it. Intellectual property’s development might have not changed dramatically however due to the rapid evolution of technology, certain laws governing it might well follow its changes.
In the case of technology, the way we listen to music has changed drastically. For instance, just in the 20th century music was heard from concerts, but due to the rapid growth of technology, music was heard from different media ranging from radios, television and currently music streaming. Such music streamline applications include Spotify, HOOQ, Apple music and amazon music that have a subscription fee mechanism.
Similar goes to one of music’s’ mogul, as part owner of “Tidal” another music streamline application; Jay-Z’s decision to withdraw his digital copyright from competitors by making his music “exclusive”. This is not limited to Jay-Z as he has pulled in supports of a number of A-list music artists to his agenda and ask them to do the same; to withdraw their collective digital rights in order to make private and exclusive deals with Tidal.
After the disputes (simply speaking) faced by two of the three biggest music publishers with America’s collective management organization and Internet radio business on competitive rates; this opens another question. If antitrust laws cannot govern competitive rates on intellectual property and most especially in the music industry, which may corner competitors, how does the protection of competition occurs?
In today’s society, online music streaming such as Pandora, Spotify, Apple Music and Beats, Amazon Music and ultimately, Tidal all have experiences in success. All these companies compete one another to give the best services for their consumers through building business strategies. Their business however goes through a lengthy process in order to obtain the licenses required to comply with the regulations and later they need to compete with one another to gain profit. When Tidal was announced back in 2015 much hype and anticipation was received since support was received from prominent musicians such as Alicia Keys, Win Butler, Regine Chassange of Arcade Fire, Beyoncé, Calvin Harris, Chris Martin of Coldplay, Daft punk, Jack White, Jason Aldean, J. Cole, Jay-Z, Kanye West, Deadmau5, Madonna, Nicki Minaj, Rihanna and Usher. These support suggested the confidence needed for Tidal and since it claims to pay royalty rates of 75%, higher than most music online streaming services. Certain features that has once put Tidal in the top spot; when they released Kanye West’s newest album exclusively one week before it became available for purchase elsewhere.
Jay-Z’s action is just the tip of the iceberg. True, popular music does affect your business, but so does the number of licenses owned by certain parties that play a “dominant” role in the business. This important role is held by powerful licensors; they may use their considerable market power and later pose supra competitive rate on a licensee leaving them with two choices: agree to the proposed rate or face revocation of songs by the licensor which may put the licensee’s business down the drain. This scenario was somewhat felt in Pandora vs. ASCAP, but before we discuss it, we need to understand different parties and their roles in the music licensing business.
First, there exists collectives; they are bodies which operate under the government’s consent decree and established from concerns of anticompetitive behavior such as supra competitive pricing from a handful of copyright holders (in Indonesia’s case is due to administer the collection of royalties). They serve an important function in making the content’s access available for prospective licensees who is willing to pay an agreed-upon and transparent rate. Second there are licensors, who own a particular licensed content and may obtain royalties. Lastly there are licensees, or parties that need the licensed content most likely for business purposes, in this case examples of licensees are Tidal, Pandora, Spotify etc.
The content/goods in question is a “song(s)”, keep in mind that each song is unique. Beyoncé’s song is different to Beach House, making it not truly substitutable. A single song itself has 4 attached licenses to it such as (i) the master license to the sound recording; (ii) the public performance right to digitally transmit the sound recording; (iii) the right to publicly perform; and (iv) the right to reproduce and distribute non-dramatic musical work. The process in acquiring it is further complicated since multiple parties hold the license’s ownership in (most likely) different territories. The process of obtaining the first 3 licenses is made simple through compulsory music license through PROs/collectives. In this case for every time a song is played (in the music streaming) royalties are given to the parties that are entitled to it.
The system now works like this (overly simplified), the licensed content(s) are given to collectives in order to collect the royalties entitled. Licensees on the other hand may use the content but pay a certain amount of fee to the collectives and finally the collectives would pay the royalties owed to the licensors. This is all done transparently.
Problem however arises when these licensors decide to revoke their license from the collective (as seen in Pandora Vs. ASCAP) in order to make private dealings. This causes several problems: first, the negotiations and prices are not transparent; second, if there is no deal the licensee may be forced to accept a one sided deal or face less content rendering them in a difficult position to compete with their competitors. This may happen if the party holding the negotiation holds considerable power in the business leaving it in an unhealthy competition. Below the case concerning Pandora vs. ASCAP is discussed.
Back in July 2005, Pandora and ASCAP (collective) negotiated for a blanket license that ran from 2005 but later Pandora canceled it in 2010. After nearly two years negotiating with ASCAP on a particular rate without making a deal, Pandora then filed a rate court.
ASCAP is known for its high administrative costs, and since technology has made it easier to manage digital music; music publishers had the idea and proposed in withdrawing their digital rights from collectives. The proposed withdrawal by the “big members” puts ASCAP in an uncomfortable situation since it would lose revenue from its larger members, and the heavy administration costs will be the burden of independent songwriters and less powerful publisher members. In order to satisfy their needs, the major music publishers needed ASCAP to amend the regulation in order for parties to remove their digital rights. The major music publishers later agreed ASCAP handled the distribution (but not its negotiation or collection of digital royalties). The mechanism they proposed (in their understanding) makes them able to negotiate for higher rates in private dealings. This “higher rate” will then be presented as “evidence” to the rate court as a new “market rate”. This “market rate” will in turn allow collectives to charge a higher rate for all of its members. All of this may only be done if the regulation within ASCAP is amended, which it did, on April 27, 2011. The ASCAP Board voted to amend its governing articles to allow a member to remove their digital rights but are then welcomed to rejoin.
Not long after the amendment, EMI publicly announced its withdrawal of digital rights followed by Sony in 2012 and Universal in 2013. The major music publishers had understood the limits of ASCAP and had withdrawn their digital rights in order to increase profits. Later by December 2012, another amendment was made in ASCAP’s side, allowing the music publishers to revoke their digital rights selectively (This is where Jay-Z’s role plays an important part). Pandora on the other hand faced a higher stake in which they had to deal with private “dealings” with the major music publishers as opposed through ASCAP (and its compulsory license).
Pandora then filed a rate court petition against ASCAP, which angered the major music publishing companies such as Universal. Universal’s representative had at that time communicated with both ASCAP and other music publishers, who were handling private negotiations with Pandora in order to “push” them into “paying more”. By late November 2012, when Pandora thought that it had finally reached an agreement with ASCAP and whilst waiting for the board to terminate the rate court, in the behind scenes, Sony had threatened to sue ASCAP if it reached an agreement with Pandora and would then revoked all rights owned by Sony (including the analogs). Due to the pressure made by both Sony and Universal, the ASCAP Board had rejected the terms with Pandora.
By the time Sony controlled about 30% of the market for musical composition, (which was not deemed threatening by the FTC) at the end of October 2012, Sony had then negotiated with Pandora, leaving them with two choices: agree to Sony’s rate; or remove all of Sony’s content or else face copyright infringement litigation. Pandora had anticipated this and raised this concern to the Federal Trade Commission (FTC)but with the unanticipated reaction. In this case, Pandora would not survive competition if a combined of 30% of content were to be revoked.
By January 17 2013, Sony and Pandora had “agreed” of an undisclosed advance and a rate 25% higher than ASCAP’s going rate the rate proposed however was made known to public. Universal heard it and went to make a similar deal; by February 2013 its private negotiations with Pandora successfully pulled a rate of 50% higher than ASCAP’s previous rate. By July 1, 2013, the “deal” was made to a rate of 7.5% (just under double the ASCAP rate) for a six-month period. In comparison, Universal charged Pandora’s competitor iHeartRadio a rate of 1.7%, lower than ASCAP’s going rate. Both Sony and Universal presented the provisional agreement as evidence of “market rate” to the court proceeding, and so did Pandora (prior being reluctant) whom presented 1.70% or slightly less than the ASCAP rate. This “evidence” rate was then to be considered as a “bench mark” for the rates of the “market”.
After the evidence was presented, the court then made its final decision by mentioning several points. First, ASCAP had failed to prove that the deals of Pandora with the major music publishers constitute fair benchmarks. Second, both Universal and Sony (along with ASCAP) had used their considerable market power to extract supra-competitive prices and acted in a troubling coordination as opposed to being competitors. In the end, the rate court set a rate of 1.85% of revenues, the same rate currently under ASCAP’s 5.0 blanket license for every year of the license term (from 2011 to 2015). The rate court had also noted that that if the publishers were to withdraw their digital rights, they must also withdraw all of their rights (including its analog) which was hard to maintain and administer. This effectively invalidated Sony and Universal’s attempted withdrawal of their digital rights only.
In Jay-Z’s case, his actions may affect the business if he is in a position of “dominance” in the music industry. The term of “dominance” , arises where a particular party (most likely company) “has the power to behave to an appreciable extent” independently of its competitors, its customers and ultimately of the consumers allowing it to prevent effective competition being maintained on the relevant market. The ironic thing is, a party who owns an IPR essentially enjoys a significant legal “monopoly”.In this case, since Jay-Z does not Sony or Universal, this does not put him in the category of “dominant”. However, if digital rights are allowed to be revoked and that includes specific licenses (specific artists and songs), then Jay-Z and his supporters may have the upper hand in private dealings, but maybe not enough to hold or drive the market in posing supra-competitive prices.
No matter how popular the song is, the amount of songs you own in the market puts you in the important “dominant” role that can put you in charge of driving the “market”. This position in this case is held by powerful licensors (and in the case above by Sony and Universal) and was used to pose supra competitive rate on a licensee. This is the mechanism that we hope to avoid. From the case above, both music publishers that were supposed to compete with one another ended up aligned with common interests and subsequently beaten the licensee in terms of deals. The problem that arise with private dealings are that: one, the negotiations and prices are not transparent, and two, if there is no deal the licensee may be forced to accept a one sided deal or face less content rendering them hard to compete; three, this mechanism can be of choice by the dominant market, in order to push out a certain company, they may work in tacit collusion in order to push other companies. The fact is seen when Iheartradio accepted a deal that was favorable and a rate lesser compared to the one received by Pandora.
Imagine if three of the companies (major music publishers) have access to 80% percent of the music available and work together to maintain a rate that is beneficial for one another and not acting as competitors. It will be hard for the licensee to remain competitive. With the demand of revoking the publisher’s content, not identifying the content and threats of massive copyright litigation, this coordinated effort is therefore seen as “tacit collusion”. This highly concentrated music licensing industry has a high risk to control competition posed by coordination. If or when a few large powerful firms dominate a market that may impact other firms it may constitute as an oligopoly.
Such tacit collusion results from the major music publishers “have a meeting in the mind” where (supposed to be) competitors end up in their collective best interests to set price or quantity equal to the collusive level, and later creates a parallel pricing.
By having ASCAP grant the right to perform all of the compositions to prospective licensees gives access for companies such as Pandora to compete in the industry and target their efforts more in their marketing. By prohibiting discrimination (through ASCAP/collectives), Pandora wont need to worry if they had received a better or worse price from their competitor since the rate is transparent.
What can be done? To stop this from happening (again… or in certain countries have not yet happened) certain regulation can fix and maintain competition. The proposed mechanism in this case is by maintaining both compulsory licensing and private ordering, but only if a certain amount of competition is evident. First through compulsory licenses, make the access of content available still in collectives. Second, private ordering may only be used if the party that wishes it can prove there is a relevant and evident competition in the market. If private ordering is wished, they must go through a mechanism of petitioning or obtaining a certain approval by a government body (separate to a collective). This solves 2 points, first by leaving the content accessible, and second, a lengthy process that will need to prove competition for those who wish for private ordering.
Other than remedial regulation, certain bodies should also ensure certain intervention or supervision on certain dealings, such as the role of the FTC or in Indonesia the KPPU. Even if intellectual property itself poses a sort of “legal monopoly”, however there should always be a certain intervention from government bodies so that the mechanism doesn’t get to far in order to create monopoly.
In Indonesia’s case itself, the anti-monopoly law or law no. 5 year 1999 has an emphasis that it does not regulate in relation to Intellectual Property Rights such as licensing, patent, trade mark, copy right, design industry etc. and in the case of FTC in Pandora vs. ASCAP; the FTC did not make a move when Sony acquired EMI’s catalog list (later owning 30% of the content) only to point out that there was no market in the first place.
It is important to determine and maintain the structural market in order to prove that there is an evident trace of anti-competitiveness. Another point for consideration is that anti-competitive acts are difficult to prove and may be costly. The music industry itself right now still gives way for this limited “monopolies”. However so, the ever-changing technology will eventually push the change from understanding the market on only property rights and shift towards intellectual property rights. In my opinion, the FTC or in this case the KPPU holds an important role to dig information, especially if there is a report of an alleged anti-competitive conduct. The only difference there is since there is a little to none amount of cases to be found on the said topic, it will be hard to prove and may be costly when brought into court.
In the case of Indonesia, since certain aspects of intellectual property is still in its development stage, such as the recent establishment of the collective body, this opens a bigger chance for it to learn from previous cases. First by the application of the compulsory license for open access and second, for the KPPU in digging and maintaining a watch on competition of the music licensing industry in hopes that if many reports are found, may in turn change the laws and regulation on monopoly and move towards watching competition into intellectual property rights.
Jay-Z’s acts in this case may not be considered as monopoly since he does not stand in a dominant position, however he is still a prominent and influential artist that if he manages to somehow provoke major licensors such as Sony or Universal and the mechanism of private ordering may be maintained as to the Pandora vs. ASCAP case, then he may be in a position of dominance.
As an antidote however, anti competitive activities in the music licensing industry may be done by the following: by maintaining compulsory licenses through collectives, and by maintaining private ordering through sufficient evidence by the party who wishes it and last but not least, through government bodies such as the FTC/ KPPU (in Indonesia’s case) by watching and making a move if there appears any reports on the music licensing being anti-competitive.
- Facilitating Competition by Remedial Regulation. (2016). Berkeley Technology Law Journal, 31:1, 185.
- IN DEFENSE OF COPYRIGHT: RECORD LABELS, CREATIVITY, AND THE FUTURE OF MUSIC. (2011). Seton Hall Journal Of Sports And Entertainment Law,21(1), 62.
- (2017). Retrieved fromhttp://ssrn.com/abstract=547802
- Intellectual Property and Competition Law, Exploring Some Issues of Relevance to Developing Countries. (2007). Carlos M. Correa. ICTSD Programme on IPRs and sustainable Development.
- Like Running Water?-The Interplay Between Antitrust and Online Misoc Licensing. Nuni Carrolo dos Santos. 2012. Instituto de Direito Economico Financeiro e Fiscal.
 (“Facilitating Competition by Remedial Regulation”, 2016)
 http://themusic.com.au/news/all/2015/05/01/tidals-75-per-cent-royalty-rate-not-exactly-what-jay-z-made-it-out-to-be/ “Tidal’s ‘75%’ Royalty Rate Not Exactly What Jay Z Made It Out To Be”, theMusic, accessed on 2 August 2017, 22:13.
 https://www.engadget.com/2016/02/14/kanye-west-the-life-of-pablo-tidal-exclusive/ “Kanye West’s new album is streaming exclusively on Tidal”, Engadget, accessed on 1 August 2017, 22:03.
 (“Facilitating Competition by Remedial Regulation”, 2016) p.192
 ibid p. 198
 ibid p. 200
 ibid p. 213
 (“IN DEFENSE OF COPYRIGHT: RECORD LABELS, CREATIVITY, AND THE FUTURE OF MUSIC”, 2011)
 ibid p. 63
 (“Facilitating Competition by Remedial Regulation”, 2016) p. 206
 ibid p. 201
 ibid p. 202
 ibid p. 201
 ibid p. 202
 ibid p. 206
 ibid p. 203
 ibid p. 204
 ibid p. 235
 ibid p. 206
 ibid p. 204
 ibid p. 205
 ibid p. 206
 ibid p. 207
 ibid p. 207
 ibid p. 208
 (Following the legal standard established by the European Court of Justice)
 (“Facilitating Competition by Remedial Regulation”, 2016) p. 189
 ibid p. 219
 ibid p. 220
 ibid p. 256
 ibid p. 236
 ibid pg. 233