The $7.8 Billion Music Case of the Century

George Clinton, Taylor Swift and Pharrell Williams
Musicians George Clinton, Taylor Swift and Pharrell Williams. Photo by Kevin Mazur/WireImage
Eriq Gardner
July 11, 2022

There was a time, not long ago, when I could accurately predict NPR producers would be calling me up for an interview. How? All I’d have to do is write about karaoke, that sing-along form of entertainment that’s perfect for a drunk Saturday night. It turns out that karaoke not only has been the subject of a lawsuit or a dozen over the years, but this diversion is also a fun vehicle to discuss just how abstruse music rights can be. “You mean you need a separate license when the song is being matched to visuals, and one when the lyrics are reprinted too?”

I was thinking about this the first day of July when the government handed down a decision literally worth billions of dollars, which, not surprisingly, was also pretty much ignored by the nation’s leading news outlets. Who has the patience, after all, to deconstruct a decision by the obscure Copyright Royalty Board to increase the royalty rate that streamers must pay publishers and songwriters from 10.5 percent to 15.1 percent? Or tackle how this might impact an even bigger upcoming trial with no less than $7.8 billion on the line? A few trade publications? Maybe. Anyone else?

The music business can feel at times like it exists on some labyrinthian and inscrutable plane, which may explain why few reporters dare touch it. But it’s also a subject that impacts pretty much everyone. What’s more, the business of tunes is arguably one of America’s most regulated industries, at least with respect to pricing. That’s been so for about a century, even if few ever think about the distribution of songs that way.

But it’s worth discussing how this stuff actually works. Around the turn of the 19th century, Congress granted composers the right to control the public performance of their work. Ultimately, that’s meant in stadiums, on stages, on the radio and on television, in bars and restaurants, and so forth. Basically, anywhere where loudspeakers play music. A few Performance Rights Organizations (PROs)—predominantly, ASCAP (American Society of Composers, Authors and Publishers) and BMI (Broadcast Music Inc.)—collect fees and monitor for compliance, but crucially, those who use music can immediately access a very large song catalog without waiting around for permission. Thanks to an antitrust proceeding that the Department of Justice pursued in the 1940s and a subsequent settlement (and modification), ASCAP and BMI offer a few different licensing options including blanket licenses to their full repertoires. When there’s disagreement about the rate, a licensee—say, a group of radio stations—can trigger a “rate setting” proceeding in New York federal court where a judge will eventually determine what’s reasonable. 

In other words, a songwriter like Taylor Swift has no ability to independently set the market for what’s charged to publicly play her music. Recently, Irving Azoff, a promoter who has climbed the ladder to become one of the most powerful voices in the industry, attempted to change the rules by rounding up a few star songwriters like Jon Bon Jovi and Pharrell Williams for a new PRO, called Global Music Rights, not beholden to the old consent decrees. Naturally, that enterprise landed in court too, after it was accused by radio stations of violating antitrust law through concerted license demands. Earlier this year, this dispute culminated in a settlement.

The performance of music is not the only way to wring money from songs, though. Songs can be recorded and reproduced and physically packaged for sale. In the early 20th century, it was piano rolls. Then came vinyl records. Later, it was tape cassettes and CDs. Now, vinyl is hot again. Since the 1970s, Congress has recognized a separate copyright in the specific sound recording, which is of benefit to recording artists and record labels. But it’s also important to understand that each sound recording embodies a composition. As such, Kid Harpoon and Tyler Johnson get something for co-writing “As It Was,” the #1 song in the country at the moment recorded by Harry Styles

Indeed, anyone packaging a recording can obtain a compulsory license for the mechanical reproduction of a composition. In other words, a songwriter’s consent isn’t necessary here either—only some kind of notice and a royalty payment. At the time of piano rolls, the cost of doing this was a couple of pennies for every copy. Beginning in the 1970s, the rate started slowly climbing after Congress tasked a copyright tribunal with deciding what rate record distributors should pay to use song compositions. It’s now up to 12 cents a pop.

There are other ways to generate money from music, including the “sync” licensing of songs for motion pictures or, yes, doing drunk karaoke. But the fattest part of the pie is tied to digital distribution. About $10 billion a year, currently.

Beginning in the 1990s, Congress tweaked the regime to encompass digital transmission. This hasn’t been easy, in large part because of some initial confusion about which delivery mechanism would reign (multicasting? downloading? streaming?) and how to adapt our definitions of performance and reproduction in light of technological developments. Indeed, in 2018, in one of the very few legislative accomplishments of the Trump era, Congress attempted to catch up via the Music Modernization Act.

Yeah, there’s been talk of a wider overhaul. For instance, the Antitrust Division of the Justice Department has periodically re-examined the old consent decrees and taken comments about whether they should even survive—i.e., perhaps the market should once and for all be trusted with sorting the licensing of songs. But that prospect has proven just too much (even as analogous government rules for Hollywood movies fell by the wayside). Pretty much every Congressman in the nation, after all, has radio stations, bars, and restaurants in their district that play music. And besides political forces, it’d be quite a logistical pain in the ass to incorporate more complex dealmaking between copyright owners and song users into the system. Thus, if the government has its hands in the pricing of moving songs ad hoc, it’s probably because anything else would sound like one of those disruptive record needle scratches.

A Change Is Gonna Come

One area of the song business that has gotten a ton of attention of late is the rush of private equity money for song catalogs. Hipgnosis Songs Fund, which raised a billion dollars from Blackstone, has invested in libraries from Neil Young, David Crosby, Barry Manilow, and others. BMG has allied with KKR to buy out Mick Fleetwood, Tina Turner and John Legend. Apollo Global Management has invested in HarbourView, which has staked Luis Fonsi, among others. And traditional players like Universal Music and Primary Wave have also raised funds for song catalogs including Bob Dylan, Stevie Nicks, and Whitney Houston. Music Business Worldwide estimates $5 billion in dealmaking in just the past year. These investors are attracted to the steady flow of income, though some have designs at shaking more from the tree. “None of us should be able to sleep in good conscience at night until the true value of the songwriters’ contributions are recognized—and until they go from the bottom of the economic equation to the top,” said Merck Mercuriadis at Hipgnosis.

Some profound battles await. The first will take place just after Labor Day in the shadowy recesses of the Library of Congress—“some conference room,” one insider tells me—where the three judges of the Copyright Royalty Board (one still has to be appointed) will oversee a trial and decide what percentage of revenue from Spotify, Apple Music, Amazon Music, Pandora, and YouTube will head to music publishers for a five-year period between 2023 and 2027. After many years of litigation that included an appeal up to the D.C. Circuit, these streamers were recently told to pay 15.1 percent for the five years between 2018 and 2022, and now the music publishers are shooting for 20 percent while the streamers want to take it back to 10.5 percent. That’s a huge difference—$7.8 billion to be exact, according to calculations by the National Music Publishers Association. It’s more than total song publishing revenue this past year.

Thanks to one big change in the Music Modernization Act, this is a whole new ballgame that has both Big Tech and music industry veterans essentially fighting over the existential value of music in our society. 

Up until recently, the CRB decided a “reasonable” rate based upon what would maximize the availability of works to the public, afford copyright owners a fair return, and minimize any disruptive impact on the industries involved. But that’s now changed to what’s known as the “willing buyer/willing seller” standard, meaning that even though the market isn’t truly free, the parties are going to attempt to simulate a free market anyway. In other words, the government must pretend it doesn’t have a thumb on the scales.

It’s an audacious experiment, and in advance of the trial, those involved in this proceeding have been lodging tens of thousands of pages of expert testimony, news articles (I found a few of my own in the archive of filings), data about whatever dealmaking has taken place (e.g. foreign licensing, sync licensing, etc.), consumer spending habits, and anything else that can be used as a “benchmark.” Additionally, there’s quite a bit of background about the development of these streaming platforms and the structure of the music industry. The fact that Wall Street has taken a recent shine to song publishing has certainly been noted by the tech giants.

Most of all, each side tells a story about the past and future of music. “The Services have resuscitated the music industry,” states Spotify’s submission, pointing to how total revenue today surpasses the “halcyon, pre-Napster era” and that songwriters are getting a bigger slice from the streamers than they ever got from the record labels.

Amazon is even more blunt in its own submission: “The evidence shows that publishers, PROs, and record labels are oligopolists whose market power already allows them to extract supra-competitive rates; that the compulsory license sets a floor, not a ceiling, on rates; that songwriters are thriving under the current system; and that the ‘American songbook’ is not in jeopardy.” 

As for song owners, who in their spare time like to pass around infographics showing just how little a million streams is actually worth to them, they say these tech companies have it backwards: It’s the musicians who have contributed to the enormous market cap of the tech giants, and these trillion dollar companies are ungrateful. “These bespoke proposals are not good faith attempts to craft reasonable rates and terms for the national marketplace for 2023 through 2027,” states the memorandum from copyright owners. “They are each Service’s attempt to get favor, a calculated trade off of spending tens of millions on legal fees to procure a soft spot in the rates and terms they can exploit for hundreds of millions. Each and every Service proposal contains multiple terms that are purposely opaque and amount to ticking time bombs designed to obliterate reasonable royalties.”

That’s the prelude for what’s sure to be a blockbuster symphony premiering in some Washington D.C. cavern this autumn. Where exactly? Who really knows. But I have it on good authority that this trial will be streamed.