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Underpinning many policy disputes is a frequently rehearsed conflict of visions: Should we experiment with policies that are likely to lead to superior, but unknown, solutions, or should we should stick to well-worn policies, regardless of how poorly they fit current circumstances? 

This conflict is clearly visible in the debate over whether DOJ should continue to enforce its consent decrees with the major music performing rights organizations (“PROs”), ASCAP and BMI—or terminate them. 

As we note in our recently filed comments with the DOJ, summarized below, the world has moved on since the decrees were put in place in the early twentieth century. Given the changed circumstances, the DOJ should terminate the consent decrees. This would allow entrepreneurs, armed with modern technology, to facilitate a true market for public performance rights.

The consent decrees

In the early days of radio, it was unclear how composers and publishers could effectively monitor and enforce their copyrights. Thousands of radio stations across the nation were playing the songs that tens of thousands of composers had written. Given the state of technology, there was no readily foreseeable way to enable bargaining between the stations and composers for license fees associated with these plays.

In 1914, a group of rights holders established the American Society of Composers Authors and Publishers (ASCAP) as a way to overcome these transactions costs by negotiating with radio stations on behalf of all of its members.

Even though ASCAP’s business was clearly aimed at ensuring that rightsholders’ were appropriately compensated for the use of their works, which logically would have incentivized greater output of licensable works, the nonstandard arrangement it embodied was unacceptable to the antitrust enforcers of the era. Not long after it was created, the Department of Justice began investigating ASCAP for potential antitrust violations.

While the agglomeration of rights under a single entity had obvious benefits for licensors and licensees of musical works, a power struggle nevertheless emerged between ASCAP and radio broadcasters over the terms of those licenses. Eventually this struggle led to the formation of a new PRO, the broadcaster-backed BMI, in 1939. The following year, the DOJ challenged the activities of both PROs in dual criminal antitrust proceedings. The eventual result was a set of consent decrees in 1941 that, with relatively minor modifications over the years, still regulate the music industry.

Enter the Internet

The emergence of new ways to distribute music has, perhaps unsurprisingly, resulted in renewed interest from artists in developing alternative ways to license their material. In 2014, BMI and ASCAP asked the DOJ to modify their consent decrees to permit music publishers partially to withdraw from the PROs, which would have enabled those partially-withdrawing publishers to license their works to digital services under separate agreements (and prohibited the PROs from licensing their works to those same services). However, the DOJ rejected this request and insisted that the consent decree requires “full-work” licenses — a result that would have not only entrenched the status quo, but also erased the competitive differences that currently exist between the PROs. (It might also have created other problems, such as limiting collaborations between artists who currently license through different PROs.)

This episode demonstrates a critical flaw in how the consent decrees currently operate. Imposing full-work license obligations on PROs would have short-circuited the limited market that currently exists, to the detriment of creators, competition among PROs, and, ultimately, consumers. Paradoxically these harms flow directly from a  presumption that administrative officials, seeking to enforce antitrust law — the ultimate aim of which is to promote competition and consumer welfare — can dictate through top-down regulatory intervention market terms better than participants working together. 

If a PRO wants to offer full-work licenses to its licensee-customers, it should be free to do so (including, e.g., by contracting with other PROs in cases where the PRO in question does not own the work outright). These could be a great boon to licensees and the market. But such an innovation would flow from a feedback mechanism in the market, and would be subject to that same feedback mechanism. 

However, for the DOJ as a regulatory overseer to intervene in the market and assert a preference that it deemed superior (but that was clearly not the result of market demand, or subject to market discipline) is fraught with difficulty. And this is the emblematic problem with the consent decrees and the mandated licensing regimes. It allows regulators to imagine that they have both the knowledge and expertise to manage highly complicated markets. But, as Mark Lemley has observed, “[g]one are the days when there was any serious debate about the superiority of a market-based economy over any of its traditional alternatives, from feudalism to communism.” 

It is no knock against the DOJ that it patently does not have either the knowledge or expertise to manage these markets: no one does. That’s the entire point of having markets, which facilitate the transmission and effective utilization of vast amounts of disaggregated information, including subjective preferences, that cannot be known to anyone other than the individual who holds them. When regulators can allow this process to work, they should.

Letting the market move forward

Some advocates of the status quo have recommended that the consent orders remain in place, because 

Without robust competition in the music licensing market, consumers could face higher prices, less choice, and an increase in licensing costs that could render many vibrant public spaces silent. In the absence of a truly competitive market in which PROs compete to attract services and other licensees, the consent decrees must remain in place to prevent ASCAP and BMI from abusing their substantial market power.

This gets to the very heart of the problem with the conflict of visions that undergirds policy debates. Advocating for the status quo in this manner is based on a static view of “markets,” one that is, moreover, rooted in an early twentieth-century conception of the relevant industries. The DOJ froze the licensing market in time with the consent decrees — perhaps justifiably in 1941 given the state of technology and the very high transaction costs involved. But technology and business practices have evolved and are now much more capable of handling the complex, distributed set of transactions necessary to make the performance license market a reality.

Believing that the absence of the consent decrees will force the performance licensing market to collapse into an anticompetitive wasteland reflects a failure of imagination and suggests a fundamental distrust in the power of the market to uncover novel solutions—against the overwhelming evidence to the contrary

Yet, those of a dull and pessimistic mindset need not fear unduly the revocation of the consent decrees. For if evidence emerges that the market participants (including the PROs and whatever other entities emerge) are engaging in anticompetitive practices to the detriment of consumer welfare, the DOJ can sue those entities. The threat of such actions should be sufficient in itself to deter such anticompetitive practices but if it is not, then the sword of antitrust, including potentially the imposition of consent decrees, can once again be wielded. 

Meanwhile, those of us with an optimistic, imaginative mindset, look forward to a time in the near future when entrepreneurs devise innovative and cost-effective solutions to the problem of highly-distributed music licensing. In some respects their job is made easier by the fact that an increasing proportion of music is  streamed via a small number of large companies (Spotify, Pandora, Apple, Amazon, Tencent, YouTube, Tidal, etc.). But it is quite feasible that in the absence of the consent decrees new licensing systems will emerge, using modern database technologies, blockchain and other distributed ledgers, that will enable much more effective usage-based licenses applicable not only to these streaming services but others too. 

We hope the DOJ has the foresight to allow such true competition to enter this market and the strength to believe enough in our institutions that it can permit some uncertainty while entrepreneurs experiment with superior methods of facilitating music licensing.

By Geoffrey Manne and Berin Szoka

Everyone loves to hate record labels. For years, copyright-bashers have ranted about the “Big Labels” trying to thwart new models for distributing music in terms that would make JFK assassination conspiracy theorists blush. Now they’ve turned their sites on the pending merger between Universal Music Group and EMI, insisting the deal would be bad for consumers. There’s even a Senate Antitrust Subcommittee hearing tomorrow, led by Senator Herb “Big is Bad” Kohl.

But this is a merger users of Spotify, Apple’s iTunes and the wide range of other digital services ought to love. UMG has done more than any other label to support the growth of such services, cutting licensing deals with hundreds of distribution outlets—often well before other labels. Piracy has been a significant concern for the industry, and UMG seems to recognize that only “easy” can compete with “free.” The company has embraced the reality that music distribution paradigms are changing rapidly to keep up with consumer demand. So why are groups like Public Knowledge opposing the merger?

Critics contend that the merger will elevate UMG’s already substantial market share and “give it the power to distort or even determine the fate of digital distribution models.” For these critics, the only record labels that matter are the four majors, and four is simply better than three. But this assessment hews to the outmoded, “big is bad” structural analysis that has been consistently demolished by economists since the 1970s. Instead, the relevant touchstone for all merger analysis is whether the merger would give the merged firm a new incentive and ability to engage in anticompetitive conduct. But there’s nothing UMG can do with EMI’s catalogue under its control that it can’t do now. If anything, UMG’s ownership of EMI should accelerate the availability of digitally distributed music.

To see why this is so, consider what digital distributors—whether of the pay-as-you-go, iTunes type, or the all-you-can-eat, Spotify type—most want: Access to as much music as possible on terms on par with those of other distribution channels. For the all-you-can-eat distributors this is a sine qua non: their business models depend on being able to distribute as close as possible to all the music every potential customer could want. But given UMG’s current catalogue, it already has the ability, if it wanted to exercise it, to extract monopoly profits from these distributors, as they simply can’t offer a viable product without UMG’s catalogue. Continue Reading…