SPEAKERS CONTENTS INSERTS
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PUBLIC PERFORMANCE RIGHTS ORGANIZATIONS
SUBCOMMITTEE ON COURTS, THE INTERNET,
AND INTELLECTUAL PROPERTY
COMMITTEE ON THE JUDICIARY
HOUSE OF REPRESENTATIVES
ONE HUNDRED NINTH CONGRESS
MAY 11, 2005
Serial No. 10925
Printed for the use of the Committee on the Judiciary
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Available via the World Wide Web: http://www.house.gov/judiciary
COMMITTEE ON THE JUDICIARY
F. JAMES SENSENBRENNER, Jr., Wisconsin, Chairman
HENRY J. HYDE, Illinois
HOWARD COBLE, North Carolina
LAMAR SMITH, Texas
ELTON GALLEGLY, California
BOB GOODLATTE, Virginia
STEVE CHABOT, Ohio
DANIEL E. LUNGREN, California
WILLIAM L. JENKINS, Tennessee
CHRIS CANNON, Utah
SPENCER BACHUS, Alabama
BOB INGLIS, South Carolina
JOHN N. HOSTETTLER, Indiana
MARK GREEN, Wisconsin
RIC KELLER, Florida
DARRELL ISSA, California
JEFF FLAKE, Arizona
MIKE PENCE, Indiana
J. RANDY FORBES, Virginia
STEVE KING, Iowa
Page 3 PREV PAGE TOP OF DOCTOM FEENEY, Florida
TRENT FRANKS, Arizona
LOUIE GOHMERT, Texas
JOHN CONYERS, Jr., Michigan
HOWARD L. BERMAN, California
RICK BOUCHER, Virginia
JERROLD NADLER, New York
ROBERT C. SCOTT, Virginia
MELVIN L. WATT, North Carolina
ZOE LOFGREN, California
SHEILA JACKSON LEE, Texas
MAXINE WATERS, California
MARTIN T. MEEHAN, Massachusetts
WILLIAM D. DELAHUNT, Massachusetts
ROBERT WEXLER, Florida
ANTHONY D. WEINER, New York
ADAM B. SCHIFF, California
LINDA T. SÁNCHEZ, California
ADAM SMITH, Washington
CHRIS VAN HOLLEN, Maryland
PHILIP G. KIKO, Chief of Staff-General Counsel
PERRY H. APELBAUM, Minority Chief Counsel
Page 4 PREV PAGE TOP OF DOCSubcommittee on Courts, the Internet, and Intellectual Property
LAMAR SMITH, Texas, Chairman
HENRY J. HYDE, Illinois
ELTON GALLEGLY, California
BOB GOODLATTE, Virginia
WILLIAM L. JENKINS, Tennessee
SPENCER BACHUS, Alabama
BOB INGLIS, South Carolina
RIC KELLER, Florida
DARRELL ISSA, California
CHRIS CANNON, Utah
MIKE PENCE, Indiana
J. RANDY FORBES, Virginia
HOWARD L. BERMAN, California
JOHN CONYERS, Jr., Michigan
RICK BOUCHER, Virginia
ZOE LOFGREN, California
MAXINE WATERS, California
MARTIN T. MEEHAN, Massachusetts
ROBERT WEXLER, Florida
ANTHONY D. WEINER, New York
ADAM B. SCHIFF, California
LINDA T. SÁNCHEZ, California
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BLAINE MERRITT, Chief Counsel
DAVID WHITNEY, Counsel
JOE KEELEY, Counsel
RYAN VISCO, Counsel
SHANNA WINTERS, Minority Counsel
C O N T E N T S
MAY 11, 2005
The Honorable Lamar Smith, a Representative in Congress from the State of Texas, and Chairman, Subcommittee on Courts, the Internet, and Intellectual Property
The Honorable Howard Berman, a Representative in Congress from the State of California, and Ranking Member, Subcommittee on Courts, the Interenet, and Intellectual Property
Mr. Del R. Bryant, President and Chief Executive Officer, Broadcast Music Inc. (BMI)
Page 6 PREV PAGE TOP OF DOCMr. Stephen Swid, Chairman and Chief Executive Officer, SESAC Inc.
Mr. Jonathan M. Rich, Partner, Morgan Lewis & Bockius, on behalf of ASCAP
Mr. Will Hoyt, Executive Director, Television Music License Committee (TMLC)
Material Submitted for the Hearing Record
Prepared Statement of the Honorable Howard Berman, a Representative in Congress From the State of California, and Ranking Member, Subcommittee on Courts, the Internet, and Intellectual Property
Prepared Statement of the Honorable Elton Gallegy, a Representative in Congress from the State of California
ASCAP constent decree (2000)
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Supplemental Statement of Stephen Swid, Chairman and Chief Executive Officer, SESAC Inc.
Supplemental Statement of Jonathan Rich on behalf of ASCAP (May 12, 2005)
Supplemental Statement of Jonathan Rich on behalf of ASCAP (May 17, 2005)
Additional Testimony of the Television Music License Committee (TMLC)
Prepared Statement of Keith F. Meehan, Executive Director, Radio Music License Committee
Prepared Statement of Russell R. Hauth, Executive Director of the National Religious Broadcasters Music License Committee (NRBMLC)
Letter from John S. Orlando, Executive Vice President, Government Relations, National Association of Broadcasters (NAB)
Supplemental questions for BMI
Responses to Subcommittee questions from BMI
Supplemental questions for SESAC
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Responses to Subcommittee questions from SESAC
Supplemental questions for ASCAP
Responses to Subcommittee questions from ASCAP
Supplemental questions for Television Music License Committee
Responses to Subcommittee questions from Television Music License Committee
PUBLIC PERFORMANCE RIGHTS ORGANIZATIONS
WEDNESDAY, MAY 11, 2005
House of Representatives,
Subcommittee on Courts, the Internet,
and Intellectual Property,
Committee on the Judiciary,
The Subcommittee met, pursuant to call, at 4:07 p.m., in Room 2142, Rayburn House Office Building, the Honorable Lamar Smith (Chair of the Subcommittee) presiding.
Page 9 PREV PAGE TOP OF DOC Mr. SMITH. The Subcommittee on Courts, the Internet, and Intellectual Property will come to order. Without objection, the Chairman and the Ranking Member will make their entire opening statements a part of the record. If the witnesses will stand, I will swear them in, and we will get to your testimony.
Mr. SMITH. Thank you, please be seated. Would you all object if I dispense with your introductions? That will save another few minutes.
I will simply say that our witnesses today are Del Bryant, President and Chief Executive Officer, Broadcast Music Inc. (BMI); Stephen Swid, Chairman and Chief Executive Officer, SESAC, Inc.; Jonathan M. Rich, Partner, Morgan Lewis & Bockius, on behalf of ASCAP; and Will Hoyt, Executive Director, Television Music License Committee (TLMC).
Mr. SMITH. We welcome you all, and Mr. Bryantby the way, I don't see any name tags. Oh, they are the other way. Okay. Well, you all know who you are.
But, Mr. Bryant, we will begin with you. Please limit your testimony to 5 minutes or less so that we will have time for questions.
TESTIMONY OF DEL R. BRYANT, PRESIDENT AND CHIEF EXECUTIVE OFFICER, BROADCAST MUSIC INC. (BMI)
Mr. BRYANT. Thank you. I push the button.
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Mr. SMITH. Yes.
Mr. BRYANT. Mr. Chairman and Ranking Member, thank you for the opportunity to testify today. My name, as the Chairman mentioned, is Del Bryant and I am President and Chief Executive Officer of BMI.
America's copyright laws have provided a firm foundation to support the vibrant, creative community whose works fuel a robust and growing entertainment industry. BMI is proud to represent the public performing rights of over 300,000 songwriters, composers and publishers.
The BMI family includes icons in American music and today's most successful creators from Hank Williams, Senior to Toby Keith; Billie Holliday to Norah Jones; Patsy Cline to Shania Twain; Santana to Gloria Estefan; the Eagles to 3 Doors Down; John Williams to Danny Elfman, Ray Charles to Jamie Foxx, and Miles, Mingus and Monk to Herbie Hancock. And that just simply scratches the surface.
My background gives me a special insight on the issues that we are here to discuss today. My parents, Boudleaux and Felice Bryant were the first full-time songwriters in Nashville, Tennessee. Like most songwriters, you wouldn't necessarily know their names, but you would know some of their works, ''Bye-Bye Love,'' ''Wake up, Little Susie,'' ''All I Have to Do is Dream,'' and the State song of Tennessee, ''Rocky Top.'' As the son of songwriters, I know firsthand what it means to rely on the income that comes through BMI for public performances. I know how precious these royalties are to the creators and especially to their families.
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And in my more than three decades at BMI, I have certainly learned how precious licensing fees are to broadcasters and other music users.
Because we were founded by leaders of the broadcast industry, BMI has always had a special appreciation for their business models and their programming needs. There are hundreds of thousands of enterprises who bring our creators' music to the public. Our operations are efficient and fair, and our distributions are timely, accurate, and they are competitive.
The competition among American performing rights organizations provides benefits to the creators and to the music users alike. It's a win-win for the American free enterprise system. In addition to a solid platform provided by the copyright laws, BMI's consent decree insures our licensees that we are fair and evenhanded. BMI's rate court has proven to be a valuable asset to the creators and the music users. Simply put, it works.
BMI also plays a critical role in identifying new talent and fostering the musical careers of the future creators. BMI is the first professional relationship that most songwriters have; most of our songwriters, certainly. We guide young creators through the career start-up phase, educating them about the industry and about copyright, and then we bring their music to the attention of seasoned professionals.
Mr. Chairman, for example, BMI was the cofounder in Austin, Texas of the South by Southwest Music Festival, which annually draws 10,000 decisionmakers, music makers and some fans, primarily the industry, though. Each year our educational efforts include hundreds of career seminars and lectures.
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Speaking on BMI support for classical music, Pulitzer Prize winner John Adams stated, ''The support of BMI has been absolutely essential to my career. American classical music is high art, presenting what is best about our culture. BMI, as a champion of the American composers, understands this.''
As we mark our 61stexcuse me 65th anniversary, BMI has become one of the most respected brands and business models in music here and, indeed, around the world. We are grateful to Congress for the effectiveness of the Copyright Act, which has permitted BMI to develop a successful business, allowing songwriters, composers, and publishers to be fairly compensated.
Thank you for allowing me to speak to you about BMI.
Mr. SMITH. Thank you, Mr. Bryant.
[The prepared statement of Mr. Bryant follows:]
PREPARED STATEMENT OF DEL R. BRYANT
Mr. Chairman, thank you for the opportunity to testify before the Subcommittee on the occasion of congressional oversight of the three U.S. music performing right licensing organizations. I would also like to thank the Ranking Minority Member and the other members of the Subcommittee.(see footnote 1)
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My name is Del Bryant. I am President and Chief Executive Officer of BMI, one of the world's leading performing right organizations. Mr. Chairman, America's copyright laws have provided a firm foundation to support a vibrant creative community of songwriters and composers whose works fuel a robust and growing entertainment industry. BMI is proud to represent the public performing rights of over 300,000 songwriters, composers and music publishers, more than any other performing right licensing organization. BMI also represents the works of thousands of foreign composers and songwriters when those works are publicly performed in the United States. Our core competency is as a trusted third party in licensing the public performing right of these musical creators and copyright owners. To be successful in this mission, we have developed an understanding of and appreciation for the business models and programming needs of the hundreds of thousands of businesses across our nation who bring our creators' music to the public.
We must be, if you will, a trusted bridge between the musical creator and copyright owner on the one hand and the businesses using music on the other. Our operations are efficient, fair and transparent, and our royalty distributions are accurate and timely. The competition among American performing right organizations provides benefits to creators and music users alike . . . a win-win success story for the American enterprise system. We maintain a sensitivity to the creative process, identifying and supporting musical creation in all its varieties. At the same time, we assist our licensees by offering customized licensing solutions that permit them to focus on their businesses.
BMI oversees a repertoire of more than 6.5 million musical works. BMI's repertoire includes outstanding creators in every style of musical composition: from pop songwriters to film and television composers; from country music to gospel; from classical composers to commercial jingle writers; from library music to musical theatre composers; from jazz to hip hop; from metal to meringue; classical to soul; rock to reggae; and all categories in between.
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As you know, BMI, ASCAP and SESAC enjoy statutory recognition in the Copyright Act. A ''performing rights society'' is defined as ''an association, corporation, or other entity that licenses the public performance of non-dramatic musical works on behalf of copyright owners of such works, such as the American Society of Composers, Authors, and Publishers (ASCAP), Broadcast Music, Inc. (BMI), and SESAC, Inc.'' 17 U.S.C. §101. For more than six decades, BMI has worked with the House and Senate Judiciary Committees to promote the efficacy and fairness of this Nation's copyright law. BMI recognizes the importance of oversight in ensuring the effectiveness of our laws and their administration.
Specifically, BMI's role is to license one of the six exclusive copyright rights, the right to perform publicly musical works on radio, television, cable, satellite and the Internet as well as at concerts, sports venues, restaurants, hotels, retail stores and universities, to name a few of the many categories of BMI licensees. BMI licenses its music literally wherever music is heard or communicated to the public.
Although BMI, ASCAP and SESAC share certain similarities, there are important differences. Moreover, while the organizations are allies on legislation which protects copyright, we are also competitors in the marketplace. It is widely acknowledged that competition between performing right organizations provides an important incentive for efficiency and innovation in this sector delivering benefits to music creators and users alike. My testimony will describe BMI's history and mission, and briefly highlight some recent successes.
Page 15 PREV PAGE TOP OF DOC BMI's history gives it a unique and well-rounded perspective on the role of a performing right organization as a bridge between creators of music and the businesses that use and transmit that music to the American public. Created by the broadcasting industry in 1939 to provide a competitive source of music licensing, BMI threw its doors open wide to representation of genres of American music that were not, at the time, generally available for licensing. BMI's ''open door'' policy opened a floodgate of music from folk and country to rhythm and blues, to gospel, to bluegrass, to jazz . . . the true roots of music of America. This explosion of musical creativity benefited the burgeoning entertainment business of the 1940s, bringing vast new audiences to broadcasters, record companies and live music performances.
Here's how legendary Atlantic Records producer Jerry Wexler tells the story:
''The lid was kept on Rhythm-and-Blues music, Country music, ethnic music, folk. Once the lid was liftedwhich happened when BMI entered the picturethe vacuum was filled by all these archetypal musics. BMI turned out to be the mechanism that released all those primal American forms of music that fused and became Rock-and-Roll.''
BMI protected the rights of minority songwriters and publishers in many cases providing funds essential for their survival. In the words of legendary Motown composer Lamont Dozier:
''. . . all of my life I have worked at being a songwriter, and ever since I was able to get my family and myself out of the Jeffrey Projects in Detroit, Michigan, at the age of 16 years old, I have been writing songs and making a living writing songs. Performance income is now the only living that I do earn.. . . . If it weren't for BMI and performance income, my family would be destitute. We are not receiving any income from mechanicals or sales, as one would call it, only air play.'' Letter from Lamont Dozier to Hon. John Conyers, Jr. (Sept. 28, 2001).
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Thanks to that ''Open Door'' policy, it is not surprising that many of these seminal songwriter/artists have chosen BMI to represent their works. The list includes 69% of the inductees into the Rock 'n Roll Hall of Fame, 87% of the Country Music Hall of Fame, 76% of the Bluegrass Hall of Fame, 87% of the Rhythm & Blues Foundation Pioneers and 94% of the Blues Hall of Fame. The BMI family includes true icons of American music and today's most successful songwriters and composers: from Hank Williams to Toby Keith; Billie Holliday to Norah Jones; Elvis to Kid Rock; Patsy Cline to Shania Twain; Santana to Gloria Estefan; the Beach Boys and the Eagles to Maroon 5 and 3 Doors Down; Bill Monroe to Alison Krauss; Ray Charles to Jamie Foxx; Miles, Mingus and Monk to Herbie Hancock; John Williams to Danny Elfman; and from classical music legend Charles Ives to the Pulitzer-winning John Adamsand that just scratches the surface.
When you think of BMI's affiliates, we ask that you not think only of these superstars, however. The typical songwriter does not receive income from recording his or her own songs, nor does he or she receive income from performing at concerts, television appearances, appearing in commercials, the sale of souvenirs, T-shirts, and so forth. The typical songwriter is a small businessperson, working out of a home studio, often borrowing money when necessary, sometimes working two jobs. The typical songwriter receives a modest income stream for his or her creative efforts of writing music that is publicly performed by others. You may not know their names; but you see them in the supermarket pushing a grocery cart or on the soccer field with their kids. They may be your neighbors. When you consider BMI and the music industry, please think of these songwriters and composers.
Page 17 PREV PAGE TOP OF DOC To successfully perform our role as a trusted bridge between the music creators and music users, BMI's mission includes: (1) to distribute performing right royalties to songwriters, composers and music publishers on an accurate and timely basis; (2) to provide the business and broadcast communities with legal access to publicly perform a music catalog of unique and lasting value which includes all genres of music; (3) to educate the public about the importance of copyright to culture and to protect the copyright rights of BMI's affiliates; and (4) identification of the next generation of musical talent and fostering of songwriting careers.
BMI operates on a non-profit making basis. BMI collects license fees from businesses that perform music. After deducting its overhead, it distributes the license fees collected to its affiliated songwriters and music publishers. BMI strives for ever greater efficiency, and last year distributed more than 85 cents in royalties from every dollar collected while assuring that we continue to support the important work of developing new careers and protecting copyright.
Since its inception, BMI has played an active role in the evolution of U.S. Copyright Law. Domestically, BMI has always worked closely with the leadership of this Subcommittee, and with the Copyright Office. Internationally, BMI contributed to the process of joining the Berne Convention in 1988, as well as the negotiation and ratification of the recent WIPO Copyright Treaties. In the digital era, copyright enforcement not only depends on the law, but also relies on an informed citizenry to respect property rights of owners and authors, increasingly the intangible property of copyright. In this regard, BMI works with a wide variety of organizations representing the creative community and music licensees to help create a greater understanding of the public performing right in copyright and to help foster an environment of copyright protection. For example, we collaborate with organizations representing the creative community, including: the Recording Academy; the Television Academy; Motion Picture Association of America; Recording Industry Association of America; Songwriters Guild of America; Nashville Songwriters Association International; Songwriters Hall of Fame; National Music Publishers' Association; and the official associations representing Country, Gospel, Blues and Bluegrass Music. We also work with a host of organizations representing those who bring the music to the public, including: National Association of Broadcasters; Radio Advertising Bureau; National Association of Black Owned Broadcasters; American Hotel and Lodging Association; North American Concert Promoters Association; Broadcast Cable Financial Management Association; and National Restaurant Association. In addition, we work with educators through organizations such as the American Council on Education and the National Association for Music Education.
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Mr. Chairman, America's music is one of its most important exports, annually bringing in almost $400 million in performing right royalties to U.S. songwriters, composers and copyright owners from overseas. BMI's repertoire has enjoyed explosive growth overseas during the last 15 years with international royalties increasing well over 300% since 1990.
BMI is now one of the largest copyright organizations in the world as measured by performing right revenue. BMI plays an extremely active role in the international copyright arena, serving on many committees and in leadership capacities in CISAC, the international confederation of societies of authors and composers.
The BMI Foundation, Inc., a not-for-profit corporation founded by BMI in 1985, is devoted to encouraging the creation, performance and study of music through awards, scholarships, internships and grants. In the spirit of ''giving back,'' support for the Foundation comes primarily from BMI-affiliated songwriters, composers and publishers, BMI employees and members of the public with a special interest in music.
To support its mission, BMI plays a prominent role in the discovery of new musical talent and the fostering of careers for the next generation of songwriters in all genres of music. We produce over 100 new talent showcases in more than two dozen cities across the nation to introduce promising new songwriter/artists to the industry and to new audiences. For example, we were a co-founder of the South By Southwest Music Festival in Austin, Texas in 1987, and continue to be an anchor sponsor of this event, which now draws more than 10,000 music professionals each year. Likewise, BMI sponsors dozens of showcases at regional music industry events nationwide.
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Career development is a top priority at BMI which annually sponsors competitions for the best new musical compositions in the field of classical musiceleven winners of this contest have gone on to win the Pulitzer Prize; popular music with the John Lennon Scholarship Contest; jazz with the Charlie Parker Prize; and other coveted prizes for jazz composers and musical theater composers and lyricists. BMI also provides some of the industry's most sought after professional workshops for composers in film and television music, jazz, and musical theater.
Legendary songwriter/composer Isaac Hayes said this of the unique role that BMI plays in the creative community: ''It is very important to have someone who is strong and has good ethics. BMI exemplifies all of that. They've been fighting my battles for years and years.'' Speaking of BMI's support for classical music, Pulitzer Prize winner John Adams said, ''The support of BMI has been absolutely essential for me. American classical music is . . . a great tradition. It is high art, representing what is best about our culture. BMI, as a champion of American composers, understands this and continues to do the right thing to make the tradition persevere.''
BMI also engages in many educational activities, both within the field of music as well as the copyright law itself, and each year BMI executives make many appearances at schools and universities, on industry panels and legal seminars in an effort to educate the public about the music industry and the importance of copyright.
TECHNOLOGY LEADERSHIP BY BMI
Page 20 PREV PAGE TOP OF DOC BMI is a worldwide leader in technology and innovation. BMI was the first entertainment industry organization to launch a website in September 1994, at a time when there were only a handful of websites, mostly run by governmental entities or institutions of higher education. BMI.com(r) now serves more than 10,000,000 visitors each year on a network of 20 different sites, encompassing over 10,000 web pages.
BMI has entered into global agreements and initiatives that have streamlined the collective administration of the performing right. For example, BMI was one of five original founding members of FastTrack(, an international technical alliance, which delivers unprecedented efficiency as BMI processes millions of international copyright transactions each year on behalf of its songwriters, composers and publishers. On other fronts, through technology partnerships with MediaBase, Nielsen BDS, Shazam, and many others, BMI is breaking new ground in identifying performances of music in a fast and efficient manner.
BMI'S CONSENT DECREE
While BMI and ASCAP now have consent decrees that have similar licensing provisions, BMI's history is different from ASCAP's. Shortly after BMI was formed in 1939, the Justice Department started a proceeding against ASCAP. To terminate that case, ASCAP agreed to enter into a consent decree in 1941. But the DOJ desired to have a ''level playing field'' between BMI and ASCAP. And so, even though BMI was only a fledgling organization at the time, BMI also agreed to enter into a consent decree with the Department of Justice in 1941. Like ASCAP, BMI has agreed to license rights on a non-exclusive basis and to avoid discrimination in licensing, and these provisions are reflected in BMI's current decree, which was entered in 1966. Further, BMI is required to offer broadcasters per-program licenses that allow broadcasters to pay fees only for programs containing BMI music. BMI's consent decree prohibits discrimination between users who are ''similarly situated.''
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BMI's consent decree also contains two provisions aimed at resolving license fee disputes. The first is an automatic license provision, which permits any user of BMI music to apply for a license by sending BMI a request for a license in writing and become immediately licensed. The second is a provision designating a specific federal district court to serve as a ''rate court'' to resolve license fee disputes. Unlike ASCAP, until 1994 BMI did not have an automatic license provision in its consent decree or a provision allowing parties to adjudicate license fee disputes. This situation changed when an amendment establishing BMI's own separate rate court was agreed to with the Department of Justice and approved by the court in that year.
While BMI historically attempted to negotiate fair and reasonable rates in the marketplace with users, certain large music-using industries urged that BMI seek its own rate court to provide a neutral forum for them to bring any potential rate disputes and to eliminate the threat of infringement liability. For its part, BMI often felt disadvantaged in the marketplace compared to ASCAP by the fact that BMI did not have a legal mechanism to resolve rate disputes. The existence of the ASCAP rate court had ensured that ASCAP would continue to be paid license fee payments through court-set interim fees pending the outcome of negotiations over final fees and terms, while BMI did not have an interim fee mechanism.
In over ten years since the 1994 amendment of BMI's consent decree, only a handful of rate proceedings have been commenced, and only one of them has gone to trial. BMI continues to meet the needs of the market and BMI is striving to negotiate, rather than litigate, fee disputes. However, in those instances where the parties have been unable to negotiate license fees, the rate court proved to be a valuable asset to BMI and its customers.
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BMI'S LICENSING PRACTICES
BMI has always attempted to work closely with users of music to create licensing models that work for both the users of music and songwriters, composers and music publishers. In recent years BMI redoubled its efforts to address concerns of the restaurant industry in the Fairness in Music Licensing Act of 1998 by entering into negotiations with numerous state restaurant, tavern, and licensed beverage associations so that mutually acceptable license structures and license fees could be developed. These negotiations proved to be well received by licensees. The BMI/Association agreements include 41 state restaurant associations and 10 licensed beverage associations. It should be noted that just last year BMI received the ''Restaurant Supplier of the Year'' award from the Alabama Restaurant Association.
BMI's licensing program has been a success for both BMI and the associations since its inception, giving each side the opportunity to work with the other on issues affecting both sides. BMI has worked diligently to maintain a cooperative business relationship with these associations. The program has resulted in a better understanding of each other's contributions to the U.S. economy as well as a lessening of misunderstandings between those businesses using music and BMI.
BMI has made several other initiatives aimed at improving its service to licensees, including:
In response to requests from various groups, BMI placed a comprehensive list of the songwriters, composers and publishers of BMI's repertoire of songs, including film and television themes scores, on the Internet in order to give users of music immediate knowledge of and access to information about the BMI repertoire. BMI was also the first to offer data on its repertoire on CD-ROM.
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Early on BMI entered into Internet licensing agreements with users of music on the Internet. BMI was the first to offer on-line licensing for Internet users of music via BMI's Digital Licensing Center. This ''Klik-Thru'' license is aimed at smaller Internet users and is structured to afford the music user the opportunity to obtain a license quickly and easily in an on-line environment.
BMI offers Radio Select and TV Select to the broadcast radio and broadcast television industries. Radio Select was developed in concert with the National Religious Broadcasters Music License Committee. The free software offered by BMI enables those radio and television stations on per program licenses to save money and time in reporting their music use.
COMPARISON TO SESAC
BMI operates as a non-profit making organization, and ASCAP is a non-profit making association, while SESAC operates for the profit of its private owners. As previously mentioned, BMI and ASCAP also have consent decrees which regulate their relations with licensees and require non-discriminatory treatment. SESAC does not have any similar licensing requirements. Additionally the BMI and ASCAP consent decrees govern their relationships with their respective songwriters, composers and publishers. No comparable regulations apply to SESAC.
Mr. Chairman, thank you for the opportunity to tell the BMI story. In a challenging period for the music industry, BMI remains a bulwark of support for songwriters, composers and publishers, and an ever more valuable supplier of essential rights to music users. Our thousands of affiliates are being accurately and quickly compensated for the public performance of their musical works. We offer our licensees non-exclusive collective licenses for millions of copyrighted works. BMI serves both creators and music users by finding solutions that facilitate the use of copyrights, at reasonable and competitive prices, while growing the world's most vibrant and diverse musical catalog for our licensees and their audiences. Increasingly, our licensing model is being copied and touted by rights-clearance and royalty-payment systems beyond the public performing right in musical works. We continue to be a leader in the use of technology to identify performances of music and collect and distribute royalties.
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We have a huge job with huge responsibilities. BMI does its job in an exemplary fashion. The BMI Consent Decree is doing the job it is supposed to do . . . that is, afford a BMI license to those music users that want a BMI license, and afford a relief valve in the event the music user and BMI cannot agree to license fees/terms. In fact, as stated above, in those few instances where rate proceedings were commenced only one has proceeded to trial.
Mr. Chairman, we are grateful to you and the Subcommittee Members for the effectiveness of the Copyright Act, which permits BMI to function, and songwriters, composers and publishers to be compensated. Thank you for your leadership on these issues which affect the livelihoods of those we represent.
Mr. SMITH. Mr. Swid.
TESTIMONY OF STEPHEN SWID, CHAIRMAN AND CHIEF EXECUTIVE OFFICER, SESAC INC.
Mr. SWID. Thank you, Mr. Chairman and distinguished Ranking Member, Mr. Berman. My name is Stephen Swid. I am the Chairman, Chief Executive Officer, and a shareholder of SESAC, Inc. I have already provided a detailed statement for distribution in advance of the hearing today.
I would like to share with you three important aspects of SESAC's role and function in the U.S. performing rights marketplace. These are: one, SESAC's size and influence in the market; two, that SESAC forces competition, innovation to the market; and, three, the size and market power of the competitors and licensees.
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I believe that after considering these factors, you will reach the just conclusion that SESAC should not and need not be subject to regulation. SESAC is one of the three performing rights organizations. SESAC is relatively small compared to its competitors, ASCAP and BMI, who share annual revenues of approximately 1.3 billion, which constitutes approximately 95 percent of all performing rights revenues.
SESAC nevertheless manages to effectively compete, because one critical lesson learned by all experienced entrepreneurs: We listen to the market. We respond to songwriters and composers as importantly as we respond to the concerns of our licensees. As a result, in the past 10 years, SESAC has grown its market share of revenues from less than 1 percent to approximately 5 percent. SESAC is very proud of the innovations it has produced in our marketplace.
One case example is SESAC's creation of unique customized license for Spanish-language broadcasters. These broadcasters have testified before Congress that they objected to the forms of license offered by ASCAP and BMI that require them to pay for access to unwanted English language repertory.
SESAC allied with Broadcast Data Systems, a company that had developed a digital fingerprint technology for identification of copyrighted music, to adapt this technology for the Spanish-language music market license that charged Spanish language broadcasters for the actual SESAC music they were using.
SESAC created a new division to serve this market and provide the Spanish-language music creators broadcast using their public forum music in bilingual royalty-earning statements. This technology was subsequently adopted by ASCAP and BMI for their writers and publishers.
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SESAC must survive in the marketplace, uncomfortably sandwiched between ASCAP and BMI, each of which controls 45 to 50 percent of American copyrights and the numerous alliances of music license users whose combined revenues and market power far exceed those of SESAC.
Despite operating under consent decrees with the Government, both ASCAP and BMI individuallythrough owners' retention policies that inhibit right of publishers from changing PROs to collectively excluding SESAC from joint ventures, as more fully detailed in my written testimonyengage in activities and conduct that serve to reduce competition and restrain SESAC's ability to compete with ASCAP and BMI.
SESAC also must negotiate with music licensees, almost all of whom retain greater market and bargaining power than to SESAC. For example, SESAC is currently engaged in the negotiation with the Television Music Licensing Committee. This committee represents 1,200 local broadcasters with combined advertising revenues approximately of $30 billion.
In response to their request, their request for a license that would charge only for the music that was actually played, SESAC created novel musica novel license model that was based on actual music use by each local station.
It's hard to fathom the TLMC complaints and reaction to this license form that equitably balances license fees with actual repertory use. Moreover, these multibillion usersor any music user, for that mattercould avail them themselves to licensing SESAC's modest share of the market, including licensed directly with SESAC composers or simply choosing not to use any SESAC music.
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SESAC is the quintessential model of an innovative American small business competing in the challenging marketplace. SESAC has served to enhance competition in the marketplace. SESAC believes that its innovative practices, its modest market share, and its de minimis market power, when viewed in the perspective of the overall performing rights marketplace, creates competition and does not require regulation.
It is antithetical to a free market economy and to the intent, spirit, and letter of the Sherman Act, for Congress to impose burdensome and unnecessary regulation on SESAC when the Department of Justice has declined to do so.
I thank you for the time you have provided me to help you better understand SESAC and to share our several themes with you, and the just conclusion that SESAC does not require and should not and need be subject to any regulation.
I look forward to responding to any questions you may have. Also, because of the voluminous submissions of the other witnesses, we would like the opportunity later to add any needed ideas and answers.
Mr. SMITH. Okay. The record will be open, and you will be able to do that without objection.
[The prepared statement of Mr. Swid follows:]
PREPARED STATEMENT OF STEPHEN SWID
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Mr. Chairman and distinguished members of the Subcommittee. My name is Stephen Swid. I am the Chief Executive Officer and one of the shareholders in SESAC, Inc. Thank you for inviting me to testify today on behalf of SESAC about the operation of music performing rights organizations in the United States. I greatly appreciate the opportunity to speak to you about who SESAC is, what SESAC does in this highly competitive and sometimes misunderstood aspect of the American music industry, and how SESAC fundamentally differs from its two much larger competitors ASCAP and BMI. I hope to shed light on issues that may concern you, enabling you to reach the just conclusion that there is no need at this time for Congressional oversight or governmental regulation concerning SESAC.
WHO IS SESAC?
SESAC is essentially a small business competing successfully in a challenging marketplace. It has done so by constantly embracing innovative and efficient business practices that benefit and improve the marketplace. SESAC is the type of American enterprise that we all value.
SESAC is one of three domestic performing rights organizations. It was organized under the laws of New York in 1930, and was originally formed to represent the interests of European composers for performances of their works in the United States In its early years, SESAC also represented American composers and music publishers of Christian and Gospel music when no one else would represent them. SESAC is this country's second oldest performing rights organization. SESAC literally started as a mom and pop operation, and was family owned for its first sixty-two years. Nearly 13 years ago, the present ownership, including myself, acquired SESAC.
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WHAT DOES A PERFORMING RIGHTS ORGANIZATION DO?
SESAC, like other performing rights organizations, represents songwriters and music publishers and grants licenses to music users authorizing the public performance of musical compositions, for which SESAC functions as a non-exclusive licensing agent. Of course, any music user may, at its election, choose to license directly with the SESAC's songwriters or music publishers. Under the current Copyright Act, and its predecessors all the way back to 1897, the owner of a musical composition has the exclusive right to perform the composition in public. A song may be publicly performed in any number of waysbe it a disc jockey playing the song on the radio, a pianist playing the song in a nightclub, a television station broadcasting music in its programming, or more recently, a webcaster streaming the song over the internet. In every instance, the Copyright Act entitles the copyright owner to be paid for the use of his or her intellectual property.
WHY PERFORMING RIGHTS ORGANIZATIONS ARE NEEDED?
The public performance of music is so widespread and pervasive in our culture that it would be difficult for individual owners of songs to license and enforce their rights on a nationwide scale. Such an enormous task would result in exponentially higher license fees for music users than otherwise are available through licenses offered by performing rights organizations. This is precisely why songwriters and music publishers engage the services of performing rights organizations, such as SESAC, to collectively license and monitor these rights. Section 101 of the Copyright Act expressly recognizes SESAC as one of the three musical performing rights organizations in the United States.
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SESAC COMPETES EFFECTIVELY IN A MARKET WITH TWO DOMINANT COMPETITORS
SESAC is a member of the National Federation of Independent Businesses (the ''NFIB''). SESAC is a for-profit company, as are 99% of its music user licensees. SESAC, with annual revenues of approximately 5% of the performing rights industry revenues, has been able to survive for 75 years despite market power of its competitors, who collectively have revenues in excess of $1.3 billion. It has done so by being a more efficient company, an early user of technology, a creator of innovative music licensing practices, and accelerated and transparent payments to its songwriter and music publisher affiliates. These pro-competitive, efficient business methods combined with historical judicial oversight of the Department of Justice have contributed to SESAC's survival in an environment where it competes with two larger economic powers.
As a for profit company, SESAC is not tethered to the past or the continuity of the status quo; SESAC seeks efficient and effective methods of conducting performing rights business tasks, and is responsive to customer insight, feedback, and needs. As far back as the 1930s, SESAC was the only performing rights organization to provide to radio stations, free of charge, transcription recordings of its gospel and appropriate church music to help those stations comply with the FCC requirement that broadcasters devote a portion of their programming to public service.
SESAC seeks to introduce new technologies, cooperation, and efficiencies into its performing rights business model. SESAC is a small business that successfully thrives in a marketplace through its ability to be innovative, creative, transparent, and responsive to developing market needs.
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Shortly after purchasing the company, SESAC's new management met with Spanish language broadcasters at the National Association of Broadcasters convention in Las Vegas. The radio broadcasters were chagrined that blanket licenses offered by ASCAP and BMI required them to pay for access to unwanted Anglo repertories. Their complaints fell on deaf ears. Moreover, the performances of Spanish language songwriters were not adequately recognized by ASCAP and BMI radio surveys to determine royalty distributions.
SESAC undertook the innovative role to address these gaps by working with Broadcast Data Systems (BDS), a company that had developed a digital fingerprint technology for identification of copyrighted music. (It is interesting to note that it was SESAC who encouraged BDS, a company also affiliated with Billboard Magazine, to properly attend to a Latin chart which had been missing from the array of charts provided for monitoring and recognizing hit-driven music). SESAC spent considerable time and resources to help manage the massive first-time encoding process of Spanish language copyrights into the BDS system and to recommend market deployment locations for monitoring the bulwark of licensed Spanish language stations.
Recognizing the needs of Spanish language composers and publishers, SESAC successfully launched a first-time bilingual presentation of royalty statements. This not only benefited the Spanish language writers but also provided these writers the recognition and respect they deserved.
In order to satisfy the Spanish broadcasters, SESAC undertook a novel licensing model that measured SESAC's daily ''detection share'' of all PRO copyrights and developed a mini-blanket license that charged the stations for the actual use of SESAC's Latina repertory, a total departure from the blanket license structure imposed upon these broadcasters by other performing rights organizations. Taking this new concept one logical step further, the SESAC Latina affiliates would also get paid for all public performances of their works with accompanying intelligent data that specified when and where a station used their songs.
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The net result was a championing of Spanish language music, a facilitation of a more appropriate performance license, and a customized approach to an underserved segment of the music community. ASCAP and BMI passed on this opportunity. SESAC, a small market innovator, rescued this format.
Having successfully introduced BDS technology to the Spanish language format, SESAC initiated the expansion of the BDS fingerprint technology to all mainstream radio formats. This meant that for the first time, broadcasters, songwriters and music publishers knew when music was actually being broadcast and by what broadcaster, a process that was simpler, cost efficient, and more accurate for both the creator of music and the music user. Years later, ASCAP and BMI adopted the same technology.
More recently, when another technology firm attempted to bring a new ''watermarking'' technology to the performing rights marketplace, it was SESAC who invested financial and human resources and allied with that company to bring greater accuracy to the identification of music cues (short musical interludes) contained in television programming, to the benefit of copyright owners and the television broadcast industry.
Moreover, SESAC is an active member of the nation's larger copyright community. It has actively participated in the recent public policy discussions regarding copyright-related issues, including the recent legislative efforts surrounding passage of the Satellite Home Viewer Extension and Reauthorization Act of 2004 and the Copyright Royalty and Distribution Reform Act of 2004; several amicus briefs in appellate court proceedings concerning important new issues of music use on the Internet; and several pending proceedings before the Copyright Office regarding rate-setting and distribution of compulsory license royalties.
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Ultimately, SESAC must survive in the marketplace competing, on the one hand, against ASCAP and BMI, each of which claim to represent 45% to 50% of American music copyrights while, on the other hand, often negotiating with organized combinations of music users whose combined revenues and market power far exceed those of SESAC. The songwriters and music publishers have the option of affiliating with a different performing rights organization. The music users have the option of choosing not to use SESAC's small 5% share of the American musical performing rights market. Alternatively, music users are free to bypass SESAC and instead obtain licenses for SESAC-represented compositions directly from the copyright owners.
SESAC believes that it has been able to grow, in part, because it has been able to recognize and react positively to inefficiencies in the marketplace. For example, SESAC has been approached by songwriters who believe that they are underpaid and undervalued by their performing rights organization. In certain instances, several of these songwriters have become affiliates of SESAC, which has helped fuel SESAC's music growth and enhance the value of a SESAC license. We have heard it said by certain licensees, and SESAC's two competitors, that SESAC has grown its repertory and market share by overpaying royalties to songwriters. In fact, the list of songwriters who have engaged SESAC in affiliation discussions but who have nonetheless chosen not to join SESAC, is far lengthier than the short list of those who have joined SESAC. This fact alone would dispel the unfounded ''overpayment'' argument. Typically, the writers who chose not to affiliate with SESAC did so because they eventually were offered far more money from either ASCAP or BMI than SESAC thought prudent. Moreover, negotiations with songwriters and publishers who either choose to join SESAC or remain with their existing performing rights organizations serves to foster competition and is the anthethis of anti-competitive conduct.
Page 34 PREV PAGE TOP OF DOC To stay in business, SESAC must offer value to its customers or it will price itself out of the market. Although SESAC has a duty to maximize the value of its affiliates' intellectual property, if it pursued a business strategy of refusing to enter license agreements for failure to come to terms, SESAC would not survive for long.
SESAC IS NOT A SERIAL LITIGATOR
SESAC is proud that over the past 50 years, it has been pressed to initiate only three copyright infringement lawsuits, two of which were expeditiously settled. The third case, concluded in December 2003, resulted in a federal jury award in SESAC's favor. SESAC has consistently, vigorously and efficiently protected its affiliates' copyrights without resorting to serial litigation. Instead, SESAC's innovative, transparent, and informational licensing methods, such as the use of digital fingerprinting and other technology to electronically track and identify music use, has led to greater compliance with the Copyright Act by its music users.
SESAC NEGOTIATES WITH INDUSTRY GROUPS SOME OF WHICH ARE VERY LARGE, WELL-ORGANIZED, AND WELL-FUNDED
SESAC presently is in negotiations with an organization called the Television Music License Committee (the ''TMLC''), the organization that represents all of the full-power, commercial television stations in the United States and its territories. The TMLC collectively negotiates music performing rights license fees with performing rights organizations for authorization to perform copyrighted compositions in the programming that its member stations broadcast. The TMLC represents such entities as ABC Television, CBS Television, Cox Broadcasting, Gannett Broadcasting, NBC Television, Scripps Howard Broadcasting, The Tribune Company, and other large companies. The TMLC member stations had combined 2004 advertising revenues of approximately $30 billion. The broadcasters retain the ultimate bargaining power to either: (i) reject the benefits of a SESAC license and only use ASCAP and BMI music, which constitutes approximately 90% of all local television music; (ii) choose not to air programming that contains SESAC music; or (iii) license the music directly from the copyright owner, thus avoiding the need for a SESAC license. The TMLC cannot use such power against either ASCAP or BMI, because of their respective significant market share and music impregnation of local television programming. SESAC's lack of market power is reflected in the fact that, in the TMLC's lengthy website references regarding performing rights, SESAC is given only cursory mention.
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Many of the broadcasters represented by the TMLC are, in fact, subsidiaries of large diversified companies whose other subsidiaries both produce the programming that the broadcasters air and own the compositions contained in that programming. Surely, if those broadcasters chose to, they could simply obtain direct licenses from their sister publishing companies for the music that they both own and use, cutting SESAC out of the process. Ironically, some of these producers / broadcasters / publishers have direct representation on the boards of ASCAP and BMI. The integrated operations of those broadcasters again point out the superior market power that the TMLC, as well as ASCAP and BMI, exercise over SESAC.
SESAC SHOULD NOT BE SUBJECT TO GOVERNMENTAL REGULATION
SESAC's competitors control a combined market share of approximately 95% of the American copyrights. The conduct of SESAC's competitors has been repeatedly challenged by the Department of Justice under the antitrust laws. Based on these actions, ASCAP and BMI have been subject to Consent Decrees overseen by a federal district court since 1941. Additional regulations under the decrees were imposed in 1950 and 1966, and there were further modifications in 1994 and 2001. Both ASCAP and BMI still claim a market share of approximately 45% to 50% of performing rights revenues.
In contrast, with a small 5% share of performing rights revenues, SESAC promotes competition, has been innovative and responsive to both music creators and music users alike and does not require judicial or legislative regulation. In fact, despite several requests by local television interests, the Department of Justice has determined that action to regulate SESAC was not necessary.
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SESAC DOES NOT VIOLATE ANTITRUST LAWS
The antitrust laws were intended to remove obstacles to free competition, such as predatory pricing through misuse of market power by single firms or price fixing by powerful organized, well-funded groups. They are based on the belief that the best way to protect the interests of consumers, so that they can benefit from low prices, high quality, and innovation, is to permit the unfettered interaction of competitive forces in the marketplace.
The antitrust laws are not intended to be a system of regulation that allows government lawyers to dictate in advance which business activities are legitimate and which are unlawful. Instead, these laws are applied to business conduct when that conduct causes or seriously threatens to cause injury to competition. This is done through the judicial process in which a company is found to have violated the law, not just because a company has reached a certain size or uses a certain business model.
Under the section of the antitrust laws that prohibit agreements that unreasonably restrain trade, the Department of Justice investigated and brought actions against the improper use of so called ''blanket'' licenses by ASCAP that prevented music users from licensing rights directly from the copyright owners. The Department of Justice also challenged ASCAP's membership policies that favored some members to the disadvantage of others.
SESAC is an excellent example of the best workings of the competitive process. SESAC has none of the characteristics, and engages in none of the conduct, that might subject a company to the antitrust laws and justify regulation in the form of a decree or otherwise. It is not uncommon for SESAC's affiliated songwriters and music publishers to negotiate independent direct licenses with music users. SESAC's non-exclusive representation of multiple copyright owners under a blanket license is not the type of agreement among competitors with which the courts are concerned. In fact, the courts have consistently recognized that blanket licenses are lawful, efficient, and pro competitive methods of connecting music users with music owners. There has never been any suggestion that SESAC has treated any of its songwriter and music publisher affiliates in a discriminatory way. In fact, SESAC has enhanced its blanket licensing with innovations and technology that make it possible to pay affiliates faster than its competitors, and to maintain a high rate of compliance with the copyright laws by music users.
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Another section of the antitrust laws prohibits individual companies with very significant market shares from engaging in actions such as predatory pricing or requiring customers to deal exclusively with them, which effectively drive other competitors out of the market. This anti-monopoly provision does not prohibit a firm with a significant market share from charging its customers whatever price ''the market will bear'' as long as the firm does not also act to prevent competition. SESAC's market share, especially in the face of the far larger individual and collective shares of the two dominant performing rights organizations, is simply too small to suggest that SESAC has any ability to dominate the market. Of course, every copyright confers upon its owner some amount of market power, because there will be some music users for whom that copyrighted work has no substitute for immediate use. However, this is not monopoly power. In this country, private parties, and I believe regulators as well, share the belief that regulation tends to stifle innovation and efficient competition.
Despite being subject to several consent decrees, ASCAP and BMI continue to engage in conduct, which is or appears to be anticompetitive. Examples of such conduct are:
''Licenses in effect'' which restrain the free movement of writers between performing rights organizations.
Failure to pay earned royalties to departing members.
Predatory pricing including the authorization of free use of copyrights within digital broadcasts.
Page 38 PREV PAGE TOP OF DOC The use of other affiliates' / members' earnings as loans or royalty advances to discourage movement to other performing rights organizations.
Allowing incorrect information to be maintained in databases available to music users and other performing rights organizations, thus impeding the accurate distribution of license fees.
The exclusion of SESAC by ASCAP and BMI in their collaboration to establish and control an electronic database of television cue sheets essential to the accurate collection and payment of television royalties.
As the members of the Subcommittee of Courts and Intellectual Property are aware, in recent discussions concerning the possibility of revamping the music licensing scheme for certain subscription music services on the Internet under Section 115 of the Copyright Act, ASCAP and BMI proposed that the licensing be administered by a newly created super agency. Not surprisingly, ASCAP and BMI (along with the National Music Publishers Association) proposed that they alone run this new agency to the exclusion of SESAC (and any other representatives of songwriters or music publishers). Without explanation, ASCAP and BMI would exclude the one remaining independent organization in the United States that collects royalties on behalf of songwriters and publishers from participating in the operation of this new super agency. As ASCAP and BMI would have it, SESAC's deserved share of royalties, on behalf of its songwriter and music publisher affiliates, would effectively be controlled by and dispersed at the whim of SESAC's two direct market competitors in a medium that some believe will be the future of music delivery.
SESAC does not engage in anti-competitive practices including ''copyright misuse.'' In fact, this defense and other antitrust claims were defeated in SESAC's successful 2003 copyright infringement lawsuit in federal court. As I said earlier, a business model based upon the refusal to license music would be, at best, counterproductive to SESAC's goals, and has never been a part of SESAC's business practices. Certainly, from time to time SESAC is required to engage in difficult and protracted negotiations, as is currently the case with the TMLC. But these are simply commercial disputes, which the marketplace should be allowed to resolve.
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SESAC's demonstrated pragmatic, informational, and transparent approach in dealing with its customers and potential customers has been embraced by the music user community. For example, a radio station that is not licensed by SESAC, contacted SESAC with a problem. The radio station had received a request from local concert promoter to broadcast advertisements of an upcoming concert by a SESAC songwriter/artist affiliate. The advertisements contained some of the affiliate's music copyrights. Because the radio station was not a SESAC licensee, and apparently did not otherwise perform SESAC music, it asked SESAC to grant it a limited license permitting the radio station to perform the music contained in the commercial advertisements. Although SESAC had the right to seek substantial license fees, given the fact that radio station would receive between $4,000 and $6,000 in advertising revenues from airing the advertisement, SESAC granted the license for this limited use of music and for a limited period of time. SESAC's transparent, pragmatic approach in this instance is demonstrative of its licensing philosophy and the antithesis of predatory practices. SESAC's innovation and efficiency is further demonstrated by its unique negotiations with individual broadcasters wherein SESAC has entered into barter agreements with radio stations. SESAC effectively trades a percentage of license fees in exchange for commercial advertising spots populated solely with advertising encouraging music users to respect copyright laws, avoid unlawful peer-to-peer distribution of copyrighted music and obtain appropriate music licenses.
SESAC is the quintessential model of an innovative American small business competing successfully in a challenging marketplace. SESAC's business methods enhance competition and should be fostered and promoted. SESAC believes that it would be against the small business philosophy of this body to impose a regulatory scheme on SESAC similar in any fashion whatsoever to the regulation that has been required of its dominant competitors given SESAC's small market share, limited economic power and resources. Unnecessary regulation would drain SESAC's limited economic resources and could threaten its investment in people and benefits, if not its very existence.
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SESAC's business practices should be nurtured, encouraged, and protected. The Copyright Act was enacted to protect the Constitutional rights of creators, including songwriters who themselves are small businessmen and women and is intended to encourage the production of literary and artistic works for the benefit of the public. The policy of the Untied States since at least the passage of the antitrust laws in 1890 has been to eliminate cartels and to prevent the misuse of market power by dominant firms. To regulate SESAC would be anticompetitive and could destroy a feisty, exciting, and innovative company that successfully protects the intellectual property of its songwriter and music publisher affiliates by competing for market share with two dominant competitors, on one hand, while negotiating licenses with government sanctioned oligopolies. It would be contrary to the free market economy to impose upon SESAC any type of regulation, especially when the Department of Justice has declined to do so. SESAC believes that its innovative practices, minimal market share, and de minimus market power, when viewed in the perspective of the performing rights marketplace, creates competition and does not require any government regulation. The Department of Justice, which is responsible for the enforcement of the antitrust laws and prohibiting monopolistic practices, has found no justifiable reason or purpose to proceed against SESAC
Again, thank all of you for this opportunity to come here today and explain to you what SESAC is, what it does, and how it competes in the marketplace.
Mr. SMITH. Mr. Rich.
TESTIMONY OF JONATHAN M. RICH, PARTNER, MORGAN LEWIS & BOCKIUS, ON BEHALF OF ASCAP
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Mr. RICH. Thank you, Mr. Chairman, Mr. Berman,
Ms. Sánchez. I am Jonathan Rich, and I am here and thank you very much for the opportunity to be here on behalf of ASCAP. I am not going to talk about ASCAP as an organization today, because I think that the Members of the Subcommittee are quite familiar with ASCAP. But I will talk a little bit about the consent decree, which I know is one of the subjects in which you are interested.
The ASCAP decree, the current ASCAP decree, dates back to 2001, but it's actually the third decree that's in effect in the United States v. ASCAP, going back to 1941. In the mid-1990's, the Department of Justice and ASCAP both sort of reached a mutual conclusion that after 50 years the degree needed some updating. And we spent quite a bit of time over a number of years working out a new decree.
I would like to just hit on a few of the important provisions that are in the current decree. One is that the grant of rights that ASCAP received from its writer and publisher members are nonexclusive; which is to say that users can always obtain a license directly from a copyright owner and cannot deal with ASCAP.
Number two, the ASCAP licenses cover all of the works, and there's millions of works, in the ASCAP repertory.
Number three, the decree says that ASCAP has to treat like users alike.
Page 42 PREV PAGE TOP OF DOC Fourth, whenever a user requests a license in writing, from that moment on, that user is licensed and doesn't have to worry about infringement. The only issue that is left is how much that user is going to pay for that license.
Which brings me to one of the most important parts of the decree, which is it actually has rate-setting machinery in it, the so-called rate court, which is an institution that actually sets the rates.
And finally, the decree has transparency provision that requires ASCAP's repertory to be well known to the public both in electronic and other forms.
One of the biggest changes that we made when we negotiated that new agreement was with respect to the rate court, which had become a very slow and cumbersome process at that point. And the new decree dramatically streamlined the rate court provisions so they are much faster than they used to be; it put in place special rules that made a proceeding go quite quickly.
In the 4 years since the decree has been in effect, rate proceedings have all been decided fairly quickly and without going to trial. There actually has not yet been a rate case that has gone to trial under the new decree.
For all of those reasons, ASCAP is viewed by many, not just by us, as the model for music licensing. In fact, Judge Connor, who is the judge who administers the decree in the Southern District of New York, at one point said that if ASCAP didn't exist, it would have to be invented.
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So that's the decree, and I would be delighted to answer any questions you may have about it further.
Turning for a moment to SESAC and to our friends there, ASCAP believes very strongly in free and unfettered competition and just notes that at this point in time, we have two societies that are governed by fairly detailed consent decrees and one that is not, and that is a difference can which could very well be affecting the marketplace.
Thank you very much.
Mr. SMITH. Thank you, Mr. Rich.
[The prepared statement of Mr. Rich follows:]
PREPARED STATEMENT OF JONATHAN M. RICH
Mr. Chairman, Mr. Berman, members of the Subcommittee, good afternoon. I am Jonathan M. Rich, a partner in the firm of Morgan, Lewis and Bockius, and I advise ASCAP on antitrust matters. I thank you for the opportunity to testify at this oversight hearing on America's performing rights organizations. ASCAP is usually represented at Congressional hearings by one of its songwriter members. Given that the focus of this hearing is of a legal nature, we thought it best to have an attorney as a witness to answer your questions.
The Subcommittee is, I believe, so familiar with ASCAP that I need not spend time describing the Society; we have attached to our written statement a brief description of ASCAP, which I would ask be made part of the record.
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We understand that the Subcommittee wishes us to address two points today: first, the ASCAP consent decree as it currently functions, and second, the activities of another performing rights organization, SESAC.
The ASCAP Consent Decree. The ASCAP model of licensing the nondramatic performing rights in copyrighted musical works on a collective basis has on occasion raised antitrust issues. Accordingly, starting in 1941, ASCAP entered into a series of consent decrees with the Department of Justice that eliminated any possible antitrust concern. The 1941 consent decree was completely reshaped in 1950, in what was called the Amended Final Judgment, or ''AFJ.'' After almost 50 years, both ASCAP and the Department of Justice thought it was time to update and modernize AFJ, and take account of 50 years of experience under it. After long and careful discussions and negotiations, a revamped Second Amended Final Judgment, or ''AFJ2,'' was entered by the court on June 11, 2001 to replace the old AFJ. (The full text of AFJ2, by the way, is posted on ASCAP's website.)
AFJ2 contains certain provisions concerning the licensing of music users:
The rights ASCAP gets from its writer and publisher members are nonexclusive, so that users may always obtain licenses directly from the copyright owners and need not deal with ASCAP at all.
ASCAP's licenses cover all the millions and millions of works in its repertory, on a collective, bulk basis.
ASCAP may not discriminate in license fees, terms, or conditions among similarly situated users.
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If a user requests an ASCAP license in writing, ASCAP must grant the requestthe user will, thus, not infringe the copyrights of ASCAP members. The only question, then, is the amount of a reasonable license fee.
If the user and ASCAP cannot agree on a license fee, the court with jurisdiction over AFJ2 will determine a reasonable license fee, and the burden is on ASCAP to prove the reasonableness of its fee proposal.
AFJ2 also guarantees that users can have full informationboth in traditional and electronic, on-line formabout the works in the ASCAP repertory.
One of the significant improvements of AFJ2 was that it radically streamlined the rate determination process. For example, during the pendency of rate determination proceedings, users pay an interim fee, subject to retroactive adjustment when a final fee is agreed upon or determined; AFJ2 eliminated lengthy battles over the amount of the interim fee. Or, as another example, rate proceedings are much shorter: Under AFJ, rate proceedings sometimes lasted over a decade. Today, AFJ2 requires that the proceedings be ready for trial within one year after they start. And AFJ2 guaranteed certain types of usersincluding broadcasters, and, for the first time, background/foreground music services and on-line servicesa genuine choice among different types of licenses to meet their needs.
On the membership side of the equation, ASCAP admits to membership anyone who meets the minimal requirement of being a professional writer or a legitimate music publisher. Further, under ASCAP's rules and regulations, members may resign from membership and affiliate with a different performing rights organization annually. ASCAP's distribution rules are fully transparent and available for all to seeASCAP has posted on its website all the ''Distribution Resource Documents'' that govern the royalty distribution system. The basic principle of royalty distribution is simplethe more your works are performed, the more you earn in royalties.
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In fact, ASCAP performing rights royalties constitute the largest single source of income for its member songwriters and composers. It is worth noting that, other than for very limited and rare exceptions (such as a writer's assignment of royalties to a charity), ASCAP will not pay writer royalties to anyone but the writer.
For all these reasons, ASCAP is held up as the model for others in the music industry to emulate. Both creators and users of music agree that the ASCAP model works well. That is why, when performing artists testify before Congress about their relationship with their record labels, they point to their relationship as songwriters with ASCAP as the ideal paradigm. It is also why, when DiMA's representatives testify about their licensing needs, they cite ASCAP as the model for others to follow. It is no wonder that Judge William C. Conner, who administers AFJ2, has said on more than one occasion that, if ASCAP did not exist, it would have to be invented.
We should also note that consent decree rate proceedings very frequently provide the framework for negotiations and settlements. In the four years under AFJ2, ASCAP has reached voluntary licenses with major users of music including cable television networks, the local television industry, the local radio industry, and background/foreground music services, all without need of a trial. This track record demonstrates the efficiency of the ASCAP licensing model.
SESAC: ASCAP believes in vigorous competition as the lifeblood of the American economy, and has no objection to fair competition with other performing rights organizations, and with SESAC in particular. But if there is to be fair competition, there must be a level playing field. Because ASCAP is subject to governmental regulation (through a consent decree) and SESAC is not, the playing field is not level. Thus, we must grant a license to any user who requests it, but they need not. We may only obtain nonexclusive rights, but they may get exclusive rights. We are subject to third-party rate determination, but they are not. We must offer alternative forms of licenses to broadcasters and other users, but they need not. If performing rights organizations are to compete fairly, we should all be subject to the same rules.
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Thank you for the opportunity to testify on behalf of ASCAP, and I look forward to your questions.
The American Society of Composers, Authors and Publishers is the United States' oldest and largest performing rights licensing organization. ASCAP was founded in 1914 by songwriters including Victor Herbert and John Phillip Sousa, for the purpose of licensing the right of nondramatic public performance in the copyrighted musical works they created.
ASCAP is the only true American performing rights societyit is an unincorporated membership association, whose members (now numbering over 210,000 active writers and publishers) are exclusively composers, lyricists and music publishers. ASCAP is run by a 24-person Board of Directors consisting of 12 writers and 12 publishers; the writer Directors are elected by the writer members of ASCAP and the publisher Directors by the publisher members. The current Chairman of the Board is the noted, multiple award-winning lyricist Marilyn Bergman.
The ASCAP repertory consists of millions upon millions of musical works in all genres and typespop, rock, alternative, country, R&B, rap, hip-hop, Latin, film and television music, folk, roots, blues, jazz, reggae, gospel, contemporary Christian, new age, theater, cabaret, dance, electronic, symphonic, chamber, choral, band, concert, educational and children's musicthe entire musical spectrum.
ASCAP is home to the greatest names in American music, past and present, as well as thousands of writers in the early stages of their careers. ASCAP members include Cole Porter, Aaron Copland, Stevie Wonder, Bruce Springsteen, Leonard Bernstein, Madonna, Wynton Marsalis, Stephen Sondheim, Dr. Dre, Mary J. Blige, Duke Ellington, Rogers and Hammerstein, Garth Brooks, Tito Puente, Dave Matthews, Destiny's Child, and Henry Mancini, just to name a few. In addition, through affiliation agreements with foreign performing rights societies, ASCAP licenses the music of hundreds of thousands of their members in the USA.
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ASCAP's licenses allow music users to perform any and every work in the ASCAP repertory, upon payment of one license fee. ASCAP's hundreds of thousands of licensees include Internet sites and wireless services, restaurants, nightclubs, hotels and motels, cable and television networks, radio and television stations, conventions and expositions, background/foreground music services, shopping malls, dance schools, concert promoters, and retail businesses. Those who perform music find ASCAP's licensing model highly efficient, for, with one transaction, they are able to perform whatever they want in the enormous ASCAP repertory.
ASCAP deducts only its operating expenses from the licensing fees it receives (in 2004, operating expenses were 13.5%lower than any other American performing rights organization, and among the lowest in the world). The remainder is split 5050 between writers and publishers. Each member's royalty distribution is based on a survey of what is actually performed in the various licensed media. ASCAP royalty distributions make up the largest single source of income for songwriters, enabling them to make a living, pay their rent and feed their families. ASCAP thus fulfills the Constitutional purpose of copyright, allowing songwriterswho are the smallest of small businessmen and womento earn a fair return on the use of their property and so use their creativity to enrich America's culture.
Mr. SMITH. Mr. Hoyt.
STATEMENT OF WILL HOYT, EXECUTIVE DIRECTOR, TELEVISION MUSIC LICENSE COMMITTEE (TMLC)
Mr. HOYT. Mr. Chairman, Ranking Member Berman, and Members of the Subcommittee. Good afternoon. My name is Will Hoyt and I am the Executive Director of the Television Music License Committee, a nonprofit association that represents approximately 1,200 full power commercial television stations in the United States and its territories.
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Thank you for inviting me to testify today. My written testimony lists a broad array of music user groups who have urged me to express our joint concern. There is a void in current copyright law that allows PROs without consent decrees to undermine the functioning of the Nation's music licensing system. Simply put, in contrast to the situation as to ASCAP and BMI, no dispute mechanism exists under current law for music users to resolve license fee disputes with SESAC and future PROs.
Currently the implied threat of copyright infringement with the accompanying risk of willful damages is skillfully exploited by SESAC to suppress free competition and force arbitrary licensing rates on users. There are three fundamental principles that guide the relationship among ASCAP, BMI, and all major music performance rights consumers.
First and most important is the third-party dispute resolution process that can be invoked by either party and averts the prospect of copyright infringement liability for the users while that takes place.
Second, users are free to negotiate directly with composers, rather than having to deal only with the PROs.
And third is the availability of a license in which the user pays fees only for programs or segments for which its music is actually used. These do not apply to SESAC.
SESAC wants you to believe that a television station may walk away from a SESAC license. That is simply not the case. No television station can operate without syndicated programming. Since television stations contractually cannot eliminate or change the music in these programs, they are forced to pay whatever SESAC unilaterally determines is a fair price for a blanket license fee. SESAC uses a similar strategy in other industries.
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The problem is compounded by SESAC's licensing arrangements with key television composers. These arrangements legally or economically take away those composers' ability to license performing rights directly to television broadcasters. Despite Mr. Swid's assertion of transparency, the fact is that SESAC speaks in generalities about how prevalent SESAC music is within a given user's industry while withholding the actual information to back it up.
If you are a broadcast user faced with potentially massive copyright infringement penalties for guessing wrong about whether you are or are not using SESAC music, chances are that you will opt for taking a SESAC license at their price.
SESAC argues that it is simply a small competitor trying to survive in a world dominated by ASCAP and BMI. But at the bargaining table, SESAC sings a very different tune to its market share. Our industry is currently paying SESAC some 9 percent of total television music station license fees. And in the most recent round of negotiations, SESAC insisted on still more.
Our Nation's copyright laws exist to encourage, protect and reward intellectual creativity. SESAC's music licensing practices do not promote that goal. SESAC does not create a music licensing market, does not increase output, does not offer composers competitive license fees to which they otherwise would be deprived or offer any other meaningful efficiencies for consumers.
They, instead, cynically misuse the collective power of the copyrights of SESAC licenses to wring as much money out of trapped users as SESAC can. Left unchecked, such practices will continue to undermine and erode copyright policy and might serve to encourage development of new PROs similarly unconstrained by existing copyright law.
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We believe that there is a compelling case for Congress to act on this issue. Only Congress can address this issue in a manner that uniformly applies to SESAC as well as future PROs. We are seeking legislation that applies only to PROs not operating under a consent decree, establishes a third-party dispute resolution process that can be initiated by either party to determine reasonable fees, and averts the prospect of copyright infringement liability during the pendency of such proceedings.
The challenge we have brought before the Committee is not just a SESAC issue. SESAC's practices have simply exposed what any PRO not under consent decree can do to manipulate the current law. It requires a legislative solution to fix the broad challenge and allow the integrity of the copyright system to prevail.
We look forward to working with individual composers, the PROs, and the Subcommittee to meet this challenge and hopefully to craft legislation that will address it in a fair and reasonable way.
[The prepared statement of Mr. Hoyt follows:]
PREPARED STATEMENT OF WILL HOYT
Mr. Chairman, Ranking Member Berman, and members of the Subcommittee, good afternoon. My name is Will Hoyt and I am the Executive Director of the Television Music License Committee (TMLC), representing the vast majority of local commercial television broadcast stations in the United States and its territories.
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The Television Music License Committee is a non-profit association that negotiates and administers industry music performance licenses and fees with the performing rights organizations (PROs), ASCAP, BMI and SESAC, on behalf of approximately 1,200 full-power, commercial television stations in the United States and its territories. The Committee is made up of volunteers from local television stations and group broadcasters throughout the country (representatives of large and small market stations and affiliates and independents).
The ultimate goal of the TMLC is to provide a competitive marketplace for music performance rights in which local television stations (and other music users) pay a fair price for performance rights and composers and publishers receive equitable payments for the rights used by local television stations.
Thank you for inviting me to testify today. I will address the broader issues regarding all PROs in my testimony. However, first and foremost my testimony will expose a serious flaw in current copyright law that allows select PROs to undermine the music licensing system. With the exception of ASCAP and BMI, any other future PRO couldand SESAC actually doesthrive and prosper by exploiting this loophole in the system.
The issue I speak of impacts not just television stations, but every music user across the nation seeking to pay for the use of music in broadcast or cable programming as well as in business establishments. While I am the only music user witness invited to testify today, I have been urged by a broad array of music user groups to express their grave concern regarding the current manipulative practices and abuse of copyright privileges engaged in by SESAC.
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Radio Music License Committee (RMLC)Keith Meehan, the Executive Director of RMLC states, ''The Radio Music License Committee joins in the concerns expressed here by the other user communities. SESAC blanket license fees for radio stations are projected to increase tenfold from 1995 to 2008 even though much of SESAC's music on radio is background music or music in commercials,not feature performances. But stations have to keep paying SESAC's price or risk infringement suits.''
National Religious Broadcasters Music License Committee (NRBMLC)Russell Hauth, the Executive Director of NRBLC, which represents religious, classical and other radio stations that perform limited amounts of copyrighted music during their broadcasts, has described SESAC as one of the Committee's major concerns, and called SESAC a monopolist with extraordinary, unconstrained, market power with whom all radio stations must deal. SESAC flatly refused that constituency's request to hold negotiations over its effective doubling of fees from 20042008 (the second consecutive doubling of fees over a five-year period), and also refused its request for arbitration.' He has informed me that the NRBMLC will be submitting a written statement for the record.
National Cable Television Association (NCTA)Dan Brenner of NCTA reports ''Our experience in previous negotiations with BMI and in negotiations with SESAC indicate that SESAC and future music performance organizations that aggregate music performance copyrights should be subject to the same negotiating restrictions that are applied to BMI and ASCAP, including a third party dispute resolution process that can be invoked by either party and averts the prospect of copyright infringement liability while that process takes place.''
Page 54 PREV PAGE TOP OF DOC It is highly likely that these concerns are also shared by small, medium, and large business establishments using music such as restaurants, taverns, casinos, and health clubs.
When any music user seeks to pay licensing fees to SESAC (a situation that would pertain in dealings with any future PRO other than ASCAP or BMI), no dispute resolution mechanism exists under current law, except a lawsuit brought against the prospective licensee for copyright infringement if that user fails to agree to the license terms requested by SESAC. I will elaborate on how this unbridled power, with the accompanying risk to the user of an assessment of willful copyright damages, is skillfully manipulated by SESAC to suppress free competition and extort supracompetitive licensing rates.
Under sections 504(c) and 505 of the Copyright Act, successful plaintiffs who prove willful copyright infringement may be awarded damages of up to $150,000 per work infringed, as well as costs and reasonable attorney's fees. Thus, if each of the 1200 stations represented by the TMLC Committee were found liable for the infringement of just one song, the total damages at $150,000 per song would be $180 million! These damages would far exceed any reasonable costs of a license to perform music on local television.(see footnote 2)
MUSIC LICENSINGFUNDAMENTAL PRINCIPLES THAT GOVERN ASCAP AND BMI
Currently, there are three music performance organizations operating in the U.S.ASCAP, BMI, and SESAC. ASCAP, the oldest performing rights organization, is a non-profit association and represents the greatest number of composers and publishers. While BMI was formed and is still nominally owned by broadcasters, it is operated as a not-for-profit corporation representing the interests of composers and publishers in head-to-head competition with ASCAP and SESAC. Today BMI is roughly comparable in size to ASCAP. Until recently, the music performing rights market was dominated by these two large PROs. Between them, ASCAP and BMI controlled the public performance rights in virtually all of the copyrighted musical works broadcast by local radio and television stations or shown on cable television in the United States. Because no individual composer can simultaneously license his or her works through more than one performing rights organization, the net effect was that both ASCAP and BMI enjoyed monopoly power over the licensing of the millions of works they represent on behalf of the respective composers who affiliate with them. In sum, stations must have licenses from both PROs.
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The local television industry, typifying in most ways the experience of the other major broadcast and cable media, has engaged in a multi-decade effort to instill some degree of competition in the music performing rights market. The TMLC has been a leader in achieving significant reforms in the marketplace dominated by ASCAP and BMI.
Today, there are three fundamental principles that guide the relationship among ASCAP, BMI and all music performance rights consumers. The first and most important is the third-party dispute resolution process that can be invoked by either party and averts the prospect of copyright infringement liability while that process takes place. The second is a provision that allows composers to negotiate individually with users in lieu of accepting royalty payments as determined by their PRO's royalty distribution formula (non-exclusive composer affiliation contracts); and the third is a requirement that the PRO offer a license in which the user pays fees only for programs in which its music is actually used (the ''per program'' license) instead of a fee for access to the entire repertoire of the PRO (the ''blanket license'').
BACKGROUND ON ASCAP AND BMI DEVELOPMENTS AND OBSERVATIONS
In large part the principles described above were derived through the dispute resolution process that exists with regard to ASCAP and BMI. Through invocation of the third-party dispute resolution procedures provided as part of the ASCAP consent decree, our industry was able to make major strides in the direction of a freely-competitive market for music performing rights.
First, in 1990 the federal district court determined that it is inappropriate to tie the license fees paid by television broadcasters to their advertising revenues. Second, the court gave teeth to the per-program provisions of the ASCAP decree. The court structured a per-program license that gave many local stations a realistic opportunity to pay directly for the services of a composer in their community to write the theme for their local news programming and not have to pay ASCAP again for those same rights.
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More recently, a group of background music service industry licensees of ASCAP and BMI attained court rulings that should similarly stimulate access to competitive license alternatives for a wide group of music users. The Second Circuit Court of Appeals as to BMI and the Federal District Court for the Southern District of New York as to ASCAP have affirmed users' rights to a blanket license, the fee for which must reflect ''credits'' for direct licensing initiatives by the licensee.
Last November, ASCAP and the TMLC reached agreement on a license for local television stations that will end in 2009. The agreement was made after months of preparing for a similar rate court proceeding under the consent decree guidelines. The facts and theories that greatly influenced the decision by both parties to reach agreement were included in discovery and position papers filed as part of this dispute resolution process. The mere availability of a dispute resolution process forces the parties to clarify and document their positions, which, in turn, often leads to a negotiated settlement based on the information shared between the parties.
Many of these advances have been adopted by the Justice Department and incorporated into the recently-amended ASCAP consent decree for the benefit of all users.
I would be less than honest if I sat before you today and reported that the progress music users have been making with ASCAP and BMI has resulted in the kind of market-based music licensing to which music consumers are entitled. It remains difficult to convince many composers, music publishers and program producers to break with the ways of the past and agree to engage in alternative license discussions.
Page 57 PREV PAGE TOP OF DOC I would like to make two specific observations about TMLC's current positions concerning license provisions that we believe will strengthen the competitive market for music performance rights. First, a license similar to the license advocated by the background music industry and sustained by the courts relative to ASCAP and BMI will benefit both copyright owners and users. Such a license provides licensees an economic incentive to direct license individual music performances within an individual broadcast program, thus providing copyright owners a competitive choice when they decide to license their performance rights. The current BMI and ASCAP per program licenses entitle these organizations to deny this competitive choice unless all of the composers within a program agree to direct license their music. Second, access to electronic cue sheets (the documents that record information about each performance within a television program) will create a more efficient system for determining music use and equitable royalty distributions to copyright owners. Although the TMLC advocates a cooperative effort to establish such an electronic data base, ASCAP and BMI currently have denied the TMLC and all other parties with an interest in music performance licensing the right to invest in, participate in, purchase or license the rights to RapidCue, a system jointly developed and operated by these two large PROs.
Indeed, it is still a chore to obtain in any form from the PROs complete and accurate information as to the music which they license that appears in our programming, even though much of that information is readily available to those organizations in the form of music cue sheets prepared by third parties and supplied regularly to them. By artificially branding such cue sheets as ''proprietary,'' when in fact all they contain is a listing of musical works that are publicly performed on broadcast television, the PROs have needlessly made the process of accountability for what they license and its marketplace value a game of cat-and-mouse.
Page 58 PREV PAGE TOP OF DOC Nevertheless, over the last several decades, thanks in large part to the dispute-resolution mechanisms described, a good deal of progress has been made among ASCAP, BMI and music users moving toward meaningful competition in the performing rights marketplace.
SESAC'S ABUSE OF THE MUSIC LICENSING PROCESS
Today we would like to focus on an overriding obstacle that has emerged in recent years that threatens to severely limit all of the competitive gains that the TMLC and others have made, and to revert the music performing rights marketplace to one which freezes out any meaningful competition. That is the emergence of a third, wholly-unregulated licensing organization whose practices are a throwback to the early days of ASCAP and BMI. That organization is SESAC, which is not new to the marketplace, but which has grown sufficiently in licensing repertory so as to develop an avaricious licensing-fee appetite and market power that commands supracompetitive prices.
SESAC is distinct from ASCAP and BMI in several key respects. It is the only organization that operates with a profit motive. It is substantially smaller than ASCAP and BMI in terms of composers, publishers, and its repertoire of music. Most importantly, it operates without the legal constraints imposed on BMI and ASCAP.
Every major media industry has a long line of SESAC ''horror stories'' to recount. Written testimony to be submitted by other groups will, no doubt, elaborate. Common to these stories is an exorbitant demand for license fees, unsupported by any evidence of actual usage of SESAC-repertory works and a refusal to extend licenses to permit negotiations. The threat of an infringement suit permeates every communication, meeting, discussion, and negotiation. Accordingly, the music user has two alternatives: either pay the ransom or face the implied or real threat of an infringement suit since there is no third party dispute resolution process.
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The impact of SESAC practices is especially evident in local television station licensing due to the nature of television programming. Local stations license syndicated programming months and often years in advance. It is often the most popular programming they broadcast. Stations' costs to acquire and promote highly coveted programs like ''Seinfeld,'' ''Oprah'' and ''Everybody Loves Raymond'' are huge and unprecedented. Ironically, the only creative right not included in a syndicated program license is the music performance right. The music is embedded in these programs by the producers and, under syndicated license agreements, the station cannot eliminate or change the music in these programs. This fact allows a PRO like SESAC to control the licensing of performance rights within designated television programs and then insist that the program cannot be aired unless the television station pays whatever SESAC unilaterally determines is a fair price. Thus, if SESAC signs a composer formerly associated with BMI or ASCAP whose music is part of one of the more popular shows, a station is forced to sign a license agreement with SESAC in order to protect a significant investment in its syndicated program. The resulting license fee with SESAC can be significantly more than the previous BMI or ASCAP fee for the same exact music in the same program.
Since SESAC was purchased by the current investment group in 1992, the owners have pursued an aggressive ''take it or be sued for infringement'' approach to music licensing that has abused the privileges conferred on the individual composers and music publishers SESAC claims to represent. In 1995, although SESAC was unable to demonstrate any meaningful increase in the use of its repertory, SESAC announced to local television stations a DOUBLING of industry-wide blanket license fees effective almost immediately. At the same time, SESAC required ABC, CBS and NBC to sign separate performance rights agreements covering music in their network programming, which previously had been included in the local station license.
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Since most, if not all, of the SESAC affiliates were previously ASCAP or BMI members and most of their music has already been written and pre-recorded in television programming, SESAC licenses do not create a music licensing market, increase output, afford composers competitive license fees of which they otherwise would be deprived, or offer any other meaningful efficiencies for consumers. SESAC licenses instead impose a new and unjustifiable cost for music that otherwise would be included within licenses already paid for by local stations. And when SESAC lures a composer from ASCAP or BMI, the ASCAP and BMI rates do not fall commensurately to account for the change.
The coercive effect of SESAC's licensing practices is further exacerbated by its inability and/or unwillingness to disclose the identities of all its affiliated composers and publishers and works under license in a comprehensive and timely manner. In contrast, ASCAP is required under its consent decree to make available a public list containing the title, date of copyright, writer, and publisher of all works in its repertory, and is barred from bringing an infringement action as to works not listed.
While SESAC has provided the TMLC with a list of affiliated composers whose works appear on a recurring basis in local broadcast television programming, SESAC has not undertaken comprehensively to identify all of the works that may appear on local television, and without question enjoys the leverage that such lack of full knowledge on the stations' part provides. Thus, even if local stations were scrupulously to avoid programming reflected in SESAC's lists, they would still face significant risk of copyright infringement if they unknowingly broadcast SESAC music in commercials or unknowingly make incidental or occasional uses of SESAC music in other programming. In direct contrast to ASCAP there is no restriction on SESAC's ability to sue for infringing uses of music in the SESAC repertory not identified on lists provided to stations.
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Local television stations thus, have no alternative to taking a SESAC blanket license. This lack of information contributes to the impossibility of eliminating SESAC music from programming and works in combination with the other elements of SESAC's licensing practices to force reliance on the blanket license at the risk of being sued for copyright infringement for failing to obtain one.
SESAC's ability to demand supracompetitive rates from consumers is based on its ability to aggregate the licensing authority of strategic composers and use the hammer of copyright infringement damages to force a fee resolution to SESAC's satisfaction.
This method of operation has enabled SESAC to gain an ever-increasing market advantage over ASCAP and BMI, which cannot operate in so unconstrained a manner, and threatens to undermine decades of progress in the music performing rights marketplace and freeze out meaningful competition.
What makes SESAC so difficult to contend with, and affords it such anticompetitive potential, is not simply its disdain for settled marketplace fee-level expectations, shaped in many instances by decades of rate court decisions on ASCAP fees. It is, rather, the fact that SESAC brazenly exploits the aggregated power of the copyright rights held by its composer-affiliates free of any third-party arbiter, such as a rate court or arbitration forum, to place a check on its license rates. Accordingly, SESAC does, and any other future PRO without a consent decree could, engage in the following practices:
Refuse to afford alternative dispute resolution mechanisms that can be invoked by either party in the event of a negotiating impasse, so as to allow the more balanced approach present as to ASCAP and BMI of continuous access to the organization's musical repertory in return for a fair and dispassionate fee-determination mechanism.
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Refuse to provide interim copyright protection during negotiations when the user is actively seeking a license
Resort to ''gun-to-the-head'' licensing tactics with users or user groups unwilling to agree to SESAC's blanket license fee demands, creating deadlines by which an agreement must be reached, failing which authority to use SESAC music on an ongoing basis will be revoked
Obtain exclusive license authority from key radio and television composers, creating enormous hold-up potential in its license negotiations with major users who are effectively unable to maintain their day-to-day programming intact unless they acquire a performance license with SESAC or a newly created organization.
Refuse to bargain over alternative forms to the single-price blanket license, whether in the form of a meaningful per-program license, a blanket carve-out license, or the like.
In stark contrast to the legal framework and fundamental principles that apply to ASCAP and BMI, armed with the power to trigger infringement suits, SESAC freely engages in practices that undermine the music licensing system and provide no meaningful choice to music users seeking to pay copyright fees. We believe that there is a compelling case for Congress to act on this issue.
CONGRESS SHOULD CREATE A DISPUTE RESOLUTION MECHANISM
Our nation's copyright laws exist to encourage, protect and reward intellectual creativity. SESAC's music licensing practices do not foster that result but, instead, cynically misuse the power that SESAC has aggregated to attempt to wring as much money out of trapped users as it can. Left unchecked, such practices will continue to undermine and erode copyright policy and might serve to encourage development of new PROs similarly unconstrained by existing copyright law.
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Only Congress can address this issue in a manner that uniformly applies to SESAC as well as future PROs. We are seeking legislation that:
applies only to PROs not operating under a consent decree
establishes a third-party dispute resolution process that can be initiated by either party to determine reasonable fees, and
averts the prospect of copyright infringement liability during the pendency of such proceedings.
The legislative solution we are seeking is in line with already-established procedures as to ASCAP and BMI for resolving music licensing fee disputes. Music users and ASCAP and BMI have had access to the rate court for decades. In addition, under Chairman Sensenbrenner's leadership, in 1997 Congress acknowledged and enacted music fairness legislation creating a dispute resolution mechanism available to small and medium business establishments through the federal courts.
SESAC has also provided evidence that arbitration is a viable dispute resolution mechanism. They included the option, with the choice to initiate only at their sole discretion, in their 1997 agreement with the TMLC. The fact that SESAC just recently exercised their unilateral option to trigger arbitration proceedings with the TMLC is further evidence that they should not object to such a process in and of itself.
Page 64 PREV PAGE TOP OF DOC One might surmise that their unilateral option to initiate arbitration combined with their proclivity to threaten infringement action simply allows the abuse of their copyright privileges to persist. If SESAC suggests that they have or are willing to offer bilateral arbitration within negotiations with TMLC, it would only support our contention that the concept itself is viable and should apply to all music users and all future PROs not subject to consent decrees.
The challenge we have brought before the subcommittee is not just a SESAC issue. SESAC's practices have simply exposed what any new PRO not under a consent decree can do to manipulate the current law. It requires a legislative solution to fix the broad challenge and allow the integrity of the copyright system to prevail.
We look forward to working with the subcommittee to meet this challenge and hope to craft legislation that will address it in a fair and reasonable way. I am confident that that other music user groups who were not able to be heard today will join in this request fully communicating their views in written testimony.
Mr. SMITH. Thank you, Mr. Hoyt. Let me address my first question to you.
You have been pretty rough on SESAC, both in your oral and in your written testimony. Now, my question is this. Why should any business, and particularly SESAC, be required to offer arbitration? I think that's one of the main issues of the day when someone doesn't like their fees; but why should anybody, Congress or anyone else, mandate arbitration?
Page 65 PREV PAGE TOP OF DOC Mr. HOYT. Well, I think in our view, the problem is that the PROs can aggregate copyrights, which in themselves are monopolies, as you know. And it's the aggregation that gives us a problem in terms of the policy. We aren't really interested in what the rate is. What we are interested in is setting up a system that allows us to have a competitive pricing for music performance rights. Whether that's higher than it is now or lower than it is now is not important to us.
Mr. SMITH. Okay.
Mr. Rich, do you think that SESAC has been abusing its position in the marketplace. And, if so, why?
Mr. RICH. Well, they have been able to take advantage of the fact that there are some differences between the two societies that are under decrees and themselves. The ASCAP decree has some fairly clear membership rules. There are fewer than there used to be, but there are still some in there. And ASCAP governs itself in a way that allows ready exit by members from the Society.
SESAC doesn't have that same arrangement. Similarly on the licensing side, ASCAP and BMI are obligated to offer users certain types of licenses, and SESAC doesn't have that same requirement.
Mr. SMITH. Mr. Swid, very quickly, why would it be unfair for you to operate under the same conditions as BMI and ASCAP? Why not offer arbitration yourself?
Page 66 PREV PAGE TOP OF DOC Mr. SWID. Well, I can answer that in two parts. The first is, we are a 5 percent market-share player. Secondly, we are subject to all the U.S. laws, including the Sherman Act and all antitrust legislation. We are not otherwise under the consent decree like ASCAP and BMI, because we have not violated, do not violate, and don't plan to violate.
Mr. SMITH. I know you are not required, because you are not under consent decrees, and the other two PROs are. Why not, out of fairness, opt for arbitration?
Mr. SWID. Well, we have a contract with the local television industry. And in our arbitration proceeding last time, we reached a contract at the end of it. They asked us for one thing other than the monetary agreement that we made; that is, that they make the allocation. This time, they are asking us for mutual arbitration. We agreed to that already. They know it. We said we will give you mutual arbitration. We never planned to sue them. We plan to go to arbitration.
Mr. SMITH. If arbitration was good enough for you and them in that case, why wouldn't it be good for all other individuals who do business with you?
Mr. SWID. Because I don'tarbitration is very, very costly. We paid approximately $3 million to go to arbitration last year. That's us. They had 1,200 stations. If they are about $3 million, they are paying $2,500 a station. We had to pay $3 million. If that happened all year long, in 1 year, we would be out of business.
Mr. SMITH. So cost is a consideration.
Page 67 PREV PAGE TOP OF DOC Mr. SWID. Extraordinary.
Mr. SMITH. Thank you, Mr. Swid.
The gentleman from California, Mr. Berman, is recognized for his questions.
Mr. BERMAN. I am a little confused. Seems like there are people who have said opposite things about the same situation, and I want to make sure I have this right.
Mr. Hoyt, you describe the fundamentals which describe your relationship with ASCAP and BMI, but not SESAC. And you say, ''The second fundamental principle is a provision that allows composers to negotiate individually with users in lieu of accepting royalty payments as determined by their PROs.''
But SESAC in its testimony says, ''SESAC functions as a nonexclusive licensing agent.'' if they are right, then it seemed like you might be wrong. Can you go to a composercan you go to a SESAC composer directly and get a license?
Mr. HOYT. We can with some and not with others. The ones that we thinkand we don'twe would want tothe last time around in the last arbitration, apparently there is some evidence thatand even since then, there is some evidence there are exclusive contracts between SESAC and some of their critical composers.
Mr. BERMAN. Are there?
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Mr. SWID. Not that I know of.
Mr. HOYT. Exclusivity can be done in economic terms as well as in legal terms.
Mr. BERMAN. Is this like the Mafia or something, or what?
Mr. HOYT. No, no. If the composer signs an agreement with SESAC that says, for instance, if you want to do direct licensing, you have to come to me and come to SESAC and others. If I want a direct license with a composer, that contract might say, for instance, that we have to go to thatto SESAC in order to negotiate that, and that the composer has to accept what SESAC has agreed to.
Mr. BERMAN. That sounds legal to me.
Mr. HOYT. Well, I guessI think the term is de facto, economic, it's an economic exclusivity, not a legalyou cannot
Mr. BERMAN. Is a composer legally constrained from negotiatingwith you?
Mr. HOYT. We believe they are.
Mr. BERMAN. Mr. Swid says not that he knows of; right?
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Mr. SWID. Correct. And in fact, we gave a list of our composers to Mr. Hoyt, because he requested it, and he ran down to some of our composers in Texas and other places and asked to direct license. He offered them basically nothing, and they said no.
Mr. HOYT. I think we may have a difference in factualview of what happened.
Mr. BERMAN. You can take it to arbitration.
Mr. HOYT. Yes, and probably will. I can only tell you that the composer that we talked to, at Mr. Swid's suggestion, told us that he could not disclose what was in his contract.
Mr. BERMAN. Something else, something else confused me about what you said. You said, you represent a bunch of different television stations. They depend on syndication. But from earlier conversations I had, the syndication rights come separately from the rights to the music; is that right?
Mr. HOYT. That is correct.
Mr. BERMAN. Is there something in your contract with the people who syndicate the programming that force you to use the same music?
Mr. HOYT. Yes. We cannotin a syndicated contract, if you have a program, that allows you to put a syndicated program on the air, there's a contract with that syndicator that says you may not change or remove any of the music in that program.
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Mr. BERMAN. So even though the person you are contracting with can't give you the music rights, they make you use the music that went with your original show?
Mr. HOYT. That is correct.
Mr. BERMAN. Thank you.
I know you probably want to finish this hearing?
Mr. SMITH. If at all possible.
Mr. BERMAN. In that spirit, I will yield back the balance of my time.
Mr. SMITH. Thank you, Mr. Berman, but I want to check to see if either Mr. Wexler or Ms. Sánchez have a quick question to ask.
Mr. WEXLER. Can I ask a very quick question following on Howard?
Mr. SMITH. Sure. The gentleman is recognized.
Mr. WEXLER. I just always get concerned when possibly Congress may be in the position of rewriting a contract, in effect. The original contract that you refer to in response to Mr. Berman's question, in terms of when you agreed to buy the syndicated program, you then agree to use the music, even though the person giving you the power for the syndication can't give you the power for the music.
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Could you originally, or as you do new syndications, negotiate that differently?
Mr. HOYT. I will answer it this way. I would like the opportunity to actually give a little bit further answersince this seems to be of some concernin writing later. But I think the quick answer to that question is historically the producers get paidthe publishing companies that are owned by the producers get paid money through the performance rights system. And so the answer is, no, we can't.
Mr. BERMAN. That doesn't make sense.
Mr. SMITH. Thank you. Mr. Wexler.
Ms. Sánchez, do you have a question?
Ms. SÁNCHEZ. Very quickly. Being the most junior Member on this Subcommittee I am still sort of sorting through what is going on.
Mr. Rich, can you tell me why BMI and ASCAP are currently under a concept decree, when it is like 50 years later after the fact?
Mr. RICH. It goes back quite a ways. The first antitrust case actually was, I believe, in 1934. And the first decree dates back to 1941. Back then, the grant of rights that ASCAP got from their members was exclusive. And there were a number of disputes overall, a number of issues between ASCAP and their users that resulted in one and then successive consent decrees to resolve antitrust disputes.
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Ms. SÁNCHEZ. Okay, thank you.
Mr. Swid, I am interested in knowing why is it that you think SESAC should not be subject to a rate court like ASCAP and BMI?
Mr. SWID. Well, a rate court was set up as a penalty for the violations of the antitrust laws that ASCAP and BMI incurred. And the rate court is not for a nonviolation. It's a penalty. We have an arbitration clause in the contract, like most businesses haveor some businesses have.
Ms. SÁNCHEZ. Okay. And a follow-up question. The allegation from TLMC is that because of your unique position in the market, that you have doubled and tripled your fees to the television industry; is that correct?
Mr. SWID. In the last arbitration, our fees tripled, and that was an agreementas you well know, the arbitration did not go to termination, to decision; we agreed in a negotiation while arbitration was onof the fees. As a matter of fact, two things were said, one today and one in 2003.
In 2003, ASCAPexcuse me, TLMC said in their courtin their submission to the rate court, that applicants believe that SESAC's agreement is probative of a reasonable ASCAP blanket license fee. So our music grew at least three times. So we went up at least three times in rate.
Page 73 PREV PAGE TOP OF DOC And today Mr. Hoyt said we are asking for 9 percentthey are paying 9 percent of the fees.
They have told us that they have done a study, a music study by an organization called MRI. And in 2002, which is the last year they did this study, they told us we had 9.4 percent of the music on television without ambient or incidental music. That means they didn't count the advertisements and other types of one-off songs.
Mr. SMITH. Ms. Sánchez, we are going to need to go vote. Members, I am sure, are welcome to give written questions to the witnesses, and they would be happy to respond.
Mr. BERMAN. Mr. Chairman, I don't think the 10-minute bell has gone off yet.
Mr. SMITH. We are on go.
I want to thank the Members for their interest and thank the witnesses for their expert testimony. This has been very helpful. Obviously, this is an issue we care about as well. Thank you very much.
[Whereupon, at 4:47 p.m., the Subcommittee was adjourned.]
A P P E N D I X
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PREPARED STATEMENT OF THE HONORABLE HOWARD L. BERMAN, A REPRESENTATIVE IN CONGRESS FROM THE STATE OF CALIFORNIA, AND RANKING MEMBER, SUBCOMMITTEE ON COURTS, THE INTERNET, AND INTELLECTUAL PROPERTY
Thank you for holding this oversight hearing on the Performing Rights Organizations. It has been a number of years since this Subcommittee has examined the differences in the ways the PROs operate, and specifically how their licensing practices impact their members or affiliates and the music users.
Section 106 of the Copyright Act affords copyright owners the exclusive right to publicly perform their works. With respect to music, the right to authorize public performances is the most crucial right to songwriters because it provides them with their largest source of income. This right provides incentives for the creator to continually produce new musical compositions and helps foster the growth of music offerings.
Acknowledging the integral role PROs have in the licensing system, The Fairness in Music Licensing Act of 1998 added the definition of Performing Rights Societies into the Copyright Act. ASCAP, BMI and SESAC, all specifically named in the Act, perform one of the most essential services for the copyright owner. PROs act as the composer's agent to those who publicly perform music. They negotiate licenses with the many restaurants, taverns, hotels, radio, tv and other establishments that perform musical compositions and then collect and distribute the rightful compensation to the copyright owner. Imagine a world without the PROs, where Alan and Marilyn Bergman had to pound the pavement to discover which wedding halls performed ''The Way We Were'' or where the unknown songwriter who waits tables for a living has to go knocking on doors across the country in an attempt to find the radio stations playing his music.
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The PROs have also developed new technologies such as digital fingerprinting which help track where and when music is performed. But the question that pervades the licensing mechanisms of the PROs is the ability to compete in both offering reasonable rates to benefit the music user and better returns for the member. An ASCAP economist summarized the dilemma perfectly when saying '' I never met an ASCAP member who thought he was being paid too much and I never met a music user who thought he was paying too little.''
Currently, two of the PROS operate under a consent decree. One does not. Two of each of the PROs has at least 45 % of the market, one does not. Do these differences impact the ability of the members to get the best value for their music and for users to perform the music?
What clearly doesn't benefit the composer or the public interest is a boycott of music. If the choice is between infringement or a blackout of music, nobody benefits. In the 1940s, when radio broadcasters objected to facets of the music licensing scheme, only music in the public domain was played over the airwaves. It became known as the era of ''I Dream of Genie with the Light Brown Hair.'' This should not be repeated.
Healthy competition among the PROs should serve to benefit music usersbut most importantly, songwriters.
I look forward to hearing from the witnesses.
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PREPARED STATEMENT OF THE HONORABLE ELTON GALLEGLY, A REPRESENTATIVE IN CONGRESS FROM THE STATE OF CALIFORNIA
Thank you for holding this hearing, Mr. Chairman.
I am concerned, and I have constituents who are concerned, about the operation of two of the Performance Rights Organizations under consent decrees that promote fairness in the market and the operation of the third, SESAC, under no such constraints.
Constituents have come to me with concerns about behavior that SESAC engages in that ASCAP and BMI are not permitted to engage in. For example, small content users, even some talk radio stations that use only a bar or two of content at a time, are forced to purchase a very expensive blanket license instead of purchasing a smaller unit commensurate with the amount of content that they use.
Though SESAC only represents less than 10% of the performance rights market, they are able to engage in what is arguably anti-competitive behavior due to the nature of the market. Courts have recognized that when a number of artists band together to license their unique musical performances, there is a potential to engage in anti-competitive conduct. I look forward to hearing from the witnesses about whether that is happening in this case.
I am thankful that the subcommittee is holding this hearing and I am interested in hearing more about the Performance Rights Organizations, how they function, and the appropriate role of the Department of Justice in regulating anti-competitive conduct.
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ASCAP CONSENT DECREE (2000)
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BMI CONSENT DECREE (1966)
SUPPLEMENTAL STATEMENT OF STEPHEN SWID, CHAIRMAN AND CHIEF EXECUTIVE OFFICER, SESAC INC.
Mr. Chairman and distinguished members of the Subcommittee. On behalf of SESAC, Inc., I appreciate the opportunity to supplement my previous written statement in light of the written and oral testimony presented by ASCAP, BMI, and the TMLC at the May 11, 2005 hearing. I will demonstrate that SESAC is able to provide value and service to its customers and potential customers through licensing practices that are not only fair, but innovative and responsive to their needs, while at the same time ensuring that SESAC's affiliated songwriters and music publishers are fairly compensated for their intellectual property.
Meeting the needs of one's customers and constituents is fundamental to a competitive economy. The TMLC and ASCAP, which have an entrenched way of doing business that has barely changed in decades, do not like the fact that SESAC is bringing energy to the marketplace, attracting a growing base of talented music writers, compensating those creative talents more fairly than ASCAP and BMI (whose ranks they left to join SESAC), and seeking to price its repertory in innovative ways that it believes are responsive to the needs of the music and television community. They therefore seek Congressional intervention in the hope that they can stymie SESAC's innovations rather than having to meet those competitive pressures by changing their own behavior.
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Before addressing the specific misstatements made by the other parties testifying before the Subcommittee, I feel compelled to note the obvious: The TMLC (along with ASCAP), in seeking to impose upon SESAC a rate court mechanism similar to those imposed by the Department of Justice upon ASCAP and BMI, evidences a fundamental business philosophy that stands the American economic system on its head. As a matter of first principles, SESAC operates by virtue of a free market economy. ASCAP and BMI are subject to Consent Decrees and rate courts because the Department of Justice has determined that their behavior in exercising their admittedly vast market share and leverage to extract terms from both its members and its licensees that they would not otherwise have obtained through free negotiation. Rate courts were imposed on ASCAP and BMI as a remedial measure because they used their disproportionate market power unfairly to extract terms to which they were not entitled.
By contrast, SESAC does not have such market power. SESAC's annual revenues amount to only approximately 5% of the American performing rights industry's revenues. A dozen years ago, when the present owners bought SESAC, it was a moribund society with only about a 1% market share. SESAC is growing, and attracting talent from the membership ranks of ASCAP and BMI, because it is prepared to be creative and to pay and be paid for value delivered. If SESAC overprices its repertory, the television industry will stop hiring SESAC members; SESAC will then either need to cut its prices, or its members will resign and move back to ASCAP or BMI. That is how competitive markets work.
But the TMLC prefers regulation to competition. That is how it has done business with ASCAP and BMI, which have been regulated for generations, so that is all that it knows. As the TMLC would have it, heavy marketplace regulation would be the norm, the default, and a free market business model would be reduced to a ''loophole'' that has to be closed as soon as any upstart finds new ways of meeting marketplace demand. This is a curious suggestion from a negotiating body representing virtually the entire local television industry, whose members' combined revenues are approximately $30 billion, and who thrive on charging their own advertiser customers escalating fees for the programming aired on their stations. The TMLC brings to bear the economic power of 1,200 television stations to collectively exercise leverage over SESAC, a small service provider that is a fraction of their size. In fact, the parent companies of many of these stations are multimedia giants that control the majority of television production in this country, and which have aggregate revenues of at least hundreds of billions of dollars.
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As I stated earlier, SESAC is the quintessential model of an innovative American small business operating successfully in a challenging industry. It competes, on the one hand, against two large PROs that dominate the marketplace while, on the other hand, often negotiating with large all-industry negotiating committees, like the TMLC, whose membership has combined revenues that dwarf those of the entire performing rights industry by roughly 20 times. The TMLC acts for multimedia powerhouses. Simply stated, these are not small organizations in need of Congressional protection and compulsory and ongoing judicial oversight to ensure that they do not get overcharged for music rights; these are the ''big boys'' of the industry who, in other contexts, have demonstrated themselves to be quite capable of making savvy business deals and looking out for their own economic interests.
SESAC's innovative business methods enhance competition and should be fostered and promoted, not regulated to the benefit of industry giants. Presumable, TMLC members would have a different view about rate courts if negotiators representing automotive or pharmaceutical companies or any other large-dollar advertisers came to Congress complaining that local stations were asking for a higher advertising rate than they wanted to pay.
ASCAP's request that Congress impose regulation on SESAC should be rejected. In its testimony, ASCAP states that ''the playing field is not level'' and ''fair unfettered competition is not possible'' because ASCAP ''is subject to governmental regulation'' by consent decree ''while SESAC is not.'' This suggestion is disingenuous for at least two reasons. First, it begs the question: ''Why, after five decades, is ASCAP still subject to a Consent Decree?'' It is no wonder that, when asked this very question at the May 11 hearing, ASCAP was unable to articulate a clear and direct answer for the Subcommittee. The simple answer is that ASCAP (as well as BMI) is still subject to a Consent Decree because the Department of Justice continues to believe that such an extraordinary remedy is necessary, given ASCAP's vast market share and historical anticompetitive business practices.
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Indeed, just three years ago, ASCAP renegotiated and obtained court approval to change certain terms of its Consent Decree, but did not ask the court to terminate that decree as no longer necessary. (By contract, IBM did seek and obtain the termination of its decades-old antitrust consent decree some years ago when it was found no longer to be necessary because of new and significant competition from other computer makers.) Contrary to the tone of ASCAP's discussion on this topic, a Consent Decree is not the equivalent of a good citizenship award. Rather, it is more like plea bargaining for probation. It is an extraordinary remedy imposed to correct violations of antitrust laws to and prevent such behavior from reoccurring. The very purpose of this governmental regulation is to ''level the playing field'' that had been tilted by ASCAP, and to restore the ''fair unfettered competition'' that ASCAP had sought to negate.
Second, ASCAP's complaints of being disadvantaged by SESAC are belied by ASCAP's (and BMI's) continued domination of the performing rights marketplace. Combined, ASCAP and BMI claim approximately 95% of the market, each claiming between 45% and 50%; SESAC, by contrast, claims only 5%. Strikingly, ASCAP, which has been operating under Consent Decrees since Glen Miller was at the top of the charts and Joe DiMaggio was hitting home runs for the Yankees, does not suggest that SESAC be subject to regulation because of any perceived illegal business practices on SESAC's part. Rather, ASCAP seeks SESAC's regulation simply so that ASCAP, BMI and SESAC ''all be subject to the same rules.'' This simplistic analysis disregards the lessons of history as perceived by the Department of Justice, which has always declined to seek similar regulation of SESAC. SESAC is left to wonder exactly how much of its 5% market share ASCAPwhich already controls nearly half the marketseeks to capture through the impositions of consent decree obligations on SESAC. (It should be noted that, in its testimony, BMI does not seek such regulation of SESAC. Rather, BMI acknowledges that the competition existing among the PROs benefits both copyright owners and music users.)
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One wonders about the real motives underlying ASCAP's comments; could this simply amount to a woeful response to the fact that SESAC's market share is escalating while ASCAP's share of television music is declining? If SESAC's present market share were reduced by half, would that ''level the playing field'' sufficiently for ASCAP? Forcing regulation upon a small but savvy competitor would be tantamount to penalizing SESAC because of the true market forces that are pulling down ASCAP, and rewarding an unsuccessful competitor that could neither retain nor attract significant composers to avoid market share decline.
Specific Statements by ASCAP
The following are specific responses and corrections to factual assertions and false premises presented by ASCAP in its testimony:
Statement: ASCAP states that, ''under ASCAP's rules and regulations, members may resign from membership and affiliate with a different performing rights organization annually.''
Fact: ASCAP conveniently ignores any mention of its onerous membership rules which serve to discourage such resignation. For example, under its ''licenses in effect'' policy, ASCAPwhile technically permitting a member's resignationpurports to prohibit the movement of that member's existing catalog of compositions so long as any ASCAP license granting rights in those compositions remains in effect. Because, on any given day, there are vast numbers of ASCAP licenses covering its entire repertory in place for periods up to five years, the practical effect of this policy is to hold compositions hostage indefinitely and discourage members from leaving ASCAP, or to force them to leave without their work product. Under another ASCAP policy, because ASCAP pays its members from their earnings six months in arrears, if a songwriter resigns, he or she will not be paid for the two quarter-years of earnings that accrued as of the resignation date. In short, when ASCAP members leave, they must ''leave money on the table''; broadcasters are paying ASCAP for music it represents, but that money does not go to the music owners. This half-year earnings gap serves as a strong disincentive for an ASCAP member to resign, despite the purported benevolent membership policy. By contrast, BMI and SESAC pay their composer and publisher affiliates all of the royalties earned while they are affiliates.
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Effective January 1, 2005, ASCAP changed its policies with regard to resigning members. Previously, members could terminate their association with ASCAP at the end of each calendar year by giving not less than 90 days notice. This provided a convenient date for members to evaluate their status with ASCAP and plan accordingly. The decision to resign from ASCAP had to be made prior to September 30 of each year, a convenient and straightforward process.
The new policy removes the common resignation dates and states that resignations are effective on the first day following the calendar quarter in which the anniversary date of the resigning member's ''election'' to ASCAP's membership falls. Notice must be given not less than six months and not more than nine months prior to the resigning member's election date. Thus, if a member's election date is February 15, the effective date of the member's resignation is April 1, and notice of resignation must be given between July 1 and September 30 of the previous year; a rather more complicated calculation. By the same token, another member will have an entirely different set of dates to comply with. ASCAP has established an obstacle course of notices and calendar hurdlesand requires a one year delay (and a new notice) if any of those technical obstacles is missed by even a day.
Because ASCAP is a membership society, the member's ''election date'' is the date that the member was formally elected into ASCAP's membership. This date is not readily available to ASCAP's members. It does not appear on the membership application; it does not appear on ASCAP royalty statements; and it does not appear on the membership card. This now-critical date was not previously a date that would hold any importance to a member. What was once a simple, understandable process has been turned into a confusing maze that serves to prevent ASCAP members from defecting to SESAC or BMI. ASCAP members must first ascertain what their election date is, then must calculate the effective date of the resignation, and finally must evaluate their status within a short three-month window. (Of course, in any event, an ASCAP member who successfully resigns will have to ''leave money on the table.'')
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Statement: ASCAP states that it ''must grant a license to any user who requests it, but [SESAC] need not.''
Fact: This requirement was imposed by the Department of Justice because of ASCAP's misuse of its large market share. In any event, SESAC is in the licensing business; to refuse to grant licenses as a matter of policy would be contrary to its interests and business model. If the Subcommittee would find it helpful, SESAC is willing to share additional information on a confidential basis concerning examples of its innovative licensing practices.
Statement: ASCAP states that it ''may only obtain nonexclusive rights, but [SESAC] may get exclusive rights.''
Fact: This is another restriction imposed because of ASCAP's improper exercise of market share and leverage. In any event, it is SESAC's policy to obtain only nonexclusive rights, giving its songwriter music publisher affiliates the ability to license their music directly themselves. To the best of its knowledge, SESAC has only one affiliate agreement that prohibits direct licensing, and that agreement is currently being restructured to permit it.
Statement: ASCAP states that it is ''subject to third-party rate determination, but [SESAC] is not.''
Fact: Again, this restriction was and continues to be a penalty imposed on ASCAP by the Department of Justice in response to ASCAP's demonstrated market share, leverage, and conduct. SESAC has granted arbitration rights to licensees on occasion. However, this has been the result of marketplace negotiations, not governmental regulation. The marketplace works in SESAC's case to establish contractual rights and a fair market value for its music. Fair market value is the value to which a willing buyer and a willing seller agree. It is not the regulated, restricted or artificially manipulated ''lowest price'' that an independent third party might see as appropriate or ''fair.''
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Statement: ASCAP states that it ''must offer alternative forms of licenses to broadcasters and other users, but [SESAC] need not.''
Fact: Again, this is a result of ASCAP's demonstrated market share, leverage, and conduct. In any event, SESAC routinely uses alternative forms of licenses for broadcasters and other users, which acknowledge the amount of their use of SESAC music. SESAC is willing to provide additional information about these alternative license forms on a confidential basis.
The true reason why ASCAP was compelled to offer alternatives to its blanket license is that ASCAP's refusal to do so was deemed as harmful to a competitive marketplace. SESAC, as a for-profit company, seeks to listen to and innovate for its licensees. It has led the way to new forms of licenses, such as a per-use license for Spanish-language radio stations, because it made sense for all parties and fostered good relations with those licensees. SESAC formulates new licenses without the attendant regulatory compulsion because, to remain competitive in this challenging industry, SESAC must be market-sensitive. (Unlike ASCAP and BMI, SESAC also licenses separate ''mechanical'' rights to compositions in its repertory on a minimal basis from time to time. There is no legal prohibition against doing so and, historically, this has been done to accommodate a handful of SESAC affiliates. SESAC does not consider this a part of its core business; the new ownership ''inherited'' this undertaking from the previous owners, and they have not invested resources in it. First and foremost, SESAC is in business of licensing music performing rights.)
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The TMLC's self-serving request that Congress impose a rate court mechanism upon SESAC should be rejected. The ASCAP and BMI rate courts are extraordinary and expensive remedies put in place because of those entities' dominant market share, leverage, and conduct, as the TMLC readily acknowledges. Rate courts are not intended as a general industry substitute for marketplace negotiations and the normal give-and-take that buyers and sellers exercise in commercial transactions.
The TMLC's request is extreme and antithetical to the American economic system. Dispute resolution processes should be voluntary and not imposed by Congress to resolve commercial transactions. The TMLC, which represents members whose combined revenues are approximately $30 billion, pleads for Congress' aid because it seeks to enhance its members' profits outside of contractually agreed procedures. The TMLC granted SESAC the unilateral right to seek arbitration in negotiating a new license. SESAC opted for such arbitration, as it had done under the previous license negotiated by the parties. SESAC notified the TMLC that it would arbitrate rather than take the easier route of avoiding negotiations with the TMLC altogether and, instead, establish its own rate structure for individual local television stations.
The TMLC simply is displeased with the contract it negotiated with SESAC. In fact, it has let the Subcommittee know in no uncertain terms that little, if anything, about SESAC pleases the TMLC. But the TMLC sings a different tune when that suits its members: In a different forumthe ASCAP rate courtthe TMLC has stated that the SESAC/TMLC license has probative value in determining what the ASCAP/TMLC license fee should be. For all of the TMLC's over-the-top hyperbole and vitriol, if the TMLC points to its SESAC agreement as the measure of fair market pricing that results from arm's length negotiations, that agreement surely could not have been the result of ''gun-to-the-head'' negotiating, monopolistic practices, anticompetitive behavior, or any other untoward activities in the TMLC's long list of perceived sins. To the contrary, the TMLC entered into negotiations with SESAC immediately after SESAC had presented its case in an arbitration proceeding; the TMLC chose to negotiate a settlement rather than challenge SESAC's case. If the TMLC wants ASCAP to accept the SESAC agreement as the basis for apportioning license valuations in light of the PROs' relative market shares, it would appear that SESAC received, at best, fair market value in its negotiations with the TMLC.
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Ultimately, the goal of the TMLC before the Subcommittee is the same goal that all for-profit companies aspire to achieve: lower operating costs. In fact, lowering music licensing costs for its 1,200 local television members is the sole justification for the existence of the TMLC. Its station members spend hundreds of millions of dollars on programming acquisitions in a competitive market, vying against fellow TMLC station members. To offset program costs and earn large profits, TMLC members seek billions of dollars in advertising revenues. The TMLC members do not seek Congressional assistance in purchasing programming, and they certainly do not seek Congressional oversight of their own advertising sales practices. (For example, as every football fan knows, advertisers are made toand willingly dopay ''what the market will bear'' for commercials during the Super Bowl and other compelling programming.)
It is not a coincidence that the TMLC comes before this Subcommittee in the middle of spirited negotiations and on the eve of arbitration with SESAC; it is a commercial dispute. The TMLC would have the Subcommittee believe that SESAC, with its minimal market share and leverage, has cast some type of magic spell rendering the TMLC enfeebled and no longer empowered by its members' multiple billions of dollars in revenues and profits. The TMLC is not confident that it will obtain from SESAC its sought-after music cost reductions through the commercial negotiation process, the arbitration process, or the Department of Justice. Therefore, the TMLC now seeks the aid and assistance of Congress to reform its members' SESAC contracts, to give the TMLC the leverage and obeisance that it demands from SESAC. Given the TMLC members' willingness to litigate against ASCAP and BMI, often successfully, it would appear that the TMLC acknowledges SESAC's market power and conduct do not require antitrust oversight. The TMLC cannot prove otherwise; its problem is that SESAC will not cower to its tactics. The Department of Justice has received similar diatribes from the TMLC regarding SESAC and, after review, has declined to take any action. The TMLC and its members are vigorous advocates and worthy litigants. Despite the TMLC's relentless complaints, however, it has never undertaken, much less succeeded in, any legal action concerning SESAC's licensing practices. This Subcommittee and Congress similarly should decline to take any action against SESAC at the TMLC's request.
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The general rule is that, except for a small number of statutory compulsory license requirements, a copyright owner has no obligation to license works to anyone, or to license on any particular terms. Nevertheless, it is SESAC's business to license the public performance of music; that is how SESAC and its songwriter and its music publisher affiliates make money. SESAC is perfectly willing to negotiate individually with television station owners and to offer favorable terms to those stations that do not use a great deal of SESAC music. It is the individual station owners, however, controlling tens of billions of dollars in media holdings and acting in concert through the TMLC on behalf of virtually the entire United States television broadcast industry, who exercise their market power by refusing to negotiate individually. Instead, they insist on acting only as a collusive bloc.
These television station owners are not persons in need of Congressional protection. TMLC members buy and sell companies far larger than SESAC on a regular basis. Indeed, each of the leading TMLC station owner members has annual revenues between 200% and 2,000% of the total license fee that the 1,200 TMLC stations collectively pay to SESAC each year. To assist the Subcommittee, I have attached to this statement a three-page exhibit, based upon company reports and independent industry reports, demonstrating that (i) television music rights costs have not kept pace with other broadcast syndication expenses; (ii) television licensees, including TMLC members, are enjoying robust financial health; and (iii) broadcasting operating margins increased significantly in recent years.
In fact, the licensing ''problem'' that the station owners complain about is one of their own creation. When the television networks and production companies, which often are sister companies to the television stations, hire a composer to write for a television program, they do so under a ''work for hire'' agreement. Under a common scenario, the production company, a corporate relative of the local station, owns (through a music publisher alter ego) all of the rights to the music. The producer chooses to allow the composer (and itself, through its publishing entity) to collect performing rights from its PRO. The producer could just as easily increase the work for hire payment to the composer at the outset and ''buy out'' virtually all of the rights (and thus be able to direct licenses to their related broadcasters). The producers chose instead to participate in ''back end'' distribution of royalties paid by the PROs, which enhance their bottom line. They make their election because the network and production companies create pilot programming ''on spec,'' and they do not want to add to their initial costs by paying for music in television pilot programs that might not become successful. Instead, they would rather pay later, only if and when the television program is a hit and goes to syndication. They elect this as the best economic practice for their companies. When successful programs go into syndication years after production, the station owners again do not want to pay a fair price for the music, even though they purchase syndication rightsin highly competitive marketplace bidding for huge and ever-growing pricesalways knowing that there will be an additional fee for the public performance of the music pursuant to the Copyright Act. The performing rights fees are an insignificant fraction of the price paid purchasing the right to air the programs. Hit syndicated television programs like ''Friends'' are so very profitable for these sophisticated businesses that they are loath to allow music licensing to eat into their already high profit margins.
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This system was not created by SESACthe media companies created and continue to preserve it for their economic self-interest. When the profits of the production companies and the profits of the local television stations are consolidated on the top-level financial statements of such media companies, they have concluded that it is a net benefit: their production companies save the money by not buying the music rights on the ''front end,'' choosing instead to have a sister company, which owns television stations, incur an offsetting performing rights expense later.
For all of the TMLC's discussionwhich is heavy on hyperbole and light on hard factsSESAC has crafted for television music a licensing model that is innovative and equitable to all interests. The SESAC model attempts to join all music copyright interests into one valuation pool, from which all licensor participants are allocated proportionate shares, including the equitable proportion of music use based on credible, third party information. In essence, it would charge each station only for the SESAC music that it actually performs, based upon the programs that it chooses to broadcast and further valued by the actual number of viewers who watch the program. Given its proclamations about seeking fairness in television music licensing, one would assume that the TMLC's approval of this model. However, because television stations who use relatively little SESAC music would receive a very economical deal, while those who use a substantial amount of SESAC music would pay more, the TMLC apparently wants to avoid such fair apportionment of fees for fear that it would cause dissention among certain substantial members. In the meantime, SESAC has received complaints from television station licensees about the perceived inequity in the TMLC's allocation of license fees. (During the 2002 arbitration settlement, the TMLC negotiated for and obtained the right to determine how to allocate the industry-wide license fee among its members.) Instead, the TMLC has come to Congress complaining that SESAC is taking advantage of its sophisticated members, who collectively earn tens of billions of dollars in revenues, and asking this Subcommittee to assist it in continuing to reap even greater profits on the backs of the songwriters and music publishers that SESAC represents.
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Specific Misstatements by the TMLC
The following are specific responses and corrections to factual assertions and false premises presented by the TMLC in its testimony:
Statement: The Radio Music License Committee (''RMLC''), speaking through the TMLC, purportedly states that ''SESAC blanket license fees for radio stations are projected to increase tenfold from 1995 to 2008 even though much of SESAC's music on radio is background music or music in commercialsnot feature performances.''
Fact: SESAC's blanket license fees for radio stations are projected to increase approximately by a multiple of 3.7, not 10, for the 13-year period from 1995 through 2008, to reflect the increased market share and value of SESAC music in that medium. (By contrast, ASCAP's radio license fees for the period 2001 through 2009 will have increased 52.3%; BMI's radio license fees for the period 2001 through 2006 will have increased 40%.) The vast majority of SESAC's music on radio is not background music or music in commercials. Rather, SESAC represents featured music in virtually all genres of today's most popular music, including R&B/Hip-Hop, Dance, Rock, Country Latina, Contemporary Christian, and Jazz. Over the years, innumerable recording artists who have performed SESAC-affiliated songs. A handful of names includes Usher, Bob Dylan, Garth Brooks, Destiny's Child, Mercy Me, Ludacris, Jim Brickman, Kenny Chesney, Eric Clapton, Neil Diamond, U2, Luciano Pavarotti, LeAnn Rimes, Mariah Carey, Alan Jackson, Cassandra Wilson, Jagged Edge, Jimi Hendrix, Christina Aguilera, and UB40. In fact, just two weeks ago, SESAC recently had the Number One country song on the Billboard Chart, ''Anything But Mine,'' as sung by Kenny Chesney. As verified by industry trade resources, during the past 17 months SESAC has represented songwriters of 180 Top Ten record releases in various genres, including 63 Number One hits.
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Statement: The National Religious Broadcasters Music License Committee (''NRBMLC''), speaking through the TMLC, purportedly states that SESAC is ''a monopolist with extraordinary, unconstrained, market power''; that ''SESAC flatly refused the NRBMLC's request to hold negotiations over its effective doubling of fees from 20042008 (the second consecutive doubling of fees over a five-year period), and also refused its request for arbitration.''
Fact: As an initial matter, the NRBMLC's name is misleading. While some of its constituents include religious broadcasters, the NRBMLC also represents broadcasters in many other non-religious music-intensive formats such as Contemporary Hit Radio, Adult Contemporary, Country, Jazz, and Urban Contemporary. After introducing a new license fee schedule effective January 1995, SESAC entered into what was effectively a stand-still letter agreement with the NRBMLC in April 1995, agreeing to allow its constituents to pay pre-1995 fees while discussions ensued concerning final fee rates. At the time, the NRBMLC was in a license fee dispute with ASCAP and it asked for SESAC's forbearance. SESAC agreed to postpone any fee negotiations with the NRBMLC until the ASCAP matter was resolved. Another letter agreement between SESAC and the NRBMLC occurred in November 1997, extending the pre-1995 license fee arrangement. (During discussions in 1999, SESAC discovered that the NRBMLC represents stations outside the traditional religious formats.)
After nearly five years of forbearance and on-again, off-again negotiations during which NRBMLC stations continued to pay pre-1995 fees while enjoying interim authorization to perform all the copyrights represented by SESAC in all radio formats, a final five-year agreement was reached effective December 1999. The agreement benefits not only stations represented by the NRBMLC during negotiations, but all stations that subsequently become members or that are acquired by members, regardless of radio format. That agreement, renewed by SESAC in 2004, provided benefits for all NRBMLC members. Retroactive to January 1, 1995 and on a going-forward basis, any station operating under ASCAP and BMI per-program licenses would receive a SESAC license fee discounted by 45%. SESAC's amendment for ''talk radio,'' providing a 75% discount in license fees continues to be available to NRBMLC members. SESAC also gave a one-time financial credit to all other stations not qualifying for the per-program or ''talk radio'' discounts, in the amount of $250 for classical stations and $100 for all others. Additionally, SESAC's radio group license and corresponding discount are available to all radio groups retroactive to January 1997. Although the SESAC/NRBMLC agreement expired in December 2003, SESAC extended to NRBMLC members through 2008 the same benefits that were negotiated in 1999. SESAC has proposed an ''across the board'' rate adjustment for the entire radio industry. Finally, contrary to the NRBMLC's assertion, SESAC's license fees for its members did not double from 2004 through 2008. In fact, the increase was less than 50%.
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Statement: The National Cable Television Association (''NCTA''), speaking through the TMLC, purportedly states that its experience in negotiations with SESAC indicates that SESAC should be ''subject to the same negotiating restrictions that are applied to BMI and ASCAP, including a third party dispute resolution process that can be invoked by either party and averts the prospect of copyright infringement liability while that process takes place.''
Fact: SESAC proposed a license agreement for cable operators in May 1995. Later that year, SESAC was contacted by the NCTA advising that it wanted to negotiate collectively, and asking for SESAC's forbearance until it finalized negotiations with ASCAP and BMI. Again SESAC agreed to the NCTA's request. In 1998, the parties reached a ''standstill'' agreement providing for a modest down payment of license fees from the entire cable industry, with negotiations for a final agreement to commence after the NCTA's rate court proceeding against ASCAP concluded. In 1999, the standstill agreement was extended with an additional modest down payment. A final license agreement was approved in 2001, retroactive to 1994 and extending through December 2004. SESAC attempted to negotiate with the NCTA in mid-2004 for an extension of the agreement. The NCTA, however, unbeknownst to SESAC, previously had concluded negotiations with ASCAP and BMI through 2006 (two years beyond the SESAC/NCTA agreement), expressed dissatisfaction that SESAC was seeking increased license fees for the period beginning in January 2005, because the NCTA had not sought or obtained any license fee reductions from ASCAP or BMI in the event that SESAC's market share increased. Accordingly, SESAC sought to enter into individual extension agreements for a three year period directly with cable operators at license fee levels that it had sought from the NCTA. Eventually, the NCTA came to SESAC to renew discussions in early 2005. A final agreement resulted in a two-year extension through 2006, which eliminated authorization for certain types of music performances in exchange for a license fee that was less than that proposed by SESAC. Again, in this instance, the marketplace worked.
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Statement: The TMLC states that, ''[w]hen any music user seeks to pay a licensing fees to SESAC . . . , no dispute resolution mechanism exists under current law, except a lawsuit brought against the prospective licensee for copyright infringement if that user fails to agree to license terms requested by SESAC,'' thereby permitting SESAC ''to suppress free competition and extort supracompetitive licensing rates.''
Fact: There is no basis in law for singling out a small business for a ''third party dispute resolution process'' to second guess arm's-length marketplace negotiations among sophisticated parties. ASCAP and BMI are subject to rate courts because the Department of Justice determined that their market share, leverage, and conduct required it. In practice, being subject to a possible rate court proceeding by any licensee who wants a second bite at the negotiating apple would be intolerably cost-prohibitive for SESAC and for many licenses.
To put this suggestion in perspective, the average SESAC license fee per day for AM radio stations is $3.37; for FM radio stations, $6.29; for commercial television stations, $31.69; for hotels, $1,.97; for restaurants, $0.83, and for health clubs, $0.240. It would be crippling for SESAC to be subjected to arbitration concerning all of these types of licenses given its small share of the marketplace. In fact, Congress in its wisdom discerned the distinction between ASCAP and BMI, on the one hand, and SESAC, on the other hand, when setting up the ''mini'' rate court provisions of the Fairness In Music Licensing Act of 1998. The TMLC notes that, under Chairman Sensenbrenner's leadership, Congress enacted this law ''creating a dispute resolution mechanism available to small and medium business establishments through the federal courts.'' What the TMLC fails to acknowledge is that, even in this recent legislation, SESAC was exempted from the rate court system required by the market share, leverage, and conduct of ASCAP and BMI.
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In any event, the TMLC's dire prediction of infringement lawsuits flies in the face of SESAC's demonstrated non-litigation strategy, as compared to the litigation strategy of ASCAP and BMI. Recent archival research indicates that over the last 50 years, SESAC has filed six copyright infringement lawsuits. (This is a correction to information contained in the SESAC Fact Sheet distributed earlier, in which SESAC indicated that it had filed three lawsuits over the past 50 years. We apologize for the misstatement.) Four of those lawsuits were settled quickly; one resulted in a default judgment against a group of radio stations that remains unlicensed to this day; and the other resulted in a jury verdict in SESAC's favor against a group of radio stations that, tellingly, still remains unlicensed by SESAC.
The lawsuit that resulted in a jury verdict for SESAC is illustrative. The music user was a company that operated two radio stations (having sold a third station for approximately $11 million). SESAC was forced to cancel its performance license in the early 1990s due to non-payment of fees by the licensee. Over the course of years, SESAC repeatedly offered to reinstate performance licenses, but all attempts were rebuffed even though the stations continued to play SESAC music. In July 1998, SESAC filed suit in Federal Court in Pennsylvania for copyright infringement. Initially, SESAC was granted a restraining order prohibiting the stations from playing SESAC music, but they nevertheless continued to do so. The company asserted several counterclaims and affirmative defenses including copyright misuse and antitrust violations, all of which it withdrew after conducting extensive discovery. Ultimately, after all attempts to settle the lawsuit failed, in November 2002 the case went to trial, during which the company admitted copyright infringement. SESAC does not use litigation as a first resort but understands that, on rare occasions, unfortunately it is the only remaining remedy.
Page 96 PREV PAGE TOP OF DOC Statement: The TMLC states that SESAC has ''an avaricious licensing-fee appetite and market power that commands supracompetitive prices.''
Fact: The TMLC's hyperbolic words do not square with its actions. In recent rate court proceedings against ASCAP, the TMLC touted its agreement with SESAC as being probative evidence of the market value of music. SESAC's minimal market power is evidenced by its minimal share of the American music performing rights market. ''Supracompetitive rates,'' in plain English, means that this well-funded and sophisticated all-industry negotiating group does not want to pay fair market value for use of SESAC music. As a specific example, the total fees paid from 2002 to 2004 for blanket licenses by the local television industry was $198 million annually. The TMLC acknowledged that its own studies revealed SESAC's share of the music use in this industry was 9.4% in 2002, and SESAC has strong evidence that its share of such music use is approximately 11% today. Simple mathematics shows that the TMLC understood that they should have been paying SESAC $18.6 million for 2002 and $21.78 million for 2004. Instead, the TMLC paid SESAC only $11.5 million for 2002, a full 42% less than fair market value by the TMLC's own calculations, and only $13.5 million for 2004, a 38% reduction from fair market value. This raises the question: ''Which party here, in fact, has been ''unfair'' and ''avaricious'' in its dealings with the other?'' It would appear that the TMLC's definition of ''fair'' means less royalties for composers and more profits for broadcasters; the TMLC's complaint that SESAC has ''disdain for settled marketplace fee-level expectations'' translates to: ''SESAC is an upstart unwilling to permit the TMLC to devalue the music of its songwriters and music publishers.'' The TMLC cries crocodile tears about SESAC's ''anticompetitve'' behavior after it has negotiated at least a $18 million decrease in license fees payable to ASCAP, based in part upon SESAC's probative licensing values. Far from being anticompetitive, SESAC's licensing practices appear to set marketplace standards while protecting the rights of American songwriters.
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Statement: The TMLC complains that SESAC is ''wholly-unregulated'' and ''operates with a profit motive.''
Fact: The wrong-minded premise of this statement is troubling. SESAC is indeed regulated to the same extent that all other businesses must comply with the rules, regulations, and statutes enacted by governmental bodies having jurisdiction over it. The fact that SESAC's marketplace negotiations with customers are not otherwise regulated, and the fact that SESAC is a for-profit company, are attributes of the American economic system, not faults. The TMLC's complaints in this regard read like an indictment of the entire American free enterprise system. I will not apologize for SESAC being a for-profit company. Regulation is not the norm; a free market is the norm. For example, the TMLC would have SESAC subjected to a rate court which, among other things, could adjust downward SESAC's negotiated or arbitrated blanket license fee rates to account for ''carve-out'' credits to the TMLC for any direct licenses that its members obtain from SESAC affiliates. In essence, the TMLC would have the opportunity to have a ''second bite'' before some governmental body with the power to reform SESAC's contracts after the fact. Not only would this be contrary to the fundamentals of American enterprise, it also would be wholly unnecessary. The existence of direct licenses, along with numerous other factors, is a subject that can be presented and weighted in negotiations leading up to an agreement. Direct licensing is a factor that sophisticated and powerful groups like the TMLC can ''put on the table'' in negotiating fair market fees. ASCAP and BMI are subject to consent decrees and rate court mechanisms because the Department of Justice has concluded that their market share, leverage and conduct require it. By contrast, after reviewing SESAC's market share and licensing practices, the Department of Justice has concluded that governmental regulation is not appropriate. As the TMLC concedes, SESAC ''is substantially smaller than ASCAP and BMI in terms of composers, publishers, and its repertoire of music.''
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Statement: The TMLC alleges that SESAC ''refus[es] to extend the licenses to permit negotiations.''
Fact: SESAC has negotiated, with more than a dozen cable network groups, license agreements that contain provisions for interim authorization while the parties negotiate renewal contracts. In fact, three such entities presently have chosen that option and are currently operating under their interim authorization based upon contracts that expired in December 2004. Over the last several years, SESAC has provided interim authorization during negotiations with a vast number of music users, including television stations, cable networks, radio station groups, local cable operators, and the NRBMLC. Moreover, SESAC is aware of the unlicensed status of hundreds of AM and FM radio stations, and several dozen commercial television stations. SESAC has not one copyright infringement lawsuit pending against any of these unlicensed stations.
Statement: The TMLC states that, ''[i]n 1995, although SESAC was unable to demonstrate any meaningful increase in the use of its repertory, SESAC announced to local television stations a DOUBLING of industry-wide blanket license fees effective almost immediately.''
Fact: Prior to 1995, SESAC licensed television stations based upon factors such as market size and advertising spot rates. SESAC had developed an adjusted fee schedule effective January 1983. However, pending final resolution of the Buffalo Broadcasting rate court lawsuit, SESACat the TMLC's urgingchose not to apply its revised fee schedule, and rolled back fees to 1980 levels. The 1983 fee schedule was not implemented until 1985.
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In 1994, after nine years of stagnant license fee rates, during which SESAC continued to add to its television repertory, SESAC began to develop a new television fee schedule and a new methodology that was audience- and ratings-driven. SESAC again requested that the TMLC negotiate with it, but the TMLC requested that SESAC forbear until the TMLC's rate court proceeding against ASCAP was concluded. Over a two-year period, SESAC principals and management met with the TMLC requesting that negotiations commence; again, the TMLC requested SESAC's forbearance until negotiations with the other PRO were concluded.
Finally, upon the conclusion of the TMLC's disputes with the other PROs, SESAC informed the TMLC that it wished to negotiate license fees; the TMLC declined. SESAC then informed the TMLC that, unless good faith negotiations were commenced within a reasonable time, SESAC would implement its new fee schedule effective October 1995. On that date, the new fees were introduced to the local television industry which, on an industry-wide basis, effectively doubled the stagnant license fees that SESAC had been receiving without incremental increases since 1985. This represented SESAC's first rate increase in a decade, designed to more accurately reflect the value of its songwriter and music publisher affiliates' music.
In early 1996, the TMLC approached SESAC with a request to enter into industry-wide negotiations; SESAC agreed. SESAC did not bring a single copyright infringement lawsuit against a local television during the period 1985 through the present. In January 1997, negotiations between the parties were finalized, providing for slightly lower licensing fees than those implemented by SESAC in October 1995. In short, it was only after SESAC raised its license fee rates that the TMLC commenced negotiations with SESAC.
Page 100 PREV PAGE TOP OF DOC Statement: The TMLC states that, in 1995, ''SESAC required ABC, CBS and NBC to sign separate performance rights agreements covering music in their network programming, which previously had been included in the local station license.''
Fact: While SESAC had licensed the three major television networks for many years prior to October 1995, the TMLC did not negotiate on behalf of the networks, only the local television stations. Network programming was explicitly excluded from the final TMLC/SESAC negotiated license agreement, leaving SESAC no alternative but to turn to the networks directly. In 1996, SESAC commenced negotiations with all three networks. All three networks are presently licensed by SESAC. Licenses granted to networks are for the programming they supply to local affiliates and do not cover local or syndicated programming created or bought by those stations, as the TMLC well knows.
Statement: The TMLC states that ''most, if not all, of the SESAC affiliates were previously ASCAP or BMI members.''
Fact: Less than 10% of SESAC affiliates were previously affiliated with ASCAP or BMI. The overwhelming majority of SESAC songwriters have never written music that was previously represented by ASCAP or BMI.
Statement: The TMLC states that ''SESAC licenses do not . . . offer any . . . meaningful efficiency for consumers''; that ''SESAC licenses instead impose a new and unjustifiable cost for music that otherwise would be included within licenses already paid for by local stations [to ASCAP and BMI]''; and that ''when SESAC lures a composer from ASCAP or BMI, the ASCAP and BMI rates do not fall commensurately to account for the change.''
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Fact: Efficiency is in the eye of the beholder. The TMLC has informed SESAC that it has ''taken down'' ASCAP license fees by as much as $18 million from 2004 to 2005, and that it likewise intends to ''take down'' BMI license fees, in light of the fact that SESAC is the only PRO whose (admittedly minimal) market share is growing. SESAC, in turn, based upon the growth that the TMLC acknowledges, is seeking a $5 million increase in music use fees. The math indicates that the net result would be lower prices for the TMLC's members; the fee increase sought by SESAC because of its market share growth is far outweighed by the fee reduction already obtained by the TMLC based on the market share contraction of ASCAP. This is yet another example of how an innovative small business, permitted to function efficiently in a market populated by giants, can nevertheless effect benefits for both its songwriter and music publisher affiliates and its music customers. If the TMLC is complaining that its members have paid ASCAP and BMI for music licensing rights that belong to SESAC, it should address that matter with ASCAP and SESAC, not Congress. By the same token, if the TMLC believes that the license fees its members pay to ASCAP and BMI are too high in light their shrinking market share, again that would be a matter to discuss with ASCAP and BMI in negotiations or before their respective rate courts. SESAC merely seeks to be paid its fair share, without regard to the TMLC's possible ''overpayment'' to ASCAP and BMI. In any event, SESAC's gains in affiliate representation have actually benefited some local stations whose programming, purged of any ASCAP or BMI music, can now take advantage of the ASCAP and BMI per-program license fees and thereby obtain considerable savings. The TMLC's members, whose combined revenues are in the tens of billions of dollars, are sophisticated music users who well understand the licensing and affiliation practices of the PROs when they agree to fees in negotiations or rate court proceedings. They should not be heard to complain to Congress after the fact.
Page 102 PREV PAGE TOP OF DOC Statement: The TMLC states that ''[t]he corrosive effect of SESAC's licensing practices is further exacerbated by its inability and/or unwillingness to disclose the identities of all its affiliated composers and publishers and works under license in a comprehensive and timely manner;'' and that SESAC has not undertaken comprehensively to identify all of the works that may appear on local television, and without question enjoys the leverage that such lack of full knowledge on the station's part provides'' because the stations might ''unknowingly broadcast SESAC's music in commercials or unknowingly make incidental or occasional uses of SESAC music in other programming.''
Fact: SESAC provides continually updated lists of songwriters, composers, music publishers, and song titles to the public via its website (www.sesac.com) and by providing printed lists upon request. In fact, upon the TMLC's request, SESAC provided such a list to permit the TMLC to attempt to obtain direct licenses from copyright owners. (the TMLC was unsuccessful in seeking such direct licenses because its offer was deficient. Indeed, one SESAC composer of music for local news programming, who was approached by the TMLC, later told a TMLC member that the member's stations paid more for paper cups than had been offered for his music.)
As a practical matter, it is impossible for SESACor ASCAP and BMI, for that matterto give an instantaneous list of all of the music titles that it represents, much less a list of television programming in which such music will appear. Music, be it hit songs or television and movie cues, is being created and added to the SESAC repertory continuously. For example, there is no practical method for a PRO to learn in advance that a popular musical artist has been chosen to perform a song in SESAC's repertory on a live late night television talk show or a live morning news/information program. Moreover, SESAClike ASCAP and BMIalso represents musical compositions in ''music libraries,'' large catalogs of incidental music which are pre-licensed in their entirety for use by various music users, including television program producers, without further need for authorization. Again, SESAC has no method to monitor in advance all of the proposed uses of such music.
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It is a fundamental precept of copyright law that the burden to obtain permission to perform a copyrighted composition rests on the music user, not upon the copyright owner in the first instance to announce his or her rights under jeopardy of not being paid. If, for example, a television station accepts advertising money to air a commercial containing SESAC music, it behooves that station to obtain a license in advance to use the music for its profit. As the parties and the courts acknowledge, this is the raison d'etre for blanket licensing. The TMLC's implicit suggestion to the contrary would rewrite decades of clear legal precedent and negate exclusive rights granted under the Copyright Act.
Statement: The TMLC states that ''[l]ocal television stations . . . have no alternative to taking a SESAC blanket license.''
Fact: If local television stations do not choose the convenient and efficient alternative of entering into a SESAC blanket license, they can either license the music that they use directly from the copyright owner or screen their programming for any music that they conclude is not in the ASCAP or BMI repertory. In many instances, the local television station presumably could contact its related corporate music publisher to obtain such rights directly. In any event, the TMLC's suggestion that the sky is falling is unfounded; SESAC has never sued a single local television station for copyright infringement. It is in the business of music licensing, not music litigation.
Statement: The TMLC states that SESAC can ''demand supracompetitive rates'' because of its ability to ''use the hammer of copyright infringement damages to force a fee resolution to SESAC's satisfaction.''
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Fact: Again, for all of the TMLC's hyperbole, SESAC has never sued a single local television station for copyright infringement, although it is aware of at least dozens of television stations that are not licensed by SESAC. Litigation, which is an extremely expensive and inefficient method of conducting business, is not the general policy of SESAC, which believes in the efficiency of marketplace negotiations with its potential customers. The TMLC's constant drum beat concerning SESAC's purported ''supracompetitive license fees'' is baffling in light of the fact that the current fees were negotiated at arms' length by this sophisticated group of highly profitable companies in the midst of arbitration with SESAC, without any threat of a lawsuit. SESAC has every right to seek on behalf of its songwriters and music publishers whatever fees the marketplace will bear, and the TMLC's members presumably would not pay such fees to use SESAC music if it was not profitable for them.
Statement: The TMLC states: ''What makes SESAC so difficult to contend with'' is that it ''brazenly exploits the aggregated power of the copyright rights held by its composeraffiliates free of any third-party arbiter, such as a rate court or arbitration forum, to place a check on its license rates.''
Fact: Again, the TMLC's shrill complaint sounds like an indictment of the American free enterprise system. SESAC readily acknowledges that it desires fair compensation for the copyrights of its affiliated songwriters and music publishers; SESAC is in the business of maximizing the value of their copyrights, and has an obligation to its affiliates to do so. SESAC is proud that it has vigorously and for 75 years honorably represented its composers and music publishers without the need for sanctions or regulation. In America's vibrant economy, the presence of a third-part arbiter such as a rate court to ''place a check'' on marketplace pricing is the exception, not the rule. The TMLC appears to be advocating some sort of regulated economy for all musical rights (but presumably not for its own members' tens of billions of dollars in unregulated advertising revenues) under which the absence of governmental price regulation is considered a ''loophole.'' This viewpoint has been discredited worldwide in recent decades.
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Statement: The TMLC states that SESAC ''[r]efuse[s] to afford alternative dispute resolution mechanisms that can be invoked by either party in the event of a negotiating impasse.''
Fact: SESAC has already agreed to include such a provision prospectively in the new TMLC license currently being negotiated. Previously, SESAC did not refuse to afford such a provision; the TMLC, with all of its negotiating acumen, did not request it for its members. The unilateral right to arbitrate was a hold-over provision from the 1996 TMLC/SESAC negotiation, to which the TMLC agreed. When the TMLC ultimately sought mutual arbitration rights in 2005, SESAC immediately agreed. Significantly, however, the provision of mutual arbitration rights was one that was agreed to by SESAC during arms' length, marketplace negotiations between the parties and not, as the TMLC would have it, imposed upon SESAC by the government. This again provides clear evidence that, as to SESAC, the marketplace is working properly.
Statement: The TMLC states that SESAC ''[o]btain[ed] exclusive license authority from key radio and television composers, creating enormous hold-up potential in its licensing negotiations.''
Fact: When asked directly at the March 11 hearing whether SESAC affiliates have the legal right to license directly, the TMLC appeared unable, despite its written testimony, to provide a clear response. In fact, as a matter of course, SESAC obtains non-exclusive rights from its affiliated composers and music publishers and permits direct licensing by them. Several of SESAC's most noted songwriter and music publisher affiliates have issued and continue to have the ability to do so.
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Statement: The TMLC states that SESAC ''[r]efuse[s] to bargain over alternative forms to the single-price blanket license, whether in the form of a meaningful per-program license, a blanket carve-out license or the like.''
Fact: SESAC routinely issues many forms of negotiated custom licenses to meet the unique needs of its customers. It has done so in the restaurant industry, the airline industry, the health club industry, the retail industry, the hotel industry, the background/foreground music industry, the jukebox industry, the theme park industry, the racing industry, the sports industry, the health care industry, and others. Moreover, all of SESAC's major Internet accounts have custom licenses negotiated between the music user and SESAC without governmental intervention, to deliver only the particular rights needed by the music user at a price arrived at through negotiation.
Finally, it is curious that throughout the TMLC's diatribe, it continually suggests that its proposed regulations apply not only to SESAC, but to any other PROs not operating under a consent decree. As the Copyright Act acknowledges, there are only three such entities in the United States: ASCAP, BMI, and SESAC. There has not been a new PRO formed in the United States in over 65 years and, given the significant barriers to entry and the difficult environment of the music performing rights marketplace, there is no indication that any new PRO will be formed in the foreseeable future in the United States. This begs the question: ''Why does the TMLC go to such lengths to suggest that it is not attempting to single out SESAC here, but instead is seeking legislation that will govern any future PROs?'' Perhaps the TMLC is somewhat shy about asking Congress to enact what could be viewed as an unconstitutional bill of attainder, seeking legislation that singles out SESAC and imposes punishment for legal activity without benefit of trial. The TMLC's target here is not all theoretical PROs that may someday exist; it is SESAC, with whom it concurrently happens to be engaged in spirited negotiations in which SESAC has already voluntarily chosen the independent third-party dispute resolution that the TMLC claims is not available. Congress should not accede to such requests from a group whose combined revenues are in the tens of billions of dollars and who aggregate the bargaining power of 1,200 local television stations against one small American business contending with giants on all sides. The TMLC's sole objective is to reduce the cost of music licensing so that its members can increase their already prodigious profit margins at the expense of American songwriters and music publishers.
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SESAC is proud of its role in the American music industry, proud of the innovations and efficiencies that it has brought to the performing rights marketplace, and proud of the service that it provides to both its songwriter and music publisher affiliates as well as its music customers. SESAC epitomizes a success small American business that competes in a marketplace dominated by giants, and its business model should be fostered.
I have been working since the age of 16. Whether delivering groceries, working as a waiter throughout my college years, or running a PRO, I have always been in the business of buying or selling goods or services. I know one thing for certain: in the marketplace, the seller usually wishes he had gotten more for his wares and the buyer usually wishes he had paid less. That is the marketplace. Absent undue market share, leverage, and improper conduct (as has been the case with ASCAP and BMI), there is no need for a judicial or quasi-judicial apparatus to second guess arms' length agreements made by sophisticated parties.
Again, SESAC appreciates having been given the opportunity to explain to this Subcommittee what SESAC is, what it does, how it competes in the marketplace and why it should not be subjected to governmental regulation at the behest of one of its giant competitors and giant all-industry negotiating committees. Thank you.
SUPPLEMENTAL STATEMENT OF JONATHAN RICH ON BEHALF OF ASCAP (MAY 12, 2005)
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SUPPLEMENTAL STATEMENT OF JONATHAN RICH ON BEHALF OF ASCAP (MAY 17, 2005)
ADDITIONAL TESTIMONY OF THE TELEVISION MUSIC LICENSE COMMITTEE (TMLC)
SYNDICATION CONTRACT PROVISIONS
After my testimony before the subcommittee on May 11, 2005, Rep. Wexler asked for further clarification regarding my statement that television stations cannot eliminate or change the music in syndicated programming. I offer the following information in response to his inquiry.
In order to broadcast syndicated programs, television stations obtain individual licenses from syndicators. Included in all those licenses, in some form or another, is a standard provision that requires the television station to broadcast the program in its entirety without any changes. For instance, under the heading ''EXHIBITION REQUIREMENTS'' in a license currently in effect between a local station and one of the largest syndicators, the agreement provides, ''Licensee agrees to run the Programs licensed hereunder as delivered without any alterations . . .'' If Licensee breaches this provision, the syndicator is entitled, among other remedies, to seek to collect any remaining fees due under the license agreement and to seek injunctive relief.
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In another syndicated contract between a local television station and a syndicator, the language states, ''Licensee agrees that, unless otherwise specified, it shall telecast each Program licensed hereunder in its entirety, without deletion of Program content . . . or addition to Program content . . .'' Station network affiliation agreements include similar language. One network provision includes the following language, ''Licensee agrees to broadcast . . . all (Network) programs in their entirety . . . without interruption, deletion, addition, squeezing, alteration or other changes . . .'' This kind of language is included in these agreements in order to protect the creative integrity of the program taken as a whole, which is a separate creative unit and is separately copyrighted.
In addition to these contractual provisions, the programs are delivered in a format that would make it virtually impossible to physically delete the music from a program without also deleting the dialogue and other sound included in the program's soundtrack (Laugh track, sound effects, foreign-language translation if carried in the signal).
PREPARED STATEMENT OF KEITH F. MEEHAN, EXECUTIVE DIRECTOR, RADIO MUSIC LICENSE COMMITTEE (RMLC)
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PREPARED STATEMENT OF RUSSELL R. HAUTH, EXECUTIVE DIRECTOR OF THE NATIONAL RELIGIOUS BROADCASTERS MUSIC LICENSE COMMITTEE (NRBMLC)
Mr. Chairman and distinguished members of the Subcommittee, the National Religious Broadcasters Music License Committee (NRBMLC) appreciates the opportunity to submit this written statement to the record of your oversight hearing on music performing rights organizations in the United States.
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I am the Executive Director of the NRBMLC. The NRBMLC is a standing committee established under the auspices of the National Religious Broadcasters to represent the interests of religious, classical and other specialty format local radio stations that use relatively limited amounts of copyrighted music in their broadcast programming and that do not fit neatly into the all-talk or all-music categories that characterize mainstream radio. The ASCAP Rate Court determined in 1996 that the stations represented by the NRBMLC are not ''similarly situated'' with those represented by the mainstream Radio Music License Committee. The special character of the stations represented by the NRBMLC has since been recognized by all of the music performing rights organizations.
I submit this statement today to express the Committee's serious concerns about SESAC and its abuse of the market power it has gathered by aggregating and fixing the prices for many thousands of copyrighted works free from any oversight or regulation. The experience of the NRBMLC over the past ten years confirms and highlights many of the issues raised by Willard Hoyt of the Television Music License Committee when he testified before the Subcommittee on May 11. Specifically, the NRBMLC has learned through experience that:
SESAC functions as a seller with which all radio stations must deal. It thus exercises true monopoly power. Contrary to Mr. Swid's statements before the Subcommittee, it is effectively impossible for a radio station to eliminate all SESAC music from its broadcasts.
The absence of any neutral third-party fee-setting mechanism and SESAC's use of the threat of infringement liability as leverage permits it to extract supracompetitive fees from radio stations. SESAC's license fees are far in excess of the relative value of its repertory in relation to ASCAP and BMI, both of which are subject to rate court supervision that moderates but does not completely eliminate their market power.
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Contrary to the suggestion of Mr. Swid in his testimony before the Subcommittee, SESAC does not offer most licensees the ability to arbitrate license fees. In fact, the NRBMLC has requested fee arbitration with SESAC and has been flatly refused.
When SESAC imposed its most recent unilateral fee increases, SESAC refused even to negotiate with the NRBMLC.
SESAC has repeatedly refused to offer NRBMLC stations a license with a fee that varies depending on the amount of SESAC music actually performed. Thus, a station other than one that meets SESAC's definition of ''all talk'' and that performs any SESAC music at all (whether in commercials, as background, in syndicated programs or otherwise) must pay at least 55% of SESAC's full blanket license fee applicable to all-music radio stations, even if it only uses SESAC music incidentally or sporadically.
SESAC functions as a monopolist. It abuses rights granted under the Copyright Act to force music users to purchase licenses at prices far in excess of the value that would exist in a competitive marketplace. Negotiations have not worked. Most recently, negotiations have been refused. The Department of Justice has not acted to curb these abuses and to regulate SESAC in the manner that the other music performing rights organizations are regulated. Under these circumstances, the NRBMLC asks Congress to act, to create a reasonable and useable third party mechanism to determine license fees charged by music performing rights organizations that are not otherwise subject to a rate court mechanism. I present a fuller proposal in Part III, below.
Page 113 PREV PAGE TOP OF DOCI. BACKGROUND-SESAC AND MUSIC PERFORMANCE RIGHTS
The testimony of other witnesses submitted in this hearing describes the workings of the three music performing rights organizations and how ASCAP and BMI control between 90 and 95% of the copyrighted music performed on radio in the United States. Both ASCAP and BMI are subject to antitrust consent decrees designed to protect music users. Those decrees establish certain minimum standards for the operation of a collective music performing rights organization, including: (i) a neutral third party to determine license fees and terms; (ii) a procedure that allows music users to be licensed on an interim basis subject to later determination of reasonable fees; (iii) reasonable discovery to permit music users to obtain information necessary to establish their case for reasonable fees; (iv) prohibition on the securing of exclusive rights; and (v) the requirement to offer licenses with fees that vary according to the amount of the collective's music that is actually performed and that offer a genuine economic alternative to the flat-fee blanket license, in order to permit the development of a competitive market for direct licenses and licenses from other organizations. These safeguards do not wholly eliminate the ASCAP's and BMI's market power, but they do provide some control over it.
SESAC, although it controls a very small fraction of the nation's music, has the same monopoly power in its dealings with music users. Although the exact totals are not known, SESAC is believed to control many thousands of copyrighted compositions, including, notably, many jingles used in commercial announcements.
Contrary to the testimony offered by SESAC, it is not reasonably possible for a radio station to eliminate all SESAC music from its broadcasts. First, reliable and efficient information systems do not exist that would permit licensees to identify SESAC music in any economically reasonable way. Second, much music played on the radio is beyond the control of the radio station. For example, radio stations cannot control what is performed at live events the station is broadcasting. Further, the advertiser, not the radio station, typically selects the music in a commercial announcement. The only way to eliminate the music is to forego the ad entirely, which obviously represents revenue to the station far greater than the value of the jingle used in the commercial. Similarly, many of the religious stations represented by the NRBMLC sell ''block program time'' to third parties, who use the time to air programs that present their message to the public. Again, the station cannot control the choice of background and other music in such programs, and the station's only choice is to forego that program entirely, and to forego revenue far in excess of the value of any SESAC music that might happen to be in the program. In other words, SESAC is able to exploit the existing market structures, the lack of options available to radio stations and its aggregate market power to secure license fees far in excess of any competitive market value of the rights it controls.
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Third, even if it were possible for a radio station to eliminate some SESAC music from its broadcasts, it would still be forced to take a full-priced SESAC license on SESAC's terms unless it could eliminate all of the music controlled by SESAC. Thus, there is no incentive even to try to reduce the amount of SESAC music a station performs or develop competing sources of licenses. In this way, SESAC effectively forecloses (i) any direct licensing options, (ii) any control of SESAC music use, and (iii) any competition between SESAC and other suppliers of music rights.
II. SESAC AND THE NRBMLC
Until 1999, the primary focus of the NRBMLC was on ASCAP and BMI. Although broadcasters, including the NRBMLC, questioned SESAC's legitimacy and its unregulated operation, the fees sought by SESAC were typically low enough that they did not justify a sustained effort to challenge. However, a fee increase in 1995, followed by unilateral fee doubling over the period from 19992003, followed by unilateral fee increases for the period from 20042008 that again almost doubled SESAC's fees (taking into account the raw fee increases and the re-definition of markets and reclassification of stations), have made SESAC a major concern of the NRBMLC.
SESAC first sought to increase the fees it charged to the radio industry in 1995, after its acquisition by its current ownership group. The NRBMLC objected to this increase and entered into a ''standstill'' agreement with SESAC preserving the right of the stations then represented by the NRBMLC to pay on the pre-1995 basis.
A. The 19992003 Fee Doubling
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In 1999, SESAC unilaterally announced that it was more than doubling the fees charged to commercial radio stations, phased in over the period from 19992003. The NRBMLC again objected and questioned the basis for any increase. The Committee urged SESAC to offer a license with a fee that varied depending on the amount of SESAC music performed by the station. Using the stations owned by Salem Communications Corp. as an example, the NRBMLC demonstrated the disparity between SESAC's fees and its repertory, informing SESAC that under SESAC's pre-increase 1998 fee schedule, the Salem stations with an ASCAP and BMI per program license would pay SESAC, on average, 33% and 34% of their payments to ASCAP and BMI, respectively. Under SESAC's proposed fee increases for 1999 alone, the stations would have paid SESAC approximately 45% of the stations' 1998 ASCAP fees and 47.5% of the stations' 1998 BMI fees. By contrast, data developed by the NRBMLC during the negotiations demonstrated that the share of SESAC music performed on religious stations represented by the Committee was about 5%. The share of SESAC music performed on classical stations represented by the Committee was a mere .04%. Moreover, these percentages likely overstated the relative size of SESAC's repertory substantially, as they did not reduce SESAC's share to account for the number of SESAC compositions that also appeared in ASCAP's or BMI's repertory and were therefore already licensed under the stations' ASCAP and BMI licenses.(see footnote 3)
SESAC did not hesitate to use the threat of infringement liability as leverage in the 1999 negotiations. First, SESAC did not consider stations represented by the NRBMLC that were acquired after 1997 to be licensed under the standstill agreement, and continuously referred to their unlicensed status, despite efforts by the NRBMLC to have the stations licensed under the terms then applicable to Committee stations. Second, SESAC terminated the standstill agreement for all NRBMLC stations by letter of October 13, 1999, thereby putting the gun of infringement liability firmly to the head of all stations represented by the Committee.
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As a result of SESAC's tactics, particularly its threat of infringement liability, the NRBMLC had no choice but to accept a license under unsatisfactory terms. The parties agreed that stations operating under both the ASCAP and BMI per program licenses would be offered a 45% reduction from SESAC's newly raised fees. Stations not able to operate under both the ASCAP and BMI per program license were required to pay full SESAC fees, even if their format used sufficiently little music that the station could use one of the other organization's per program license.(see footnote 4) In any event, the fee paid by the station depended not at all on the amount of SESAC music performed.
B. The 20042008 Fee Increase
In late 2003, SESAC again unilaterally announced fee increases for the period 20042008 that, after taking into account the redefinition of markets and the re-classification of stations, again approximately doubled SESAC radio fees. This increase was to apply pro rata to stations on the ''Talk Amendment'' and to stations entitled to the 45% reduction from SESAC full fees on the basis of their use of ASCAP and BMI per program licenses.
On November 26, 2003, the NRBMLC wrote to SESAC questioning the appropriateness of the new unilateral increase, expressing a willingness to listen in good faith to SESAC's rationale and ''to discuss the matter with an open mind.'' The NRBMLC proposed a ''standstill agreement'' similar to those used in the past to permit time for discussions free from the threat of infringement liability.
Page 117 PREV PAGE TOP OF DOC SESAC took only one day to reject not only the standstill proposal, but also any negotiations whatsoever. On December 2, SESAC responded to the letter it had received on December 1, with the arrogance of the monopolist: ''When the NRBMLC and SESAC reached agreement in 2000 on economic benefits to be enjoyed by NRBMLC members, it was certainly not SESAC's intention to negotiate further accommodations with the NRBMLC at the end of each term of SESAC's radio industry license agreement.'' In other words, the new increases were advanced on a ''take it or leave it'' basis, with no possibility even for discussion.
The NRBMLC responded on January 23, 2004, again questioning the basis for the increases, requesting a license that would allow a station to control its SESAC fees by controlling its use of SESAC music or obtaining direct licenses, and requesting arbitration over the fee increase. SESAC again refused any use-based license. It also flatly refused any alternative dispute resolution process. The NRBMLC stations had no choice but to pay the increased fees under protest, or face ruinous liability for copyright infringement.
In response to SESAC's move, the NRBMLC undertook an informal research project to determine whether SESAC's share of music performed by NRBMLC-represented stations had, in fact, increased. The Committee examined 6,477 titles chosen from the playlists of stations it represents in seven genres (not including classical). Of those titles, 134, or 2.1% appeared in the SESAC database. Moreover, the Committee checked a further sampling of 37 of the titles identified by SESAC to see if the compositions were also licensed by ASCAP or BMI. Fully 23 of the 37 (62%) were also licensed by ASCAP and BMI, so a SESAC license would not be necessary to perform them.
SESAC's fees continue to represent a far greater percentage of total music licensing fees than the small size of its repertory would justify. Again, using stations owned by Salem Communications Corp. as an example, ten religious teaching stations that rely on a mixed format of talk with some music paid SESAC 15.4% of the sum of their payments to ASCAP and BMI in 2003. With SESAC's fee increases, that percentage is estimated to rise to 18% in 2005 and more than 19% in 2006. Five all-talk stations (that qualified for SESAC's Talk Amendment) paid SESAC 12.4% of the sum of their payments to ASCAP and BMI in 2003, with that percentage estimated to rise to 14.6% in 2005 and more than 15% in 2006.
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III. A REASONABLE SOLUTION
The NRBMLC believes it is essential to control SESAC's unchecked market power, price fixing and abuse of its aggregation of thousands upon thousands of copyrights. The best approach would be to adopt either a rate court or arbitration structure comparable to that which already exists for ASCAP and BMI. Specifically, Congress should enact legislation:
1. Providing for a neutral decision maker to determine disputes over the fees and terms applicable to SESAC licenses. This could take the form of granting jurisdiction to one or more federal district courts or establishing a right to arbitration when a music performing rights organization is not otherwise subject to a consent decree establishing a rate court.
2. Establishing that users are licensed upon application for a license, subject to a retroactive obligation to pay once reasonable fees are determined, to prevent SESAC from holding up a music user's business.
3. Ensuring that adequate discovery is available to permit the parties to learn and present relevant information. Experience has demonstrated that such discovery is essential to provide data necessary to evaluate the rights at issue against relevant benchmarks.
4. Prohibiting SESAC from acquiring exclusive rights or taking any actions to deter or discourage its affiliates from granting direct licenses.
5. Obligating SESAC to offer alternative forms of licenses with fees that vary according to the amount of the collective's music that is actually performed and that offer a genuine economic alternative to the flat-fee blanket license. Experience has demonstrated that performing rights organizations often are loath to offer such licenses on reasonable terms, so care needs to be taken. The provisions of ASCAP's Second Amended Final Judgment embody a number of important safeguards that should be considered.
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At the May 11 hearing, Mr. Swid argued that an arbitration obligation would be too expensive. That is nonsense. Arbitration would provide a check on the existing abuses and would create an even incentive on both parties to reach agreement on reasonable fees and terms that more closely approximate those that would pertain in a competitive market.
Thank you again for the opportunity to submit this statement. The NRBMLC looks forward to working with the Subcommittee in crafting legislation that will create a level playing field for music users and creators alike and that will preserve the integrity of the copyright laws.
LETTER FROM JOHN S. ORLANDO, EXECUTIVE VICE PRESIDENT, GOVERNMENT RELATIONS, NATIONAL ASSOCIATION OF BROADCASTERS (NAB)
SUPPLEMENTAL QUESTIONS FOR BROADCAST MUSIC INC. (BMI)
RESPONSES TO SUBCOMMITTEE QUESTIONS FROM BMI
SUPPLEMENTAL QUESTIONS FOR SESAC
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RESPONSES TO SUBCOMMITTEE QUESTIONS FROM SESAC
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SUPPLEMENTAL QUESTIONS FOR ASCAP
RESPONSES TO SUBCOMMITTEE QUESTIONS FROM ASCAP
SUPPLEMENTAL QUESTIONS FOR TELEVISION MUSIC LICENSE COMMITTEE (TMLC)
RESPONSES TO SUBCOMMITTEE QUESTIONS FROM TELEVISION MUSIC LICENSE COMMITTEE
(Footnote 1 return)
Neither I nor BMI have received any funds, grants, contracts (or subcontracts) from any federal agency or proceeding of any kind during this fiscal year or the preceding two fiscal years that would have any relevancy to this hearing or my testimony.
(Footnote 2 return)
To underscore the risks for users associated with refusing to take a SESAC license, in August 1998, SESAC commenced a copyright infringement action against a radio broadcaster in Pittsburgh in which SESAC sought, and was ultimately awarded, willful infringement damages dozens of times higher than the blanket license fees SESAC had requested from the station. See SESAC, Inc. v. WPNT, Inc., 327 F. Supp.2d 531 (W.D. Pa. 2003) (denying defendants' motion for a new trial).
(Footnote 3 return)
It is not uncommon where there are multiple writers involved in creating a composition for them to be affiliated with different performing rights organizations. Copyright law requires a user to have a license from only one copyright owner where there are multiple owners.
(Footnote 4 return)
Stations with an all talk format that did not contain any feature music programming, were entitled to use the ''All-Talk Amendment'' that SESAC offered to the industry at large, which charged 25% of the prevailing SESAC blanket fee. A station with no SESAC feature performances could not use this license if its programming contained feature performances of ASCAP or BMI music. Even this amendment compares unfavorably to the ASCAP and BMI per program licenses, which at the time typically charged mainstream talk stations roughly 15% of the corresponding blanket license fee, and which charged NRBMLC stations considerably less, as a result of the 1996 Rate Court decision.