Court: District Court, S.D. New York; May 28, 2015; Federal District Court
The Court, led by District Judge Louis L. Stanton, has issued an Opinion and Order regarding Broadcast Music, Inc. (BMI)'s petition under the BMI Consent Decree for a determination of reasonable fees and terms for an adjustable-fee blanket license (AFBL) to Pandora Media, Inc. for the period from January 1, 2013, to December 31, 2016. After a five-week non-jury trial, the Court concluded that BMI's proposed 2.5% revenue rate and associated terms for the license are reasonable.
BMI, as a non-profit performing rights organization, manages licensing for approximately 600,000 affiliates, holding rights to around 8.5 million musical compositions. The proposed blanket license fee of 2.5% is contingent on adjustments for direct licenses obtained by Pandora. The adjustment structure includes a minimum fee (floor) of 10% of the traditional license fee, an incremental administrative fee of 3% on the remaining amount, and credits for any performances of BMI works that are directly licensed or withdrawn. Additionally, BMI allows Pandora to deduct up to 15% of commissions to third-party advertising agencies from gross revenue calculations.
The Court emphasized that determining a reasonable fee involves referencing benchmarks derived from similar transactions, following precedents set in previous cases. This approach aims to establish fair market value, reflecting what a willing buyer and seller would agree upon in an arm's-length negotiation.
The BMI consent decree mandates non-discriminatory treatment of similarly situated licensees, as outlined in Article VIII(A). The Second Circuit clarified that when selecting a benchmark for rate setting, a court must assess the comparability of negotiating parties, the rights involved, and the economic conditions influencing both past and current negotiations. BMI holds the burden of proving the reasonableness of its requested fees; if it fails, the court will determine a reasonable fee based on available evidence. BMI's primary benchmarks for fees include five direct licensing agreements with major publishers, with rates between 2.25% and 5.85% of Pandora's revenue, alongside confirmatory benchmarks from licenses with Pandora's competitors, ranging from 2.5% to 4.6%. Pandora contests the 2.5% rate as unreasonable, arguing that its own agreements were made under non-competitive conditions, and cites its long-standing 1.75% rate with BMI as a more appropriate benchmark. Additionally, Pandora references its direct licenses with EMI and BMG, its ASCAP license, and BMI's agreement with the Radio Music License Committee, proposing a reasonable rate between 1.7% and 1.85%. Pandora also suggests an adjustment formula incorporating credits for certain performances and an advertising deduction of 9.5% to 15%. The BMI Consent Decree governs BMI's licensing operations, establishing the court as a rate-setting authority when BMI and applicants cannot reach an agreement on fees. Discrimination in rates is prohibited, except where justified by business factors or changing market conditions.
BMI and an applicant may seek court intervention to determine a reasonable license fee if an agreement cannot be reached, as outlined in Section XIV(A). The classification of Pandora’s product is pivotal, necessitating a review of online music sources, including programmed radio, customized radio, and on-demand services. Traditional radio, historically a one-to-many model, is evolving with internet technology allowing for one-to-one delivery, enhancing listener interactivity. Customizable internet radio services, like Pandora and iHeartMedia’s 'Create Station', enable users to influence their music experience. In contrast, on-demand services, exemplified by Spotify, allow users to select specific songs from vast libraries, with varying exposure to advertisements based on subscription status.
Pandora, launched in 2005, is the largest internet radio service in the U.S., boasting around 200 million registered users and controlling approximately 70% of the U.S. streaming music market. It is also the largest licensee of BMI music. Central to Pandora's operation is the Music Genome Project (MGP), which employs trained music analysts to evaluate songs based on up to 450 characteristics. This analysis allows Pandora to curate music recommendations tailored to user preferences by identifying songs with similar traits.
Pandora offers a catalog of approximately 2 million songs, significantly fewer than on-demand services like Spotify, which has about 20 million songs. Users can create personalized stations by selecting 'seeds' such as songs, artists, genres, or composers, and can create up to 100 such stations. Additionally, Pandora provides 690 pre-programmed 'genre stations.' Users can influence station content through a rating system—thumbs up increases song frequency, while thumbs down prevents future play. Users can skip songs a limited number of times daily and pause tracks as needed.
Pandora generates revenue through two primary channels: a free service funded by advertising, which accounts for about 80% of its revenue, and Pandora One, a subscription service that offers ad-free access. Despite significant revenue growth from approximately $19 million in 2009 to over $600 million in 2014, Pandora has not achieved sustained profitability, with music acquisition costs consuming over 60% of its revenue in fiscal year 2013. The company identifies terrestrial radio as its main competitor, as well as internet radio providers and on-demand services, but it struggles to monetize its product effectively, selling only 60% of its advertising inventory. To improve its competitive position, Pandora has expanded its advertising sales team and enhanced its availability across various mobile and consumer platforms.
Broadcast radio stations pay BMI approximately twice the fees per listener performance compared to Pandora, while Spotify pays about eight times as much as Pandora. BMI first introduced the BMI Web Site Music Performance Agreement in 1995, which charged websites either 1.75% of gross revenues or a calculation based on music-related revenues. Pandora entered this agreement on June 30, 2005, paying the 1.75% rate. However, by 2011, BMI deemed this rate inadequate for emerging streaming services and introduced the Music Service Web Site Music Performance Agreement at a 2.5% rate. In 2012, this was replaced by the BMI Digital Music Service Music Performance License Agreement, which maintained the 2.5% gross revenue rate and defined 'Music Service' to encompass internet and mobile transmissions. After failed negotiations, Pandora terminated the Form Website License on October 24, 2012, and applied for a new license under the BMI Consent Decree in December 2012. BMI subsequently offered a higher rate for 2013-2014, but further negotiations failed, prompting BMI to seek court intervention for a determination of reasonable license fees, proposing 2.5% of gross revenues as reasonable.
Simultaneously, major music publishers expressed dissatisfaction with the traditional performance rights fee system, arguing that fees received by BMI and ASCAP from Pandora did not reflect fair-market value. This disparity became more pronounced as digital services paid far higher fees to record companies for sound recording rights compared to the lower fees for public performance rights. The distinction between public performance rights for compositions and sound recordings was emphasized, particularly following the 1995 Digital Performance in Sound Recordings Act, which introduced public performance copyright for sound recordings.
Section 114 designates SoundExchange as a non-profit responsible for collecting and distributing royalties for the performance of sound recordings to copyright holders, specifically targeting digital services which are mandated to pay these royalties as per 17 U.S.C. 106(6). The fees for sound recordings are calculated at a per-performance rate, significantly exceeding the percentage-of-revenue fees paid to performance rights organizations (PROs) like ASCAP and BMI; for instance, Pandora pays roughly 60% of its revenue to record companies but only about 4% to the PROs.
From 2011 to 2013, major music publishers, including Sony/ATV, EMI, Universal Music Publishing, and BMG, opted to withdraw from ASCAP and BMI the rights to license their compositions for digital services, aiming for higher licensing rates. Sony CEO Marty Bandier indicated that this move would facilitate free market negotiations, while UMPG CEO Zach Horowitz noted the challenges faced under the consent decree constraints of ASCAP and BMI, advocating for direct negotiations to ensure fair compensation for songwriters.
EMI was the first to withdraw its licensing rights from ASCAP effective May 1, 2011, followed by Sony's notification to ASCAP in September 2011, initially set for April 1, 2012, and later extended to December 31, 2012. After acquiring EMI's catalog, Sony also informed BMI of its intent to withdraw rights effective January 1, 2013. BMI ultimately conceded to the withdrawals, modifying agreements to exclude the licensing rights to new media services. Consequently, Pandora, as the main digital performer of these compositions, was forced to negotiate directly with publishers for performance rights, losing the ability to perform under the more favorable blanket license rate of 1.75%. Between March 2012 and July 2014, Pandora successfully entered into seven direct licenses with publishers for these performances, beginning with negotiations with EMI shortly after its withdrawal from ASCAP.
Key terms for the license fee were established in July 2011, but the licensing agreement was not signed until March 2012. During negotiations, Pandora did not request a list of EMI works withdrawn from ASCAP, which would limit its performance capabilities. On March 16, 2012, Pandora signed a license with EMI for a rate of 1.85% of its prorated gross revenue for EMI's withdrawn ASCAP works, effective January 1, 2012.
In October 2012, following Sony's notification to BMI about withdrawing its catalogs, Pandora began negotiating a direct license with Sony. The license negotiated with EMI in March 2012 covered only EMI's ASCAP works, while the new agreements addressed Sony's ASCAP and BMI works. Negotiations were led by Peter Brodsky from Sony and Robert Rosenbloum from Pandora, who had a history of successful collaborations.
On November 1, 2012, Rosenbloum expressed concerns about the potential loss of repertory if rates were not agreed upon with Sony and requested a catalog list and rate proposal. Brodsky recalled an oral proposal from Sony at a meeting on November 30, 2012, for a 5% revenue rate. Communication continued into December 2012, with Brodsky seeking feedback on their proposal.
Pandora’s general counsel, Delida Costin, intervened on December 17, 2012, reiterating the request for a list of withdrawn works, which surprised Brodsky given the impending deal closure. Rosenbloum clarified he had previously requested the list from Sony, but it was not provided. On December 18, Brodsky sent a draft term sheet, leading to a binding agreement on December 21, 2012, at a rate of 5% of Pandora's gross revenue, effective January 1, 2013, which included terms for both Sony/ATV and EMI catalogs.
Judge Cote evaluated Brodsky's credibility in negotiations related to Pandora's licensing, noting that Brodsky claimed Sony did not provide a list of works because Rosenbloum indicated they were close to finalizing a deal; however, Rosenbloum denied making such a statement. Despite this, Judge Cote found Brodsky credible, citing their extensive negotiation experience and personal rapport, which suggested no ongoing disputes regarding the rate, and noted Brodsky's immediate communication with Rosenbloum after receiving an email from Ms. Costin.
In February 2013, Pandora was informed that UMPG would withdraw its new media licensing rights from ASCAP effective July 1, 2013. Following a meeting on March 22, 2013, UMPG proposed an 8% industry-wide rate for a direct license covering the withdrawn ASCAP works, which Pandora sought to facilitate with a list of affected works provided under a Non-Disclosure Agreement (NDA). The parties disagreed on the NDA's terms regarding its use for take-down actions. After a May 21 meeting, negotiations stalled.
On June 11, 2013, Pandora purchased a radio station and sought partial summary judgment against ASCAP, arguing that new media withdrawals did not change ASCAP's licensing scope. In a June 13 email, Pandora’s assistant general counsel proposed to accept UMPG's 7.5% revenue rate temporarily, pending court rulings. UMPG agreed to this approach for six months, leading to a license effective July 1, 2013, at the agreed rate. Subsequently, on September 17, 2013, Judge Cote ruled in favor of Pandora, stating that ASCAP publishers could not withdraw works as per the consent decree.
On December 18, 2013, it was determined that the BMI Consent Decree mandates BMI to license all compositions in its repertory to applicants. If music publishers withdraw their digital rights from BMI, those compositions are removed from BMI’s repertory, preventing BMI from licensing them to platforms like Pandora. This withdrawal results in the publisher losing access to all BMI licensees for the affected compositions.
On November 5, 2013, Pandora’s outside counsel, Steinthal, contacted Sony/EMI, requesting information on works withdrawn from BMI’s licensing authority, to decide whether to exclude those works from its service. On November 4, 2013, Pandora’s assistant counsel, Harrison, sent a similar request to BMG management. The licenses between Pandora and Sony/EMI were set to expire on December 31, 2013. On November 8, Sony’s outside counsel proposed options for a new one-year direct license or another arrangement starting January 1, 2014, contingent on the resolution of the publishers' ability to exclude Pandora from BMI works.
Harrison sought discussions on these proposals and requested a list of withdrawn works, which Sony committed to providing in time for Pandora to adjust its service. Sony sent this list on December 2, 2013. On December 9, Pandora offered a quarterly flat fee of $500,000 to perform Sony/ATV and EMI music, which Sony rejected on December 12, countering with a "Covenant Not to Sue Agreement" requiring $2.25 million for the first two quarters of 2014, with pro-rata adjustments based on revenue for the latter quarters and a terminable clause for Pandora. A draft of this agreement was sent to Pandora on December 19, confirming the withdrawal of Sony and EMI’s catalogs from BMI’s repertory effective January 1, 2014. Following this, on December 24, Steinthal requested BMI provide Pandora with the electronic Repertoire File for the withdrawing publishers.
On December 26, 2013, BMI’s outside counsel, Atara Miller, indicated that Pandora's request for information should be directed to the publishers. The following day, Steinthal requested that Sony provide the information he had previously sought or direct BMI to do so. On the same day, Harrison communicated with Pandora management, recommending acceptance of Sony’s proposal for a $2.26 million agreement for the first quarter. By December 30, 2013, Harrison sent Brodsky an executed agreement reflecting the terms of Brodsky’s earlier proposal, with a BMI-adjusted rate of 5.85% for the 2014 calendar year for the Sony and EMI catalogs.
Regarding the UMPG license, which was set to expire on January 1, 2013, UMPG's outside counsel, Glenn Pomerantz, expressed willingness to negotiate a direct license in response to an earlier email from Steinthal. He offered to provide a list of BMI compositions if Pandora signed a Non-Disclosure Agreement (NDA), which would allow Pandora to use the list for takedown purposes if negotiations failed. On November 12, 2013, UMPG sent the NDA, which Pandora signed and returned on November 25, 2013. UMPG then provided a catalog list on November 27, 2013.
On December 4, 2013, Harrison informed Kokakis that Pandora was still evaluating UMPG's license proposal, submitted on November 20, which included a percentage of Pandora's UMPG-Adjusted Revenue and a Most Favored Nation clause. Pandora ultimately rejected UMPG’s proposal on December 9, 2013. Harrison indicated that Pandora intended to use the provided repertoire information to remove relevant songs by year-end and proposed a 90-day agreement with UMPG to avoid infringement action in exchange for $200,000. Kokakis rejected this proposal on December 18, 2013.
Pandora expressed disappointment over UMPG's refusal to negotiate a license proposal and decision to halt discussions. On December 24, 2013, Steinthal requested a "repertoire file" of UMPG's withdrawn works from BMI, which was denied, prompting Steinthal to forward the request to UMPG, who also declined, citing an existing catalog list provided to Pandora. On December 26, 2013, Harrison attempted to revive UMPG's licensing proposal, which included a one-year term with a possible second year, a guaranteed minimum fee of $5 million for both years with adjustments based on Pandora's gross revenue, and a Most Favored Nation clause. Kokakis concurred with the general terms but clarified specifics regarding revenue adjustments and the MFN clause.
Later, Harrison communicated to Pandora's senior executives a recommended headline rate of 8.5% industry-wide, with an effective rate of 4.25% specifically for UMPG’s BMI repertoire. He emphasized that the 8.5% rate reflected willingness to pay for major publishers, not for smaller ones, as seen in their rejection of a deal with BMG at 10%. On December 29, 2013, Harrison confirmed he had the go-ahead from executive management to proceed, and on December 30, Pandora signed a licensing agreement with UMPG at an 8.5% rate for BMI music.
In parallel, Pandora was in negotiations with BMG, which proposed a 10% revenue rate. BMG warned that if negotiations failed, Pandora should remove its content. Harrison suggested rejecting BMG’s proposal and removing their content, indicating he viewed BMG's value as equivalent to what Pandora was already paying BMI. Ultimately, Pandora decided to remove BMI works controlled solely by BMG from its service after determining that BMG spins accounted for only 1% of total spins on Pandora, making their removal negligible unless associated with a well-known artist's entire catalog.
Removing both UMPG and BMG accounts for 18% of listening, with BMI contributing 9% of current listening. A 1% to 3% drop in total listening hours is anticipated within 28 days of this removal. To execute the BMG take-down, Pandora utilized a catalog list provided by BMG and third-party services such as Lyr-icFind, ASCAP, and BMI databases, completing the take-down on December 30, 2013, shortly before BMG withdrew from BMI on January 1, 2014. BMG and BMI later agreed on March 31, 2014, to suspend BMG's withdrawal until December 31, 2014. Following this, an in-person meeting occurred on March 20, 2014, to discuss a new licensing agreement, leading to a two-year flat fee contract on July 28, 2014, with payments totaling $6.1 million, reflecting a headline rate of 1.81% of Pandora's gross revenue.
In early 2014, other music publishers including Sony, EMI, UMPG, and BMG entered into suspension agreements with BMI to delay their withdrawal from new media licensing for set periods. Specific agreements included UMPG's suspension until December 31, 2015, and similar arrangements for Sony and EMI. BMI has also negotiated licenses with competitors like Spotify, Rdio, Rhapsody, and Apple iTunes Radio between 2010 and 2013, with rates varying from 2.5% to 4.6%. The Apple iTunes Radio license, signed in 2013, includes a Most Favored Nation clause, aligning its rate with industry standards. The evidence suggests that BMI's proposed license fee of 2.5% for Pandora's gross revenue is reasonable and on the lower end compared to recent license agreements.
Direct licenses between Pandora and Sony/UMPG for 2014 are highlighted as the most relevant benchmarks for assessing competitive market rates. Evidence indicates that the prevailing BMI and ASCAP rates were perceived as inadequate, prompting publishers to withdraw from the PROs, believing they could negotiate better rates in the free market. Pandora aligned with this view, investing significant resources to maintain the old BMI rate rather than negotiate directly with copyright-holding publishers.
In June 2013, Pandora acquired a radio station to qualify for the 1.7% RMLC rate, and after a court ruling in December 2013, sought clarification that the ruling would not impact existing interim licenses. An internal email chain from late December 2013 reveals Pandora executives' strategy regarding new UMPG and BMG licenses. They planned to execute a 90-day agreement with SATV/EMI for $2.25 million and negotiated terms with UMPG that included a one-year contract with a potential extension, a headline rate of 8.5% with an effective rate of 4.25% for UMPG’s BMI repertoire, and revenue-based floors with true-up provisions. They decided against BMG's proposal for 10% of revenue, citing lower incremental costs for UMPG and strategic considerations regarding content management.
UMPG has expressed disinterest in a covenant not to sue and remains firm on the $5 million guarantee. Zach anticipates projected revenues exceeding $900 million next year, with some analysts estimating up to $1.5 billion, and he believes UMPG accounts for about 22% of spins, higher than the previously assumed 15%. Although Zach initially proposed linking rates to sound recording royalties, he has since abandoned that idea.
BMG, which began as a joint venture in 2008 and is now the fifth-largest publisher globally, has expanded through acquisitions of independent publishers. Laurent Hubert, President of BMG North America, serves on the ASCAP board.
In ongoing discussions, Brian expresses confusion about the effective rate being paid, suggesting that it is based on the assumption that UMPG constitutes 15% of spins, with half classified as BMI, leading to an effective rate of 8.5% or 4.25% for BMI. He questions the validity of this assumption and whether they could spin UMPG content more than 15%. Chris confirms that the assumption of an even split between ASCAP and BMI for UMPG is reasonable, noting that UMPG is likely over 15% of spins but that setting the floor at 15% allows for reduced exposure to higher royalty rates. The strategy includes spinning UMPG up to $5 million in royalties before ceasing play altogether. Chris clarifies that the 8.5% rate is not a fixed rate for all publishers but rather a figure they are willing to pay for a major publisher like UMPG.
A refusal to pay an 8.5% royalty rate to smaller publishers is highlighted, referencing a previous rejection of a deal with BMG for 10%. In the coming year, smaller publishers will be approached with an ultimatum to lower rates for their repertoire to be played. The experience at DMX is cited, where a direct licensing strategy led to a significant reduction in royalty rates, resulting in a Judge's determination of a BMI blanket license rate at $19. BMG initially proposed a royalty structure of either 10.5% of revenue or 22% of sound recording payments, which was rejected. A subsequent offer of 10% (effectively 5% for BMI) was countered with a BMI rate of 1.75%. Discussions among Pandora executives reveal a consensus on potentially offering BMG a deal at 6% with a minimum guarantee and options for renewal, despite concerns over BMG's demands being unreasonable. Suggestions were made to consider a lower percentage, with a preference for a deal that aligns closely with current rates. The executives express a desire to publicly position themselves against BMG’s substantial increase request, emphasizing that BMG withdrew from negotiations despite a reasonable offer.
Brian suggests postponing discussions on the publisher update until after January 1, 2014, to potentially secure a better offer later, while maintaining the current rate of 1.75%. The excerpt highlights that once the rate negotiations were freed from the control of the rate courts, free-market licenses showed significant increases, with Sony and EMI licenses for Pandora rising from a BMI-adjusted rate of 2.25% in December 2012 to 5.85% in December 2013. UMPG licenses also increased from 3.38% in June 2013 to 3.83% in December 2013.
Pandora argues it should be treated similarly to broadcast radio stations represented by the Radio Music License Committee (RMLC), which pay a rate of 1.7%. Kennedy's trial testimony claims a 2.5% rate is unreasonable as many competitors pay lower rates under RMLC. Although Pandora competes for listeners and ad revenue against traditional radio, it differs significantly; unlike AM/FM stations, Pandora allows users to provide feedback and customize their music experience but does not offer on-demand song selection like services such as Spotify. Pandora plays about fifteen songs per hour compared to the eleven of terrestrial radio and has a smaller catalog of about 2 million songs versus Spotify's 20 million.
Pandora’s 2014 10-K report indicates competition extends beyond music to platforms like Facebook and Netflix, with direct competitors including iHeartRadio and iTunes Radio. Given these distinctions, Pandora's categorization for rate-setting remains complex and does not fit neatly into established categories.
Pandora's situation is characterized by a blend of features from various music services but does not fit neatly into any specific category. CEO Kennedy expressed skepticism about consumer perception of Pandora as a radio service, emphasizing its unique identity. The RMLC licenses encompass both over-the-air and digital broadcasts from over 10,000 terrestrial radio stations, many of which now also stream their content online. However, Pandora's claim to benchmark its rates against iHeartMedia’s customized radio service is flawed, as iHeartMedia operates numerous terrestrial stations and its internet offerings were minimal during the relevant licensing negotiations.
Pandora's argument regarding the absence of specific works from Sony and EMI, which it contends led to potential copyright infringement liabilities, drew attention from Judge Cote. She found the 2012 Pandora-Sony and 2013 Pandora-UMPG agreements unsuitable as benchmarks. Nonetheless, the current case presents a more comprehensive record than what was available to Judge Cote, including subsequent agreements and evidence over a longer timeframe. This suggests that Pandora's claim of needing to avoid copyright infringement was primarily driven by legal counsel rather than business concerns. Internal communications among Pandora's executives revealed that their main focus was on retaining important music catalogs rather than avoiding copyright issues. Overall, the evidence indicates that Pandora's primary motive in negotiations was to secure key works vital to its business operations.
In the second quarter of 2014, Sony and EMI held a 32.2% share of the top 100 songs played on U.S. radio, while UMPG and BMG accounted for 15.2% and 6.5%, respectively, resulting in a total of 53.9% of those performances. Kennedy's declaration to the FTC indicated that Pandora could survive without Sony's catalog but could not thrive without the combined Sony and EMI catalogs, which contain many popular songs and significant music publishing rights in the U.S. Should Sony acquire EMI and withdraw these catalogs from Performance Rights Organizations (PROs), Pandora would be forced to enter direct licenses at potentially higher rates.
Evidence presented by BMI's expert, Dr. Cremieux, suggested that the negotiations were influenced by business considerations rather than legal factors, as there was no correlation between the notice period for negotiations and the rates agreed upon. The transactions were characterized by a free market environment outside of litigation constraints, validating the agreements made by Sony and UMPG in December 2013 as reasonable benchmarks. Dr. Keith Waehrer, another expert, argued that BMI conspired with publishers regarding their return to BMI, although this notion lacked factual relevance in the current context. Overall, the negotiations were driven by commercial motives, not merely concerns over copyright infringement.
BMI is characterized as a non-competitor to music publishers, acting solely as an agency for marketing their music. Pandora aimed to obtain licenses for the catalogs of Sony and UMPG before the year's end, as these catalogs represented a significant portion of its offerings. Since BMI no longer had access to Sony and UMPG’s catalogs, it had no competitive product for Pandora, which already held a blanket license for the remainder of BMI’s repertory. BMI’s licenses with competing platforms like Apple’s iTunes Radio and Spotify indicate that market rates are approximately 2.5%.
Pandora proposes a license rate between 1.7% and 1.85%, drawing from its existing agreements with BMI, EMI, and BMG, as well as the ASCAP-Pandora license and the 2012 RMLC license. The BMI Form License Agreement from 2005 is deemed outdated, contributing to publishers withdrawing their catalogs and establishing the 1.75% rate as insufficient under current market conditions. BMI’s lack of termination of its license from 2005 to 2011 was a strategic decision rather than an acknowledgment of the rate's appropriateness.
The 2012 EMI-Pandora deal is considered less relevant due to subsequent direct licenses negotiated by Sony and EMI with BMI, which established higher rates. The RMLC license is also deemed inappropriate as a benchmark since Pandora operates differently from radio entities. Similarly, the ASCAP-Pandora license does not reflect current market conditions due to its reliance on outdated data. Finally, the Pandora-BMG agreement from July 2014 is not considered a viable benchmark either.
BMG's agreement with Pandora provides significant ancillary benefits that extend beyond its fixed-dollar fee structure. This arrangement encourages greater spins of BMG music on Pandora, subsequently increasing sound recording fees for BMG and promoting its artists and writers, which was acknowledged by both parties during negotiations. Additionally, the agreement releases Pandora from any potential claims BMG may have had prior to July 1, 2014, including copyright infringement claims from that period, although the value of such claims remains unquantified. At the time of the agreement, BMG was affiliated with BMI, allowing Pandora to perform its catalog at a court-established rate.
The agreement's flat-fee structure was crafted with potential litigation benchmarks in mind, and it aligns with BMI’s AFBL (All-Formats Blanket License) framework. While BMI and Pandora generally agree on the AFBL structure, they dispute three specific components: the inclusion of a floor fee, an administrative fee, and adjustments related to withdrawn works. The floor fee represents the inherent value of the AFBL independent of music performance rights and remains constant regardless of direct licensing. BMI's proposed 10% floor fee of the blanket license accounts for any value decrease due to publisher withdrawals, which is lower than the 17% affirmed in a previous case (BMI, Inc. v. DMX, Inc.).
Currently, there are no indications of significant publisher withdrawals that would drastically reduce BMI's repertoire. It appears that publishers recognize the impracticality of withdrawing works from BMI's offerings and have opted to maintain their participation. The existing crediting mechanisms are deemed sufficient until a more extreme scenario arises. Additionally, BMI seeks an incremental administrative fee of 3% of the traditional blanket fee.
The Court affirmed the administrative fee associated with BMI's AFBL, recognizing that it incurs higher administration costs than its traditional blanket license due to the need for tracking direct licenses and processing credits for Pandora. Allocation of these costs to Pandora is deemed reasonable. BMI's proposed crediting mechanism allows Pandora to receive performance-based credits for BMI-affiliated compositions that are directly licensed by Pandora or withdrawn from BMI's repertory, although Pandora contests this arrangement in specific cases where no direct license with a withdrawn publisher is established. Under BMI's system, credits apply to co-owned works where one publisher is withdrawn, ensuring that Pandora is not charged for performances of music no longer covered by BMI. The Court supports using current performances for calculating these credits for accuracy.
BMI’s advertising deduction proposal, offering a 100% discount on advertising costs paid to others (up to 15% of total), is upheld. Pandora's request to include its internal advertising costs is rejected due to BMI's lack of control over these costs, which would complicate accounting without economic justification.
Regarding the license term, BMI's proposal for a four-year term is deemed reasonable compared to Pandora's request for five years. The shorter term allows for timely reevaluation of licensing amidst the rapidly evolving online music landscape. The Court grants the petition, establishing the BMI-Pandora license rate at 2.5% of revenue for 2013-2016, adopting BMI's AFBL formula, and entitling Pandora to an advertising agency commission deduction of up to 15% of third-party costs.
