On March 18, 2014, the ASCAP rate court issued an eagerly anticipated decision setting the rates paid by Pandora – arguably the most successful Internet music delivery service in the U.S. – for the use of ASCAP member repertoire over its service through 2015.In its decision, the rate court acknowledged increasing member concern over the disparity in royalties paid to music publishers versus their record label counterparts. However, the court declined ASCAP’s proposal to increase the rate to 5% of Pandora’s revenue by 2015, choosing instead to maintain the status quo by adopting a rate equal to 1.85% of Pandora’s revenue through 2015.

What could this mean for copyright owners and licensees? First, if the rate court’s decision stands on appeal, existing ASCAP members’ royalties from these types of services will remain essentially unchanged through 2015. The rate set by the rate court is identical to the percentage of revenue rate that Pandora was paying under a previous blanket license applicable to many Internet radio services.

Secondly, although Pandora was the only prospective ASCAP licensee in the proceeding, other similar large “webcasting” services making public performances on a “through-to-the-audience” basis may request these rates from ASCAP, to the extent the service is not already subject to an existing separately negotiated rate. Such “through-to-the-audience” licenses allow the licensee to deliver music to the public through certain third-party intermediaries, without the need for a separate license from those intermediaries.

The near-term impact of the decision aside, there could be a further reaching residual impact on musical works collective licensing. For example, there has been speculation that, as a result of dissatisfaction with the decision, ASCAP and certain of its members are seeking a U.S. Department of Justice revision to the ASCAP consent decree. The proposed revision could allow ASCAP members to essentially withdraw their membership with respect to certain licensees, thereby allowing them to negotiate direct licenses outside of the ASCAP licensing scheme.

If allowed, this could trigger a wave of member withdrawals and direct licensing across all categories of musical works licensees. This could ultimately lead to a more robust marketplace of rates that rate courts could use as benchmarks in future rate proceedings. However, such direct licensing could also lead to increased transaction costs for both copyright owners and licensees.

Separately, Congress recently introduced a bill to allow sound recording rate proceeding evidence to be introduced in future ASCAP and BMI rate court proceedings. If passed, this bill would be particularly beneficial for copyright owners because sound recording licenses generally trend higher for most licensees on a percentage of revenue basis.

In any event, both musical works copyright owners and potential and current ASCAP licensees would be wise to keep a close eye on these developments, given their potential long-term implications on the overall industry.

Article contributed by: Kyle Funn