Pandora, the popular music streaming service, just bought itself a South Dakota local radio station. This is a significant and shrewd legal move for Pandora, meant to enable the company to access a 2012 favorable licensing deal, which the largest Performing Rights Organizations (PROs), namely ASCAP and BMI, want to reserve for the traditional (terrestrial) radios only.
Outmaneuvered, BMI has filed suit.
Traditional radios and their online equivalent, like Pandora or Spotify, are not on an equal footing. Even when it comes to online music licensing, traditional radio stations benefit from preferential terms: they get low licensing fees for all their online activities, including online music streaming. Pandora has negotiated at long-length with BMI and ASCAP to be made part of that deal, which the PROs have so far refused to allow.
Consequently, Pandora has been bogged down by large licensing fees, which, in 2011, were reported to account for “roughly 50 percent of its total revenue.” This is a much larger proportion than that paid by its terrestrial competitors.
Pandora’s South Dakota Experiment.
To be sure, the South Dakota acquisition is strategic but not so much because of any latent willingness to conquer the traditional radio market. Instead, Pandora’s acquisition is nothing more than a legal move, comparable to a checkmate, made in response to a technical licensing deal from which it continues to be excluded.
BMI is understandably quite upset – hence the lawsuit.
In this writer’s opinion, BMI’s basis for differentiating between traditional and online radios does not seem particularly intellectually honest. In its complaint, BMI claims that:
(i) Overall, traditional radios are better customers than online music companies so rewarding the traditional radios with discounted price is fair (even though online companies are thereby discriminated against)
(ii) The price Pandora is asking is not fair (even though BMI offers those prices to traditional radios);
(iii) The advantageous deal was not meant to cover an online company “that happens to own a single radio station in a city with a total population that is less than 0.045% of Pandora ‘s online membership ” (even though Pandora squarely fits the deal’s basic terms).
Those are fairly weak arguments, which fail to articulate cogent reasons for treating Pandora differently, which BMI will have to persuasively do to win its case. Indeed, PROs are specifically forbidden from discriminating among similarly situated licensees.
Sadly, it is not the first time that a PRO runs into trouble when playing favorites. A long line of consent decrees, stretching all the way back to 1941, makes clear that PROs are prohibited from discriminating, in license rate or terms, among similarly situated licensees. (A consent decree is a “settlement that is contained in a court order.”)
At the end of the day, when the traditional and online radios engage in online streaming but that only the traditional radios get preferential rates, it is hard to argue that discriminatory pricing is not occurring. After all, the lower licensing rate, in essence, works as a subsidy, accruing to the sole benefit of traditional radios, to compete in the Internet streaming market.
We see this type of scheme, one that is advantageous to established actors and harmful to innovators, too often. As witnessed by the recent Airbnb and Uber cases, incumbents often utilize regulatory pull to protect their declining market shares, thereby weakening start-ups and disruptors.
But this time, the innovator, Pandora, is fighting hard and may well succeed in reforming a broken and highly technical system. In fact, Pandora’s acquisition is a brilliant move because by cloaking itself in the mantle of a traditional radio it effectively disables rule-makers from distinguishing between traditional radio and itself, thereby making it virtually impossible to treat Pandora differently without creating the appearance of arbitrary rule-making, which judges hate to do.
Guest author Steven Buchwald is a law clerk on Tim’s internet law team at Handal & Morofsky. Steven is currently a law student at the Benjamin N. Cardozo School of Law and will graduate in June 2014 with concentrations in intellectual property law and litigation.