The Operating Dynamics Behind ASCAP, BMI and SESAC, The U.S. Performing Rights Societies
by Barry M. Massarsky
Existing copyright collective organizations such as ASCAP, BMI and SESAC have developed, on behalf of their music rights holders, intricate licensing and distribution mechanisms that may augur the intellectual property safeguards confronting the emerging interactive multimedia community.
The following discussion highlights the essential operating dynamics utilized by the American Society of Composers, Authors and Publishers (ASCAP), Broadcast Music Inc. (BMI), and the Society of European Stage Authors and Composers (SESAC), to represent the public performance copyright interests on behalf of music copyright holders. This discussion will first concern itself with the role of the collective societies in licensing, identifying and distributing copyrighted musical works and then contrast the differences, when apparent, among the agent cooperatives. Second, parallel interests to networked information and multimedia will be provided, including the role of proxy evaluations as an alternative measurement device.
By definition, the intellectual property concerns of multimedia properties are far more expansive than the traditional borders affecting music licensing interests. However, the business of copyright protection for music licensing rights holders has roots dating back to 1914 when the original concept was devised to protect and administer public performance rights. The resulting entity, ASCAP, provides an appropriate window for the development of new copyright collective initiatives. ASCAP's competitors in the marketplace, BMI and SESAC, provide further insight into the learning process.
The following treatment provides an overview from which to judge this industry's relevance to the emerging multimedia network.
At this time, the licensing strategies for the three U.S. performing rights societies are similar. The bulk of the licensing effort concerns the application of the blanket license. The blanket license allows the music user unlimited access to the collectives' licensed repertory, for a contractual period of time, in exchange for a profit participation in the music user's economic growth. The following discussion will break down each component part of the aforementioned sentence.
The blanket license allows the music user...
The music user is defined as any organizational entity that wishes to use music, in a public performance form, for a commercial or non-commercial business purpose. This broad characterization includes radio stations, local commercial television stations, network television, public radio and television stations, cable television, background music services such as MUZAK, bars, grills, skating rinks, baseball stadiums, funeral parlors, etc.
ASCAP defines its music user market through strategic litigation initiatives. A case in point would be clothing stores such as the Gap chain. ASCAP defined this relatively new market as commercial establishments deploying industrial radio speakers for use as a sales inducement. These stores use the music from already-licensed radio stations for a different motive; the music is used not as a source of private entertainment but rather to stimulate a sales environment for the product. ASCAP's legal forces prevailed on the "double-dip" licensing concept. BMI followed ASCAP's market lead.
..an unlimited access to the collectives' licensed repertory...
The concept of unlimited access to the licensed repertory is the heart of the blanket license strategy. ASCAP and BMI (and to a lesser extent, SESAC) maintain that the ease of access accommodates the music user's need to gain instant permission for copyright use and thus provides a true service to the licensee community. Blanket licensing, according to the societies, eliminates the structural impediment resulting from transactional licensing. Most importantly, it allows ASCAP, BMI and SESAC to minimize their administrative costs in providing a licensing structure for the music user community. As we shall see later, these virtues are now seen differently by the music user in a vastly changed, technologically-enhanced, and cost-containment conscious entertainment economy.
...for a contractual period of time...
The significance of this statement is twofold: (1) it ties up the licensee with the repertory for a period of time, allowing the collectives to enjoy a stable economic relationship; (2) it ties up the copyright holder to the individual collective representing its works. ASCAP refers to this phenomenon as "licenses in effect." When ASCAP negotiates a license agreement with a user group (traditionally, broadcasters and other music user types form negotiating committees that represent the industries' interests), it promises to that group that it represents the song catalogs owned by its writer and publisher members. ASCAP's membership rules allow a writer or publisher to resign at a fixed point each year, but the songs attributable to the catalog, as represented to the music user in a negotiated agreement, must stay with ASCAP through the duration of the agreement with the music user.
...in exchange for a profit participation in the music user's economic growth.
The blanket license calls for a negotiated fixed percentage of the music user's gross revenue (allowing for some deductions) as consideration for the unlimited access doctrine. Each industry group negotiates with the performing rights societies based on its valuation of the use and importance of music in its operation.
The most intensive music user, the radio broadcasting industry, pays the highest rate (approximately 2.5% of gross revenues) for each of the 8,500 stations currently in operation. This fixed rate facilitates a simpler enforcement strategy by eliminating the need for customized agreements with each station. The societies regularly audit the reported financial disclosures to determine the gross revenue base. The local television industry negotiates similarly but in recent years has been battling ASCAP for a viable alternative to the blanket license. All other music users are also licensed through a percentage-of-gross formula. The glaring exception had been the commercial television networks which had been paying on a flat sum basis. Pending the decision of a recent rate determination hearing between ABC and CBS against ASCAP, this flat sum licensing practice may end soon.
ESTABLISHING A VALUATION BASIS FOR MUSIC LICENSING
ASCAP, BMI and SESAC negotiate the value of their licenses in such a similar approach that the ASCAP approach is representative of the efforts for all three performing rights societies.
ASCAP's licensing relationship with significant music user groups is predicated on an historical base line which has evolved over the last five decades. Once ASCAP established market legitimacy through a series of strategic infringement lawsuits successfully litigated against the radio broadcasters, the subsequent licensing agreements with the radio industry, constructed during the 1930's, allowed for a subjective valuation of the significance of music in broadcast. The negotiation amounted to "horse trading" between the users and the creators of the intellectual property.
As the license negotiation practice evolved, ASCAP did an economic analysis of financial data pertaining to the anticipated growth of the radio industry. ASCAP argued that music was an essential component of the profit-seeking broadcasters and thus, license fees should be linked to the industry's gross revenues. The broadcasters were more accustomed to a variable rate structure for securing rights with creative talent such as writers, actors, directors, etc. The notion of a creative element sharing in a revenue stream was anathema to their interests. To this day, broadcasters are irate about the idea that ASCAP is a silent partner in the ownership of a radio or television station.
As these license agreements progressed over time, ASCAP would monitor the use of its protected music on licensee stations and when positive trends were apparent, insist on an increase in the fixed percentage of gross revenues. Other macroeconomic conditions such as inflation required an indexing of the rate into the 1970's.
It is fair to judge that the relationship between the user and the creator became strained. Recently, the broadcasters have begun to exercise some of their contractual rights in seeking an effective alternative to the blanket license:
THE PER-PROGRAM LICENSE
ASCAP and BMI offer a per-program license for music users that require minimal access to their repertories. Typically, all-talk or all-news radio stations have been the prime beneficiary of such a licensing arrangement. Recently, local television stations have won the right to a per-program license for syndicated programming aired on non-network hours.
In practice, the per-program license has been an inefficient alternative to the blanket because ASCAP and BMI have insisted on passing high administrative costs along to the user. This tactic drives up the transactional costs, and when coupled with an onerous user reporting requirement, makes this option less attractive than the blanket. The world of per-program licensing has recently changed with the final rate determination decision handed down by Magistrate David Dollinger (United States v. ASCAP In the Matter of the Application of Buffalo Broadcasting Co. et. al ) Civ. 13-95 (WCC), governing the operating rules for determining a per-program license for local television stations. This ruling has opened up the per-program window by setting the initial rate at 140% of an applicable blanket license rate and then reducing the effective rate for those television programs which have no appreciable ASCAP music. The final outcome is likely to encourage more stations to choose a per-program alternative. The cable industry is expected to follow the local television broadcasters with a demand for a per-program license. These changes will widen the interpretation of ASCAP's Consent Decree with the Justice Department governing ASCAP's licensing offers with the music user community.
Though in the infant stages of development, SESAC is planning to introduce an alternative license that leverages a new song detection technology which matches a digital imprint detected from actual airplay, with a digitally-recognized pattern resident in a database. This information will allow for a first-time application of a usage-based license formula. Use of this and other new technologies will allow the performing rights societies to capture more information at a diminishing marginal cost.
Historically, other licensing options have met with stiff resistance within the music community. For example, efforts to license the public performance of music directly with the creators, bypassing the collective agent, have been in large measure unsuccessful. This form of licensing is referred to as direct licensing. It is difficult for the music user to properly identify and locate the copyright owner. Often, the copyright owner does not want the administrative burden of direct licensing and refers the user to the performing rights societies. Direct licensing is more appropriate when good information is available which relates the copyright holders and users in the marketplace. The natural concern about infringement (intended or unintended) inhibits the growth of this license form.
SURVEY AND DISTRIBUTION METHODOLOGY
ASCAP, BMI and SESAC expend tremendous efforts to allocate royalties to their respective memberships. ASCAP's overhead is 18%; most of that cost is apportioned for survey and distribution expenses. If there are discernible differences among the collectives, their respective choice in allocation methodology is what sets them apart. A discussion of each methodology follows.
ASCAP Survey Approach
ASCAP's Consent Decree requires that an independent survey research firm govern the principles guiding ASCAP's survey and distribution efforts. These statistical principles can be summed up in one phrase: follow-the-dollar. An analysis of ASCAP's commercial local radio survey will serve as the paradigm for other ASCAP surveys in local television, cable, public television, etc.
ASCAP's radio survey is stratified by geographic area, economic class, and type of community. These groupings allow ASCAP to properly represent the balance of all collections across the United States. The geographic consideration suggests that all regions should be sampled in relation to their pro-rata contribution of earnings. For example, ASCAP surveys 60,000 hours of radio airplay each year. If 10% of their radio collections come from New England radio stations, then 6,000 hours will be dedicated to stations in that region.
This principle provides that not all stations will be sampled and that each station's sampling allowance is not necessarily equal. ASCAP's methodology indicates that a radio station paying $10,000 is guaranteed to be sampled at least once during the year; stations paying in excess of $10,000 are sampled pro-rata to a $10,000 station; and stations paying less than $10,000 may or may not be sampled. ASCAP's follow-the-dollar strategy weights the larger stations more favorably in the more lucrative advertising markets. ASCAP does include small stations in the sample mix but to an increasingly smaller degree.
ASCAP employs several random techniques in constructing its sample design. Again, as far as small stations are concerned, their eligibility for inclusion is predicated on a random draw. The actual dates selected, and times of day that taping takes place, are governed by statistical principles of random occurrences. As an example, ASCAP maintains that out of the 60,000 hours of annual radio taping, the probability of sampling a Monday is roughly one-seventh and the probability of drawing a morning tape (typically 7am-1pm) is one-fourth for the four, six-hour average dayparts in a 24-hour day. ASCAP prides itself on these techniques to assure that all performances have an equal opportunity of being sampled. The reality is less inviting: ASCAP's 60,000 hours represents only 0.1% of the universe of radio broadcast hours, suggesting that 99.9% of all performances go undetected. ASCAP makes the argument that a truly scientific sampling fairly represents the entire universe of possibility within allowable cost tolerances.
BMI Survey Approach
While ASCAP is dedicated to great precision generated from small samples, BMI looks to include a greater number of performances absent the rigorous precision. BMI's radio sample includes over 500,000 hours of logged radio performances. While the number of BMI's recognized performances is over eight times greater than ASCAP's, the system of relying on program logs creates some concerns.
BMI requires that radio stations submit airplay logs on a regularly scheduled basis. BMI notes that it includes only a portion of the submitted logs for distribution purposes. The stations do not know if they are part of the selected group.
However, logs indicate the airplay schedule, not the actual performance. Computer-generated song rotational systems provide hour and minute listings of these airplay schedules. Often, these scheduling efforts are interrupted by last-minute insertions or deletions that are never revealed to BMI. Other stations fill out handwritten logs days after the actual performances have taken place. In these situations, the station employee is asked to recreate the playlist ex post. Many times, the employees have multiple tasks at the station and fail to promptly or accurately fill out the log requests.
BMI has made greater strides in television. BMI was the first performing rights society o conduct a complete count or census of syndicated programming on both local and cable television. ASCAP is just beginning to catch up.
SESAC Survey Approach
Because of SESAC's limited repertory offering, a comprehensive sampling approach was deemed unnecessary. SESAC employs a passive allocation system that relies on published title rankings as the basis for payment. Such publications as Billboard, R & R,and The Gavin Report provide SESAC with a listing of chart songs ranked by sales volume. It is assumed that sales volume and airplay are positively correlated; in fact, that relationship is not as obvious when compared with the ASCAP and BMI systems. The SESAC system remains simple and cost-effective for the repertory it represents.
SESAC is currently planning a major overhaul of its sampling and distribution strategy as it relates to specific music genres. At this time, the model description is deemed confidential.
In general, the collectives have similar approaches to retaining, processing and weighting data. Again, a discussion of ASCAP's methodology also reflects those of the other two licensing organizations.
ASCAP maintains a library of over 2 million song titles. To date, while this information is stored on massive tape and disk drives connected to its mainframe server, ASCAP also relies on hard copy index cards submitted by copyright holders, each of which identifies a copyright registration. A registration provides ASCAP with the copyrighted song title, writer(s), music publisher(s) and copyright date.
ASCAP dedicates a 30-person department to both manually and electronically update this information. The electronic version of this file is referred to as the title data base and is utilized extensively in the royalty allocation process.
The final product of ASCAP's survey efforts is the identification of song titles picked up in ASCAP's various samplings of radio and television broadcasts. The sample data is linked to the title data base for matches on writer, publisher and society affiliation.
Other databases play a critical role in directing the allocation system. The member databases provide essential information on name, address, social security number, authorized representative (in the case of publishers), and earnings history. The member databases also relate the song information stored in the title database.
When a song is detected on a sampled radio station, the song traverses the other files for matches on second-level information. Once this is accomplished, the songs are grouped by writer name to form the first stage of the royalty payout. ASCAP also applies a weighting scheme on each performance to reflect the type of use (feature, theme, etc.), the origin (radio, network television, local television, etc.), and the sample time (pertaining to network prime time vs. non-prime time).
The next stages of the distribution strategy route this information into the check creation phase for final payout instructions. Oftentimes, though song titles are known and corresponding writer and publisher information is provided, the physical delivery of royalty checks is hampered by a non-current address, a legal hold such as a tax lien or judgment, or an estate issue, such as identifying the rightful heirs to a deceased member's royalty earnings. Such research requirements are often overlooked when broadly describing the role of a collective organization.
The concluding stage of the distribution process involves excruciating detail to record the final results and to convert the weighted performance recognition into available dollars for distribution. The incredible attention to detail and economic logic cannot be over stressed.
THE USE OF PROXIES AS A MEASUREMENT DEVICE
The music performing rights societies have a unique advantage over the multimedia industry in that they can readily measure copyrighted product without placing an onerous burden on the user. As an example, ASCAP can conveniently tape a radio station without the knowledge or cooperation of the station. BMI can request a station log requiring some licensee intervention but typically available in some form for another business purpose. SESAC's new contemplated system will provide total data security because the sampling target will be unaware of the data collection process.
However, retrieving copyrighted uses in a multimedia environment poses many hazards. The scope of effort is demonstrably greater and will probably require some significant level of cooperation from the end user.
In spite of these fundamental differences, a study of the music rights organizations may still be instructive as a primitive first step in organizing a cohesive copyright allocation strategy. For example, identifying copyrighted works in use is sometimes a burden for the music performing rights societies. As mentioned in an earlier section, all three organizations hold license agreements with non-broadcast entities such as bars, grills, hotels, dance halls, skating rinks, arenas, stadiums, conventions and expositions, fraternal organizations, etc.
Unlike their broadcast counterparts, these general license establishments create a more difficult challenge in monitoring music usage. ASCAP has long argued that the operational costs for direct monitoring of these establishments would be prohibitive. Yet, a significant portion of ASCAP's gross revenues are attributable to general licensing venues and thus cannot be overlooked in the royalty allocation process.
ASCAP employs a feature factor proxy to distribute royalties collected from general license establishments. ASCAP's goal is to predict the content of the music being performed in these establishments based not on direct measurement but rather on other available sources of information. The difficulty resides in the lack of congruence among the various general license types. The mix of music featured in a bar may vary depending on the nature of the bar's clientele. Therefore, ASCAP relies on its sampling measurement of all radio and television performances to encourage a fair mix; accordingly, it allocates the general licensee revenue pro-rata to its existing allocation of radio and television license fees.
ASCAP provides one further distinction in that the proxy only involves the sampling of feature performances, those uses that are the principal focus of a radio listener or television viewer's attention. Most radio performances are classified as feature uses while a camera focus on a singer or singers is required for feature credit on television.
ASCAP awards its highest credit valuation to features. All other types of uses such as theme, background, jingles, etc. are allocated a fractional value of a feature use.
WHAT MULTIMEDIA TECHNOLOGY USERS CAN LEARN FROM PERFORMING RIGHTS SOCIETIES
Multimedia organizations, as presently envisioned, will require a much broader and more intensive effort for copyright management than has arisen in the public performance arena. The sheer volume of transactions will dwarf the traditional information boundaries of ASCAP, BMI and SESAC combined. The complexity of multiple administrations for different copyright constituencies has little parallel in the world of music licensing.
However, ASCAP, BMI and SESAC still prove to be the guiding working example of large-scale copyright management initiatives. Their development of license strategies is immensely useful in analyzing the pricing components of multimedia services. Their system organization provides useful insight into the inner workings of a massive copyright administration system geared to protect copyright holders.
ASCAP, BMI and SESAC provide a tremendous historical basis from which to evaluate multimedia licensing. Their vast electronic warehouses of song titles, their aggressive approach to licensing access rather than transaction, and their collective ability to establish elaborate distribution mechanisms were all precedent-setting. Music copyright collectives are likely to represent the singularly best approach for guiding multimedia licensing and distribution strategies.
Barry M. Massarsky, a consulting economist holding expertise in copyright-related industries, was formerly ASCAP's Senior Economist. He currently serves as economic counselor to SESAC, as consultant to the Recording Industry Association of America (RIAA), and as economic counsel in litigation-related music licensing matters. Mr. Massarsky's consulting practice is based in New York.
Barry Massarsky Barry M. Massarsky Consulting 1120 Ave. of the Americas, Ste. 4100 New York, NY 10036