A recent Billboard article has prompted a re-examination of the controversial Pandora-Merlin direct deal that included lower rates in exchange for additional spins for MERLIN labels. Billboard has finally admitted that the Pandora-MERLIN deal has been successfully used by webcasters to significantly lower ALL rights holders rates. While Billboard terms the effect of the MERLIN deal as “surprising” it was not surprising to readers of this blog and our friends at MusicTechPolicy.
Over a year ago we predicted that the direct deal between independent label licensing authority Merlin and Pandora would lead to lower webcasting rates for ALL performers and labels in the US. We weren’t particularly clever, we simply looked at the DMX direct deal that Pandora’s chief negotiating counsel Chris Harrison did with Sony in 2007 for a reduced publishing rate in exchange for a 2.7 million dollar advance (without taking into account the advance). This was then successfully used by as evidence of a “free market rate” against BMI in rate proceedings shortly thereafter. As the Future of the Music Business reported in 2014:
“In 2007 Sony negotiated a direct deal with DMX, the digital background music service. In doing so, it received an advance payment of 2.7 million dollars. It is doubtful whether Sony’s writers received any portion of this money. And this is why: Individual music publishing contracts vary depending on the bargaining power of individual writers or the negotiating skills of their lawyers (among other reasons), but almost all agreements have a provision similar to this one.”
We simply guessed that it was highly likely that Harrison and Pandora were gonna use the Merlin deal to do exactly what they did with the DMX deal. And we told anyone that would listen. And then Pandora did just as we predicted.
Let me back up for a moment and explain a little background on this. In 2014 Charles Caldas CEO of MERLIN negotiated a direct deal with Harrison and Pandora that effectively lowered independent labels per spin rate well below the statutory rate in exchange for increased airplay. MERLIN termed this exchange “steering” but it should more properly have been called “digital payola.” We correctly predicted that Harrison and Pandora would use the direct deal as evidence of a willing seller willing buyer rate in the Copyright Royalty Board Web IV rates settings. In particular Pandora would cite the lower effective rate that was achieved when Pandora algorithms “steered” additional Merlin recordings to users above and beyond the “natural” amount generated by user listening habits and preferences. In short payola:
“Here’s some music that we wouldn’t normally play for you based on your preferences. And this is because MERLIN gave us something of value (lower rates).”
The bottom range effective rate for the steered spins was reported by Pandora to be $0.001105. Pandora argued that this lower “steered” rate should be considered by the Copyright Royalty Judge as an example of a willing seller-willing buyer rate. The judges agreed.
The only other direct market rate cited as evidence in the CRB proceedings was a direct deal between WMG and IHeartRadio that effectively set the rate at $0.0022. It is clear from the CRB proceedings that the judges took the two direct deals as upper and lower bounds and essentially split the difference between the two rates and enacted a webcasting rate of $0.0017. Without the MERLIN steering deal the only evidence of a free market rate was the WMG-IHeartRadio deal at $0.0022.
So Billboard calculates that for each $0.0001 increase this means and additional $60 Million dollars a year to rights holders. So it’s not unreasonable to conclude that the MERLIN deal lowered the CRB rate 2017 through 2020 from $0.0022 to $0.0017. Using Billboard’s math this would appear to be a net loss to rights holders of approximately $300 million per year or $1.2 billion over four years. This represents almost 10% of wholesale recorded music revenues! Wow! For independent labels that opted into the MERLIN deal the economics may be even worse. Why? It appears that these independent labels and artists are now locked into the much lower MERLIN steering rate for the next few years. Ouch!
As much as an outrage this may be, it is worth asking some further questions at this point.
- Since the 2016 Web IV rate setting process was looming, what was the hurry? Why didn’t Merlin just wait for the rate setting process to conclude and then negotiate a lower steering rate downward from there? Surely it couldn’t have resulted in a worse rate?
- What did MERLIN get out of the deal?
- Did MERLIN accurately describe the terms of the deal to its member labels?
The last question is very important. Because in 2014 Billboard reported this:
Caldas added the partnership will financially benefit Merlin’s artists and labels. Although no financial details were made available, he suggested the terms are no worse than the statutory rates previously received. “We wouldn’t do any deal where there was any risk we were going to get paid less.”
But the CRB proceedings make it clear that this turned out to not be the case. Merlin labels were getting a rate lower than the existing statutory rate. I’m not a Merlin member, but if I were, and if this is what he told his label members I would lawyer up and put Merlin and Caldas on the spot for this.
Read more of our coverage on this deal here: