Merlin’s DMX-style direct deal with Pandora is the gift that keeps on giving.  As we expected, Pandora introduced their Merlin deal in the ratesetting preceding in Washington that sets all of our sound recording royalty rates for any service that uses the webcasting and simulcasting compulsory license.  This is done at the “Copyright Royalty Board,” which is three rate-court judges who rule on the rates we get paid on services like Pandora and Clear Channel/IHeartMedia.  This is different than the ASCAP and BMI rate courts for songwriters.

The way this works is similar to the “Chris Harrison Special” that DMX pulled with ASCAP and BMI.  The way this stunt works is that Pandora (under Chris Harrison’s guidance) goes out and finds some gullible label to make a direct deal with them at a low royalty rate.  (Harrison was the DMX lawyer who Pandora hired, likely because he did such a good job of screwing songwriters at DMX that Pandora wanted his special skills brought to their own end of the sty.  Harrison, aka Songwriter Enemy #1, has since gone on to greener pastures at SiriusXM where his special skills can be put to use in the Sirius direct licensing program–more on that later.)

They usually accomplish this by paying a big advance or giving the label some other incentive to make that direct deal.  Pandora then tries to use that low royalty deal as a “benchmark” for the Copyright Royalty Board to use as evidence of a market rate deal when setting the “willing buyer/willing seller” royalty rates that apply to everyone BUT the label that got the goodies for making the direct deal.

You can see that Pandora wants to make a direct deal with a royalty rate that is BELOW the current statutory rate that applies to the rest of us.  Why?  Because the assumption is that the current statutory rate will INCREASE in the current rate proceeding.  So if you’re Pandora, you want to try to find as many ways to screw artists and songwriters that you can, so you want to make as many of these “direct deals” as you can so you can put them in front of the Copyright Royalty Board to get the judges to IGNORE the goodies that incentivized the label to make the direct deal in the first place and ONLY look at the penny rate as evidence of an arms length “market rate” for the royalty rate that will apply to the rest of us who don’t get (and may not even want) the goodies.

The Chris Harrison Special

This is exactly the kind of “Chris Harrison special” that Pandora ran against us in the current rate setting (called “Web IV”).  The gullible label in this case is the Merlin label group.  What goodies did Merlin get?

1.   Advance:  Because we haven’t seen a copy of the Merlin deal with Pandora (or any side deals) we don’t really know what Merlin got in the way of an advance for Merlin labels or a flat fee for Merlin itself.  Even though Pandora had to file a copy of its Merlin deal with the Copyright Royalty Board in Web IV, the public version of that deal has the deal points blacked out.  That’s right–the very terms that Pandora and Merlin are using to screw the rest of us are secret.  Funny how The Verge hasn’t gotten a leaked copy of that deal.

2.  Steering Payola:  As David wrote in his comment to the FCC about the broadcasters request for a waiver of the payola rules, Pandora’s contract with Merlin allows Pandora to pay Merlin a lower royalty the more music they play from Merlin labels, called “steering”.  Remember–Pandora is now an FCC licensed broadcaster, so the payola rules apply to Pandora, and steering looks an awful lot like pay to play–a discount on royalties is just another form of payment.  David wrote the FCC to ask them to look into whether the Merlin steering deal with Pandora was even legal. Using forks and knives to eat their bacon!

3.  Direct Payments:  Merlin agreed that all artist royalties under the direct deal with Pandora should be paid through SoundExchange just like the compulsory license.  We really don’t know how this will work from a practical viewpoint.  This is kind of like what happens if a songwriter’s publisher pulls out of ASCAP or BMI because of the bizarre rate court rulings, but the writer wants to keep their writer’s share with their PRO.  It’s every bit as screwy.

We can’t believe that any Merlin label actually asked their artists if they wanted their records to be included in this direct deal rather than just get paid the compulsory rate directly from SoundExchange because the cost of accounting will probably exceed the royalty in many cases (through no fault of SoundExchange, by the way).  It appears that the only logical explanation for why Merlin wanted the artists to get paid directly in this screwed up deal was for the political cover it gave them.

Dumps Not Bumps

How is this fair for Merlin artists?  We’re not trying to speak for them, but by the looks of things, they need to wake up and smell the coffee.  We’ve heard of increases in royalty rate the better you do (“bumps”) but we’ve never heard of decreases in royalty rate the better you do (“dumps”).  Can you imagine the cocktail party conversation?  “Hey, man, I’m so special I get dumps from my label.”

It’s not enough that the royalty should be lower the more times you’re played or that your royalty should be lower the more times someone else is played, a deal that seems tailor made for the CRB to use to screw artists.  Surely that kind of royalty rate is not in anyone’s Merlin label record deal.

It’s also not enough that you don’t get told if there’s a Merlin side deal or what the terms of the Merlin side deal are, it’s not enough that your deal is going to be used by Pandora to screw every other artist–no, on top of it all, the cost of giving your label political cover has to make it so that the reporting administration for that political cover has to cost more than anyone else and may actually cost more than you make.

And who pays for that?  Who pays those additional reporting costs? Pandora?  Unlikely.  Merlin?  Even less likely.  More likely it’s SoundExchange, which may mean those costs (including the cost of fighting about it in the CRB) get “socialized” across all the featured artists, non featured artists and sound recording owners (often the same people at the featured artists).

How Can CRB Give Weight to an Illegal Payola Contract?

It’s pretty clear that the Copyright Royalty Board should give no weight to the Merlin contract in setting rates for the rest of us at least not until the FCC rules on David’s question to them in the Clear Channel payola waiver case.  Even if the FCC yields to Pandora’s lobbying power and upholds the deal, the Merlin deal still has nothing to do with anyone but Merlin, even if the steering contract isn’t illegal under the payola laws.

RAIN reports that Pandora is crowing about a ruling of the Register of Copyright that told the Copyright Royalty Board they were able to consider the direct deal as a “benchmark”:

The CRB judges asked for an opinion on the admissibility of specific direct-license benchmark agreements as evidence in their current proceedings. Today, the Copyright Office deemed that Pandora’s rate deal with indie label collective Merlin Network is admissible as a valid benchmark for the Copyright Royalty Board’s rate-setting proceedings.

Pandora’s antics would make you think they felt like they’ve won something major.  As we read the Register’s ruling, all she really said was that the CRB could consider “potentially probative benchmark agreements.”   We are mystified how a potentially illegal contract can have “potentially probative value” in setting the rates in a market that is itself defined by the compulsory license.

There’s a valid point to be made here that the CRB should not consider the Merlin deal at all when setting the compulsory rate because it really has no relation to everyone else’s deal.

Hopefully the CRB is on to Pandora’s “Chris Harrison Special” and will disregard it altogether.  Of course, if the CRB uses the Merlin rate minus goodies as a “benchmark” for our rates, then Pandora will have succeeded in screwing artists once again, and then we’ll all have to deal with that.