DMX Wins Major Direct Licensing Royalties Case; May Fundamentally Change Performance Royalty Landscape

By • July 28, 2010

A court decision this week may fundamentally change how composers, songwriters and publishers are paid royalties for public performances of their music, as the precedent created has laid the groundwork to shift many more music performances out of the hands of ASCAP, BMI and SESAC and into direct license deals with publishers and writers.

After nearly 30 months of litigation, DMX, Inc., a leading provider of commercial music services, won its rate court proceeding against performing rights organization BMI. In a July 26 opinion and order (click to download), federal district judge Louis Stanton of the Southern District of New York ordered BMI to provide DMX with an adjustable fee blanket license (AFBL) that allows DMX to make deductions from its BMI license fee bill for performances of music that DMX licenses directly from music publishers and writers.

This has the direct effect of creating a financial incentive for DMX and any other music user who receives the AFBL license to license performing rights directly from publishers and writers. Local television stations have already requested the AFBL, and other companies are expected to follow soon.

DMX’s accounting to publishers and writers for direct licensed works features quarterly accounting 45 days after the end of each quarter, as opposed to the typical performing rights organization schedule of 9 or more months after a performance. DMX also provides direct counts of the number of plays of each work.

The precedent has the potential to fundamentally change the landscape of performing rights in the US, as currently most music users use a blanket license from the US royalty societies which provides no financial motivation to direct license music. The AFBL gives copyright owners the ability to directly license their own content when they determine it is in their interest to do so, and is expected to put pressure on performing rights organizations to reduce administrative fees and increase transparency as they compete to offer both music users and copyright owners better value and service.

Ron Gertz, Chairman of Music Reports, Inc. which handles licensing and royalty administration for DMX said, “This is a historic decision that is going to provide real opportunities for music publishers to promote their catalogues directly with music users, increase their revenues and obtain much more transparent accountings than ever available before.”

Christopher Harrison, DMX’ General Counsel said, “DMX believes that securing licenses directly from music publishers presents an opportunity for the publishers – and the writers they represent – to receive greater royalties through DMX’ increased use of their musical compositions. In addition, DMX’ royalty reporting is completely transparent, allowing publishers to see exactly how many times each one of their songs was performed on DMX’ service and the resulting royalty payments.

R. Bruce Rich, senior partner and co-head of Weil, Gotshal & Manges’ IP & Media practice, who represents DMX, describes Judge Stanton’s decision as “a gratifying affirmation of the role of the BMI rate court as a means of establishing meaningful alternative license structures to the blanket license. The Court’s implementation of a sensible crediting mechanism against blanket license payments otherwise owing where a user such as DMX has made significant investments in direct licensing should have broad application for other industries.”

BMI issued a statement late yesterday stating, “We strongly disagree with the court’s decision in the DMX case, which ignores the long history of Performance Right Organization (PRO) licensing agreements in the background music industry. We are examining the decision in depth and evaluating the basis for an appeal.”

When a music performance is direct licensed, a deal is struck between the broadcaster and the copyright owner of the music that represents a direct payment for performance royalties, and those performances no longer are licensed through the performing rights organizations. These direct payments can take the form of a single lump-sum buyout of the performing right or a series of payments that are paid as long as the program is broadcast.

The creation of a widely available broadcaster direct licensing credit for individual works has the potential to profoundly affect how composers and songwriters are paid for public performances, as many more broadcasters could be in a position to realize significant cost savings by direct licensing the performance right directly from composers or as part of the composer’s agreement with a production company.

The resulting shift of the performing right licensing process away from royalty societies and into individual, private deals with production companies, music libraries and composers could create major changes in how composers and songwriters are paid performance royalties for their music as private negotiations by individual copyright owners replace collective representation by the performing rights societies. For example, production companies that own copyright as a result of composer work-for-hire agreements could be paid a direct license fee by one or more broadcasters for score music they own. What portion of those direct license fees would be payable to composers depends entirely on the individual composer’s agreement with the production company.

Music libraries could also find themselves in the position of being potential middlemen in negotiations for direct license payments with production companies, leaving composers dependent on whatever language may be in their agreements with music libraries to determine what portion of direct license fees, if any, is paid to the composer. So-called “retitling” libraries who do not own copyright may represent a better option for composers in this situation, since they do not own copyright and cannot grant a direct license unless their contract specifically gives them the ability to do so.

Comments

By Ben on July 28th, 2010 at 10:28 am

On the surface, this seems like a great ruling. (Less bureaucracy, more transparency in direct licensing.)

But in the real world, I see this as a terrible decision for writers.

“What portion of those direct license fees would be payable to composers depends entirely on the individual composer’s agreement with the production company.”

And we can see that composers in the last 20 years have given away and signed away every royalty and copyright they can, just to get the gig. I wish I had faith in composer’s ability to negotiate direct licensing with production companies, but in most cases they simply don’t have leverage to do so.

Once production companies become aware of these changes, they will simply hire composers who sign away ALL their licensing rights. The PRO’s are far from perfect, but at least they have protected the writer’s share of royalties until now.

By blumuze on July 28th, 2010 at 10:34 am

This is a sword that will cut both ways. It could potentially increase the bargaining power and income potential for publishers and writers WITH POWER, but the rank and file will find themselves at the short end of the negotiating stick — if they want to have their music played at all.

I feel this is a sorry day for most publishers and writers, but particularly for writers not represented by powerful and influential companies.

PS I also don’t see music libraries paying writers more simply because the company has the *potential* to negotiate higher fees to include the direct licenes. More than likely, those companies will want to keep their extra profits, but the writers, who will NOT be part of the negotiations with users, will see nothing from the PROs.

By Justin on July 28th, 2010 at 2:50 pm

Did everyone catch the part about “cost-savings” to the licensees like DMX?

Actors, Producers, Directors have all had great protection within the movie industry because they were permitted to unionize. Not so in the world of music. From artists requiring publishing kickbacks and un-deserved co-writing credits to all kinds of other licensee extortion, songwriters and smaller publisher have historically been the victims of all kinds of abuse because we were legally prevented from forming a union.

One of the few arenas were such abuses did not run rampant was in the area of Performing Rights due to the strength of ASCAP, BMI and SESAC. Being represented by such large “collective organizations” helped protect individual writers and smaller publishers from the kinds of abuses they’ve suffered in other areas of the music business. This decision looks like it might now erase that protection. So my question to fellow writers and publisher is ….

Do you really want to to go one on one against the “major studio and broadcasting gorillas” in this business? Or would you rather have ASCAP’s, BMI’s and SESAC’s clout get you a fairer deal?

By Mark Northam on July 28th, 2010 at 5:54 pm

Good points about the advantages of the PROs. It’s a pity they keep driving composers to alternative methods like direct licensing by paying a one-minute custom score cue only a small fraction (20%) of what a one-minute background song is paid, even though the broadcasters pay the same for both. Add to that incomplete, outdated sampling systems that miss many performances, as compared to direct licensing situations like DMX that report and pay performances digitally and quickly.

If score music was paid fairly compared to song, and modern, accurate payment systems were used by the PROs, there would be very little incentive for anyone to direct license.

By Casual-T on July 29th, 2010 at 1:17 am

“Divide et impera” still seems to work quite well. I very much agree with the comments made above, and it is a shame that this court ruling seems to present yet one more opportunity for the industry to screw the creative community. By avoiding powerful organizations such as the various PROs, the industry can now dictate performance rights terms to the individual composer, always having the “If you won’t do it for less, the next guy definitely will” line in their back pocket. Performance rights on sale… here we come!!

Of course Mark is correct in criticizing the current PRO system, and we all know he’s right on point with this, but the fact remains that it is the collective bargaining power of BMI, ASCAP, and SESAC, which stands in direct relation to the number and unity of their members, that has, so far, set the standard, and provided at least a minimum of protection in regards to performing rights payments to the writers. As it is we have enough on our plates, and trying to get the PROs to acknowledge our needs is hard enough. But to try and fight them as well as the production companies, as well as competing against your fellow composer (who’ll gladly give up his writer’s share to get the gig)… You get the picture!!

By Charlie on July 29th, 2010 at 6:19 am

I’m just getting into the music for film/tv market…this doesn’t look good for me at all.

By Mark Northam on July 29th, 2010 at 6:29 am

Charlie – don’t get too down about this – the key is to realize that there will always be those out there who will seek to devalue custom score music for their own benefit. We as composers simply must not roll over and accept a wholesale devaluation of our music no matter WHO is trying to do it! In this world you have to fight for what you want, and more and more, composers are realizing that.

By Ron Mendelsohn on July 29th, 2010 at 11:45 am

Any ruling that diminishes the power of the PROs is bad news for the industry. In reality, only the PROs have the clout and experience to properly negotiate rates for performance licenses. Performance fees are based on many factors, such as revenue, audience share, ratings, market share, etc. Individual composers have absolutely no chance of negotiating fair values since in most cases they have no idea on what basis to set the rates. The end result of any shift in power away from the PROs and towards individual composers will be that performance fees will simply whither away to nothing due to competitive pressures, as we have already seen happen in markets where the PROs have lost their clout. Who has the power in a negotiation between an individual composers and a broadcaster? Broadcasters in the marketplace are under severe pressure to cut costs and boost profits- the individual composers is not going to win in this negotiation, I can assure you. Stronger PROs are better for composers, weaker PROs mean that all composers and publishers lose their negotiating power, much like an individual Teamster cannot possibly hope to negotiate with an employer without the support and clout of his/her union. And I fail to see the logic that somehow “retitling companies may represent a better option”. In fact, the exact opposite is true. Retitling companies often do not even have the right to negotiate direct licenses, and they are certainly not going to contact each and every one of their composers to participate in a negotiation each time that they are presented with a direct license deal. Mark- I’m sorry but you are way off base on this issue. The reality is that these fees would not be collected at all and composers would lose out. Furthermore, most broadcasters will not even bother negotiating direct licenses with a retitled company since the catalog may contain identical recordings that are already covered under prior direct licenses with other retitling companies! Let’s be clear about one thing- we all need to work together to support the PROs because without them there will be no performance fees at all.

By Mark Northam on July 29th, 2010 at 2:29 pm

Ron – I certainly agree with you that strong PROs are a huge benefit to composers, and that composers are better off WITH representation by PROs than on their own. By the same token, it’s simply not fair of the PROs to take advantage of that fact by continuing their outrageous penalties against instrumental music – especially when you consider that the penalties against instrumental music were in large part what started direct licensing as we know it today back in the 1980s with the Buffalo Broadcasting case. When broadcasters who owned publishing saw how much of their income was being diverted by the PROs to others, they sued and won the right to do direct licenses. You’d think the PROs would learn from that, but no, the greed and arrogance that fuels the massive money grab by the songwriters continues unabated. And the poor PRO rates for instrumental music (compared to song) is a big part of what has fueled the growth in direct licensing – it’s simple math. If the PROs paid instrumental music fairly, there would be no financial reason to direct license for the broadcaster or for writers. The financial benefit for broadcasters comes from the fact that directly licensed music is deducted from their bills **proportionately** compared to other music – all minutes of music have the same value in that calculation.

So we’re left with a situation where the same people who discredit and devalue our music are the ones we are supposed to turn to to protect us. Ironic.

Re: retitling vs. traditional libraries and direct licensing, I merely pointed out that by retaining copyright, composers can retain more control over what the libraries who represent their works do. I take your point re: multiple libraries with overlapping cues – that can certainly complicate things.

I’m interested in how your library Megatrax handles this – I think it would be illuminating. When you commission a work that you own copyright for, do your composers have any say in the direct license rates you negotiate, and can you report what portion of the direct license fees are shared with the composer? My guess is that a clause giving Megatrax the right, as sole copyright owner, to negotiate direct licenses is a standard part of your agreement?

By Brian Lee Corber on July 29th, 2010 at 9:10 pm

The PRO blanket license is one of the greatest frauds ever created. It defrauds the music user as well as the pro member or affiliate.

You only need a license if you use the music (perform it); if you don’t you shouldn’t have to pay for what you don’t use. In one year a broadcaster can only broadcast/perform about 500,000 minutes of music, yet it must pay ascap for what may be 40,000,000 minutes worth of music. The broadcaster is paying 80 times more than it ought to under the copyright code.

On the other hand as many alreay know, the broadcaster pays (actually overpays) for access to the entire repertory, which means that if your music is in the repertory it was used to generate the invoice to the broadcaster.

So you should be paid whether your music is in the survey or not. But you only get paid if it made the survey. Wanna bet that your music did not, but that Dean Kay’s and Paul Williams’ music did? When is the last time you heard a public performance of Dean Kay’s “That’s Life?” Bet he gets paid regardless.

You musicians are so gullible.

By Brian Lee Corber on July 29th, 2010 at 9:12 pm

One final comment: if you’re going to direct license, you need a lawyer more than ever to negotiate for you.

You DIY guys are losing more money to DIY than you’d pay any lawyer.

By Joe Renzetti on July 30th, 2010 at 7:36 am

This ruling is a continuation of the dismantling of unions, started by Ronald Reagan in the 80′s, who fired 7,000 air controllers, and also started “government for, and by the corporation.”
The idea here is that a composer will be able to have the wonderful freedom to negotiate personally with the producer, one on one.
For example; you as composer will be able to negotiate with an ABC for your fee. Who do you think will come out best in that deal? Think you can hold your ground?
This judge was nominated to the court by Ronald Reagan in June 12, 1985.
Big money rules.

Joe R

By Joe Renzetti on July 30th, 2010 at 7:40 am

Mark, don’t mix arguments. This has nothing to do with how much PROs pay or not. This is about the further destruction of what little muscle composers have left.

JR

By Mark Northam on July 30th, 2010 at 8:09 am

Hi Joe -

I respectfully disagree. The underpayment of score music is exactly what brought about direct licensing in the landmark Buffalo Broadcasting case in the 1980s, and the continued underpayment of score music is what makes direct licensing make financial sense for broadcasters. Why? Look at the math…

For every minute of music that a broadcaster direct licenses, they are allowed to deduct far more than that minute of music would actually be paid to the composer/publisher under a blanket license. This is because the deduction formula values score and song **the same**. Compare that to the weighting formula used in PRO distribution, where score music is walloped with an 80% penalty for a one minute score cue compared to a one minute song cue. Because of this math, broadcasters achieve a far bigger deduction on a per-minute basis for instrumental music than would actually being paid by the PROs to the writer/publisher. This is what creates a HUGE financial incentive for broadcasters to direct license! The broadcasters can actually pay more than the composer would have received from the PRO, and still end up profiting because of the huge difference between what the PROs pay and the “all music is the same” proportional discount they give broadcasters.

A highly simplified example: If for a particular minute of music a broadcaster gets a $5.00 deduction, but the PRO is only paying the composer/publisher a total of $2.00, the broadcaster can direct license and offer the writer/publisher a 50% increase to $3.00, and still achieve $2 of profit from the deal. The broadcaster spends $3 but saves $5.

Mathematically, if the PROs paid score and song fairly – i.e. the same, just as they allow the broadcasters to treat it, the broadcasters would have little to gain by direct licensing as it wouldn’t save them any money when they matched the PRO payouts.

As I said before, I certainly believe composers are better off with PROs than without them. But it’s naive to ignore the fact that the same people we are depending on to protect our interests here are the same ones whose discriminatory policies have fueled the very thing we are depending on them to defend us against.

By Joe Renzetti on July 30th, 2010 at 4:59 pm

Sorry, I thought the subject was this case in the headline, not the 1980 case.

Song vs. score? That’s why I say, nothing but composers in a Composer’s Guild.

JR

By Les Hurdle on July 30th, 2010 at 5:38 pm

Why am I not surprised by what I read !

Does anyone seriously think a production company is going to pay its composers via a direct license?
They rape them via sync fee’s, broadcast mechanicals etc., so get real…….. EU PRO’s did not allow direct licensing, but they can’t control what happens in the USA with EU product……….. the whole thing, top to bottom is smoke n mirrors especially those who ‘hold’ our copyrights & simply steal.

Mr Corber mentions 500,000 mins per years, actually 518,400………. what makes anyone think the broadcaster actually pays for this time period?
If a broadcaster only uses X mins per day on average, that’s what they pay… don’t they?
Don’t get the 80 X’s figures.

DMX…….. a very welcome shift, now at least we have a little more ‘honesty’, in other words, we get screwed by our publishers and pro’s alike………. honestly, we don’t want to pay you.

Are PRO’s as they are a good thing?
Ask the religious composers, they will tell you how better they are doing since they left the ‘normal’ PRO’s,

Time for new brooms, time for composers to DL with broadcasters period……….. I’d sooner get 1c than the 0c I seem to get today

L

By Mark Northam on July 30th, 2010 at 7:07 pm

Hi Joe – You’re correct – the subject is indeed the DMX direct licensing case and the practice of DMX direct licensing and that now being able to spread to other music users. The continuing practice of undervaluing score music is what continues to provide the financial motivation for direct licensing, today, now.

Re: composer’s guild, I agree 100%. No lyricists. No songwriters. When the decision was made to include lyricists in the current composer unionization movement, what powerful organization(s) and their controlling groups do you think the decision to include them now, and even in earlier incarnations of composer groups in LA, was made to appease? Consider how little lyricists have in common with composers in terms of deals, workplace issues, etc etc. Why on earth would composers invite them in and give them equal footing in their own composer’s union, diluting the focus away from composer-only issues?

Why, indeed.

Funny how many things are linked together if you step back and take a look at the bigger picture…

By John Cullen on July 31st, 2010 at 1:58 pm

The good part about change is that it sure stirs up discussion. After reading the comments about this decision, let me make a few.

DMX relies on the creativity of songwriters and the publishers who represent them. We recognize their value to our business. We simply believe that we can pay those publishers more royalties through a direct license based on our incentive to use their music more frequently and in greater efficiencies of reporting; in fact, some publishers have seen their share of performances triple since signing a direct license with DMX.

We offer the following compelling reasons to bypass the “middle-man” and enter into a direct license with DMX:
Full and complete transparency of payments
A quicker payment schedule
Payments that put more money into the hands of the person who crafted the art.

To date, some 700 publishers have chosen to enter into a direct license with DMX. We must be doing something pretty well (and seemingly of benefit to them) as only 3 have not resigned when their agreements came to term.

Finally, we welcome this dialogue. As facts on this matter continue to surface, it seems more songwriters and publishers realize the advantage of our offering.

John Cullen
CEO
DMX

By Mark Northam on July 31st, 2010 at 2:17 pm

Hi John -

Welcome to the discussion, and thanks for being part of it! Through discussion can come education, clarity, and a better understanding of how things are changing and why. Writers clearly have a lot of questions about direct licensing and your willingness to be part of the discussion here will help writers and publishers better understand how direct licensing works and determine whether it’s a good option for them.

By Les Hurdle on July 31st, 2010 at 8:09 pm

Dear Mr Cullen,

Talk is cheap………. show us some $$$$$’s…………. you only talk of license with publishers, how can YOU make sure the composers are paid?
Are you prepared to send the composer a statement of monies sent to the publisher[s] with all GROSS amounts listed?

Please equate your returns compared to the PRO’s.

Les

By Gary Gross on August 2nd, 2010 at 9:30 am

I can tell you that our companies strongly encourage licensing with the PRO’s (BMI, ASCAP and SESAC) and discourage our clients from requesting a direct license.

As Ron Mendelsohn said above, we as music publishers simply do not have the clout and are not set up to negotiate performing rights payments nearly as well as the PRO’s are.

The only reason a client will want to do a “direct license” is to save money. Period. And if there’s less money paid, this either directly or indirectly devalues music. Isn’t this something that we all want to stand strongly against?

On those rare occasions where we are obligated to do a direct license (e.g. our client does not have a license with a PRO), we make sure to charge fairly (i.e. what would the value be at the PRO) and then we pay exactly one-half (50%) of what we receive for that license back to the composer(s), just as if the money had flowed through a PRO. This is the only honest and fair way to treat our composers.

By blumuze on August 3rd, 2010 at 8:06 am

As always, it will be the writers and composers who will get the short end of the stick. If you want a preview of what your performance income is going to look like as a result of this decision, all you have to do is compare your historical upfront fees to how they’re trending now. What makes anyone here think that the result of their direct licensing negotiations will trend differently?

Rather than destroying the only real collective bargaining power we have, WE (not DMX) should be taking the PROs to court to improve their methods.

And Mark, I know you’ve been on a crusade against the PROs for years now, but how can you possibly be happy at the propect of their total destruction? Because the potential is certainly there for such a result.

By Mark Northam on August 3rd, 2010 at 2:20 pm

Blumuze, to clarify, I’m not on a crusade “against the PROs,” I’m on a crusade against the wholesale devaluation of custom score music. I’m simply not willing to accept the decree of a bunch of songwriters and suits that custom score music is worth “20 cents on the dollar” for a one-minute cue, compared to a background vocal. Sorry, but that kind of rank discrimination is outrageous, especially in America, home of some of the world’s greatest score composers.

And no I’m not happy at the idea that the PROs could suffer major damage as a result of this, but we must remember that they did it to themselves, and just like any type of addict, you can only help someone so far if they’re unwilling to help themselves. If the PROs had not devalued (and continue to devalue) instrumental music so massively in order to divert money into the hands of the songwriters, there would be little financial benefit to direct licensing for the broadcasters or anyone else. By devaluing score music so heavily, compared to the deduction the rate court says they must give broadcasters in a direct license scenario, the PROs created a big profit margin for broadcasters if they direct license.

The PROs have known all along that devaluing instrumental music encourages direct licensing. They know it today. They could have, then or now, chosen to pay music fairly and drastically curtail the financial motivation they give broadcasters and others to direct license, but they have chosen not to, instead choosing to continue the discrimination and fatten the songwriters’ wallets as long as they can. They have been doing it so long they know no other way, even when they see their system coming under massive threat from direct licensing.

Maybe DMX will be the big wake-up call that the PROs have needed for so long, finally helping them see the wisdom of treating everyone fairly and reducing the financial motivations for direct licensing. We can only hope they get the message before direct licensing becomes so pervasive that this “Frankenstein” that the PROs have created gets out of control.

By blumuze on August 4th, 2010 at 7:27 am

Mark: Just a detail, but, to my knowledge, DMX doesn’t really program a lot of score music. Instrumental “songs” and vocal music, yes, but little if any underscore.

Also, I’m not sure I follow your logic regarding the relationship between PRO score music rates and direct licensing. It would seem to me that raising the rate for score music would strengthen the argument for direct licensing, not weaken it.

Finally, I agree that this ruling may act as a wake-up call for PROs. A call for more transparency, more member involvement in rule making, and a push to increase solidarity in the face of threats like this one. Music writers of ALL kinds need strong collective representation.

By blumuze on August 4th, 2010 at 7:35 am

PS: Mark, I agree that the “rate gap” between score and vocal music is too large, but what would you consider fair? For my part, I write and represent both, but I see a vocal compared to an instrumental as roughly similar to a speaking part compared to a non-speaking part. There’s a rightful difference in the pay scale.

By Mark Northam on August 4th, 2010 at 1:47 pm

@blumuze – the key to the rate gap and direct licensing is twofold:

1. The deduction the direct licensors (DLs) receive on their bills from the PROs is proportional to the amount of music they direct license – all music is treated the same (song & score) and receives an equal per-minute discount. This differs drastically from the way the PROs pay out royalties to composers, where a minute of score music only receives 20% of what a minute of background vocal receives. For example, a company direct licensing may receive $1 discount for a minute of music (hypothetical example) direct licensed, but if the PRO only pays the composer .20 for that minute of music, the direct licensor can double the composer’s payout to .40 and still profit .60 from direct licensing the track.

2. If the PROs reformed score music rates and made them equal to song, it would significantly increase the amount direct licensors would have to pay to match PRO rates to entice people to direct license, removing a lot of the incentive for companies to direct license in the first place.

The PROs are paid the same by broadcasters for score and song, and should pay royalties out the same way. It’s only fair. There are many artistic arguments made as to which should be paid at a higher rate – your speaking vs. non-speaking is one, but just as easily the argument could be made that custom score music, since it is custom and written exactly to the scene, should be paid far more than a generic song that is just dropped in and is not custom by any means. There is no right and wrong answer to the artistic arguments, so in my opinion the default should be to pay out the money as it’s paid in. It’s not ASCAP’s job to play “God” and divert huge sums of money to the pockets of one writer group or another based on arbitrary choices. It’s their job to pass on the money as accurately and at the lowest cost possible.

By Brian Lee Corber on September 7th, 2010 at 8:40 pm

When you really understand how all of it works you understand that the whole business is a fraud for everyone who pays for music and everyone who sells music.

Incidentally, BMI is appealing the decision to the Second Circuit.

The pros ought to be broken up into multi-regional organizations. Maybe multi-state.

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