DMX vs. BMI demonstrates that digital services may use direct licensing to reduce their payments to the PROs but the decision may be reversed on appeal

The case of DMX, the digital background music service, against BMI shows that direct licensing may not be a substitute for the blanket licenses offered by ASCAP, BMI and SESAC, the three performing rights organizations (“PROs”), but it may significantly reduce the license fees they have to pay. On the other hand, BMI is appealing the decision and there are sound reasons why it may be reversed or at least modified.

DMX currently provides background music to approximately 100,000 locations including restaurants, bars, clubs, retail stores and chains. DMX and BMI failed to agree on the price for a blanket license covering its 6.5 million songs, and DMX initiated an action in “Rate” court under BMI’s consent decree asking the court to reduce the amount that BMI sought to charge.

According to Federal District Judge Louis Stanton’s opinion (July 2010), BMI sought a blanket license fee of $41.81. DMX argued that it had secured “direct licenses” from 550 different publishers for $25 per location, and that that amount should be used as a “benchmark” for the true market value of the blanket licenses offered by not only BMI, but all three performing rights organizations including ASCAP and SESAC. The court agreed, and significantly reduced the fee DMX would have otherwise had to pay BMI. The judge held that the blanket license fee for use of BMI songs should be only $18.91 per location. However, even that amount subject to further reduction. The court created a mathematical formula that reduces the amount payable to BMI in proportion to the number of BMI songs that DMX clears through direct licenses. This is referred to as an “adjustable fee blanket license“ or “AFBL”, and it is the first time the Rate court has implemented such a license.

In a subsequent action against ASCAP (December 2010), DMX was also successful in significantly reducing ASCAP’s per location rate to $13.74 (also subject to reduction depending on the number of ASCAP songs subject to the direct licenses). ASCAP wanted DMX to pay $49.50 per location! Similar to BMI, ASCAP is appealing this decision

According to DMX’s chief counsel, Christopher Harrison, these decisions provided DMX with “more than $5.5 million dollars annual savings.”

BMI is currently appealing the rate court’s decision, however. “On behalf of our songwriters, composers and music publishers, we will not allow this ruling to stand without an appeal,” said Del Bryant, BMI President & CEO. “Our writers and publishers should not be expected to lose more than half of their income from DMX based on the court’s erroneous holdings, which substantially reduce the value of their creative efforts.” BMI’s appeal has already been briefed and argued, and the Second Circuit’s decision is expected soon.

BMI’s appeal may have some success. Here’s why. In regard to BMI, among the 550 “direct licenses”, there is only one license with a major publisher, that is, Sony/ATV. The court found that the $25 per location fee was a good benchmark for the real market place value of a license for all the songs DMX plays. However, the court did not consider it relevant that DMX paid a $2.7 million dollar advance to Sony. BMI maintains that although the nominal rate Sony agreed to was $25 they would never have entered into the direct license unless they received the advance, and that DMX used the deal with Sony to persuade many of the 549 other direct licensees to accept the $25 per location rate. As BMI’s appellate brief reported, DMX never told the other direct licensee publishers about the advance to Sony, and instead assured them “they would be the same as a sophisticated major publisher who had accepted the same deal.” Moreover, the $2.7 million represented approximately 150% of all royalties Sony received from both ASCAP and BMI for one year.

An ancillary issue is how can 550 direct licenses be a benchmark for the true value of the PROs’ blanket licenses when those 550 licenses represent, in probability, only a tiny fraction of songs represented by the PROs. Judge Stanton in his decision stated that the 550 direct licenses included 5500 different “catalogues“, but he never indicated how many songs were included in those catalogues. BMI as noted above, represents 6.5 million songs, ASCAP represents even more. It is doubtful that the 550 licenses add up to more than a small fraction of the number of songs in the PROs’ catalogues. And if that’s the case, how did the Rate court find that direct licenses presented an accurate benchmark for the true market value for the PROs’ blanket licenses? In its brief, BMI made the argument this way: “The direct license do not reflect a willing buyer/willing-seller price because they do not include those publishers who valued their music at a higher rate and those chose not to sign.”

Another fact that the rate court did not focus on is the consequence of its decision on writers and composers. As I noted in my previous blog about EMI withdrawing digital rights from ASCAP (7/2/11), all three PROs pay writers, as well as publishers, directly. That is, for each dollar paid, they pay 50 cents to the publishers and 50 cents directly to the writers. For that reason publishers are unable to deduct advances paid to the writers. Since many writers are “unrecouped” they may never see any money under “direct” licenses.

Note: the formal citation for the case and appeal: Broadcast Music, Inc. v. DMX, Inc., 08 Civ. 216 (LLS), 2010 U.S. Dist. LEXIS 78417, (S.D.N.Y. July 26, 2010); on appeal at 10-3429-cv (Second Circuit).