An Editorial by Dawoud Kringle
Broadcast Music Inc. (BMI), one of the major performing rights organizations (PRO) in the United States, was founded in 1939 by the National Association of Broadcasters.
In the late 1930s, royalties to publishers and songwriters worked differently than they do today. Rather than paying for the songs that they played, broadcasters were required to hand over a certain percentage of their revenue to a PRO, regardless of how much music they played, or which artists. During the Great Depression, ASCAP (the dominant PRO at that time, founded in 1914, and still the second-largest in the US today) raised the percentage it required broadcasters to pay. The radio broadcasters rebelled, and set up their collection organization; BMI. The US Justice Department under the Roosevelt Administration ran an antitrust investigation of ASCAP, and BMI. Both organizations entered into “consent decrees” with the Justice Department, requiring them to allow radio stations to pay only for the music they played, and requiring both organizations to offer their entire catalogs to broadcasters.
With only a few alterations, those consent decrees have governed ASCAP and BMI’s operations ever since. BMI and ASCAP have since operated on a nonprofit basis, collecting and distributing licensing fees to its affiliated songwriters and publishers after paying its overhead/operation costs. These PROs do not own copyrights.
For its 2022 fiscal year, BMI collected $1.57 billion and distributed $1.47 billion, the most it has ever paid in a single year. As of this writing, BMI represents more than 1.4 million songwriters and music publishers and has over 22 million compositions in its catalog.
In 2022, after first considering the sale of their company, BMI said it would switch to a for-profit model. Songwriter groups became concerned that profits for BMI for any new owners would come at the expense of royalties for writers.
In November 2023, BMI announced that it would sell its company to New Mountain. Various sources put the sale price at between $1.3 billion and $1.7 billion.
Terms of the deal between BMI and New Mountain Capital (a financial advisory firm that has had a large part in the recent rush in catalog deals – most notably, their dealings with Massarsky Consulting, the New York-headquartered firm that played an integral role in recent acquisition deals made by companies such as BMG, Round Hill, SONGS Music Publishing, Sony Music Publishing, Universal Music Publishing, Warner Chapell Music, and others – whose other investments include Citrin Cooperman) were not disclosed. In its announcement, BMI said that the sale is subject to approval by its shareholders and “customary” regulatory review and that it expects the deal to close in the first quarter of 2024. Goldman Sachs served as BMI’s financial advisor, and Fried, Frank, Harris, Shriver & Jacobson were the legal advisors. Moelis & Co and Simpson Thacher & Bartlett served as advisors to New Mountain Capital.
BMI also announced that Capital G, a fund affiliated with Alphabet, the parent company of Google, is acquiring a minority stake in BMI’s sale. CapitalG is Alphabet Inc.’s independent growth fund, set up in 2013. It has invested in companies such as Airbnb, Lyft, Crowdstrike, Robinhood, Snap, and others. The company invests in tech and tech-adjacent companies. Its investments in the music business are not a new venture for them. In 2015, another investment fund owned by the company, Google Ventures (now called GV Management) led a $60-million investment into Kobalt, the music publishing and rights company whose business model allows artists to keep their copyrights after signing with the company.
Last year, however, the vast majority of Kobalt was acquired by a private equity firm, Francisco Partners. In 2016, Google failed in its attempt to acquire the Michael Jackson estate’s 50% share of publisher Sony/ATV (now Sony Music Publishing). Sony Corp. responded by buying the stake in a deal valued at roughly $750 million.
In the company’s annual report, BMI’s chief executive Michael O’Neill (who will remain in this position after the sale) said that the reason for the switch to a for-profit model was to “explore new sources of revenue and invest in our platforms.” He also said that BMI intended to distribute 85% of the income it receives to affiliates, and retain 15% to cover costs, and a “modest profit margin.” In the past, BMI had kept only around 10% for overhead. Any investments would be funded by retained profits, not royalties. The report also announced that $100 million in proceeds from the sale would be allocated to its affiliates. However how that money would be paid while retaining the company’s distribution methods had not been finalized.
Mike Oshinsky, a director at New Mountain Capital, said that the company was eager to expand BMI’s business and help “modernize” how it works. He said that music infrastructure, including the performing rights ecosystem, has been too slow to adapt to new technologies. And he is right. But there are other things to take into consideration.
According to antitrust agreements/consent decrees with the Justice Department that have been in place at BMI and ASCAP for more than 80 years, the PROs are limited in what services they can provide and the rates they can charge licensees like radio stations or online music services. Those agreements have been periodically reviewed by the federal government, but have not been substantially changed in years.
Seen in this context, it’s clear that Alphabet wants a controlling interest in music publishing. That brings up the prospect of a conflict of interest in that Alphabet owns YouTube and YouTube Music. Any music streaming service that pays over $6 billion to the music industry annually will doubtless want to own the rights to that music – or at least, to own a PRO, and influence the rates that are paid for music.
Alphabet’s CapitalG is said to have taken a “passive minority stake” in BMI, implying that Alphabet won’t influence BMI’s decisions.
In a recent blog post (https://musictechpolicy.com/
Castle responded, saying, “What this sounds like is what you would expect – a very engaged, Silicon Valley-style venture investment. This investment will inevitably result in at least one board seat or ‘board observer,’ which is even worse from BMI’s point of view.”
Castle further quotes CapitalG, which boasts that 3,000 Google employees have advised 4,500 employees at companies CapitalG has invested in, offering “hands-on, go-to-market, people & talent, and product & engineering support.”
Castle concludes: “What that means is that Google will be all up in your grill, BMI folk. Get ready for it, because they will now be able to push you around for real with your jobs on the line because THEY OWN YOU.”
If CapitalG exerts control over BMI, it might result in the PRO adopting new technologies and processes that could make the company more efficient, thereby potentially increasing the amount of money it pays to rightsholders. From a purely operational perspective, this is a good thing. Yet with BMI’s shift to a for-profit model, which can easily be an attempt to make itself more attractive to private equity buyers, there is no guarantee of this. If there is one thing tech departments know, it’s that they are at the tender mercies of the beancounters who cannot understand how their operations work.
The aforementioned decrease in licensing revenues that it forwards to songwriters and publishers from 90% to 85% reflected the fears of many rightsholders about BMI’s shift to for-profit. A spokesperson for BMI says the change in the payout rate occurred more than a year ago when BMI switched to a for-profit model. However, the company only publicly confirmed this last October.
It’s not outside the realm of possibilities that this move will allow the wishes of powerful shareholders to take precedence over rightsholders in BMI’s mission. It may be inevitable.
On Thursday, August 17, 2023, the Artist Rights Alliance, the Black Music Action Coalition, the Music Artists Coalition, Songwriters of North America, and SAG-AFTRA sent a letter to Mike O’Neill. It said:
“Songwriters have a vested interest in changes at BMI and in any proposed transaction which is wholly dependent on songs they have written. BMI does not own copyrights or other assets; it is a licensing entity for copyrights owned by songwriters and, by extension, publishers. Songwriters have a right to understand these decisions and how they impact us. If BMI sells, will writers or composers receive part of the sale proceeds? Will the broadcasters on BMI’s Board receive the sale proceeds? If so, why should broadcasters be the biggest beneficiary of the sale of a company whose only asset is songs that belong to songwriters? If broadcasters benefit from the sale of BMI, aren’t they essentially receiving a rebate on the licensing fees they’ve paid? In other words, they got to play songs for free?”
The aforementioned $100-million payment could be meant to assuage these concerns. But the reality is that when a company is sold, the lion’s share of profits will go to shareholders, not the company’s clients/customers.
The sale price might not all be arriving in one lump. The payout to rightsholders might imply that the upfront price is $1 billion in cash, with another $300 million to $700 million pledged in additional capital. If that’s the case, that $100 million payday for songwriters and publishers is not quite as generous an offer for music rightsholders. $100 million represents only 5.9% to 7.7% of the sale price. If there is a $1 billion upfront deal, US broadcasters who pay royalties to rightsholders – often through BMI – would still see a profit of $900 million.
From the beginning of BMI’s founding in 1939, the Justice Department didn’t have a problem with BMI being owned by broadcasters, as it did not violate antitrust laws. In historical retrospect, ASCAP’s heavy-handed practices led to the creation of BMI, a PRO that would be profitable to the broadcasters. Eighty-four years later, the sale of BMI to New Mountain changed the landscape of the battle between the music industry and broadcasters for financial and political supremacy.
This threatens to inflict injustices upon songwriters and publishers whose grandparents were in diapers when the feud broke out. It’s the same old story; giants fight for power and domination, and the innocent are the ones who suffer.
This could set the stage for a new power to arise and challenge the status quo. Perhaps that power could – and should – be us. What do you think?
