Competition, Regulation and Business Strategy (Econ 6034)

The University of Hong Kong

March 30th, 2009
Charles CHARIYA
Tristan ZHUO Liang
Raymond CHAN Sin Lun
Ben CHEN Banyan
Amy WANG Yamei

Broadcast Music, Inc. v. Columbia Broadcasting System, Inc.

Analysis of the 1979 Supreme Court Case
This study is to investigate a court case in 1979 between ASCAP, BMI and CBS. It
begins with a brief introduction of the industry and the players involved, followed by
essential economic definitions involved in the case. The focus will then switch to the
history and details of the court case, as well as the court decisions. After that, the
economic analysis of the case and the conclusion of this case study will be presented.
The industry and the players
The industry of music recording and broadcast is divided into three distinct layers.
The foundation layer consists of artists, composer and right holders such as Sony and
BMG. Another layer is the broadcaster like ABC, CBS, NBC, and numerous radio
stations across the country that use, but does not own, the music. The last but not the
least, is rather like a middle layer, the Performance Rights Organization (PROs). They
are responsible for the licensing and monitoring the use of music, collection of fees
and distributing the collected revenues to the artist/composers/right-holders. They are
also held responsible for the enforcement of legally protected works of musical
compositions. There are currently three PROs in the United States: ASCAP (53%
market share), BMI (40%), and SESAC (7%). The industry is relatively large - in
1990 the revenue collected by ASCAP alone was $350 million.
In 1979, the Supreme Court of the United States heard and decided on a case
involving the plaintiff - CBS (Columbia Broadcasting System, Inc) and the defendant
- ASCAP (American Society of Composers and Publishers) and BMI (Broadcast
Music, Inc). ASCAP is a non-profit PRO owned by composers with over 22,000
members and 53% market share. BMI (also a non-profit PRO) is owned by CBS and

other broadcasters. With 40% market share, BMI is affiliated with about 10,000
publishers and 20,000 authors and composers. Finally, CBS is a national TV and radio
broadcaster as well as a copyrights holder thru BMI, with more than 200 affiliated
stations and is capable of producing 7500 network program a year.
Economic definitions employed
The main economic concepts used in the 1979 Supreme Court ruling are per se, rule
of reason, and the Sherman Act. Definitions are given below:
Per se: Inherently illegal. An act that is illegal without need of explicit
proof of the circumstances that would indicate illegal activities.
Rule of Reason: A rule stating that only combinations and contracts that
unreasonably restrain trade are subject to penalties under the anti-trust laws.
The rule of reason implies that size and possession of monopoly power
alone are not illegal. The Sherman Antitrust Act established this rule.
Sherman Antitrust Act: An act established in 1890 as a statue to limit
cartels and monopolies. The Sherman Act made attempting to monopolize,
conspire or combine to monopolize in trade or commerce a felony. It is
extended by the Clayton Act (1914).
The US Supreme Court determined activities, such as price-fixing, retail price
maintenance, geographic market division, group boycott and tying arrangement are
illegal per se regardless of reasonableness and intention. However, under the modern
anti-trust theories, the traditionally illegal per se categories create more of a
presumption of unreasonableness, and the treatments are therefore being carefully
narrowed by court and began issuing guidelines.
Another feature that plays an essential role in this court case is the blanket license
and the per-program license. A blanket license is a single license authorized by
PROs that covers multiple right-protected works of all the right-holders affiliated. It
allows the use of every song in the repertoire in exchange for a set fee. The fee is
similar to a tax on revenue generated by the programming that uses music.
On the contrary, a per-program license measures the actual usage of individual
music and charges fees accordingly. The fee charged follows a complicated
compromise formula. Although it involves a cost for the privilege of opting out of the

blanket fee in terms of keeping accurate record, it usually resulting in a significant

money saving. The per-program license was developed as an alternative to blanket
license upon complains and challenges to the prevailing blanket system in court.
Case History
The Department of Justice first investigated ASCAP in 1934. Following separate
complaints in 1941, a consent decree was reached that imposed tight restrictions on
ASCAPs operations. The decree was extensively amended in 1950 and continued to
be in effect. Under the amended decree, members may grant ASCAP only
nonexclusive rights to license their works and thus retain the rights individually to
license public performances. Moreover, ASCAP may not insist on the blanket license,
and the fee for the per-program license must offer a genuine economic choice. Since
1946, CBS had taken blanket licenses from ASCAP and BMI and had not demanded
any other kind of license until the suit in 1969.
In 1969, CBS sued ASCAP and BMI and alleged that the issuance of blanket licenses
at fees negotiated by the two organizations was illegal price fixing. In 1972, The
District Court dismissed the complaint and ruled that the blanket license was not price
fixing and a per se violation of the Sherman Act. However, in1977, the Court of
Appeals reversed the District Courts judgment and held that the blanket license was
illegal per se under the Sherman Act. Finally, in 1979, the Supreme Court reversed the
judgment of the Court of Appeal, favoring rule of reason in consideration of the
redeeming virtues of the blanket license.
The Supreme Court listed a number of rationales behind its verdict. As a matter of
fact, Congress itself employed the blanket license in the Copyright Act of 1976.
Moreover, the Court found no practical impediments preventing direct dealing by
CBS. Given the large number of individual negotiations, a middleman with a blanket
license was an obvious necessity. And a bulk license of some type is necessary to
achieve efficiencies. In essence, the blanket license is composed of the individual
compositions plus the aggregating service and is quite different from anything any
individual owner could issue. Therefore, the blanket license is not a naked restraint of
trade but rather accompanies the integration of sales, monitoring, and enforcement
against unauthorized copyright use.
The major lesson we learned from this case is that a per se approach based on
structure is undesirable. Moreover, the Court of Appeals took the term price fixing
literally without considering the historical context of the organizations. The Court of

Appeals literal approach did not alone establish that this particular practice was
plainly anticompetitive. Therefore, another lesson we learned from this case is that
literalness is overly simplistic and often overbroad. This is because when two partners
set the price of their goods and services, they are literally price-fixing but not per se in
violation of the Sherman Act. By favoring rule of reason, the Supreme Court in this
case also took a welfare balancing approach. It reasoned that the blanket license
substantially lowered costs and was potentially beneficial to both sellers and buyers.
Court Decision
One of the interesting parts of this case is the fact that CBS was a part owner of BMI.
Kleit (2000) argues that although CBS would be able to bring about the change in
pricing via the board, it was unlikely to do so. The main reason is due to the fact that
the competitive nature of the industry would put BMI at a significant disadvantage if
they were to be forced to offer alternatives to blanket pricing. Effectively, a blanket
PRO can block entry into the market by the per-use PRO, while the per-use PRO
cannot block entry by the blanket PRO.
The ability for the clients of ASCAP and BMI (namely CBS) to choose alternatives to
the blanket licensing agreement was a major reason for each of the different court
rulings. In the District Court, the court dismissed the complaint holding that direct
negotiation with individual copyright owners is available and feasible therefore,
there is no undue restraint of trade. Later, the Court of Appeals reversed the
decision of the District Court on grounds of price-fixing as illegal per se under the
Sherman Act thereby ignoring the arguments of whether there were other
mitigating factors (such as: choice of license providers).
Finally, the Supreme Court disagreed with the per se illegality of price fixing, and
further expounds that (a) members (i.e. artists/owners) may grant ASCAP only
nonexclusive rights to license their works, (b) ASCAP is required to grant to any user
making written application a nonexclusive license to perform all ASCAP
compositions, either for a period or on a per-program basis. And (c) ASCAP may
not insist on the blanket license and must offer the applicant a genuine economic
choice between the per-program license and the more common blanket license.
Therefore, the ability to choose between the available options is key in the Supreme
Courts view that the per se rule is not violated and therefore does not constitute
price-fixing.

Economic Analysis
Although the main concepts in this case include the decision between using per se and
the rule of reason, in an industry with only three vendors, monopolistic tendencies are
not too hard to imagine. At the time of the case, Kleit (2000) calculated the
Herfindahl Index to be 4,458 based on the market shares of ASCAP 53%, BMI 40%,
and SESAC 7%. By 1993, the market shares of each of the PROs were: ASCAP
61.7%, BMI 37.0%, SESAC 1.2%, therefore the HHI for this particular industry is
now 5,177 a significant increase.
Kleit (2000) presents several models to articulate the economic reasoning behind the
decision of the courts. The main components to the models presented are: the number
of Performance Rights Organizations, the number of songs, the cost of finding a
comparable song, and the cost to consumers and the revenue to PROs of blanket and
per-use schemes. After a detailed mathematical proof, the results are based
conveniently on market concentration (HHI) of the PROs:

H>5000, r<2
4445<H<5000
H<4445, r>2.25

Demanders
per-use
per-use
blanket

PROs
blanket
per-use
per-use

According to the authors calculation, in 1979 the HHI was 4458, meaning both
Demanders and PROs should have preferred per-use. The range where the
Demanders and PROs agree on per-use is fairly narrow. In fact, by 1993, the HHI
rose to 5,177, the model would predict that the PROs would prefer blanket, and the
demanders would prefer per-use (which is exactly what the court case sides indicate).
Conclusion
In the case of ASCAP vs. BMI vs. CBS, the major finding was the use of Rule of
Reason to determine whether the PROs had in fact engaged in price-fixing. After a
rigorous examination (including the overturning of a lesser courts ruling), the
Supreme Court decided in favor of the PROs, mainly due to the fact that Demanders
(CBS) had a choice as to how to obtaining licensing for compositions that they used
on the air. Using models that look at market concentration and considering motives
behind different parties perspectives reinforces the Supreme Court ruling that PROs
provide a valuable service that is differentiated and unique. With the long history of
antitrust actions and an existing system of mediation for pricing (via courts), the

industry appears to be fairly well defined and thus, the conclusion is that ASCAP and
BMI are not illegally price-fixing via blanket prices.
Current Situation (Internet and China)
An interesting side-note is the growth of television in terms of revenue for BMI. In
the 1940s, television was only at the beginning stages of development, and the
aggregators had previously not charged fees to encourage the growth of the medium.
It was not until the 1960s that the American public started adopting the color TV en
mass. The initial case appeared in the NY District Court in 1972. By the time the
lawsuit was before the Supreme Court, January 15 th, 1979, television was quickly
becoming the dominant medium of communications.
By 1993 TV comprised 46% of ASCAPs revenue, while radio only comprised 35%.
As the measurement of TV is relatively easy compared to radio (monitoring 3 major
networks instead of hundreds of individual radio stations), the lawsuit was an attempt
to affect the way the business of licensing operated. With the growth of the Internet,
we again will see challenges to this market and this model (perhaps by YouTube,
Yahoo, or the other entertainment vehicles now streaming music, compositions, etc
covered by the PROs).
In China, Music Copyrights Society of China (MCSC) authorizes and enforces media
rights. MCSCs operation is quite similar as ASCAP (i.e. Blanket License) - operating
more than 14 million music copyrights and consistently one of the top 50 Copyrights
Societies in the world since 2002. However, there are fierce conflicts between MCSC
and its competitors. Unlike the US PRO system, in China, MCSC monopolizes the
industry with exclusive rights. Because of this, MCSC is more likely to charge an
unreasonably high price, which jeopardizes the market by totally offsetting efficiency
gained from unified management of music rights.
(???) It seems like that MCSC is unlikely to be exempted by Rule of Reason,
therefore, a question is coming, will some companies sue MCSC in light of
<Competition Law>, just like what CBS did in 1979? The answer may be no, at least
before the further revision of our new competition, which have no direct provisions
about Copyrights Unified Management Organization. Compare to US, where
Sherman Act rules this issue together with a series of cases, China still has a long way
to go in anti-trust.

Sources
Kleit, Andrew N., Ascap Versus BMI (Versus CBS): Modeling Competition Between
and Bundling by Performance Rights Organizations, Economic Inquiry, Vol. 38, No 4,
October 2000, pp 579-590
Supreme Court, Broadcast Music, Inc. v. CBS, Inc., 441 U.S. 1 (1979)
Reid, Harvey, ASCAP & BMI Protectors of Artists or Shadowy Thieves, 1993,
www.woodpecker.com//royalty-politics.html