Royalty/Licensing Rates For Mobile Music Upheld by Second Circuit

MobiTV, Inc. (Mobi) purchases programming from cable television networks and transmits it to wireless carriers, to which consumers subscribe to obtain wireless service on their mobile phones. Basically, Mobi acts as a middleman between "content providers" - television networks, record labels, and radio broadcasters - and wireless phone carriers.

In November 2003, Mobi applied to the American Society of Composers, Authors and Publishers (ASCAP) for a license to the music component of its offerings. When Mobi and ASCAP were unable to agree on a price, ASCAP sought a reasonable rate in the District Court for the Southern District of New York. At issue in the case: the royalty for a blanket public performance license for music embodied in television and radio content delivered to viewers and listeners using mobile telephones/handsets.

In United States v. ASCAP (In re MobiTV, Inc.), 2010 U.S. Dist. LEXIS 45992 (S.D.N.Y., 2010) [enhanced version available to lexis.com subscribers], the district court declined to use the wireless carriers' retail revenue from their customers as the base for the royalty calculations. Instead, for programming obtained from television networks, it used Mobi's costs, i.e., the amount it paid to content providers for content, plus any revenue derived by Mobi from advertising inserted into that content. For programming obtained from record labels (music videos), the court used Mobi's revenues, i.e., the amount it received from wireless carriers for its services along with advertising income.

In more succinct terms, the district court used as a revenue base "the wholesale price for the musical content." Both revenue bases used wholesale revenue: in one case, the wholesale revenue that the cable television networks received from Mobi; in the other case, the wholesale revenue that Mobi received from the wireless carriers. In neither case was retail revenue used, i.e., the revenue the wireless carriers received from the handset customers.

As noted by the 2nd Circuit:

At first glance, this phrase ["the wholesale price for the musical content"] might seem to involve circular reasoning: the revenue base is being selected to determine what Mobi must pay ASCAP for the right to perform ASCAP music, but what Mobi must pay ASCAP might also be called "the wholesale price for the musical content." But, as used by the District Court, that is not what the phrase means. In fact, the phrase has two other meanings depending on whether Mobi is licensing content from content providers (typically television networks) or obtaining music videos from record labels.

These calculations resulted in a judgment setting the licensing fee at $405,000, substantially less than ASCAP's proposed fee of $15.8 million.

ASCAP appealed, contending that the revenue base should have been retail revenue received downstream in the distribution chain by the wireless carriers from their customers, rather than the wholesale revenue received upstream by the content providers from Mobi.

In ASCAP v. MobiTV, Inc., 2012 U.S. App. LEXIS 10307 (2d Cir. N.Y. May 22, 2012) [enhanced version available to lexis.com subscribers], the 2nd Circuit affirmed, holding:

... in Music Choice II [United States v. Broad. Music, Inc., 316 F.3d 189 (2d Cir. N.Y. 2003) [enhanced version available to lexis.com subscribers]] our Court added a significant footnote, observing that "where the customers pay a single fee for a package of audio and visual programming, which includes the music, it will be difficult to determine what part of the fees paid was for the music, as opposed to other programming." That is precisely the sort of "bundling" that occurs with Mobi's transmission of programming to wireless carriers. The wireless carriers typically offer Mobi's television products  as part of a bundle of services that also includes Internet access and text messaging, and then charge a single data plan fee for the whole bundle. As ASCAP's fee proposal to the District Court illustrated, separating out the relative value of each individual product is fraught with methodological difficulty. ASCAP's proposal was premised on the notion that the value of different products in the bundle could be determined based upon how much data each product used. As the District Court noted, this proposal made the essentially arbitrary assumption "that a consumer would pay the same amount of money to receive a kilobyte of text messaging as a kilobyte of television programming, even though a kilobyte might give a consumer several back-and-forth exchanges of text messages but only the briefest glimpse of an image from a television program." ASCAP's failure to develop a rational formula for valuing the component parts in the bundle of products sold by the wireless carriers confirms the wisdom of the District Court's decision to reject the use of a retail base in this case. ...

... although not disagreeing with the holding of Music Choice II, we are not persuaded that its contention that "retail revenues derived from the sale of the music fairly measure the value of the music," is universally true.

....

Whether or not in some contexts the retail price of a product containing music is a good measure of the fair market value of the music, the District Court in the pending case, on the record before it, did not err in concluding that the retail price paid by customers for a service that delivers video and audio channels containing music to their handsets is not a good measure of the value of the music itself.

(citations omitted) 

....

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