The American Society of Composers, Authors and Publishers (ASCAP) and MobiTV (Mobi) reached an impasse in their dispute about the royalty fees for a license for Mobi to publicly perform works controlled by ASCAP.  At the district court level, ASCAP claimed Mobi owed it $41 million in fees for the years 2003 to 2011.  Mobi calculated that it owed ASCAP $301,257.99 for fees due from November 2003 to July 2009.  The district court ruled that Mobi owed ASCAP $405,000 for fees from November 2003 through March 2010. 

The district court calculated its award using the amounts Mobi pays to cable television networks for content and the revenue Mobi receives from wireless carriers as the revenue base, i.e. the figure from which the royalties are calculated.  ASCAP appealed the case to the Second Circuit Court of Appeals, claiming that the district court should have calculated the royalty rate based on the retail revenues wireless carriers receive from sales to their customers.  The Second Circuit affirmed the district court’s decision.

ASCAP is a licensing organization that collects public performance royalties on behalf of its members.  It is estimated that ASCAP licenses 8.5 million musical works.  Because of concerns about monopoly power, ASCAP’s licenses are subject to a consent decree.  Under the most recent consent decree,

ASCAP is required to issue a “Through-to-the Audience” (“TTTA”) license to any operator that transmits content to other music users with whom it has an economic relationship relating to that content.  A TTTA license effectively allows the licensee to pay a single fee in exchange for the right of the licensee, as well as any of its downstream partners, to perform any of the music in ASCAP’s repertoire.

(Opinion pdf pages 4-5).

Mobi provides content, such as television programs, radio programs and music videos, over mobile phone networks for consumers to view or listen to on their handsets.  Mobi aggregates content from a number of sources, such as television networks, radio broadcasters and record labels.  Mobi also supplies the infrastructure for wireless carriers to provide to the wireless carriers’ users content that Mobi has not aggregated. 

This case arises out of the fees due from Mobi’s application for a TTTA license from ASCAP. Since the parties could not agree on a fee, the district court was responsible for determining a reasonable fee based on all of the evidence. The district court is required to estimate the fair market value of a license.

ASCAP’s fundamental objection is 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. 

(Opinion pdf pages 15-16).

The district court rejected ASCAP’s approach of basing the fees on the carriers’ retail revenue, in part because much of the retail figure is unrelated to the value of Mobi’s products.  The district court thought that the price Mobi paid to the content providers is the best indication of the value of a component, since some of the components are then bundled by the carriers. 

The district court agreed with the economic theory of “derived demand,” as explained by Mobi’s expert.  Derived demand is the relationship between final product markets and the demand for inputs.  In this case, there is a relationship between how cable television networks generate their revenues and the content on a channel.  As particular content becomes more popular, the content seller can demand a higher rate of compensation from advertisers and content purchasers.  Mobi’s payments to the cable television networks were based on subscriber data tracked by Mobi and shared with the networks.

The district court thought that ASCAP’s formula was too convoluted, expensive and flawed to be workable.  Finally, the district court determined that calculating the fee at the point at which Mobi pays for content and sells it to the carriers captures some revenue, such as advertising revenue, that is not captured at the retail level.

In distinguishing this case from some of its rulings in other ASCAP royalty cases, Second Circuit stated

[T]he 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.

(Opinion pdf pages 24-25).

This case is American Society of Composers, Authors and Publishers v. MobiTV, Incorporation, Second Circuit Court of Appeals, No. 10-3161-cv(L).