As we’ve covered in recent months here at the R Street Institute, the U.S. Justice Department is in the midst of its review (and possible modification) of the agreements (called “consent decrees”) that govern the operation of the nation’s two leading performance rights organizations (PROs). These groups – the American Society of Composers and Publishers (ASCAP) and Broadcast Music Inc. (BMI) – are responsible for collecting and distributing royalties from the performance of musical compositions under copyright.

The agreements place restrictions – originating from antitrust concerns, on the one hand, and fear of heavy-handed regulation, on the other – on the two entities’ operations,  through which the vast majority of our nation’s musical works are licensed. While no one would describe this system as an inherently good or logical one, it’s important to weigh how any modifications would affect the tenuous balance currently in place.

One particularly contentious piece of the debate centers on the issue of “fractional” licensing – that is, whether one of the multiple co-owners of a copyright has the ability to license a work in full – particularly as a condition for “partially” withdrawing from the consent decrees. Recently, the DOJ circulated a letter letting the PROs know it is considering making formal a requirement that a single co-owner of a work could properly license for 100 percent of it (a policy called “100 percent licensing”).

As my colleague Mike Godwin previously wrote at TechDirt, this piece of the music-licensing debate raises some thorny issues for those who want to bring more competition into a space that has been plagued by decades of government intervention. He explains:

To be clear, no one is asking to eliminate the consent decrees, even though all sides officially say they favor competition and the free market. Ironically, those who laud the competition they say would follow from allowing rights-holders to “partially withdraw” digital music rights tend to fear simplification of the system as a whole, precisely because would make competition among rights-holders more likely.

Indeed, as we have written, it’s hard for anyone to see what a free market for music licensing would even look like anymore. Matt Schruers, a law professor and vice president with the Computer and Communications Industry Association, writes about this issue at the DisCo blog, explaining that the DOJ’s interpretation is in line with existing law:

Generally, under copyright law, when multiple authors have a claim in a particular work, each is empowered to license full (but not exclusive) use of that work to others.

But in a document response to U.S. Rep. Doug Collins, R-Ga., the U.S. Copyright Office took a different view, stating that:

The Office believes that an interpretation of the consent decrees that would require these PROs to engage in 100-percent licensing presents a host of legal and policy concerns. Such an approach would seemingly vitiate important principles of copyright law…and impermissibly expand the reach of the consent decrees.

USCO’s response continues over 33 pages, outlining the case for their interpretation and making the point that:

[A]lthough the Copyright Act’s default rule theoretically permits each co-owner of a joint work to authorize the public performance of a musical composition, the common industry practice is for co-owners to divide ownership of the copyright and engage in separate licensing and collection of royalties for their respective shares.

Setting aside the complexities of the current legal environment, policymakers must also factor economic concerns, particularly in dealing with an industry that generates more than $15 billion in annual domestic revenues. As Schruers notes, fractional licensing is not always efficient:

Congress intended for any one rightsholder to be able to authorize a work’s use…as it would be inefficient for a potential licensee to strike 10 different contracts with 10 co-authors to use one individual work.

Indeed, this model’s high transaction costs and problems with holdouts could make the costs of doing business prohibitive, especially in an environment where it is commonplace to have half a dozen or more co-owners in a single composition. Given a landscape that already needs more market competition, it shouldn’t be the case that only firms with big legal departments are able to do business.

These are difficult questions and there aren’t always clear solutions (short of blowing the whole thing up, which no one wants to do). Putting rights holders in greater competition with each other, while keeping transaction costs low, could produce better results for consumers. Yet there are also legitimate concerns raised by the USCO paper, such as its impact on creative collaboration (although that could cut both ways) and potential adverse effects on the competitiveness of other PROs, such as the Society of European Stage Authors and Composers (SESAC) and Global Music Rights (GMR).

In looking toward a real solution (even if, ultimately, an imperfect one), it’s important for policymakers to keep in mind is that the constitutional purpose of our copyright system is not merely to provide rents to rights holders, but to promote progress and commerce. In other words, we should seek the outcome that best fosters entrepreneurship and promotes innovation, competition and reliance on market forces. As Godwin describes it:

The purpose of copyright is not merely to provide monopoly revenue streams to content companies, but to ensure that creative works actually reach the public. Thus, for the DOJ to clarify obligations under the decades-old consent decrees could make sense. Allowing fractional rights-holders to authorize use of a work unilaterally is one potential avenue to untangle the complex web of rights in music and bring the licensing system more in-line with those of other copyrighted works with multiple authors…Publishers and PROs thus must find a way to thread the needle in arguing both that the free market commands we let them partially withdraw digital rights and that the free market is lousy when co-authors compete with one another on price.

We’ll continue to keep an eye on all the moving parts of fractional licensing as it develops.