MBW Reacts is a series of analytical commentaries from Music Business Worldwide written in response to major recent entertainment events or news stories. Only MBW+ subscribers have unlimited access to these articles. MBW Reacts is supported by JKBX, a technology platform that offers consumers access to music royalties as an asset class.
The Thanksgiving long weekend is over, and as minds switch back to business… the sale of BMI, the US’s largest performance rights organization (PRO), is sure to generate controversy within the music industry.
Controversy has already followed BMI for the past year, as the PRO attempted to sell itself… gave up… then announced it would be shifting away from the not-for-profit business model that had been at its core for 80+ years… before finally putting itself up for sale again – this time successfully.
BMI’s announcement that it is being acquired by a shareholder group led by private equity firm New Mountain Capital came seven days ago (November 21) during the shortened, and usually sleepy, Thanksgiving week.
The timing (perhaps deliberately?) somewhat muted the industry reaction. That reaction, however, is sure to get louder in the weeks ahead.
For one thing, plenty of continued attention will be paid to the news that BMI will kick USD $100 million of the sale proceeds to songwriter, composer, and publisher clients (whom BMI refers to as “affiliates”).
The sale price for the New Mountain deal wasn’t disclosed.
Sources suggested earlier this year that BMI and New Mountain had agreed in principle on a USD$1.7-billion price tag, but a report from Billboard this week, citing unnamed sources, put the final price at between $1.3 billion and $1.5 billion; Hits suggested it was closer to $1.2 billion.
BMI’s proposed acquisition still has a few hoops to jump through: It has to be approved by BMI’s board, and pass muster with regulators, including the US Federal Trade Commission. Assuming all goes well, the deal will be finalized in Q1 2024.
Yet there’s another aspect of the New Mountain deal that is already drawing significant attention: it will see Alphabet Inc., the parent company of Google and YouTube, acquire a minority stake in BMI via its independent growth fund, CapitalG.
The fact this news emerged just two days before MBW uncovered Google’s recent submission to the US Copyright Office – in which the Big G argues that the ingestion of copyrighted music into generative AI platforms is “fair use” – tells its own story.
Another area of contention about the BMI deal?
The lion’s share of the sale’s windfall will go to a group whose interests have often been at odds with those of BMI’s songwriter and publisher members: Music broadcasters. (Prime example: around $100 million from the deal, it’s been confirmed, will be going to audio broadcast giant iHeartMedia.)
Below, MBW breaks down three salient observations about the BMI deal – and a significant shift in the US commercial music landscape…
Chubo / Shutterstock1) Alphabet/Google is now in the music rights management business. Expect fireworks.
At the bottom of BMI’spress release announcing its acquisition by New Mountain, there’s a brief, one-sentence mention of the news that, as part of New Mountain’s investment, “CapitalG will also invest a passive minority stake in BMI.”
What is CapitalG? It’s Alphabet Inc.’s “independent growth fund,” set up in 2013, when Alphabet still called itself Google. It has invested in companies such as Airbnb, Lyft, Crowdstrike, Robinhood and Snap, among others.
Generally, the company invests in tech and “tech-adjacent” companies. It doesn’t have much of a track record of investing in the music business. So what is it doing investing an undisclosed sum into BMI?
“We are able to invest heavily in each company… fueling them with recurring, significant capital and consistent, hands-on operational and strategic support.”
CapitalG, Alphabet’s investment fund, which will own a stake in BMI under the New Mountain deal
It’s no secret that Google/Alphabet has tried before to get into the music business directly.
In 2015, another investment fund owned by the company, Google Ventures (now called GV Management) led a $60-millioninvestment round into Kobalt, the music publishing and rights company that has shaken up the music industry over the past two decades, with its business model that allows artists to hold on to their copyrights after signing with the company.
(That investment is no more: Last year, the vast majority of Kobalt was itself acquired by a private equity firm, Francisco Partners.)
It’s clear that Alphabet is interested in the world of music publishing. That brings up the prospect of another conflict of interest – not unlike BMI being owned by radio stations that play music – in that Alphabet owns YouTube, which runs YouTube Music, one of the world’s largest music streaming services.
If you’re the owner of a music streaming service that pays some $6 billion to the music industry annually, it sure might be nice if you could also own the rights to that music, and pay yourself… or at the very least, to own a PRO, and influence the rates that are paid for music.
To be clear, Alphabet’s CapitalG has taken a “passive minority stake” in BMI, implying that Alphabet won’t have influence over BMI’s decisions. But in the view of Chris Castle, a prominent lawyer who represents indie musicians, there may be more to the story.
In a blog post reacting to news of the BMI acquisition, Castle cites CapitalG’s own words: “We are able to invest heavily in each company’s success, fueling them with recurring, significant capital and consistent, hands-on operational and strategic support.”
“Our mission has been, and always will be, to support our songwriters, composers and publishers and grow the value of their music.”
Mike O’Neill, BMI
“What this sounds like is what you would expect – a very engaged, Silicon Valley-style venture investment,” Castle writes. “It is inevitable that this investment will 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.”
“It is inevitable that this investment will result in at least one board seat or ‘board observer,’ which is even worse from [BMI’s] point of view.”
Attorney Chris Castle on CapitalG’s investment in BMI
Let’s call that the worst-case scenario for songwriters – or maybe not?
If CapitalG does indeed “get up in the grill” of BMI, it might result in the PRO adopting new technologies and processes that could make the company more efficient, thereby potentially upping the amount of money it pays through to rightsholders.
Yet with BMI’s shift to a for-profit model – clearly, at least partly, an attempt to make itself more attractive to private equity buyers – we can’t be sure of that either.
In a move that reflected many rightsholders’ fears about BMI’s shift to for-profit, the company confirmed in October that it was decreasing the percentage of licensing revenues that it forwards to songwriters and publishers, from 90% to 85%.
(UPDATE: 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, it appears the company only publicly confirmed the change this past October.)
Today, BMI CEO Mike O’Neill continues to insist: “Our mission has been, and always will be, to support our songwriters, composers and publishers and grow the value of their music.”
One wonders if a point arrives in future where powerful shareholders take precedence over rightsholders in BMI’s mission.
Photo credit: Marian Weyo/Shutterstock2) $100 million to songwriters and publishers is nice, but it might not be enough to silence critics
The $100 million of the proceeds that BMI plans to distribute to its “affiliates” (i.e. music rightsholders) is clearly a gesture meant to soften the criticism that there’s something fundamentally wrong with music broadcasters making a massive profit off of the collection of songwriter and publisher rights.
In a letter to BMI this summer, a group of songwriters’ advocacy groups, including the Artists Rights Alliance and SAG-AFTRA, asked a number of pointed questions, among them:
“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 from a sale of a company whose only asset is songs that belong to songwriters?”
Clearly, the $100-million payment is meant to assuage these types of concerns, but sadly for rightsholders in this case, the reality is that when a company is sold, the windfall goes to shareholders, not the company’s clients/customers.
If Spotify were sold to a private equity firm, would anyone expect that its paying subscribers (or even music distributors) would get a cut?
It’s worth noting that this $100 million is roughly equal to the extra annual amount that BMI is holding back under its new 85% payout rate.
In FY 2022, the last year for which BMI reported its revenues, the PRO took in $1.573 billion. At the previous 90% payout rate, BMI would pay out around $1.42 billion in royalties on that amount.
At the new 85% rate, it would pay out around $1.34 billion – a difference of around $80 million.
(UPDATE: Although BMI has not released revenue and payout numbers for FY 2023, a spokesperson told MBW that BMI has increased its cash distributions by 11% since the switchover to the 85/15 model.)
Sources in the music publishing industry recently told MBW that BMI was looking to tip 10% of the New Mountain deal’s sale price to its rightsholders. If the sale price range was indeed between $1.3 billion and $1.7 billion, then the $100 million represents only 5.9% to 7.7% of the sale price.
Then again, the sale price might not all be arriving in one lump.
For example: 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. (BMI’s announcement last week confirmed that New Mountain’s proposed takeover would include reserved additional capital to fund “growth investments, new ventures and technology enhancements” for the PRO.).
If that’s the case, that $100 million payday for songwriters and publishers would be a more generous offer for music rightsholders than it appears at first glance.
However, even in this case (a $1 billion upfront deal), those US broadcasters who themselves pay royalties to rightsholders – often through BMI – would still bank $900 million.
3) Broadcasters’ profit from BMI’s sale is history’s revenge
As numerous rightsholders have pointed out ever since news broke that BMI was for sale, the idea that the US’s radio broadcasters – often criticized for being stingy with payments to artists – will be the prime beneficiaries of the sale of BMI leaves a bad taste in the mouth of many in the music industry.
The letter to BMI from advocacy groups earlier this year sums up this issue succinctly: “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?”
Broadcasters have owned BMI ever since it was founded by the National Association of Broadcasters in 1939.
The PRO’s launch was essentially an attempt to pay lower royalties for playing music on the air than broadcasters had been paying to ASCAP, the dominant PRO at that time (and still the second-largest, by a thin margin, in the US today).
In the late 1930s, royalties to publishers and songwriters worked differently than they do today. Rather than paying for the songs that they actually 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.
When, during the Great Depression, ASCAP raised the percentage it required broadcasters to pay, the radio broadcasters rebelled, and set up their own collection organization – BMI.
Back in those days, President Franklin D. Roosevelt’s Justice Department ran an antitrust investigation of ASCAP, and eventually opened one into BMI as well. Both orgs 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 orgs to offer their entire catalogs to broadcasters.
With only a few alterations, those consent decrees have governed ASCAP and BMI’s operations ever since.
“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?”
Artists’ advocacy groups, in a letter to BMI
One thing that the Justice Department of that time didn’t have a problem with? BMI being owned by broadcasters – as it didn’t run afoul of antitrust laws.
Eighty years later, the sale of BMI to New Mountain highlights a deep irony in the result of that ancient fight between the music industry and broadcasters: ASCAP’s hardball practices at that time led to the creation of a PRO (in BMI) that would eventually hand a giant windfall to the broadcasters.
We can think of this as history’s revenge, a blowback to rightsholders four generations later.
The injustice here (if indeed you subscribe to the notion that this is an injustice) is that it comes at the expense of songwriters and publishers whose parents weren’t even alive when the conflict first broke out.
