ASCAP versus BMI (versus CBS): modeling competition between and bundling by performance rights organizations

ANDREW N. KLEIT [*] Bundling has been a long-standing issue in industrial organization. In recent years, bundling has gained renewed controversy as it has been employed by computer software manufacturers. This article examines BMI v. CBS (1979), which dealt with bundling by performance rights organizations (PROs). A model of competition between PROs using blanket licenses is presented. The usage of blanket licenses is shown to generate both higher profits for PROs and higher costs for the users of musical compositions when there are a small number of competing PROs. In addition, the model explains why blanket licenses are observed in unregulated PRO markets. (JEL L41, K21) I. INTRODUCTION The question of bundling has been a longstanding issue in industrial organization economics, dating back at least to Stigler [1963]. This article looks at bundling in the context of the famous antitrust case, BMI v. CBS, 441 U.S. 1 (1979). The defendants in the case were two performance rights organizations (PROs), the American Society of Composers and Publishers (ASCAP) and Broadcast Music, Inc. (BMI). PROs monitor the usage of copyrighted songs by users of music, collect fees from those users, and pay member composers whose songs are played. PROs have historically offered "blanket licenses" where, for a certain fixed fee, a station can use all the music in a PRO's catalog. Blanket licenses are thus equivalent to "bundling," or "block booking." At issue in the case was CBS's petition to require PROs to switch from offering blanket to per-use licenses, where a station would pay per usage for each composition. Here I will model competition between PROs using either blanket or per-use licenses. PROs will compete against each other, both for the compositions of songwriters and for offering their products (licenses for compositions) to producers of television programs. I will show the circumstances under which the usage of blanket licenses generates higher profits for the PROs and/or higher costs for the users of musical compositions. I will also show which license is likely to arise in equilibrium, helping explain why CBS felt compelled to sue BMI, of which it was a part owner, as well as the reluctance of ASCAP to issue attractive "per-program" licenses, as an antitrust consent decree nominally requires it to do. Bundling in general and the economic questions raised by the BMI case are staples in the economics of industrial organization and antitrust (see, for example, Kaserman and Mayo [1995, 173-4]). Yet up to this time there has apparently been little modeling of bundling of several products by competing firms. In addition, there has been little written on competition between PROs, an important exception being Besen et al. [1992]. Even that article does not formally examine the competition between PROs and the differentiated products they sell to their users. This article attempts to fill this void. The remainder of the article is organized as follows: Section II briefly describes the origins of the major PROs and the questions raised by the BMI litigation. Section III generates a market equilibrium for PROs using blanket licenses. Section IV generates an equilibrium using per-use licenses and compares that equilibrium to the one derived in section III. Section V discusses which form of license will arise in equilibrium, and section VI contains some concluding remarks. II. THE ORIGINS OF PROS AND THE CBS LITIGATION The Origins of PROs PROs exist because of the following problem: Copyright owners of compositions have property rights to their material, and therefore no one is allowed to use that material without the payment of agreed-on fees. Thus, any time a copyrighted song is played for commercial purposes the copyright owner is entitled to compensation. But it would be very costly for live theater owners, and later radio and television stations, to locate and pay the copyright owner of each score, just as it would be very difficult for copyright owners to monitor users to determine if their compositions are being played. …