In June, Pandora announced plans to purchase a South Dakota radio station, KXMZ(FM), from Connoisseur Media, LLC.   From the outside, it might have seemed curious that a pure-play Internet webcaster would seek to enter the broadcast radio business by purchasing a single station.  But Pandora explained that, among other things, the company wanted to buy the radio station so that it would qualify to pay lower royalties for the public performances of musical works in the repertories of the American Society of Composers, Authors, and Publishers (“ASCAP”) and Broadcast Music, Inc. (“BMI”) that are made via Pandora’s webcasting service.  The lower webcasting rates that Pandora seeks are available to owners of terrestrial radio stations under settlements that the Radio Music Licensing Committee (“RMLC”) – which represents the majority of the country’s broadcast radio stations – negotiated with ASCAP and BMI.  Pandora argues that, because the settlement applies to webcasting by other owners of over-the-air radio stations, once it buys an FM station, it should be entitled to pay the same rates.

ASCAP and BMI, which are seeking higher rates from non-broadcaster webcasters than they negotiated in the RMLC settlement agreements, have opposed Pandora’s move.  ASCAP first issued a statement (which it later updated) explaining why it does not believe that the purchase of a single radio station will entitle Pandora to pay the lower performance royalty rate.  Next, BMI filed a petition in its rate court seeking the higher rate.  Then, ASCAP filed a formal Petition to Deny the KMXZ(FM) license assignment application with the Federal Communications Commission (“FCC”).

In its Petition, ASCAP raises three principal objections to Pandora’s proposed purchase.  First, it argues that Pandora has failed to disclose all of the parties that will hold attributable interests in KXMZ(FM) after closing.  Second, it argues that Pandora has failed adequately to demonstrate compliance with the FCC’s foreign ownership limits.  And third, it argues that Pandora’s goal of lowering the performance royalty rates that it must pay to ASCAP suggests that Pandora will not operate KMXZ(FM) in a manner that serves the public interest.

Taking the last of these issues first, although the FCC will need to find that the assignment of KMXZ to Pandora will serve the public interest in order to approve the transaction, the Commission is likely to view ASCAP’s argument in this regard as a disguised request for the agency to wade into the intricacies of ASCAP licensing.  The FCC is unlikely to address these issues, and instead can be expected to view ASCAP’s performance royalty arguments as involving private contractual issues between the parties, or within the purview of the Rate Court in the Southern District of New York that oversees ASCAP’s licensing under an antitrust consent decree. 

The FCC is more likely, on the other hand, to provide a substantive response to ASCAP’s attribution and foreign ownership arguments.  With respect to attribution, ASCAP argues that Pandora has not disclosed all of its attributable shareholders.  Ordinarily, any person or entity that holds a 5% or greater voting stock interest in a corporation (such as Pandora) is considered to hold an attributable interest in that corporation.  There is an exception, however, for “[i]nvestment companies, as defined in 15 U.S.C. 80a-3, insurance companies and banks holding stock through their trust departments in trust accounts.”   These so-called “passive investors” may hold up to a 20% voting stock interest before they are deemed to hold attributable interest.  ASCAP identifies in its petition three parties that it states hold 5% or more of Pandora’s voting stock, but which ASCAP claims do not qualify for the higher 20% threshold.  In this regard, ASCAP appears to take issue with the fact that these parties are “investment advisers” as opposed to “investment companies.”  But this argument may overlook the question whether these entities manage the holdings of other parties that themselves qualify for “passive investor” treatment.  In that case, the identified entities – even if properly classified as “investment advisers” rather than “investment companies” – should be subject to the higher 20% benchmark under the FCC’s rules and policies.  Any other result would appear to be inconsistent with the manner in which investment funds are managed in practice, and would curb investment in the broadcast industry.

With respect to foreign ownership, ASCAP attacks the methodology that Pandora employed to determine its compliance with the FCC’s 20% foreign ownership limit for broadcast licensees, emphasizing, among other things, that the analysis Pandora used employed “shareholder addresses” to determine citizenship.  ASCAP’s argument highlights an inconsistency between the manner in which the FCC allows common carriers and broadcast companies to certify compliance with its foreign ownership limits.  Under existing policy, a widely held, publicly-traded common carrier may evaluate its foreign ownership based on an analysis of the “addresses of record” of its beneficial owners.  On the other hand, as ASCAP points out, the FCC has indicated that broadcast companies should use “statistical surveys” to determine their foreign ownership.  The FCC may well speak to this issue in the context of resolving ASCAP’s Petition.  However, the question whether the agency should reconcile its approach and permit all licensees to evaluate their foreign ownership levels in the same manner has been raised in a separate proceeding, in which the agency has sought comment on potential clarifications to its foreign ownership rules for broadcast companies.  As Wiley Rein and others have urged in that proceeding, “[g]iven that the statute applies equally to both broadcast licensees and common carriers, it is inconsistent and improper to impose on broadcast licensees more burdensome and costly requirements associated with obtaining and verifying information to assess foreign ownership.”

It remains to be seen whether the FCC will substantively address ASCAP’s attribution and foreign ownership arguments in the context of resolving the Pandora / KXMZ(FM) purchase, thereby providing informative guidance to broadcast licensees.  We are watching for developments in this proceeding and on related issues, and will keep you informed.  In the meantime, our team at Wiley Rein is equipped to help broadcast licensees and investors alike decipher the complex attribution and foreign ownership questions that may arise in their ongoing and transaction-related monitoring of ownership matters.

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